##### 



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, 2006 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 
of Incorporation or Organization)
    
    (I.R.S. Employer
Identification No.)
 6060 SEPULVEDA BOULEVARD  VAN NUYS, CALIFORNIA 91411-2501
 818 787-2100
  þ o
  Large accelerated filer o
    
    Accelerated Filer þ
    
    Non-accelerated filer o
  o þ




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##### 



ELECTRO RENT CORPORATION
FORM 10-Q
August 31, 2006
  PagePart I: FINANCIAL INFORMATION
    
    
    3Item 1. Financial Statements
    
    
    3Condensed Consolidated Statements of Income for the Three Month Periods
Ended August 31, 2006 and 2005 (Unaudited)
    
    
    3Condensed Consolidated Balance Sheets at August 31, 2006 and May 31, 2006 (Unaudited)
    
    
    4Condensed Consolidated Statements of Cash Flows for the Three Months Ended
August 31, 2006 and 2005 (Unaudited)
    
    
    5Notes to Condensed Consolidated Financial Statements
(Unaudited)
    
    
    6Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    11Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    18Item 4. Controls and Procedures
    
    
    18Part II: OTHER INFORMATION
    
    
    19Item 1. Legal Proceedings.
    
    
    19Item 1A. Risk Factors
    
    
    19Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
    
    
    19Item 3. Defaults Upon Senior Securities.
    
    
    19Item 4. Submission of Matters to a Vote of Security Holders.
    
    
    19Item 5. Other Information.
    
    
    19Item 6. Exhibits.
    
    
    20SIGNATURES
    
    
    21
  Page 2




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##### 



Part I. FINANCIAL INFORMATION
 
  ELECTRO RENT CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 (Unaudited) (000s omitted, except per share data)
 Three Months EndedAugust 31,2006
    
    
    2005Revenues:Rentals and leases
    
    $
    25,448
    
    
    $
    21,156Sales of equipment and other revenues
    
    
    4,576
    
    
    
    5,394Total revenues
    
    
    30,024
    
    
    
    26,550Operating expenses:Deprecation of rental and lease equipment
    
    
    9,882
    
    
    
    8,452Costs of revenues other than depreciation of
rental and lease equipment
    
    
    2,616
    
    
    
    2,663Selling, general and administrative expenses
    
    
    10,578
    
    
    
    7,944Total operating expenses
    
    
    23,076
    
    
    
    19,059Operating profit
    
    
    6,948
    
    
    
    7,491Interest and investment income, net
    
    
    939
    
    
    
    559Income before income taxes
    
    
    7,887
    
    
    
    8,050Income taxes
    
    
    3,128
    
    
    
    3,065Net income
    
    $
    4,759
    
    
    $
    4,985Earnings per share:Basic
    
    $
    0.19
    
    
    $
    0.20Diluted
    
    $
    0.18
    
    
    $
    0.19Shares used in per
share calculation:Basic
    
    
    25,550
    
    
    
    25,119Diluted
    
    
    25,944
    
    
    
    25,571
 See accompanying notes to condensed consolidated financial statements (unaudited).
 Page 3




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##### 



ELECTRO RENT CORPORATION
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited) (000s omitted, except share data)
 August 31,
    
    
    May 31,2006
    
    
    2006ASSETSCash and cash equivalents
    
    $
    58,580
    
    
    $
    58,748Marketable securities
    
    
    23,050
    
    
    
    22,750Accounts receivable, net of allowance for
doubtful accounts of $729 and $681
    
    
    14,475
    
    
    
    14,001Rental and lease equipment, net of accumulated
depreciation of $127,255 and $122,213
    
    
    146,980
    
    
    
    140,108Other property, net of accumulated depreciation and
amortization of $13,052 and $12,773
    
    
    15,362
    
    
    
    15,528Goodwill
    
    
    2,028
    
    
    
    2,083Intangibles, net of amortization of $453 and $294
    
    
    2,023
    
    
    
    2,127Other
    
    
    3,910
    
    
    
    4,337$
    266,408
    
    
    $
    259,682LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Accounts payable
    
    $
    11,378
    
    
    $
    11,344Accrued expenses
    
    
    9,507
    
    
    
    8,595Deferred revenue
    
    
    3,212
    
    
    
    3,303Deferred tax liability
    
    
    15,381
    
    
    
    14,599Total liabilities
    
    
    39,478
    
    
    
    37,841Shareholders 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, 2006 - 25,558,323;
May 31, 2006 - 25,546,719
    
    
    26,681
    
    
    
    26,351Retained earnings
    
    
    200,249
    
    
    
    195,490Total shareholders equity
    
    
    226,930
    
    
    
    221,841$
    266,408
    
    
    $
    259,682
 See accompanying notes to condensed consolidated financial statements (unaudited).
 Page 4




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ELECTRO RENT CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited) (000s omitted)
 Three Months EndedAugust 31,2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    4,759
    
    
    $
    4,985Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    10,314
    
    
    
    8,693Provision for losses
on accounts receivable
    
    
    71
    
    
    
    48Gain on sale of rental and lease equipment
    
    
    (1,942
    )
    
    
    (2,288
    )Stock compensation expense
    
    
    194
    
    
    
    Tax benefit for stock options exercised
    
    
    
    
    
    
    140Deferred tax liability
    
    
    782
    
    
    
    1,196Change in operating assets and liabilities:Accounts receivable
    
    
    (545
    )
    
    
    (1,061
    )Other assets
    
    
    426
    
    
    
    (130
    )Accounts payable
    
    
    335
    
    
    
    (364
    )Accrued expenses
    
    
    912
    
    
    
    765Deferred revenue
    
    
    (91
    )
    
    
    127Net cash provided by operating activities
    
    
    15,215
    
    
    
    12,111Cash flows from investing activities:Proceeds from sale of rental and lease equipment
    
    
    3,676
    
    
    
    4,338Payments for purchase of rental and lease equipment
    
    
    (18,789
    )
    
    
    (17,401
    )Purchases of marketable securities
    
    
    (300
    )
    
    
    (5,970
    )Redemptions of marketable securities
    
    
    
    
    
    
    5,800Payments for purchase of other property
    
    
    (106
    )
    
    
    (133
    )Net cash used in investing activities
    
    
    (15,519
    )
    
    
    (13,366
    )Cash flows from financing activities:Proceeds from issuance of common stock
    
    
    107
    
    
    
    579Tax benefit for stock options exercised
    
    
    29
    
    
    
    Net cash provided by financing activities
    
    
    136
    
    
    
    579Net decrease in cash and cash equivalents
    
    
    (168
    )
    
    
    (676
    )Cash and cash equivalents at beginning of period
    
    
    58,748
    
    
    
    31,997Cash and cash equivalents at end of period
    
    $
    58,580
    
    
    $
    31,321
 See accompanying notes to condensed consolidated financial statements (unaudited).
 Page 5




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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
  Share-Based Payment
 Accounting for Stock-Based
Compensation,
   Page 6




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Accounting for Stock Issued to Employees
 Net income, as reported
    
    $
    4,985Deduct: Total stock-based
employee compensation
expense determined
under the fair value
based method for all
awards, net of
related tax effects
    
    
    (187
    )Pro forma net income
    
    $
    4,798Earnings per share:Basic, as reported
    
    $
    0.20Basic, pro forma
    
    $
    0.19Diluted, as reported
    
    $
    0.19Diluted, pro forma
    
    $
    0.19
     Page 7




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WeightedAverageWeighted
    
    
    RemainingAverage
    
    
    Contractual
    
    
    AggregateExercise
    
    
    (Term in
    
    
    IntrinsicShares
    
    
    Price
    
    
    years)
    
    
    ValueOutstanding at May 31, 2006
    
    
    1,141
    
    
    $
    9.13
    
    
    
    2.4Granted
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    (11
    )
    
    
    9.13
    
    
    
    Forfeited/Cancelled
    
    
    (1
    )
    
    
    9.51
    
    
    
    Outstanding at August 31, 2006
    
    
    1,129
    
    
    $
    9.13
    
    
    
    2.1
    
    
    $
    7,882Vested and expected to vest at
August 31, 2006
    
    
    1,129
    
    
    $
    9.13
    
    
    
    2.1
    
    
    $
    7,882Exercisable at August 31, 2006
    
    
    944
    
    
    $
    8.98
    
    
    
    1.9
    
    
    $
    6,730
   WeightedAverage GrantShares
    
    
    Date Fair ValueNonvested at May 31, 2006
    
    
    344
    
    
    $
    4.76Vested
    
    
    (160
    )
    
    
    4.69Nonvested at August 31, 2006
    
    
    184
    
    
    $
    4.82
      Page 8




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##### 



Balance as ofJune 1, 2006 (net
    
    
    
    
    
    
    
    
    
    
    Balance as ofof amortization)
    
    
    Adjustments
    
    
    Amortization
    
    
    August 31, 2006Goodwill
    
    $
    2,083
    
    
    $
    (55
    )
    
    $
    
    
    
    $
    2,028Trade Name
    
    
    357
    
    
    
    55
    
    
    
    
    
    
    
    412Non-compete agreements
    
    
    704
    
    
    
    203
    
    
    
    (111
    )
    
    
    796Customer relationships
    
    
    1,066
    
    
    
    (203
    )
    
    
    (48
    )
    
    
    815$
    4,210
    
    
    $
    
    
    
    $
    (159
    )
    
    $
    4,051
   GrossEstimated
    
    
    Carrying
    
    
    Accumulated
    
    
    Net CarryingUseful Life
    
    
    Amount
    
    
    Amortization
    
    
    AmountTrade name
    
    
    
    
    
    $
    412
    
    
    $
    
    
    
    $
    412Non-compete agreements
    
    2-5 years
    
    
    1,050
    
    
    
    (254
    )
    
    
    796Customer relationships
    
    3-4 years
    
    
    1,014
    
    
    
    (199
    )
    
    
    815$
    2,476
    
    
    $
    (453
    )
    
    $
    2,023
  FutureYear ending May 31,
    
    Amortization2007
    
    $
    4512008
    
    
    5022009
    
    
    3352010
    
    
    2562011
    
    
    67$
    1,611
     August 31,
    
    
    May 31,2006
    
    
    2006Gross minimum lease payments receivable
    
    $
    529
    
    
    $
    516Less  unearned interest
    
    
    (32
    )
    
    
    (31
    )Net investment in sales-type lease receivables
    
    $
    497
    
    
    $
    485
 Page 9




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T&M
    
    
    DP
    
    
    TotalAugust 31, 2006Rentals and leases
    
    $
    19,082
    
    
    $
    6,366
    
    
    $
    25,448Sales of equipment and other revenues
    
    
    3,912
    
    
    
    664
    
    
    
    4,576$
    22,994
    
    
    $
    7,030
    
    
    $
    30,024August 31, 2005Rentals and leases
    
    $
    17,087
    
    
    $
    4,069
    
    
    $
    21,156Sales of equipment and other revenues
    
    
    4,696
    
    
    
    698
    
    
    
    5,394$
    21,783
    
    
    $
    4,767
    
    
    $
    26,550
   Three Months ended August 31,2006
    
    
    2005Revenues: (1)U.S.
    
    $
    26,857
    
    
    $
    23,340Other (2)
    
    
    3,167
    
    
    
    3,210Total
    
    $
    30,024
    
    
    $
    26,550
 2006
    
    
    2005Net Long Lived Assets: (3)U.S.
    
    $
    155,103
    
    
    $
    126,268Other (2)
    
    
    11,356
    
    
    
    12,252Total
    
    $
    166,459
    
    
    $
    138,520
 
 (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 10




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##### 



Three Months ended August 31,2006
    
    
    2005Denominator:Denominator for basic
earnings per
shareweighted average
common shares outstanding
    
    
    25,550
    
    
    
    25,119Effect of dilutive
securities-options
    
    
    394
    
    
    
    45225,944
    
    
    
    25,571Net income
    
    $
    4,759
    
    
    $
    4,985Earnings per share:Basic
    
    $
    0.19
    
    
    $
    0.20Diluted
    
    $
    0.18
    
    
    $
    0.19
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Overview
      Page 11




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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
   
    
    We have recently entered into distribution agreements with three leading manufacturers
for a range of basic T&M equipment.
 Page 12




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##### 




    
    We have re-focused our DP marketing approach to emphasize short-term, event-oriented
rentals in addition to our traditional markets.
    
    We have been purchasing more environmental test equipment to expand our presence in this
market.
    
    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.
    
    On October 3, 2005, we announced that we acquired a T&M equipment rental company based
in Belgium, from which we are beginning to service the European market.
  PROFITABILITY AND KEY BUSINESS TRENDS
   2006
    
    
    2005Net income per diluted common share (EPS)
    
    $
    0.18
    
    
    $
    0.19Net income as a percentage of average assets
    
    
    7.2
    %
    
    
    8.4
    %Net income as a percentage of average equity
    
    
    9.2
    %
    
    
    9.9
    %
   Page 13




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##### 



Three Months EndedAug. 31,
    
    
    May 31,
    
    
    Feb. 28,
    
    
    Nov. 30,
    
    
    Aug. 31,2006
    
    
    2006
    
    
    2006
    
    
    2005
    
    
    2005Rentals and leases
    
    $
    25,448
    
    
    $
    25,294
    
    
    $
    22,093
    
    
    $
    22,005
    
    
    $
    21,156Sales of equipment and other revenues
    
    
    4,576
    
    
    
    5,684
    
    
    
    7,184
    
    
    
    5,996
    
    
    
    5,394Operating profit
    
    
    6,948
    
    
    
    8,261
    
    
    
    7,683
    
    
    
    8,266
    
    
    
    7,491
 Critical Accounting Policies and Estimates
  Stock-based compensation
   Results of Operations
 Comparison of Three Months Ended August 31, 2006 and August 31, 2005
 Revenues
  Page 14




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##### 



Operating Expenses
    Interest and Investment Income, Net
  Income Taxes
  Liquidity and Capital Resources
   Page 15




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##### 



Page 16




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##### 



SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
  Page 17




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##### 



Item 3. Quantitative and Qualitative Disclosures About Market Risks
       
 Item 4. Controls and Procedures
   Page 18




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Page 19




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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
 Page 20




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##### 



/s/ Craig R. Jones

Craig R. JonesVice President and Chief Financial Officer(Principal Financial Officer and duly authorized
to sign this report on behalf of the company)
 Page 21