Electro Rent Corporation

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Electro Rent Corporation

6060 Sepulveda Boulevard
Van Nuys, California 91411–2512
U.S.A.
Telephone: (818) 787-2100
Toll Free:(800) 688-1111
Fax: (818) 786-4354
Web site: http://www.electrorent.com

Public Company
Incorporated: 1965
Employees: 425
Sales: $147.9 million (2002)
Stock Exchanges: NASDAQ
Ticker Symbol: ELRC
NAIC: 532420 Office Machinery and Equipment Rental and Leasing

With its headquarters in Van Nuys, California, Electro Rent Corporation rents and leases state-of-the art electronic equipment, as well as selling used items. Target customers are major electronics, telecommunications, defense, and aerospace companies. The bulk of the equipment inventory, some 70 percent, is comprised of sophisticated testing equipment. General purpose items include oscilloscopes, LCR/impedance analyzers, and a wide range of probes. Electro Rent offers an array of RF and Microwave equipment, including spectrum analyzers, network analyzers, vector modulation analyzers, RF power meters, and microwave accessories. The company also rents testing equipment for use in wireless communications, optical and electronic data transmission, fiber optic and LAN media, digital design, environmental measurement and recording, and general electrical power. The balance of the Electro Rent equipment inventory is devoted to personal computers—purchased from such major vendors as Apple, Compag, Dell, IBM, and Toshiba—and work stations from Sun Microsystems and Hewlett Packard. After equipment is used from three to five years, Electro Rent sells it, generally above book value, a program which over the years has become a significant portion of revenues and operating cash flow. Electro Rent customers include many Fortune 500 companies, but no single customer accounts for more than 10 percent of revenues. The company maintains a network of centers to service and calibrate equipment across North America. In the United States, centers are located in California, Colorado, Georgia, Illinois, Maryland, Massachusetts, Michigan, New Jersey, and Texas. Service centers are also located in Canada to serve the eastern and western portions of the country. In addition to servicing Electro Rent’s equipment portfolio, these centers also sell the company’s used equipment.

1960s Origins

Electro Rent was originally founded in 1965 as a subsidiary of Beverly Hills, California-based Telecor Inc. It was one of the pioneers in the electronic equipment rental business. The company’s current chief executive officer and chairman, Daniel Greenburg, joined Telecor in 1967. Born in Minnesota, Green-berg earned an undergraduate degree in 1962 from Reed College (located in Portland, Oregon), and then received a J.D. from the University of Chicago Law School in 1965. Prior to Telecor, he served as a staff attorney for California’s Department of Water Resources. Greenburg’s work with Electro Rent began in 1973, and he ultimately went on to become Telecor’s CEO and chair. By the end of the 1970s, the Electro Rent business was the dominant force in Telecor, so much so that in April 1979 shareholders voted to liquidate the company. As a result, Electro Rent securities were distributed to Telecor shareholders, and starting in April 1980 Electro Rent became a public corporation.

In the late 1970s, Electro Rent enjoyed a surge in business, with revenues growing at an annual clip of 28 percent. However, the company’s success led to a problem. Customers wanted to rent newer models of equipment, leaving Electro Rent with an increasing inventory of equipment not yet fully depreciated (because the average rental life was three to four years) and which no one wanted to rent. To address this issue, Electro Rent decided to refurbish and recalibrate the equipment and then sell it at an attractive price to customers who did not require the latest state-of-the-art item. Moreover, the company was able to more fully utilize its service centers, which were already in place to support the rental business. Used sales proved to be an immediate success. By 1983, it had become the company’s fastest-growing segment, accounting for a quarter of all revenues.

With the rise of the personal computer and computer workstations, Electro Rent entered the computer rental market, which affected the way the company viewed its distribution system. In the mid-1980s, Electro Rent began to move away from a localized approach to customer support. At the time, Electro Rent operated ten regional offices but now established larger, concentrated centers to accommodate the rental of both testing equipment and computers. Ultimately, the number of facilities that offered a wide range of warehousing and repair services was cut back to just three. In 1985, the leasing of PCs and workstations “represented probably less than one percent” of the company’s rentals, according to Greenburg. Ten years later, the segment would account for half of all sales. The segment became increasingly important because with the end of the Cold War era, the company experienced a serious decline in equipment rentals to the defense and aerospace industries. Another factor that had an impact on Electro Rent was the tax reform that abolished the investment tax credit in 1987. On the one hand, the company experienced an increase in equipment costs, but it also benefited because more companies now found it more advantageous to lease rather than to buy new equipment. In addition, used equipment sales picked up because there was no longer an advantage to buying new equipment over old.

Overseas Expansion in 1980s

In the mid-1980s, Electro Rent took several steps to expand its business. In 1985, it acquired Data Rentals/Sales Inc., which operated as a wholly-owned subsidiary before it was ultimately merged into the company and became a division. The company also looked overseas during this period. It established a joint venture with NFI Inc. to launch a Tokyo-based electronic equipment rental business named Nippon Electro Rent. In addition to serving the Japanese market, the joint venture also helped Electro Rent to establish operations elsewhere in the Far East, as well as in Europe and Canada. Nevertheless, the company soon discovered that the rental business in Japan and Europe differed greatly from the United States. Length of rental agreements was much shorter in these markets and the needs more diverse. In Japan, Electro Rent entered a market with only one major competitor, but soon several other rental companies cropped up, making conditions difficult. Matters only worsened with the erosion of the Japanese economy. In Europe, Electro Rent faced the difficulty of doing business in so many different cultures, coupled with language difficulties. Canada proved to be more fertile ground for Electro Rent, which opened a division in Toronto. The company, in the end, elected to focus its efforts on the North American market.

After enduring a period of soft sales, Electro Rent began to gain some momentum in the 1990s. During the 1980s, the company had bought back a large portion of stock, believing it was undervalued, but in early 1992 the board approved a 3-for-2 stock split. Not only did this move reflect improved profitability, it also increased the total number of shares that could be traded, thus helping marketability. Annual revenues topped the $100 million mark in 1993, and then improved to $111.5 in 1994. Net income also grew at a steady pace, totaling $10 million in 1993 and $11.6 million in 1994. Much of the company’s improvement was due in large measure to the rising needs of the communications markets, in particular the rapid expansion of the Internet and related activities. Electro Rent grew by external means in 1994 when it acquired one of its chief competitors, Genstar Rental Electronics Inc., a Palo Alto firm that rented a similar line of equipment and generated nearly $24 million in annual sales. Electro Rent paid $24.2, of which $9.2 million was in cash and another $15.1 in assumed debt. With the Genstar acquisition Electro Rent opened new offices in Florida, Houston, and Seattle. Moreover, the combined Canadian operations instantly transformed Electro Rent into a major player in that market as well. Because the company was able to finance the deal with ready cash and short-term debt, it was also well positioned to make further acquisitions, should an opportunity arise.

The Genstar acquisition had an immediate impact on the balance sheet. Because Electro Rent’s fiscal year ended on May 31, it only recorded partial benefits from Genstar operations. Nevertheless, revenues for 1995 increased by 9 percent over the previous year, from $111.5 million to $121.4 million. In 1996, the company completed another acquisition, paying $2.3 million in cash, financed by a short-term credit line, to pick up Cleveland-based LDI Computer Rentals, Inc., a subsidiary of LDI Corporation. LDI Computer rentals dealt primarily with the rental of PCs, generating close to $6 million in annual sales from operations in Georgia, Illinois, Michigan, Ohio, and Texas. With a full-year of Genstar contributing to sales, plus eight months from LDI, Electro Rent experienced a 16 percent boost in sales in fiscal 1996, totaling over $141.1 million. Even more impressive were the gains in net income, which improved from $14.6 million in 1995 to $21.6 million in 1996, a 49 percent increase.

Electro Rent completed the most important acquisition in its history in 1997, when it bought the computer and test and measurement equipment rental businesses of GE Capital Technology Management Services in November of that year for $241 million. TMS had been Electro Rent’s chief competitor. Because it was such a large buy, the company devoted virtually all of 1998 to assimilating the TMS assets. When Electro Rent reported its first quarterly earnings after the acquisition, a 131 percent increase in revenues of the same period the year before, the price of its stock experienced an immediate jump of 17 percent. Despite such positive developments, however, the company was not yet covered by any major investment banks. To rectify this situation and improve the marketability of its stock, the company instituted a 2-for-l stock split, which increased the number of outstanding shares to approximately 24 million.

Company Perspectives

With the industry’s largest inventory of leading edge technology products, innovative rental/leasing programs and services, and a knowledgeable staff, Electro Rent is unmatched in North America. And we’re always looking toward the future.

Challenges in the Late 1990s and Beyond

Because of the sales realized by the TMS acquisition, Electro Rent posted record results in fiscal 1998. Revenues grew by 70 percent to $255.5 million and net income surged to $32.3 million. These positive numbers, however, masked some difficulties Electro Rent incurred in digesting the TMS assets. Many TMS customers disputed the rental contracts inherited by Electro Rent and a large number of TMS customers took their business elsewhere. Electro Rent was so disenchanted by some aspects of the TMS acquisition that it made comments in the press expressing its desire for a partial refund on the purchase. However, GE Capital made it abundantly clear that it considered the transaction final. In the words of a spokesperson, “As far as we’re concerned it was a fair business, fair price done in good faith.”

Of more concern in the second half of calendar 1998 were changing business conditions that would have a lasting impact on the health of Electro Rent. The defense industry was undergoing consolidation which led to a weakening in the test and measurement equipment rental business. Difficult economic conditions in Asia were also causing many corporations to assume a wait-and-see posture and display a reluctance to make capital investments. Moreover, the personal computer rental business was uncertain because of increased competition among manufacturers that led to wildly fluctuating prices and price points. Despite fully integrating TMS into its operations, Electro Rent realized only a 6 percent gain on revenues in 1999, totaling $269.7 million. Net income, on the other hand, experienced a 33 percent drop-off to $24 million.

The trend would only worsen for Electro Rent at the turn of a 21st century and the onset of a recession, which forced the company to begin cutting staff. Despite the fact that net income held steady in fiscal 2000, actually increasing to $24.8 million, revenues suffered an erosion, dipping to $241.8 million, due in large part to a reduced demand for personal computers. Although the telecommunication’s product line enjoyed gains in fiscal 2001, Electro Rent experienced further declines. Total revenues decreased by 13 percent to $211.2 million, the major factor being continued attrition in the TMS business. One positive development that occurred in 2001 was the announcement that Electro Rent had been selected to represent Agilent Technologies latest test and measurement equipment in the short-term rental market, becoming a Premier Rental Partner.

Nevertheless, the situation for the company, and the technology sector in general, only worsened in fiscal 2002, which management considered the worst in its history. The computer rental business fell by about 50 percent, while the test and measurement business decreased by some 18 percent. As a result, revenues fell to $147.9 million and net income to $13.1 million, forcing management to make further cuts in staff. Only three years earlier the workforce totaled 930, but had now been trimmed to 425. In an August 2002 letter to shareholders, Green-burg wrote, “We made the painful reductions in personnel that were required to run our business with lower revenue. The challenge was to bring costs down sharply without harming our core competencies, to make required reductions without crippling operating muscle, and to say goodbye with dignity and respect to valued colleagues when there was no productive work for them to do.” Because Greenburg and his management team had always taken a conservative approach to the company’s finances, it was better off than most in the technology sector and remained a profitable business. There was every reason to believe than when the economy improved and customers began to once again invest in new equipment that Electro Rental would be well positioned to resume its long-term pattern of growth.