CONTINUING STRONG FINANCIAL RESULTS
Rental and lease revenues in our test and measurement equipment group increased more than 7% in fiscal 2008 versus the prior year. We again experienced continued strong demand for test and measurement equipment in our key markets of aerospace and defense, electronics and telecommunications, although this higher demand was somewhat offset by lower rental rates during the year resulting from competitive pressures.
Operating profit for fiscal 2008 increased nearly 6% to $30.7 million from $29.0 million, but was impacted by those competitive pressures as well as decreased utilization of both test and measurement and data products equipment.
Net income in fiscal 2008 was $21.1 million, or $0.81 per diluted share, compared with $21.0 million, or $0.81 per diluted share, in fiscal 2007. Fiscal 2007 included $1.6 million in other income relating to proceeds received from a class action lawsuit.
Profitability in our data products segment improved in fiscal 2008 and revenues stabilized, with data products rental and lease revenues generally flat, compared with the prior year. We are now focusing more on short-term, event-oriented rentals in addition to our traditional markets and are confident in the growth opportunities here, as well as expanding our business overseas.
Depreciation of rental and lease equipment increased approximately 7% for fiscal 2008, to $45.0 million from $42.2 million in the prior year, primarily due to an increase in the acquisition cost of our equipment pool to $333.7 million at May 31, 2008 from $301.9 million at May 31, 2007. The book value of our equipment pool rose to $172.5 million at the end of fiscal 2008 from $161.8 million a year earlier. To support our business, equipment purchases were $76.0 million in fiscal 2008, compared with $74.3 million last year and $58.4 million in fiscal 2006.
Selling, general and administrative (SG&A) expenses declined to 30.4% of revenues for fiscal 2008 from 33.1% of revenues a year ago. As planned, SG&A expenses grew only 4.6% to $43.9 million for fiscal 2008 from $42.0 million for fiscal 2007, principally reflecting higher personnel and benefit costs to support our growing revenues. SG&A expenses included $200,000 and $900,000 in stock compensation expense for fiscal 2008 and 2007, respectively.
Our balance sheet remains strong with no debt. Over the past three years, our cash balances have been very stable. We ended fiscal 2008 with $73.6 million in cash, cash equivalents and investments, compared with $80.7 million at the end of fiscal 2007. Shareholders’ equity increased for the fifth consecutive year to $256.1 million at May 31, 2008 from $243.5 million at May 31, 2007.
INCREASING SHAREHOLDER VALUE
Our cash position at the end of fiscal 2008 was a significant achievement, given that we returned almost $12.0 million to our shareholders in the form of dividend payments and stock repurchases, while also purchasing $76.0 million in equipment during the year to support business growth.
In January 2008, Electro Rent’s Board of Directors increased the company’s regular quarterly dividend to $0.15 per common share from $0.10 per share, resulting in $11.7 million in dividend payments during fiscal 2008. At the very end of the fiscal year, we started purchasing Electro Rent common stock, buying approximately 12,000 of the company’s common shares for a total price of $152,000.
Our financial strength has placed Electro Rent in the enviable position of being able to share the company’s continued financial success with our shareholders, while retaining sufficient liquidity to continue our growth initiatives and take advantage of new opportunities.
EXPANDING OUR GLOBAL FOOTPRINT
In response to what we identified as a large, mostly untapped opportunity, we began diversifying our business almost 3 years ago by expanding into China. Shortly thereafter, we entered a more mature, but dynamic market in Europe, thereby penetrating two of the world’s largest markets outside of the United States for our products and services.
In fiscal 2008, we continued to build and solidify our overseas operations. With a global delivery model and equipment pool, and local operations in markets outside the U.S., we can now say “yes” to doing business virtually anywhere in the world. In the past, it would have been extremely difficult to do so. Now, not only can we assist U.S. customers with their global equipment needs, but we can assist European and Asian customers with their North American equipment needs.
International growth has successfully widened our reach by allowing us to participate in two activities vital to the world economy: research and development (R&D) and manufacturing. In North America, our primary focus has been on customers’ research and development activities. Of late, the military sector has ramped up its use of electronics to develop more sophisticated satellite communications and coded communications. In the commercial sector, the recent focus has been on the use of satellites for greater and more varied personal entertainment options and consumer electronics, particularly in the wireless arena.
We’ve learned that in China, where it is often less costly to produce consumer goods, manufacturing takes center stage, while the market in Europe possesses characteristics similar to that of North America. By balancing manufacturing requirements overseas with existing domestic R&D requirements in North America and Europe, we are moderating and offsetting the different economic cycles associated with each, and at the same time, providing the impetus to generate sustained and profitable revenue increases over the long-term.
Our efforts to build our base of business in Europe and China have required more resources than we initially thought, and, accordingly, we did not expand to other world markets during this past year. However, we continue to actively identify and evaluate additional opportunities for geographic expansion, and when the time is right, we will take the next steps toward expanding our worldwide presence. Meanwhile, we will broaden our North American business while also creating additional prospects in Europe and Asia.
STRENGTHENING OUR TEST & MEASUREMENT CAPABILITIES
Our ability to provide a full complement of products and services to our customers on a global scale is an important distinction. Given the restrictive credit climate, small and mid size companies are struggling in the current difficult economic environment. Large companies in the present environment emphasize return on invested capital. Electro Rent provides a cost-effective, easy way to acquire the equipment both classes of customer need without large capital outlays and financial commitments.
By differentiating ourselves in the marketplace, we are solidifying vendor and customer relationships, strengthening our market position, and building true long-term partnerships with our equipment suppliers by planning more strategically with them. During the year, we worked hard to bolster our affiliations with the world’s premier measurement equipment companies, and with the leading providers of communications test and measurement solutions and optical products, among others. The importance of these relationships cannot be overstated, since they allow us to be a full service provider and increase our ability to expand internationally.
Our new distribution channel, which has grown very quickly since we first implemented our strategy 18 months ago, serves a similar purpose, and we hope to expand our offerings this coming year.
At the same time, we significantly expanded our leasing program through a financing alliance with GE Capital Solutions. It has been a long time since Electro Rent has partnered with a third party to bring additional innovation to the marketplace, but in this case it made good economic and strategic sense. The combination of our equipment leasing market expertise and GE Capital’s financing capabilities will significantly enhance our ability to meet increasing customer demand by delivering competitive operating leases to customers throughout the world.
GROWING OUR DATA PRODUCTS SEGMENT
Our data products business was fairly stable in fiscal 2008. This segment has been well managed, although we have not yet seen the growth we had originally sought. The event, training and convention market – big sectors for our products – has been impacted by the slowing economy, and we are replacing customers at a faster rate than in the past.
Even as we continue to watch the macro environment, we believe the future holds promise for Electro Rent. In fiscal 2008, we opened a sales office in Florida, and early in fiscal 2009, we expanded our geographic penetration to include the Midwest with the opening of a sales office in Chicago. During the fall season we expect to benefit from large political events and the needs of individual candidates. In addition, we believe our capabilities and relationships will mature enough this year to allow us to open new markets outside of the United States and provide our customers with greater alternatives.
IN MEMORIAM
We are saddened to report that S. Lee Kling, a senior director of the company for more than 11 years passed away on July 26, 2008 of lung cancer. He was a man of outstanding accomplishment, remarkable conviction and uncommon character. He brought a wealth of business experience and political acumen to our business. He was a positive force and calming influence. He inspired profound optimism and practiced pragmatism. His mantra, “the harder I work, the luckier I get” was an inspiration to us all. We will miss his wise ways and persuasive counsel.
LOOKING AHEAD WITH OPTIMISM
Over the last several years, we have designed and implemented a strategy aimed at finding a different and exciting path for Electro Rent, while enhancing our current position in the marketplace. This year, we made considerable progress growing and strengthening Electro Rent’s core capabilities to ensure that we are able to meet our customers’ product and service requirements around the world. This global footprint is unique to our industry.
The entire Electro Rent team has worked tirelessly to bring us to this stage in our evolution and is equally committed to taking our strategy forward. We look to the future with optimism and are confident that with continued focus and determination, we can work our way through the current economic environment and succeed in becoming the equipment rental, leasing and sales company with which customers and vendors prefer to do business.