Calculated Risks : Despite Slump, Electro Rent Is Bucking Trends in Instrument Leasing

Early this year, Electro Rent Corp. Chief Executive Daniel Greenberg moved his company into a newly built, post-modern headquarters with a sculpture in the lobby and landscaped grounds, at a cost of nearly $15 million. It’s the kind of move companies usually make when the business climate is sunny. But the climate isn’t sunny for Electro Rent, a Van Nuys company that rents high-tech testing and measuring devices.

In fact, Greenberg admitted, “There are a whole host of reasons for pessimism.”

But the move into new quarters is typical of Greenberg’s confidence that his company is doing the right thing. Some companies search for new directions when hard times strike, but not Electro Rent.

Despite a nearly five-year slump in electronics, defense and aerospace--the industries Electro Rent depends on for rentals--the company is sticking to its basic game plan--to have plenty of distribution centers scattered throughout the country to be close to its customers.

Price-Cutting

That’s hardly true elsewhere in the business, which has been hammered by price-cutting in the last few years. The rental market for high-tech testing gear is anywhere from $350 million to $450 million a year, depending on who is doing the counting. Electro Rent, with about $115 million in revenues (not all of it in instrument rentals), is the biggest player. But Electro Rent’s closest rivals have cut back their number of distribution centers to save money.

Those rivals include United States Instrument Rental (USIR) in Dallas, which is owned by Ford, and Leasametric in Foster City, Calif., which is owned by the billionaire Pritzker family of Chicago.

Since 1984, those companies and others have begun centralizing their equipment centers’ operations. Leasametric reduced its system of satellite offices, and USIR cut back from three regional distribution centers to one. But although Electro Rent reduced its payroll from 523 to 486 last year through attrition and layoffs, it has essentially stuck to a local-office strategy. Electro Rent still has 10 equipment depots across the country. Greenberg acknowledges that the approach is far more costly but insists that it is the only way for Electro Rent to maintain its lead.

USIR’s senior vice president, Jack Cunningham, said of his company’s consolidation, “We’ve done it because we think we’re right.”

“Our competitors have made a serious mistake,” Greenberg said. “They will suffer because of it.”

Maybe so, but refusing to scale back its operations is still a gamble for Greenberg, because Electro Rent does not have the deepest pockets in the business. USIR and Leasametric, with their wealthy parents, obviously can get cheap financing in a business that depends heavily on borrowing to buy equipment.

Greenberg is sticking with his old strategy of staying close to his customers because it has paid off before. For five years, beginning in 1980, when Electro Rent was spun off as an independent public company from its parent company, Telecor, its sales grew at an average rate of 29%, reaching $89.9 million in 1985. Profits rose steadily, hitting $10.8 million in 1985.

Defense Buildup

The growth of the instrument rental business was closely tied to the Reagan-era defense buildup. “I’d like to tell you it all had to do with my personal genius,” Greenberg said. But “we were all being pulled by the runaway train of the Reagan revolution.”

But beginning in 1985, that runaway train got switched onto a sidetrack. The yearly growth rate of Electro Rent’s revenues tailed off, and in the latest fiscal year, which ended in May, its sales shrank less than 1% to $114.5 million. Meanwhile, its profits fell three out of the past four years and stood at $7.9 million in fiscal year 1989.

That’s when trouble struck Electro Rent’s business. The company’s main line is renting out sophisticated electronic testing equipment, from devices such as a $500 digital voltage meter to high-tech gadgets such as a $60,000 microwave spectrum analyzer, which monitors the frequency of microwave transmissions. Electronics and aerospace firms rent the devices for short projects when buying isn’t practical, or when they want to avoid sinking money into hardware that may become obsolete. Electro Rent’s best customers are defense contractors, such as Lockheed, Boeing and TRW, who find renting especially convenient to help assign equipment costs to specific government contracts.

Keeping its equipment in the field is essential for Electro Rent to make money. When Electro Rent buys, say, the $60,000 microwave spectrum analyzer, the company turns around and rents it for between 6% to 11% of the purchase price per month (or about $3,600 to $6,600), hoping to keep it in use 60% of the time. After about three years, Electro Rent sells the analyzer for $30,000 to $45,000. The resale is crucial and helps Electro Rent turn a profit on the equipment.

Turning a profit is tougher than it used to be because of a wave of price-cutting in instrument rentals. Some of the most visible price-cutting was done by Telogy, a new Redwood City, Calif., company, as it competed for big contracts. But USIR’s Cunningham said, “I think we all shot ourselves in our own foot.” Whoever initiated it, the price cuts had a clear effect. Electro Rent’s profit margin per dollar of sales fell from 12% in 1985 to 7% in 1989.

Slow Growth

Reeling from slow growth and evaporating profit margins, most of Electro Rent’s competitors rethought the business and decided to cut their distribution costs by closing some offices. Electro Rent, of course, believes that keeping a number of regional offices across the country helps its marketing, delivery and customer service.

In the recent tougher times, Electro Rent has also embarked on a $44-million stock repurchase program to consolidate Greenberg’s and his family’s grip on the company and to help boost the stock to near its five-year high recently. Greenberg, with his family, holds about 36% of Electro Rent’s stock, worth about $27 million at recent trading prices.

Will Greenberg’s defiant strategy work? Industry analyst Gerald Fleming of Fahnestock & Co. pointed out that Electro Rent’s profit margin remains solid at about 7%. And he notes that Greenberg seems to have known what he was doing in the past. “You can’t fight with success,” Fleming said.

Running a public company isn’t what Greenberg set out to do. In the mid-1960s, he was a lawyer in the state Department of Water Resources, but he began to realize that he did not like being an attorney. His father was chairman at Telecor but Greenberg and his father had made a pact not to get into business together.

As Telecor began in 1967 to plan going public, one of his father’s partners secretly offered him a job in the company, whose main business was distributing and marketing Panasonic products. Greenberg told his father about the deal on a Friday and began working the next Monday--first on the orders desk taking calls from appliance wholesalers and retailers.

Telecor Purchase

In 1973, Telecor bought Electro Rent, then an 8-year-old Mountain View company doing $3.5 million a year in sales in the obscure business of instrument rentals. Telecor wasn’t interested in the instrument rental business itself, but in the tax shelter provided by Electro Rent’s large equipment depreciation.

By the time Telecor sold its right to distribute Panasonic appliances back to the Japanese Matsushita Electric Industrial Co., Electro Rent had grown to have more than $15 million a year in sales. After the deal with the Japanese company in 1980, only Electro Rent remained, and Telecor shareholders received stock in the newly-independent company.

To some, Electro Rent looked like only the scraps left after a viable company had been gobbled up. The company’s bank, Greenberg said, essentially refused to lend Electro Rent enough money to grow as fast as Greenberg believed it could. Greenberg found another bank.

By 1989, Electro Rent’s revenues had grown by more than seven times. Greenberg said he believes the company’s did at least one thing right to earn that success. “We kept our cool,” he said.

Which is why he isn’t about to make any hasty changes now.