##### 



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 February 28, 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  (Address of Principal Executive Offices and Zip Code)
 818 787-2100  (Registrants Telephone Number, Including Area Code)
  þ o
  o þ o
  o þ




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##### 



ELECTRO RENT CORPORATION
FORM 10-Q
February 28, 2007
  
 TABLE OF CONTENTS
    
    PagePart I: FINANCIAL INFORMATION
    
    
    3Item 1. Financial Statements
    
    
    3Condensed Consolidated Statements of Income for the Three and Nine Month Periods
Ended February 28, 2007 and 2006 (Unaudited)
    
    
    3Condensed Consolidated Balance Sheets at February 28, 2007 and May 31, 2006 (Unaudited)
    
    
    4Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
February 28, 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
    
    
    13Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    20Item 4. Controls and Procedures
    
    
    20Part II: OTHER INFORMATION
    
    
    21Item 1. Legal Proceedings
    
    
    21Item 1A. Risk Factors
    
    
    21Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    21Item 3. Defaults Upon Senior Securities
    
    
    21Item 4. Submission of Matters to a Vote of Security Holders
    
    
    21Item 5. Other Information
    
    
    21Item 6. Exhibits
    
    
    22SIGNATURES
    
    
    23EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  Page 2




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##### 



Part I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 ELECTRO RENT CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 (Unaudited) (000s omitted, except per share data)
 Three Months Ended
    
    
    Nine Months EndedFebruary 28,
    
    
    February 28,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues:Rentals and leases
    
    $
    24,716
    
    
    $
    22,093
    
    
    $
    75,918
    
    
    $
    65,254Sales of equipment and other revenues
    
    
    5,974
    
    
    
    7,184
    
    
    
    16,336
    
    
    
    18,574Total revenues
    
    
    30,690
    
    
    
    29,277
    
    
    
    92,254
    
    
    
    83,828Operating expenses:Depreciation of rental and lease equipment
    
    
    11,097
    
    
    
    8,666
    
    
    
    31,489
    
    
    
    25,782Costs of revenues other than deprecation of
rental and lease equipment
    
    
    3,724
    
    
    
    4,668
    
    
    
    9,838
    
    
    
    10,399Selling, general and administrative expenses
    
    
    9,809
    
    
    
    8,260
    
    
    
    30,564
    
    
    
    24,207Total operating expenses
    
    
    24,630
    
    
    
    21,594
    
    
    
    71,891
    
    
    
    60,388Operating profit
    
    
    6,060
    
    
    
    7,683
    
    
    
    20,363
    
    
    
    23,440Interest and investment income, net
    
    
    978
    
    
    
    750
    
    
    
    2,827
    
    
    
    1,906Income from settlement
    
    
    1,571
    
    
    
    
    
    
    
    1,571
    
    
    
    Income before income taxes
    
    
    8,609
    
    
    
    8,433
    
    
    
    24,761
    
    
    
    25,346Income tax provision
    
    
    3,411
    
    
    
    2,517
    
    
    
    9,880
    
    
    
    8,826Net income
    
    $
    5,198
    
    
    $
    5,916
    
    
    $
    14,881
    
    
    $
    16,520Earnings per share:Basic
    
    $
    0.20
    
    
    $
    0.23
    
    
    $
    0.58
    
    
    $
    0.65Diluted
    
    $
    0.20
    
    
    $
    0.23
    
    
    $
    0.57
    
    
    $
    0.64Shares used in per share calculationBasic
    
    
    25,808
    
    
    
    25,451
    
    
    
    25,654
    
    
    
    25,279Diluted
    
    
    26,131
    
    
    
    25,883
    
    
    
    26,036
    
    
    
    25,694
 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)
 February 28,
    
    
    May 31,2007
    
    
    2006ASSETSCash and cash equivalents
    
    $
    63,369
    
    
    $
    58,748Marketable securities
    
    
    23,450
    
    
    
    22,750Accounts receivable, net of allowance for
doubtful accounts of $791 and $681
    
    
    15,472
    
    
    
    14,001Rental and lease equipment, net of accumulated
depreciation of $140,537 and $122,213
    
    
    147,845
    
    
    
    140,108Other property, net of accumulated depreciation and
amortization of $13,540 and $12,773
    
    
    15,140
    
    
    
    15,528Goodwill
    
    
    2,859
    
    
    
    2,083Intangibles, net of amortization of $758 and $294
    
    
    1,717
    
    
    
    2,127Other
    
    
    5,566
    
    
    
    4,337$
    275,418
    
    
    $
    259,682LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Accounts payable
    
    $
    7,453
    
    
    $
    11,344Accrued expenses
    
    
    7,684
    
    
    
    8,595Deferred revenue
    
    
    3,249
    
    
    
    3,303Deferred tax liability
    
    
    15,429
    
    
    
    14,599Total liabilities
    
    
    33,815
    
    
    
    37,841Commitments 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 February 28, 2007 - 25,928,737;
May 31, 2006 - 25,546,719
    
    
    31,232
    
    
    
    26,351Retained earnings
    
    
    210,371
    
    
    
    195,490Total shareholders equity
    
    
    241,603
    
    
    
    221,841$
    275,418
    
    
    $
    259,682
 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)
 Nine Months EndedFebruary 28,2007
    
    
    2006Cash flows from operating activities:Net income
    
    $
    14,881
    
    
    $
    16,520Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    32,742
    
    
    
    26,520Provision for losses on accounts receivable
    
    
    230
    
    
    
    48Gain on sale of rental and lease equipment
    
    
    (6,782
    )
    
    
    (6,929
    )Income from settlement
    
    
    (1,571
    )
    
    
    Stock compensation expense
    
    
    628
    
    
    
    Tax benefit for stock options exercised
    
    
    
    
    
    
    1,073Deferred tax liability
    
    
    830
    
    
    
    717Changes in operating assets and liabilities:Accounts receivable
    
    
    (130
    )
    
    
    (2,497
    )Other assets
    
    
    (1,228
    )
    
    
    (900
    )Accounts payable
    
    
    (505
    )
    
    
    (558
    )Accrued expenses
    
    
    (1,661
    )
    
    
    (1,464
    )Deferred revenue
    
    
    (54
    )
    
    
    353Net cash provided by operating activities
    
    
    37,380
    
    
    
    32,883Cash flows from investing activities:Proceeds from sale of rental and lease equipment
    
    
    13,988
    
    
    
    15,600Cash proceed (payment) for acquisition, net of acquired
cash and settlements
    
    
    493
    
    
    
    (9,608
    )Payments for purchase of rental and lease equipment
    
    
    (50,392
    )
    
    
    (44,937
    )Purchases of marketable securities
    
    
    (700
    )
    
    
    (500
    )Redemptions of marketable securities
    
    
    
    
    
    
    26,600Payments for purchase of other property
    
    
    (401
    )
    
    
    (404
    )Net cash used in investing activities
    
    
    (37,012
    )
    
    
    (13,249
    )Cash flows from financing activities:Proceeds from issuance of common stock
    
    
    3,391
    
    
    
    3,616Tax benefit for stock options exercised
    
    
    862
    
    
    
    Payment for repurchase of common stock
    
    
    
    
    
    
    (82
    )Net cash provided by financing activities
    
    
    4,253
    
    
    
    3,534Net increase in cash and cash equivalents
    
    
    4,621
    
    
    
    23,168Cash and cash equivalents at beginning of period
    
    
    58,748
    
    
    
    31,997Cash and cash equivalents at end of period
    
    $
    63,369
    
    
    $
    55,165
 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
 Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year
Financial Statements
 Fair Value Measurements
 Page 6




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##### 



Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans
 The Fair Value Option for Financial Assets and
Financial Liabilities
  Share-Based Payment
 Accounting for Stock-Based
Compensation,
   Page 7




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##### 



Accounting for Stock Issued to Employees
 Three Months Ended
    
    
    Nine Months EndedFebruary 28,
    
    
    February 28,2006
    
    
    2006Net income, as reported
    
    $
    5,916
    
    
    $
    16,520Deduct: Total stock-based employee compensation expense determined
under the fair value based method for all awards, net of related
tax effects
    
    
    (190
    )
    
    
    (571
    )Pro forma net income
    
    $
    5,726
    
    
    $
    15,949Earnings per share:Basic, as reported
    
    $
    0.23
    
    
    $
    0.65Basic, pro forma
    
    $
    0.22
    
    
    $
    0.63Diluted, as reported
    
    $
    0.23
    
    
    $
    0.64Diluted, pro forma
    
    $
    0.22
    
    
    $
    0.62
    Three Months Ended
    
    Nine Months EndedFebruary 28,
    
    February 28,2007
    
    2006
    
    2007
    
    2006Risk-free interest rate
    
    
    
    
    
    
    3.9
    %
    
    
    4.7
    %
    
    
    3.9
    %Expected life (in years)
    
    
    
    
    
    
    4.6
    
    
    
    3.5
    
    
    
    4.6Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expected volatility
    
    
    
    
    
    
    52.5
    
    
    
    40.2
    
    
    
    52.5
 Page 8




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##### 



WeightedWeighted
    
    AverageAverage
    
    Remaining
    
    AggregateExercise
    
    Contractual
    
    IntrinsicShares
    
    Price
    
    Term (in years)
    
    ValueOutstanding at May 31, 2006
    
    
    1,141
    
    
    $
    9.13Granted
    
    
    56
    
    
    
    17.69Exercised
    
    
    (382
    )
    
    
    8.88Forfeited/Cancelled
    
    
    (43
    )
    
    
    12.91Outstanding at February 28, 2007
    
    
    772
    
    
    $
    9.66
    
    
    
    2.1
    
    
    $
    4,379Vested and expected to vest at
February 28, 2007
    
    
    768
    
    
    $
    9.62
    
    
    
    2.0
    
    
    $
    4,345Exercisable at February 28, 2007
    
    
    590
    
    
    $
    9.13
    
    
    
    1.8
    
    
    $
    3,584
      Page 9




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##### 



Balance as ofJune 1, 2006 (net
    
    
    
    
    
    
    
    
    
    
    Balance as ofof amortization)
    
    
    Adjustments
    
    
    Amortization
    
    
    February 28, 2007Goodwill
    
    $
    2,083
    
    
    $
    776
    
    
    $
    
    
    
    $
    2,859Trade Name
    
    
    357
    
    
    
    54
    
    
    
    
    
    
    
    411Non-compete agreements
    
    
    704
    
    
    
    203
    
    
    
    (286
    )
    
    
    621Customer relationships
    
    
    1,066
    
    
    
    (203
    )
    
    
    (178
    )
    
    
    685$
    4,210
    
    
    $
    830
    
    
    $
    (464
    )
    
    $
    4,576
    February 28, 2007GrossEstimated Useful
    
    
    Carrying
    
    
    Accumulated
    
    
    Net CarryingLife
    
    
    Amount
    
    
    Amortization
    
    
    AmountTrade name
    
    
    
    
    
    $
    411
    
    
    $
    
    
    
    $
    411Non-compete agreements
    
    2-5 years
    
    
    
    1,050
    
    
    
    (429
    )
    
    
    621Customer relationships
    
    3-4 years
    
    
    
    1,014
    
    
    
    (329
    )
    
    
    685$
    2,475
    
    
    $
    (758
    )
    
    $
    1,717
 May 31, 2006GrossEstimated
    
    
    Carrying
    
    
    Accumulated
    
    
    Net CarryingUseful Life
    
    
    Amount
    
    
    Amortization
    
    
    AmountTrade name
    
    
    
    
    
    $
    357
    
    
    $
    
    
    
    $
    357Non-compete agreements
    
    2-5 years
    
    
    847
    
    
    
    (143
    )
    
    
    704Customer relationships
    
    3-4 years
    
    
    1,217
    
    
    
    (151
    )
    
    
    1,066$
    2,421
    
    
    $
    (294
    )
    
    $
    2,127
 Page 10




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##### 



FutureYear ending May 31,
    
    Amortization2007
    
    $
    1462008
    
    
    5022009
    
    
    3352010
    
    
    2572011
    
    
    66$
    1,306
     February 28,
    
    
    May 31,2007
    
    
    2006Gross minimum lease payments receivable
    
    $
    567
    
    
    $
    516Less  unearned interest
    
    
    (37
    )
    
    
    (31
    )Net investment in sales-type lease receivables
    
    $
    530
    
    
    $
    485
     T&M
    
    
    DP
    
    
    Total2007Rentals and leases
    
    $
    19,165
    
    
    $
    5,551
    
    
    $
    24,716Sales of equipment and other revenues
    
    
    5,456
    
    
    
    518
    
    
    
    5,974$
    24,621
    
    
    $
    6,069
    
    
    $
    30,6902006Rentals and leases
    
    $
    17,710
    
    
    $
    4,383
    
    
    $
    22,093Sales of equipment and other revenues
    
    
    6,516
    
    
    
    668
    
    
    
    7,184$
    24,226
    
    
    $
    5,051
    
    
    $
    29,277
 Page 11




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##### 



T&M
    
    
    DP
    
    
    Total2007Rentals and leases
    
    $
    58,079
    
    
    $
    17,839
    
    
    $
    75,918Sales of equipment and other revenues
    
    
    14,309
    
    
    
    2,027
    
    
    
    16,336$
    72,388
    
    
    $
    19,866
    
    
    $
    92,2542006Rentals and leases
    
    $
    52,522
    
    
    $
    12,732
    
    
    $
    65,254Sales of equipment and other revenues
    
    
    16,542
    
    
    
    2,032
    
    
    
    18,574$
    69,064
    
    
    $
    14,764
    
    
    $
    83,828
   Three Months Ended
    
    
    Nine Months EndedFebruary 28,
    
    
    February 28,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues: (1)U.S.
    
    $
    26,920
    
    
    $
    26,311
    
    
    $
    81,696
    
    
    $
    74,987Other (2)
    
    
    3,770
    
    
    
    2,966
    
    
    
    10,558
    
    
    
    8,841Total
    
    $
    30,690
    
    
    $
    29,277
    
    
    $
    92,254
    
    
    $
    83,828
 February 28,
    
    
    May 31,2007
    
    
    2006Net Long Lived Assets: (3)U.S.
    
    $
    148,140
    
    
    $
    148,435Other (2)
    
    
    19,421
    
    
    
    11,411Total
    
    $
    167,561
    
    
    $
    159,846
 
 (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. Page 12




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##### 



Three Months Ended
    
    
    Nine Months EndedFebruary 28,
    
    
    February 28,2007
    
    
    2006
    
    
    2007
    
    
    2006Denominator:Denominator for basic
earnings per
shareweighted average
common shares outstanding
    
    
    25,808
    
    
    
    25,451
    
    
    
    25,654
    
    
    
    25,279Effect of dilutive
securities-options (1)
    
    
    323
    
    
    
    432
    
    
    
    382
    
    
    
    41526,131
    
    
    
    25,883
    
    
    
    26,036
    
    
    
    25,694Net income
    
    $
    5,198
    
    
    $
    5,916
    
    
    $
    14,881
    
    
    $
    16,520Earnings per share:Basic
    
    $
    0.20
    
    
    $
    0.23
    
    
    $
    0.58
    
    
    $
    0.65Diluted
    
    $
    0.20
    
    
    $
    0.23
    
    
    $
    0.57
    
    
    $
    0.64
 
 (1)
    
    Excludes 56 options outstanding for the three and nine months ended February 28, 2007 for
which the exercise price exceeded the average market price of our stock during those periods.
There were no such options for the three and nine months ended February 28, 2006.      
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Overview
  Page 13




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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.
    Page 14




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##### 




    
    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
   
    
    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
  Page 15




---



##### 



2007
    
    2006Net income per diluted common share (EPS)
    
    $
    0.57
    
    
    $
    0.64Net income as a percentage of average assets
    
    
    7.4
    %
    
    
    9.2
    %Net income as a percentage of average equity
    
    
    8.7
    %
    
    
    10.8
    %
    Three Months EndedFeb. 28,
    
    
    Nov. 30,
    
    
    Aug. 31,
    
    
    May 31,
    
    
    Feb. 28,2007
    
    
    2006
    
    
    2006
    
    
    2006
    
    
    2006Rentals and leases
    
    $
    24,716
    
    
    $
    25,754
    
    
    $
    25,448
    
    
    $
    25,294
    
    
    $
    22,093Sales of equipment and other revenues
    
    
    5,974
    
    
    
    5,786
    
    
    
    4,576
    
    
    
    5,684
    
    
    
    7,184Operating profit
    
    
    6,060
    
    
    
    7,355
    
    
    
    6,948
    
    
    
    8,261
    
    
    
    7,683
 Critical Accounting Policies and Estimates
  Stock-based compensation
 Share-Based Payment
  Page 16




---



##### 



Results of Operations
 Comparison of Three Months Ended February 28, 2007 and February 28, 2006
 Revenues
    Operating Expenses
    Interest and Investment Income, Net
  Income from Settlement
  Page 17




---



##### 



Income Tax Provision
  Comparison of Nine Months Ended February 28, 2007 and February 28, 2006
 Revenues
    Operating Expenses
    Interest and Investment Income, Net
  Income from Settlement
  Page 18




---



##### 



Income Tax Provision
  Liquidity and Capital Resources
      SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
  Page 19




---



##### 



Item 3. Quantitative and Qualitative Disclosures About Market Risk
       
 Item 4. Controls and Procedures
   Page 20




---



##### 



Part II. OTHER INFORMATION
 
   
   
   
   
   
   Page 21




---



##### 



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, 1997.10.1
    
    Employment Agreement for Steven Markheim dated October 31, 2005, is incorporated by reference
to Exhibit 10.1 of our Current Report (Form 8-K) dated October 31, 2005.*10.2
    
    Employment Agreement for Gary B. Phillips dated October 31, 2005, is incorporated by
reference to Exhibit 10.1 of our Current Report (Form 8-K) dated October 31, 2005.*10.3
    
    Employment Agreement for Craig R. Jones dated October 31, 2005, is incorporated by reference
to Exhibit 10.1 of our Current Report (Form 8-K) dated October 31, 2005.*10.4
    
    The Executive Employment Agreement between the Company and Daniel Greenberg, Chairman of the
Board of Directors and Chief Executive Officer, originally entered into December 15, 1986 and
amended November 22, 1988 by Amendment No. One To Executive Employment Agreement, as further
amended and restated as of July 15, 1992. A copy of the Executive Employment Agreement
(Amended And Restated as of July 15, 1992), and as further amended as of October 2001) is
incorporated by reference to Exhibit (10)(D)-(1) of Registrants Annual Report (Form 10-K) for
the fiscal year ended May 31, 1993. A copy of Amendment No. 1 to the Amended and Restated
Executive Employment Agreement, dated October 12, 2001 is incorporated by reference to Exhibit
10(D)-(1) of Registrants Annual Report (Form 10-K) for the fiscal year ended May 31, 2003.*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
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/s/ Craig R. Jones
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