##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended August 31, 2007 or
 o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to
 Commission File Number: 0-9061
 ELECTRO RENT CORPORATION
  CALIFORNIA
    
    95-2412961(State or Other Jurisdiction
    
    (I.R.S. Employerof Incorporation or Organization)
    
    Identification No.)
 6060 SEPULVEDA BOULEVARD  VAN NUYS, CALIFORNIA 91411-2501
  818 787-2100
   þ o
  o þ o
  o þ




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##### 



ELECTRO RENT CORPORATION
FORM 10-Q
August 31, 2007
  PagePart I: FINANCIAL INFORMATION
    
    
    3Item 1. Financial Statements
    
    
    3Condensed Consolidated Statements of Operations for the Three Months Ended
August 31, 2007 and 2006 (Unaudited)
    
    
    3Condensed Consolidated Balance Sheets at August 31, 2007 and May 31, 2007 (Unaudited)
    
    
    4Condensed Consolidated Statements of Cash Flows for the Three Months Ended
August 31, 2007 and 2006 (Unaudited)
    
    
    5Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    6Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    12Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    17Item 4. Controls and Procedures
    
    
    17Part II: OTHER INFORMATION
    
    
    18Item 1. Legal Proceedings
    
    
    18Item 1A. Risk Factors
    
    
    18Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    18Item 3. Defaults Upon Senior Securities
    
    
    18Item 4. Submission of Matters to a Vote of Security Holders
    
    
    18Item 5. Other Information
    
    
    18Item 6. Exhibits
    
    
    18SIGNATURES
    
    
    19EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  Page 2




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##### Table of Contents



Part I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 ELECTRO RENT CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited) (000s omitted, except per share data)
 Three Months EndedAugust 31,2007
    
    
    2006Revenues:Rentals and leases
    
    $
    27,444
    
    
    $
    25,448Sales of equipment and other revenues
    
    
    6,750
    
    
    
    4,576Total revenues
    
    
    34,194
    
    
    
    30,024Operating expenses:Depreciation of rental and lease equipment
    
    
    10,993
    
    
    
    9,882Costs of revenues other than deprecation of rental and lease equipment
    
    
    4,863
    
    
    
    2,616Selling, general and administrative expenses
    
    
    10,482
    
    
    
    10,578Total operating expenses
    
    
    26,338
    
    
    
    23,076Operating profit
    
    
    7,856
    
    
    
    6,948Interest income, net
    
    
    872
    
    
    
    939Income before income taxes
    
    
    8,728
    
    
    
    7,887Income tax provision
    
    
    3,414
    
    
    
    3,128Net income
    
    $
    5,314
    
    
    $
    4,759Earnings per share:Basic
    
    $
    0.21
    
    
    $
    0.19Diluted
    
    $
    0.20
    
    
    $
    0.18Shares used in per share calculation:Basic
    
    
    25,839
    
    
    
    25,550Diluted
    
    
    26,037
    
    
    
    25,944
 See accompanying notes to condensed consolidated financial statements (unaudited).




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ELECTRO RENT CORPORATION
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited) (000s omitted, except share data)
 August 31,
    
    
    May 31,2007
    
    
    2007ASSETSCash and cash equivalents
    
    $
    55,092
    
    
    $
    57,172Marketable securities
    
    
    23,950
    
    
    
    23,550Accounts receivable, net of allowance for doubtful accounts of $246 and $251
    
    
    19,326
    
    
    
    17,161Rental and lease equipment, net of accumulated depreciation of $144,705 and $140,164
    
    
    163,393
    
    
    
    161,806Other property, net of accumulated depreciation and amortization of $14,022 and $13,761
    
    
    14,873
    
    
    
    14,990Goodwill
    
    
    2,859
    
    
    
    2,859Intangibles, net of amortization of $1,050 and $904
    
    
    1,425
    
    
    
    1,571Other
    
    
    5,593
    
    
    
    5,710$
    286,511
    
    
    $
    284,819LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Accounts payable
    
    $
    5,354
    
    
    $
    10,084Accrued expenses
    
    
    14,152
    
    
    
    11,019Deferred revenue
    
    
    5,012
    
    
    
    5,047Deferred tax liability
    
    
    15,105
    
    
    
    15,190Total liabilities
    
    
    39,623
    
    
    
    41,340Commitments and contingencies (Note 10)Shareholders equity:Preferred stock, $1 par  shares authorized 1,000,000; none issuedCommon stock, no par  shares authorized 40,000,000;
issued and outstanding August 31, 2007  25,901,108;
May 31, 2007  25,812,943
    
    
    33,282
    
    
    
    32,212Retained earnings
    
    
    213,606
    
    
    
    211,267Total shareholders equity
    
    
    246,888
    
    
    
    243,479$
    286,511
    
    
    $
    284,819
 See accompanying notes to condensed consolidated financial statements (unaudited).




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ELECTRO RENT CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited) (000s omitted)
 Three Months EndedAugust 31,2007
    
    
    2006Cash flows from operating activities:Net income
    
    $
    5,314
    
    
    $
    4,759Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    11,401
    
    
    
    10,314Gain on sale of rental and lease equipment
    
    
    (2,379
    )
    
    
    (1,942
    )Deferred tax liability
    
    
    341
    
    
    
    782Stock compensation expense
    
    
    124
    
    
    
    194Provision for losses on accounts receivable
    
    
    37
    
    
    
    71Excess tax benefit for stock options exercised
    
    
    (82
    )
    
    
    (29
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (2,202
    )
    
    
    (464
    )Other assets
    
    
    117
    
    
    
    426Accounts payable
    
    
    (181
    )
    
    
    335Accrued expenses
    
    
    2,413
    
    
    
    941Deferred revenue
    
    
    (35
    )
    
    
    (172
    )Net cash provided by operating activities
    
    
    14,868
    
    
    
    15,215Cash flows from investing activities:Proceeds from sale of rental and lease equipment
    
    
    5,893
    
    
    
    3,676Payments for purchase of rental and lease equipment
    
    
    (20,643
    )
    
    
    (18,789
    )Purchases of marketable securities
    
    
    (400
    )
    
    
    (300
    )Payments for purchase of other property
    
    
    (144
    )
    
    
    (106
    )Net cash used in investing activities
    
    
    (15,294
    )
    
    
    (15,519
    )Cash flows from financing activities:Proceeds from the exercise of common stock options
    
    
    866
    
    
    
    107Excess tax benefit for stock options exercised
    
    
    82
    
    
    
    29Payment for repurchase of common stock
    
    
    (19
    )
    
    
    Payment of dividends
    
    
    (2,583
    )
    
    
    Net cash (used in) provided by financing activities
    
    
    (1,654
    )
    
    
    136Net decrease in cash and cash equivalents
    
    
    (2,080
    )
    
    
    (168
    )Cash and cash equivalents at beginning of period
    
    
    57,172
    
    
    
    58,748Cash and cash equivalents at end of period
    
    $
    55,092
    
    
    $
    58,580
 See accompanying notes to condensed consolidated financial statements (unaudited).




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ELECTRO RENT CORPORATION
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 (in thousands, except per share amounts)
  .
   Accounting for Uncertainty in Income Taxes , Accounting
for Income Taxes
 Fair Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities
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WeightedAverageWeighted
    
    RemainingAverage
    
    Contractual
    
    AggregateExercise
    
    Term (in
    
    IntrinsicShares
    
    
    Price
    
    years)
    
    ValueOutstanding at May 31, 2007
    
    
    663
    
    
    $
    9.89Granted
    
    
    
    
    
    
    Exercised
    
    
    (90
    )
    
    
    9.66Forfeited/Cancelled
    
    
    
    
    
    
    Outstanding at August 31, 2007
    
    
    573
    
    
    $
    9.92
    
    
    
    2.09
    
    
    $
    2,764Vested and expected to vest
at August 31, 2007
    
    
    571
    
    
    $
    9.88
    
    
    
    2.07
    
    
    $
    2,764Exercisable at August 31, 2007
    
    
    525
    
    
    $
    9.31
    
    
    
    1.92
    
    
    $
    2,738
  Fair Value Disclosure
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Stock-Based Compensation
 Share-Based Payment
          Balance as ofJune 1, 2007 (net
    
    
    
    
    
    
    
    
    
    Balance as ofof amortization)
    
    Adjustments
    
    Amortization
    
    August 31, 2007Goodwill
    
    $
    2,859
    
    
    $
    
    
    
    $
    
    
    
    $
    2,859Trade Name
    
    
    411
    
    
    
    
    
    
    
    
    
    
    
    411Non-compete agreements
    
    
    533
    
    
    
    
    
    
    
    (87
    )
    
    
    446Customer relationships
    
    
    627
    
    
    
    
    
    
    
    (59
    )
    
    
    568$
    4,430
    
    
    $
    
    
    
    $
    (146
    )
    
    $
    4,284
  Page 8




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August 31, 2007Estimated
    
    Gross Carrying
    
    Accumulated
    
    Net CarryingUseful Life
    
    Amount
    
    Amortization
    
    AmountTrade name
    
    
    
    
    
    $
    411
    
    
    $
    
    
    
    $
    411Non-compete agreements
    
    2-5 years
    
    
    1,050
    
    
    
    (604
    )
    
    
    446Customer relationships
    
    3-4 years
    
    
    1,014
    
    
    
    (446
    )
    
    
    568$
    2,475
    
    
    $
    (1,050
    )
    
    $
    1,425
 May 31, 2007Estimated
    
    Gross Carrying
    
    Accumulated
    
    Net CarryingUseful Life
    
    Amount
    
    Amortization
    
    AmountTrade name
    
    
    
    
    
    $
    411
    
    
    $
    
    
    
    $
    411Non-compete agreements
    
    2-5 years
    
    
    1,050
    
    
    
    (517
    )
    
    
    533Customer relationships
    
    3-4 years
    
    
    1,014
    
    
    
    (387
    )
    
    
    627$
    2,475
    
    
    $
    (904
    )
    
    $
    1,571
   FutureYear ending May 31,
    
    Amortization2008
    
    $
    3552009
    
    
    3352010
    
    
    2572011
    
    
    672012
    
    
    $
    1,014
     Page 9




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August 31,
    
    
    May 31,2007
    
    
    2007Gross minimum lease payments receivable
    
    $
    739
    
    
    $
    818Less  unearned interest
    
    
    (48
    )
    
    
    (55
    )Net investment in sales-type lease receivables
    
    $
    691
    
    
    $
    763
  Disclosure about Segments of an Enterprise and Related Information
    T&M
    
    
    DP
    
    
    Total2007Rentals and leases
    
    $
    21,331
    
    
    $
    6,113
    
    
    $
    27,444Sales of equipment and other revenues
    
    
    6,220
    
    
    
    530
    
    
    
    6,750$
    27,551
    
    
    $
    6,643
    
    
    $
    34,1942006Rentals and leases
    
    $
    19,082
    
    
    $
    6,366
    
    
    $
    25,448Sales of equipment and other revenues
    
    
    3,912
    
    
    
    664
    
    
    
    4,576$
    22,994
    
    
    $
    7,030
    
    
    $
    30,024
   Three Months endedAugust 31,2007
    
    
    2006Revenues: (1)U.S.
    
    $
    29,211
    
    
    $
    26,857Other (2)
    
    
    4,983
    
    
    
    3,167Total
    
    $
    34,194
    
    
    $
    30,024
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August 31,
    
    
    May 31,2007
    
    
    2007Net Long Lived Assets: (3)U.S.
    
    $
    160,408
    
    
    $
    158,377Other (2)
    
    
    22,142
    
    
    
    22,849Total
    
    $
    182,550
    
    
    $
    181,226
 
 (1)
    
    Revenues by country are based on the location of shipping destination, whether the order
originates in the U.S. parent or a foreign subsidiary.(2)
    
    Other consists of other foreign countries that each individually account for less that 10%
of the total revenues or assets.(3)
    
    Net long-lived assets include rental and lease equipment, other property, goodwill and
intangibles, net of accumulated depreciation and amortization.   Three Months EndedAugust 31,2007
    
    2006Denominator:Denominator for basic
earnings per
shareweighted average
common shares outstanding
    
    
    25,839
    
    
    
    25,550Effect of dilutive
securities-options (1)
    
    
    198
    
    
    
    39426,037
    
    
    
    25,944Net income
    
    $
    5,314
    
    
    $
    4,759Earnings per share:Basic
    
    $
    0.21
    
    
    $
    0.19Diluted
    
    $
    0.20
    
    
    $
    0.18
 
 (1)
    
    Excludes 41 options outstanding during the three months ended August 31, 2007 for which the
exercise price exceeded the average market price of our stock during that period. There were no
such options during the three months ended August 31, 2006.    Reduction in retained earnings (cumulative effect)
    
    $
    366Additional deferred tax assets
    
    
    3,545Increase in liability
    
    $
    3,911
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Overview
     Page 12




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
    
    Our acquisition cost;
    
    Our estimates of current and future market demand for rentals;
    
    Our estimates of current and future supply of product;
    
    The book value of the product after depreciation and other impairment;
    
    Our estimates of the effect of interest rates on rental and leasing fees as well as
capital financing; and
    
    Our estimates of the potential current and future sale prices.
     
    
    Net income per diluted common share (EPS);
    
    Net income as a percentage of average assets; and
    
    Net income as a percentage of average equity.
 STRATEGIC GROWTH PLANS
  Page 13




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
    
    We have entered into distribution agreements with three leading manufacturers for a
range of basic T&M equipment.
    
    We have re-focused our DP marketing approach to emphasize short-term, event-oriented
rentals in addition to our traditional markets.
    
    We have been marketing a flexible leasing program that allows customers to build equity
that can be applied against the future purchase of the test equipment.
    
    We have implemented an expanded customer communication program to identify used
equipment re-marketing opportunities.
   
    
    Our wholly owned subsidiary in Tianjin, China, commenced operations in June 2005 after
we received what we believe to be one of the first licenses for a wholly foreign-owned
equipment rental business in China.
    
    In September 2005, we acquired a small T&M equipment rental company based in Belgium,
from which we service the European market.
  PROFITABILITY AND KEY BUSINESS TRENDS
  2007
    
    2006Net income per diluted common share (EPS)
    
    $
    0.20
    
    
    $
    0.18Net income as a percentage of average assets
    
    
    7.4
    %
    
    
    7.2
    %Net income as a percentage of average equity
    
    
    8.8
    %
    
    
    9.2
    %
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Three Months EndedAug 31,
    
    
    May 31,
    
    
    Feb. 28,
    
    
    Nov. 30,
    
    
    Aug. 31,2007
    
    
    2007
    
    
    2007
    
    
    2006
    
    
    2006Rentals and leases
    
    $
    27,444
    
    
    $
    27,165
    
    
    $
    24,716
    
    
    $
    25,754
    
    
    $
    25,448Sales of equipment and other revenues
    
    
    6,750
    
    
    
    5,832
    
    
    
    5,974
    
    
    
    5,786
    
    
    
    4,576Operating profit
    
    
    7,856
    
    
    
    8,648
    
    
    
    6,060
    
    
    
    7,355
    
    
    
    6,948
 Critical Accounting Policies and Estimates
    Results of Operations
 Comparison of Three Months Ended August 31, 2007 and August 31, 2006
 Revenues
    Operating Expenses
  Page 15




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Interest Income, Net
  Income Tax Provision
  Liquidity and Capital Resources
       Page 16




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Contractual Obligations
  SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
   
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
   Page 17




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Part II. OTHER INFORMATION
 
   
   
   
   
   
   
 Item 6. Exhibits
  Exhibit#
    
    Description3
    
    Articles of Incorporation (Restated) and bylaws are incorporated by reference to Exhibits 1.2
and 6.1, respectively, of Registration Statement (Form S-14), File No. 2-63532. A copy of the
Restated Articles of Incorporation and the Certificate of Amendment of Restated Articles of
Incorporation filed October 24, 1988 are incorporated by reference to Exhibit (3) to the
Annual Report (Form 10-K) for the fiscal year ended May 31, 1989. A copy of the Certificate
of Amendment of Restated Articles of Incorporation filed October 15, 1997 is filed as Exhibit
(3) to the Annual Report (Form 10-K) for the fiscal year ended May 31, 1999. A copy of the
amendment to the bylaws adopted October 6, 1994 is incorporated by reference to the Annual
Report (Form 10-K) for the fiscal year ended May 31, 1995. A copy of the amendment to the
bylaws adopted November 15, 1996 is incorporated by reference to Exhibit (3) of the Annual
Report (Form 10-K) for the fiscal year ended May 31, 1997.31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer32.1
    
    Section 1350 Certification by Principal Executive Officer32.2
    
    Section 1350 Certification by Chief Financial Officer
 Page 18




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/s/ Craig R. Jones

Craig R. Jones
Vice President and Chief Financial Officer
(Principal Financial Officer and duly authorized
to sign this report on behalf of the company)
 Page 19