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CORPORATE FOCUS—Rental Firm Pays Off Debt From Purchase of GE Unit

Summary Business: Electronics equipment rentals Headquarters: Van Nuys CEO: Daniel Greenberg Market Cap: $404.4 million Dividend Yield: N/A* Total Liabilities: $84.8 million P/E: 12.81 Long-Term Debt: $0 * Electro Rent does not pay dividends When Van Nuys-based Electro Rent Corp. broke its revenue record in 1999, the future looked promising. But by last year, the sensational growth had come to an end. Most of the growth came from the acquisition of General Electric’s Technology Management Services unit but, as it turned out, the expansion proved more than the company could effectively manage. In the last fiscal year before the purchase, the company posted $24.1 million in net income and $150.5 million in gross revenue, and followed it up with $32.3 million in net income and $255.5 million in gross revenue the following year. As a result of the acquisition, Electro Rent revenues grew to $269.7 million in 1999, with net income of $24.1 million. In 2000, the company posted $24.9 million in net income on $241.8 million in revenue. Electro Rent bought the General Electric unit, a business similar to its own, for $240 million in 1997, resulting in a 70-percent increase in revenue almost overnight. The company leases equipment to the electronics, defense and aerospace industries. Company CEO Daniel Greenberg blamed part of the company’s slow income growth on its acquisition of GE’s rental unit, a business twice as large as Electro Rent’s. Most of the unit’s top managers did not join Electro Rent following the acquisition, leaving the company without the expertise to manage the unit. Moreover, a decline in the rental of computer equipment, which accounts for about a third of Electro Rent’s business over the last three years, reduced the company’s revenue, Greenberg said. “It’s the uncertainty of the technology sector and the drop in the computer sector of our business,” said Greenberg, whose family owns 16 percent of the company’s stock. David Gold, an equity analyst with the New York-based investment firm, Sidoti & Co., said, “They acquired the rental business of General Electric, and it did well for a time. Then it started to lose revenue and when the rental contracts were up, their revenue started to go down. “It’s the nature of the business. These customers wanted to go with GE and they weren’t GE. They were a company that they hadn’t heard of, so they lost business.” Despite the drop in revenue, the company still has good fundamentals. “Because they’re a rental company, it’s difficult to tell what’s entirely going on by the revenue figures,” he said, “You have to look at the cash flow and they’ve been able to accumulate cash through their operation and are in a good position.” The company has $50 million in cash on hand and, Greenberg said, continues to accumulate more. In fact, he said, the company is looking to make more acquisitions of equipment rental companies in the next year or two. Debt service for the General Electric purchase ate up a lot of revenue over the last three years. Now cash is suddenly being freed up, Gold said, making Electro Rent’s prospects brighter. “We classify them as a buy with potential for growth,” he said, adding that his firm gives the stock a 12-month target of $22. Electro Rent’s stock peaked at $18.37 in February, with a 52-week low of $9.31. It was trading at $16.32 per share on the Nasdaq exchange on May 25. Recently, Electro Rent entered into what it calls a new strategic alliance with one of its main competitors, Palo Alto, Calif.-based Agilent Technologies Inc. Agilent, an electronics maker which also rents its equipment, will now supply electronics testing products to Electro Rent. Greenberg said the agreement allows his company to be a full partner in delivering testing equipment to customers familiar with Agilent’s brand. Moreover, the recent jump in activity in the fiber optic technology sector of the broadband industry gives Electro Rent potential for added revenue in the rental of testing equipment for that industry, Greenberg says. “We feel there is a substantial amount of business to be developed in the fiber optics and telecommunications field,” he said.

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