ELECTRO RENT CORP - FORM 10-Q

Attached files

Attached files

Stock widget

Investing forum

ELECTRO RENT CORP Reports

file	filename
EX-31.1 - EXHIBIT - ELECTRO RENT CORP	elrcex311_11302014.htm
EX-31.2 - EXHIBIT - ELECTRO RENT CORP	elrcex312_11302014.htm
EX-10.3 - EXHIBIT - ELECTRO RENT CORP	elrcex103_11302014.htm
EX-10.2 - EXHIBIT - ELECTRO RENT CORP	elrcex102_11302014.htm
EX-32.2 - EXHIBIT - ELECTRO RENT CORP	elrcex322_11302014.htm
EX-10.1 - EXHIBIT - ELECTRO RENT CORP	elrcex101_11302014.htm
EX-32.1 - EXHIBIT - ELECTRO RENT CORP	elrcex321_11302014.htm
EXCEL - IDEA: XBRL DOCUMENT - ELECTRO RENT CORP	Financial_Report.xls

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended November 30, 2014



¨	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

(Exact name of registrant as specified in its charter)



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
(Address of principal executive offices)		(Zip Code)

(818) 787-2100

(Issuer’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

The number of shares outstanding of the registrant’s common stock as of January 13, 2015 was 24,104,834.

Table of Contents

Electro Rent Corporation

Quarterly Report on Form 10-Q

For the Quarterly Period Ended November 30, 2014

TABLE OF CONTENTS



		Page

EXPLANATORY NOTE		3

SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS		3

PART I—FINANCIAL INFORMATION		4

Item 1.	Financial Statements.	4

	Consolidated Statements of Operations for the Three and Six Months Ended November 30, 2014 and 2013 (Unaudited)	4

	Consolidated Balance Sheets at November 30, 2014 (Unaudited) and May 31, 2014	5

	Consolidated Statements of Cash Flows for the Six Months Ended November 30, 2014 and 2013 (Unaudited)	6

	Notes to Consolidated Financial Statements (Unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	17

Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	23

Item 4.	Controls and Procedures.	23

PART II—OTHER INFORMATION		24

Item 1.	Legal Proceedings.	24

Item 1A.	Risk Factors.	24

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	24

Item 3.	Defaults Upon Senior Securities.	24

Item 4.	Mine Safety Disclosures.	24

Item 5.	Other Information.	24

Item 6.	Exhibits.	25

SIGNATURES		26

Page 2

Table of Contents

EXPLANATORY NOTE

In this report, unless the context indicates otherwise, the terms “Electro Rent,” “Company,” “we,” “us” and “our” refer to Electro Rent Corporation, a California corporation, and its consolidated subsidiaries.

SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). You can find many (but not all) of these statements by looking for words such as “approximates,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “would,” “may” or other similar expressions in this report. Any statements that refer to projections of our future financial or operating performance, anticipated trends in our business, our goals, strategies, focus and plans, and other characterizations of future events or circumstances, including statements expressing general optimism about future operating results, are forward-looking statements.

We claim the protection of the safe harbor contained in the Private Securities Litigation Reform Act of 1995. We caution investors that any forward-looking statements presented in this report, or that we may make orally or in writing from time to time, are based on the beliefs of, assumptions made by, and information currently available to us. Such statements are based on assumptions, and the actual outcome will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control. Although we believe that our assumptions are reasonable, they are not guarantees of future performance, and some will inevitably prove to be incorrect. As a result, our actual future results may differ from our expectations, and those differences may be material. We are not undertaking any obligation to update any forward-looking statements. Accordingly, investors should use caution in relying on past forward-looking statements, which are based on known results and trends at the time they are made, to anticipate future results or trends.

Factors that could cause or contribute to these differences include, among others, those risks and uncertainties discussed under the sections contained in this Form 10-Q entitled “Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Part I, Item 3. Quantitative and Qualitative Disclosures about Market Risk,” and “Part II, Item 1A. Risk Factors” as well as in our Annual Report on Form 10-K for the fiscal year ended May 31, 2014 (including the “Risk Factors” discussed in Item 1A in that document), and our other filings with the Securities and Exchange Commission. The risks included in those documents are not exhaustive, and additional factors could adversely affect our business and financial performance. We operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for us to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

Page 3

Table of Contents

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

ELECTRO RENT CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited) (in thousands, except per share data)



	Three Months Ended November 30,				Six Months Ended November 30,
	2014		2013		2014		2013
Revenues:
Rentals and leases	$	33,469	$	35,205	$	67,358	$	70,862
Sales of equipment and other revenues	26,234		22,671		54,216		47,182
Total revenues	59,703		57,876		121,574		118,044
Operating expenses:
Depreciation of rental and lease equipment	14,670		14,241		28,585		28,614
Costs of rentals and leases, excluding depreciation	4,547		4,798		9,121		9,610
Costs of sales of equipment and other revenues	19,661		15,699		40,563		33,217
Selling, general and administrative expenses	14,598		14,226		29,619		28,905
Total operating expenses	53,476		48,964		107,888		100,346
Operating profit	6,227		8,912		13,686		17,698
Interest income, net	79		87		182		169
Other income	1,390		—		1,390		—
Income before income taxes	7,696		8,999		15,258		17,867
Income tax provision	2,901		3,418		5,692		6,589
Net income	$	4,795	$	5,581	$	9,566	$	11,278
Earnings per share:
Basic	$	0.20	$	0.23	$	0.39	$	0.46
Diluted	$	0.20	$	0.23	$	0.39	$	0.46
Shares used in per share calculation:
Basic	24,404		24,331		24,380		24,313
Diluted	24,408		24,350		24,393		24,340
Cash dividend declared per share	$	0.20	$	—	$	0.40	$	0.40

See accompanying notes to consolidated financial statements (unaudited).

Page 4

Table of Contents

ELECTRO RENT CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited) (in thousands, except share numbers)



	November 30, 2014		May 31, 2014
ASSETS
Cash	$	5,200	$	5,946
Accounts receivable, net of allowance for doubtful accounts of $659 and $555	38,422		34,970
Rental and lease equipment, net of accumulated depreciation of $241,856 and $237,151	217,801		221,888
Other property, net of accumulated depreciation and amortization of $19,329 and $18,983	12,942		13,122
Goodwill	3,109		3,109
Intangibles, net of accumulated amortization of $1,702 and $1,632	803		873
Other assets	23,058		22,150
	$	301,335	$	302,058
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Bank borrowings	$	2,843	$	—
Accounts payable	7,383		7,279
Accrued expenses	15,385		14,472
Deferred revenue	6,954		7,537
Deferred tax liability	37,286		41,812
Total liabilities	69,851		71,100
Commitments and contingencies (Note 11)
Shareholders’ equity:
Preferred stock, $1 par - shares authorized 1,000,000, none issued	—		—
Common stock, no par - shares authorized 40,000,000; issued and outstanding November 30, 2014 - 24,008,683; May 31, 2014 - 24,007,709	40,007		39,252
Retained earnings	191,477		191,706
Total shareholders’ equity	231,484		230,958
	$	301,335	$	302,058

See accompanying notes to consolidated financial statements (unaudited).

Page 5

Table of Contents

ELECTRO RENT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) (in thousands)



	Six Months Ended November 30,
	2014			2013
Cash flows from operating activities:
Net income	$	9,566		$	11,278
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	29,085			29,248
Remeasurement (gain)/loss on foreign currency	(7		)	85
Provision for losses on accounts receivable	381			341
Gain on sale of rental and lease equipment	(6,625		)	(6,504		)
Stock compensation expense	649			724
Excess tax benefit for share based compensation	(116		)	(131		)
Deferred income taxes	(4,526		)	(4,157		)
Change in operating assets and liabilities:
Accounts receivable	(2,662		)	(226		)
Other assets	(4,194		)	(2,656		)
Accounts payable	789			(8		)
Accrued expenses	1,199			(2,075		)
Deferred revenue	(543		)	422
Net cash provided by operating activities	22,996			26,341
Cash flows from investing activities:
Proceeds from sale of rental and lease equipment	16,168			15,125
Payments for purchase of rental and lease equipment	(32,985		)	(31,790		)
Payments for purchase of other property	(250		)	(343		)
Net cash used in investing activities	(17,067		)	(17,008		)
Cash flows from financing activities:
Borrowings under bank lines of credit	31,070			31,508
Payments under bank lines of credit	(28,227		)	(33,000		)
Minimum tax withholdings on share based compensation	(10		)	—
Excess tax benefit for share based compensation	116			131
Payment of dividends	(9,902		)	(9,924		)
Net cash used in financing activities	(6,953		)	(11,285		)
Effect of exchange rate changes on cash	278			(259		)
Net decrease in cash	(746		)	(2,211		)
Cash at beginning of period	5,946			10,402
Cash at end of period	$	5,200		$	8,191

Interest paid, during the period	$	17		$	80
Net income taxes paid, during the period	$	7,712		$	12,909
Dividends accrued during the period, not yet paid	$	104		$	161
Rental equipment acquisitions, not yet paid	$	3,843		$	3,267
Used equipment sales in accounts receivable and other assets, not yet collected	$	9,356		$	9,494
Transfers of demonstration equipment to rental and lease equipment	$	1,998		$	2,149

See accompanying notes to consolidated financial statements (unaudited).

Page 6

Table of Contents

ELECTRO RENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollar and share amounts in thousands, except per share amounts)

Note 1: Basis of Presentation

The unaudited consolidated financial statements included herein have been prepared by Electro Rent Corporation, pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). The consolidated financial statements include the accounts of Electro Rent Corporation and its wholly owned subsidiaries, Electro Rent, LLC, ER International, Inc., Electro Rent Europe NV, Electro Rent Asia, Inc. and Electro Rent (Beijing) Test and Measurement Equipment Rental Co., Ltd. (collectively “we”, “us”, or “our”) as well as the elimination of all intercompany transactions.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted pursuant to such SEC rules and regulations. These consolidated financial statements reflect all adjustments, consisting of only normal recurring adjustments, and disclosures that are, in our opinion, necessary for a fair presentation of our financial position and results of operations for the interim periods presented. These consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in our latest Annual Report on Form 10-K filed with the SEC on August 11, 2014.

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities as well as the disclosures of contingent assets and liabilities as of the date of these financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates, and results of operations for interim periods are not necessarily indicative of results to be expected for the full year.

Revenue Recognition

We generate revenues primarily through the rental and leasing of test and measurement equipment (“T&M”) and personal computer related data products equipment (“DP”) and through the sale of new and used equipment. Rental revenues comprise short term agreements that can be daily, weekly or monthly. Rental revenues are recognized in the month they are due on the accrual basis of accounting. We lease equipment under both operating and finance lease agreements.

Our operating lease agreements have varying terms, typically one to three years. Upon lease termination, customers have the option to renew the lease term, purchase the equipment at fair market value, or continue to rent on a month-to-month basis. Our operating leases do not provide for contingent rentals. Revenues related to operating leases are recognized on a straight-line basis over the term of the lease. Negotiated lease early-termination charges are recognized upon receipt. Rentals and leases are primarily billed to customers in advance, and unearned billings are recorded as deferred revenue.

Our finance lease agreements contain bargain purchase options and are accounted for as sale-type leases. Revenues from finance leases, which are recorded at the present value of the aggregate future lease payments, are included in sales of equipment and other revenues in our consolidated statements of operations. Unearned interest is recognized over the life of the finance lease term using the effective interest method. Our finance lease terms vary, and are typically one to three years. The net investment in finance leases, which represents the receivables due from lessees, net of unearned interest, is included in other assets in our consolidated balance sheets. Historically, we have not required security deposits based on our assessed credit risk within our customer bases.

Initial direct costs for operating and finance leases are insignificant.

Sales of new equipment through our resale channel are recognized in the period in which the equipment is delivered and risk of loss passes to the customer, while sales of used equipment from our rental and lease equipment pool are recognized in the period in which the equipment is shipped and risk of loss is passed to the customer. In the case of equipment sold to customers that is already on rent or lease to the same party, revenue is recognized at the agreed-upon date when the rent or lease term ends and the risk of loss passes to the customer.

In fiscal 2010, we became a reseller of Agilent Technologies, Inc.’s (now Keysight Technologies, Inc. or "Keysight") new T&M equipment in the U.S. and Canada. In accordance with accounting guidance, we are acting as the principal with respect to sales of new equipment through our resale agreement with Keysight, based on several factors, including:

(1) We act as the primary obligor by working directly with our customers to define their needs, providing them with options to satisfy such needs, contracting directly with the customer, and, to the extent required, providing customers with instruction on the use of the product and additional technical support once the product is received by the customer. The product manufacturer

Page 7

Table of Contents

ELECTRO RENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollar and share amounts in thousands, except per share amounts)

is not a party to our customer sales agreements, nor is it referenced in the agreements, and therefore has no obligation to our customers with the exception of the manufacturer’s standard warranty on the product;

(2) We bear back-end risk of inventory loss with respect to any product return from the customer as the original manufacturer is not required to accept returns of equipment from us. We also bear front-end risk of inventory loss in those cases where we acquire products for resale into our equipment pool prior to shipment to customers;

(3) We have full discretion in setting pricing terms with our customers and negotiate all such terms ourselves; and

(4) We assume all credit risk.

Accordingly, sales of new equipment through our resale channel are recorded in sales of equipment and other revenues and the related equipment costs are recorded in costs of sales of equipment and other revenues in our consolidated statements of operations.

Other revenues, consisting primarily of billings to customers for delivery, are recognized in the period in which the respective services are performed.

Operating Expenses

Costs of rentals and leases, excluding depreciation, primarily include labor related costs of our operations personnel, supplies, repairs, insurance and warehousing costs associated with our rental and lease revenues.

Costs of sales of equipment and other revenues primarily include the cost of new equipment and the carrying value of used equipment sold.

Selling, general and administrative (“SG&A”) expenses include sales and advertising costs, payroll and related benefit costs, insurance expenses, property taxes on our property and rental and lease equipment, legal and professional fees, and administrative overhead. Advertising costs are expensed as incurred. Total advertising expenses were $250 and $419, respectively, for the three and six months ended November 30, 2014 and $207 and $432, respectively, for the three and six months ended November 30, 2013. SG&A expenses also include shipping and handling costs of $1,085 and $2,121, respectively, for the three and six months ended November 30, 2014 and $1,153 and $2,082 for the three and six months ended November 30, 2013.

Foreign Currency

The U.S. dollar has been determined to be the functional currency of all foreign subsidiaries. The assets and liabilities of our foreign subsidiaries are remeasured from their local currency to U.S. dollars at current or historic exchange rates, as appropriate. Revenues and expenses are remeasured from any foreign currencies to U.S. dollars using historic or average monthly exchange rates, as appropriate, for the month in which the transaction occurred. Remeasurement gains and losses are included in SG&A expenses or income taxes, as appropriate. The assets, liabilities, revenues and expenses of our foreign subsidiaries are individually less than 10% of our respective consolidated amounts. The euro, Canadian dollar and Chinese yuan are our primary foreign currencies. Remeasurement gains and losses have not been significant.

We enter into forward contracts to hedge against unfavorable currency fluctuations in our monetary assets and liabilities in our European and Canadian operations. These contracts are designed to minimize the effect of fluctuations in foreign currencies. To qualify for hedge accounting, contracts must reduce the foreign currency exchange rate and interest rate risk otherwise inherent in the amount and duration of the hedged exposures and comply with established risk management policies. Our derivative instruments are not designated as hedging instruments and, therefore, are recorded at fair value as a current asset or liability, and any changes in fair value are recorded in our consolidated statements of operations. We do not use derivative financial instruments for speculative trading purposes.

The fair value of our foreign exchange forward contracts in the consolidated balance sheets is shown in the table below:



Derivatives Not Designated as Hedging Instruments	Consolidated Balance Sheet Location	November 30, 2014		May 31, 2014
Foreign exchange forward contracts	Other assets	$	401	$	9

Page 8

Table of Contents

ELECTRO RENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollar and share amounts in thousands, except per share amounts)

The table below provides data about the amount of gains and losses recognized in income for derivative instruments not designated as hedging instruments:



Derivatives Not Designated as Hedging Instruments	Location of Gain/(Loss) Recognized in Income on Derivatives	Three Months Ended November 30, 2014		Three Months Ended November 30, 2013
Foreign exchange forward contracts	SG&A expenses	$	508	$	(147	)



Derivatives Not Designated as Hedging Instruments	Location of Gain/(Loss) Recognized in Income on Derivatives	Six Months Ended November 30, 2014		Six Months Ended November 30, 2013
Foreign exchange forward contracts	SG&A expenses	$	381	$	(234	)

Other Assets

We include demonstration equipment used in connection with our resale activity of $10,036 and $6,659 as of November 30, 2014 and May 31, 2014, respectively, in other assets for a period of up to two years. Demonstration equipment is recorded at the lower of cost or estimated market value until the units are sold or transferred to our rental and lease equipment pool. Demonstration equipment transferred to our rental and lease equipment pool is depreciated over its remaining estimated useful life. We also have a Supplemental Executive Retirement Plan (“SERP”) that provides for automatic deferral of contributions in excess of the maximum amount permitted under the 401(k) for our executives who choose to participate. The SERP is a non-qualified deferred compensation program. We have the option to match contributions of participants at a rate we determine each year.

Other assets consisted of the following:



	November 30, 2014		May 31, 2014
Demonstration equipment	$	10,036	$	6,659
Net investment in sales-type leases	5,890		7,264
Prepaid expenses and other	3,738		2,978
SERP	3,394		3,418
Income taxes receivable	—		1,831
	$	23,058	$	22,150

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") and the International Accounting Standards Board ("IASB") issued guidance to establish a new, more robust framework for the recognition of revenue related to the transfer of goods and services to customers. This guidance is effective for reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The impact this guidance will have on the consolidated financial statements has not been determined at this time.

In August 2014, the FASB issued guidance that requires management to evaluate whether there is substantial doubt about the entity's ability to continue as a going concern and, if so, disclose that fact. This guidance is effective for annual periods ending after December 15, 2016, including interim reporting periods thereafter. The new guidance affects disclosures only and is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.

Other Comprehensive Income

Comprehensive income is equivalent to net income for all periods presented.

Out-of-period Adjustment

During the second quarter of fiscal 2015, we identified $1.3 million of previously recognized revenue which the Company was not entitled to recognize. We determined this adjustment to be immaterial to our current and previously filed financial statements. We have recorded this out-of-period adjustment as a reduction to sales of equipment and other revenues and an increase to accrued expenses for the quarter ended November 30, 2014.

Page 9

Table of Contents

ELECTRO RENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollar and share amounts in thousands, except per share amounts)

Note 2: Cash and Cash Equivalents

We consider highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents. We held no cash equivalents at November 30, 2014 and May 31, 2014 except for the money market funds that are part of our SERP asset.

Note 3: Fair Value Measurements

We measure certain financial assets and liabilities at fair value on a recurring basis, including SERP assets and foreign currency derivatives. The fair value of financial assets can be determined based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, as follows:

Level 1 – Observable inputs, such as quoted prices in active markets for identical assets;

Level 2 – Inputs, other than the quoted prices in active markets, that are observable either directly or through corroboration with observable market data; and

Level 3 – Unobservable inputs, for which there is little or no market data for the assets, such as those that may be used with internally-developed valuation models.

Our assets measured at fair value on a recurring basis were determined as follows:



	November 30, 2014
	Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Balance
Assets
SERP
Money market fund	$	153	$	—	$	—	$	153
Mutual funds	3,241		—		—		3,241
Foreign exchange forward contracts	—		401		—		401
Total assets measured at fair value	$	3,394	$	401	$	—	$	3,795



	May 31, 2014
	Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Balance
Assets
SERP
Money market fund	$	323	$	—	$	—	$	323
Mutual funds	3,095		—		—		3,095
Foreign exchange forward contracts	—		9		—		9
Total assets measured at fair value	$	3,418	$	9	$	—	$	3,427

The fair value measures for our SERP asset, which include money market and mutual funds, were derived from quoted market prices in active markets and are included in Level 1 inputs. Foreign currency forward contracts were valued based on observable market spot and forward rates as of our reporting date and are included in Level 2 inputs.

Note 4: Equity Incentive Plan

Page 10

Table of Contents

ELECTRO RENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollar and share amounts in thousands, except per share amounts)

Our 2005 Equity Incentive Plan (the “Equity Incentive Plan”) authorizes our Board of Directors to grant incentive and non-statutory stock option grants, stock appreciation rights, restricted stock awards, restricted stock units, performance unit awards and performance share awards covering a maximum of 1,000 shares of our common stock. Pursuant to the Equity Incentive Plan, we have granted incentive and non-statutory options to directors, officers and key employees at prices not less than 100% of the fair market value on the day of grant. In addition, we have granted restricted stock and restricted stock units to directors, officers and key employees. The Equity Incentive Plan provides for a variety of vesting dates. All previously issued and outstanding stock options granted under the Equity Incentive Plan expired on or before October 2011.

Restricted Stock Units

A restricted stock unit represents the right to receive one share of our common stock, provided that the vesting conditions are satisfied. The following table represents restricted stock unit activity for the six months ended November 30, 2014:



	Restricted Stock Units		Weighted – Average Grant Date Fair Value
Nonvested at June 1, 2014	122		$	17.57
Granted	87		15.64
Vested	(71	)	17.14
Nonvested at November 30, 2014	138		$	16.57

We granted 18 and 87 restricted stock units during the three and six months, respectively, ended November 30, 2014 and 11 and 65 restricted stock units during the three and six months, respectively, ended November 30, 2013. Under the terms of our restricted stock unit agreements, unvested restricted stock unit awards contain forfeitable rights to dividends. Because the dividends are forfeitable, they are defined as non-participating securities. As of November 30, 2014, we have unrecognized share-based compensation cost of approximately $1,848 associated with restricted stock unit awards. This cost is expected to be recognized over a weighted-average period of approximately 1.9 years.

We had 397 and 326 vested restricted stock units as of November 30, 2014 and 2013, respectively, which receive dividends following vesting and are convertible to common shares five years after the grant date.

Accounting for Share Based Payments

Accounting guidance requires all share-based payments to employees, including grants of employee stock options, restricted stock and restricted stock units, to be recognized as compensation expense in the consolidated financial statements based on their fair values. Compensation expense is recognized over the period that an employee provides service in exchange for the award, approximately three years.

Forfeitures are estimated at the date of grant based on historical experience. We use the market price of our common stock on the date of grant to calculate the fair value of each grant of restricted stock units.

We recorded $361 and $649 of stock-based compensation as part of SG&A expenses for the three and six months ended November 30, 2014 and $381 and $724 of stock-based compensation as part of SG&A expenses for the three and six months ended November 30, 2013.

We receive a tax deduction, included as an excess tax benefit, for dividends paid on vested restricted stock units where the underlying shares have not been issued. Excess tax benefits are realized tax benefits from tax deductions for such dividends. The total excess tax benefit realized from dividend payments for vested restricted stock units for the six months ended November 30, 2014 and 2013 was $116 and $131, respectively.

Note 5: Goodwill and Intangibles

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. Intangible assets resulting from the acquisitions of entities accounted for using the purchase method of accounting are recorded at the estimated fair value of the assets acquired. Identifiable intangible assets consist of purchased customer relationships and trade names.

Page 11

Table of Contents

ELECTRO RENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollar and share amounts in thousands, except per share amounts)

The changes in carrying amount of goodwill and other intangible assets for the six months ended November 30, 2014 were as follows:



	Balance as of June 1, 2014 (net of amortization)		Additions		Amortization			Balance as of November 30, 2014
Goodwill	$	3,109	$	—	$	—		$	3,109
Trade name	411		—		—			411
Customer relationships	462		—		(70		)	392
	$	3,982	$	—	$	(70	)	$	3,912

Goodwill is not deductible for tax purposes.

We evaluate the recoverability of goodwill and indefinite-lived intangible assets annually as of May 31, and whenever events or changes in circumstances indicate to us that the carrying amount may not be recoverable. There were no conditions that indicated any impairment of goodwill or identifiable intangible assets as of November 30, 2014 and May 31, 2014.

Intangible assets with finite useful lives are amortized over their respective estimated useful lives. The following table provides a summary of our intangible assets:



	November 30, 2014
	Estimated Useful Life	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Trade name	—	$	411	$	—		$	411
Customer relationships	3-8 years	2,094		(1,702		)	392
		$	2,505	$	(1,702	)	$	803

	May 31, 2014
	Estimated Useful Life	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Trade name	—	$	411	$	—		$	411
Customer relationships	3-8 years	2,094		(1,632		)	462
		$	2,505	$	(1,632	)	$	873

Amortization expense related to intangible assets was $29 and $41 for the three months ended November 30, 2014 and 2013, respectively, and $70 and $82 for the six months ended November 30, 2014 and 2013, respectively.

Amortization expense for customer relationships is included in SG&A expenses. The following table provides estimated future amortization expense related to intangible assets as of November 30, 2014:



Year ending May 31,	Future Amortization
2015 (remaining)	$	59
2016	118
2017	118
2018	97
2019	—
	$	392

Note 6: Borrowings

On November 19, 2013, we entered into a credit agreement (the “Credit Agreement”) with J.P. Morgan Chase Bank, National Association (“JPM”), as administrative agent, J.P. Morgan Securities LLC, as sole bookrunner and sole lead arranger, and a syndicate of lenders. The Credit Agreement provides for a $25,000 revolving credit facility, including swingline loans and letters of credit, and has a term of three years. We have an option to increase the commitments under the Credit Agreement by up to an additional $25,000, subject to certain approvals and conditions as set forth in the Credit Agreement. Borrowings under the Credit Agreement bear interest at a rate equal to, at our election, the applicable rate for a “Eurodollar Loan” or a “CB

Page 12

Table of Contents

ELECTRO RENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollar and share amounts in thousands, except per share amounts)

Floating Rate Loan.” Eurodollar Loan advances accrue interest at a per annum interest rate equal to (i) the quotient (rounded upwards to the next 1/16th of 1%) of (a) the applicable LIBO Rate, divided by (b) one minus the maximum aggregate reserve requirement (expressed as a decimal) imposed under Federal Reserve Board Regulation D (the “Adjusted LIBO Rate”), plus (ii) 0.75%. CB Floating Rate Loan advances accrue interest at a per annum interest rate equal to (i) the higher of (a) JPM’s Prime Rate or (b) the Adjusted LIBO Rate for a one month interest period plus 2.5%, minus (ii) 2.0%. In addition, we pay a commitment fee of 0.10% of the unused amount if the average borrowing under the Credit Agreement is less than or equal to $8,000 on a quarterly basis.

The Credit Agreement contains customary affirmative and negative covenants (which are in some cases subject to certain exceptions), including, but not limited to, restrictions on the ability to incur additional indebtedness, create liens, make certain investments, make restricted payments, enter into or undertake certain liquidations, mergers, consolidations or acquisitions and dispose of assets or subsidiaries. In addition, the Credit Agreement requires us to maintain minimum earnings and tangible net worth. We were in compliance with all financial covenants at November 30, 2014.

We had $2,843 of borrowings outstanding under the Credit Agreement at November 30, 2014. The weighted average interest rate under the line of credit was approximately 1.25%. There were no borrowings outstanding at May 31, 2014.

Note 7: Sales-Type Leases

We have certain customer leases providing bargain purchase options, which are accounted for as sales-type leases. Interest income is recognized over the life of the lease using the effective interest method.

The initial acceptance of customer finance arrangements is based on an in-depth review of each customer’s credit profile, including review of third party credit reports, customer financial statements and bank verifications. We monitor the credit quality of our sales-type lease portfolio based on payment activity that drives the finance lease receivable aging. This credit quality is assessed on a monthly basis. Our historical losses on finance lease receivables are insignificant, and therefore we do not have a specific allowance for credit losses.

The minimum lease payments receivable and the net investment included in other assets for such leases were as follows:



	November 30, 2014			May 31, 2014
Gross minimum lease payments receivable	$	6,132		$	7,543
Less – unearned interest	(242		)	(279		)
Net investment in sales-type lease receivables	$	5,890		$	7,264

The following table provides estimated future minimum lease payments receivable related to sales-type leases:



Year ending May 31,	Future Payments
2015 (remaining)	$	2,489
2016	2,955
2017	653
2018	35
2019	—
	$	6,132

Note 8: Segment Reporting and Related Disclosures

Accounting guidance establishes reporting standards for an enterprise’s operating segments and related disclosures about its products, services, geographic areas and major customers. Operating segments are defined as components of an enterprise for which separate financial information is available that is regularly evaluated by the chief operating decision maker in deciding how to allocate resources and in assessing performance. In order to determine our operating segments, we considered the following: an operating segment is a component of an enterprise (i) that engages in business activities from which it may earn revenues and incur expenses, (ii) whose operating results are regularly reviewed by the enterprise’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance, and (iii) for which discrete financial information is available. In accordance with this guidance, we have identified two operating segments in our business: our T&M and DP business.

Page 13

Table of Contents

ELECTRO RENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollar and share amounts in thousands, except per share amounts)

Although we have separate operating segments for T&M and DP equipment, these two segments are aggregated into a single reportable segment because they have similar economic characteristics and qualitative factors. The T&M and DP segments have similar long-term average gross margins, and both rent, lease and sell electronic equipment to large corporations, purchase directly from major manufacturers, configure and calibrate the equipment, and ship directly to customers. Additionally, DP segment revenues are less than 10% of total company revenues, and are not considered material.

Our equipment pool, based on acquisition cost, consisted of $421,539 of T&M equipment and $38,118 of DP equipment at November 30, 2014 and $421,128 of T&M equipment and $37,911 of DP equipment at May 31, 2014.

Revenues for these operating segments were as follows for the three months ended November 30, 2014 and 2013:



	T&M		DP		Total
2014
Rentals and leases	$	28,789	$	4,680	$	33,469
Sales of equipment and other revenues	25,758		476		26,234
	$	54,547	$	5,156	$	59,703
2013
Rentals and leases	$	31,060	$	4,145	$	35,205
Sales of equipment and other revenues	22,263		408		22,671
	$	53,323	$	4,553	$	57,876

Revenues for these operating segments were as follows for the six months ended November 30, 2014 and 2013:



	T&M		DP		Total
2014
Rentals and leases	$	58,038	$	9,320	$	67,358
Sales of equipment and other revenues	53,233		983		54,216
	$	111,271	$	10,303	$	121,574
2013
Rentals and leases	$	61,880	$	8,982	$	70,862
Sales of equipment and other revenues	46,113		1,069		47,182
	$	107,993	$	10,051	$	118,044

No single customer accounted for more than 10% of total revenues during the six months ended November 30, 2014 and 2013.

Selected country information is presented below:



	Three Months Ended November 30,				Six Months Ended November 30,
	2014		2013		2014		2013
Revenues: ¹
U.S.	$	50,245	$	48,911	$	101,397	$	99,137
Other ²	9,458		8,965		20,177		18,907
Total	$	59,703	$	57,876	$	121,574	$	118,044

Page 14

Table of Contents

ELECTRO RENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollar and share amounts in thousands, except per share amounts)



	As of
	November 30, 2014		May 31, 2014
Net Long-Lived Assets: ³
U.S.	$	186,155	$	188,343
Other ²	44,588		46,667
Total	$	230,743	$	235,010

¹ Revenues by country are based on the shipping destination.

² Other consists of countries other than the U.S. Each foreign country individually accounts for less than 10% of the total revenues and long-lived assets.

³ Net long-lived assets include rental and lease equipment and other property, net of accumulated depreciation and amortization.

Note 9: Computation of Earnings per Share

The following is a reconciliation of the denominator used in the computation of basic and diluted earnings per share for the three and six months ended November 30, 2014 and 2013:



	Three Months Ended November 30,				Six Months Ended November 30,
	2014		2013		2014		2013
Denominator:
Denominator for basic earnings per share - weighted average common shares outstanding (including shares issuable for vested restricted stock units)	24,404		24,331		24,380		24,313
Effect of unvested restricted stock units	4		19		13		27
Diluted shares used in per share calculation	24,408		24,350		24,393		24,340
Net income	$	4,795	$	5,581	$	9,566	$	11,278
Earnings per share:
Basic	$	0.20	$	0.23	$	0.39	$	0.46
Diluted	$	0.20	$	0.23	$	0.39	$	0.46

We did not include 83 shares in the calculation of diluted earnings per share for the three and six months ended November 30, 2014, respectively, and 8 shares in the calculation of diluted earnings per share for the three and six months ended November 30, 2013, respectively, as to do so would be antidilutive.

Note 10: Income Taxes

We recognize a liability or asset for the deferred tax consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. These temporary differences will result in taxable or deductible amounts in future years when reported amounts of the assets or liabilities are recovered or settled. The deferred tax assets are periodically reviewed for recoverability.

Accounting guidance for uncertain tax positions prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues.

We recognize the tax impact from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax impact recognized in the financial statements from such a position is measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. We recognize interest, penalties and foreign currency gains and losses with respect to uncertain tax positions as components of our income tax provision. Accrued interest and penalties are included within accrued expenses in the consolidated balance sheet. Significant judgment is required in the identification of uncertain tax positions and in the estimation of penalties and interest on uncertain tax positions. There were no uncertain tax positions in fiscal 2015 and 2014.

Page 15

Table of Contents

ELECTRO RENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollar and share amounts in thousands, except per share amounts)

We are subject to taxation in the U.S., as well as various state and foreign jurisdictions. We have substantially settled all income tax matters for the United States federal jurisdiction for years through fiscal 2011. Major state jurisdictions have been examined through fiscal years 2004 and 2005, and certain foreign jurisdictions are under audit for fiscal 2009 and 2010, which began in the first quarter of fiscal 2015.

Note 11: Commitments and Contingencies

We are subject to legal proceedings and business disputes involving ordinary routine legal proceedings and claims incidental to our business. The ultimate legal and financial liability with respect to such matters generally cannot be estimated with certainty and requires the use of estimates in recording liabilities for potential litigation settlements or awards against us. Estimates for losses from litigation are made after consultation with outside counsel. If estimates of potential losses increase or the related facts and circumstances change in the future, we may be required to record either more or less litigation expense. We are not involved in any pending or threatened legal proceedings that we believe would reasonably be expected to have a material adverse effect on our financial condition, results of operations or cash flows.

Agreement with Keysight Technologies, Inc.

In fiscal 2010, we became a reseller of Agilent Technologies, Inc.’s ("Agilent") new T&M equipment in the U.S. and Canada. As of November 1, 2014, Agilent spun off Keysight, its wholly-owned subsidiary, into a separate publicly traded company. Sales of new T&M equipment represent approximately 65.4% and 65.2% of our sales of equipment and other revenues for fiscal 2014 and 2013, respectively. Nearly all of our sales of new T&M equipment are in connection with our reseller agreement with Agilent (now Keysight), which expires on May 31, 2015. We have renewed our reseller arrangement four times since we entered into the reseller agreement with Agilent in 2009. If we are unable to renew our reseller agreement with Keysight, or if the terms of any renewal are less favorable to us, our T&M equipment sales business may be materially and adversely affected.

Note 12: Other Income

In the second quarter of fiscal 2015, we recognized other income from a $1.4 million settlement received as one of the plaintiffs in a class action lawsuit involving the purchase of certain computer products.

Note 13: Subsequent Events

On December 3, 2014 our Board of Directors declared a quarterly cash dividend of $0.20 per common share. The dividend will be paid on January 9, 2015 to shareholders of record as of December 19, 2014.

Page 16

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion addresses our financial condition as of November 30, 2014 and May 31, 2014, the results of our operations for the three and six months ended November 30, 2014 and 2013, respectively, and cash flows for the six months ended November 30, 2014 and 2013, respectively. This discussion should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 and the Risk Factors in Item 1A of our Annual Report on Form 10-K for the fiscal year ended May 31, 2014, to which you are directed for additional information.

Overview

We are one of the largest global organizations devoted to the rental, lease and sale of new and used electronic test and measurement (“T&M”) equipment. We purchase that equipment from leading manufacturers such as Keysight Technologies, Inc. (formerly Agilent Technologies, Inc., “Keysight”), Anritsu, Inc. ("Anritsu"), Rohde & Schwarz Gmbh & Co. KG ("Rohde & Schwarz") and Tektronix Inc. (“Tektronix”) primarily for use by our customers in the aerospace, defense, telecommunications, electronics, and semiconductor industries. Although it represented only approximately 7.6% of our revenues in fiscal 2015, we believe our Data Products ("DP") division is one of the largest rental companies in the United States for personal computers and servers from manufacturers including Dell, HP/Compaq, IBM, Toshiba and Apple.

We conduct our business activities in the United States, as well as through our wholly owned subsidiaries, Electro Rent, LLC, Electro Rent Europe, NV, and Electro Rent (Beijing) Test and Measurement Equipment Rental Co., Ltd. which conduct some or all of these business activities in Canada, Belgium and China, respectively. Our wholly owned subsidiary, Electro Rent Asia, Inc., is the U.S. parent company of Electro Rent (Beijing) Test and Measurement Equipment Rental Co., Ltd., and our wholly owned subsidiary, ER International, Inc., is the U.S. parent company of Electro Rent Europe, NV.

We primarily engage in the short-term rental, lease, and sale of state-of-the-art electronic equipment. We maintain an equipment portfolio composed primarily of T&M and DP equipment purchased from leading manufacturers. Another aspect of our business is the sale of equipment after its utilization for rent/lease and the sale of new T&M equipment primarily from Keysight. Under our agreement with Keysight, we have the exclusive right to sell certain new and premium used T&M products and services to small and medium size customers (who previously purchased directly from Keysight) in the United States and Canada. Keysight was a wholly-owned subsidiary of Agilent Technologies, Inc. (“Agilent”), with whom we originally entered into the reseller agreement. On November 1, 2014, Agilent completed its spin off of Keysight into a separate publicly traded company. We have renewed our reseller arrangement four times since we entered into the agreement with Agilent in 2009, and our current agreement is due to expire on May 31, 2015.

We do not currently have reseller agreements with any other manufacturers for equipment similar to that included in our Keysight reseller agreement. In addition, we sell used equipment from a variety of manufacturers that was previously in our rental and lease pool.

We have a focused sales strategy, using a direct sales force to meet our customers’ needs in our T&M equipment rental, lease and sales business. We have a large technical sales force that consists primarily of field engineers and applications engineers, each of whom specializes in all the products and services offered by our company. Our sales force is usually assigned to specific territories, and identifies potential customers through coordinated efforts with our marketing organization. Our marketing organization is staffed by professionals with many years of industry-related experience. As our customers have a wide range of requirements for equipment, our sales force is able to leverage our extensive knowledge of the test and measurement equipment environment to determine the right product to rent, lease or sell to the customer to meet the customer’s specific needs.

Our sales force also specializes in configuring new Keysight equipment to sell to our customers that is tailored to the customers' need. These configurations typically start with a base model, which is frequently upgraded through an extensive list of options in order to perform the customer’s specific test or measurement. Once the configuration is determined, it serves as the basis for our orders to Keysight, who builds the product accordingly. We order equipment from Keysight once the customer has placed an order with us. Equipment is typically shipped directly to the customer by Keysight at our request. Occasionally, equipment is shipped to our warehouse prior to delivery to the customer. Inventory held for sale is immaterial and is therefore included in other assets in our consolidated balance sheets. Each order and sales invoice is subject to our standard sales terms and conditions, which include provisions covering equipment delivery delays and warranty services.

During the first six months of fiscal 2015, our revenues increased 3.0% as compared to the first six months of fiscal 2014 primarily due to an increase in our sales of equipment partially offset by a decrease in rental and lease revenue. Although our

Page 17

Table of Contents

revenues have increased, our operating profit decreased as a result of a decline in our high margin rental and lease business and growth in our lower margin new equipment sales for the first six months in fiscal 2015 as compared to the same period in fiscal 2014. As of November 30, 2014, our sales order backlog for T&M equipment relating to our resale channel was $9.6 million, a decrease of 14.3% from $11.2 million at November 30, 2013.

To maximize our overall profit from the rental, leasing, and sales of equipment, we manage our equipment pool on an on-going basis by controlling the timing, pricing and mix of our purchases and sales of equipment. We acquire new and used equipment for our rental pool to meet current technological standards and current and anticipated customer demand, and we sell our used equipment where we believe that is the most lucrative option. We employ a complex equipment management strategy utilizing our proprietary PERFECT software to adjust our equipment pool and pricing on a dynamic basis in order to maximize equipment availability, utilization and profitability. We manage each specific equipment class based on a separate assessment of that equipment’s historical and projected life cycle and numerous other factors, including the U.S. and global economy, interest rates and new product launches. If we do not accurately predict market trends, or if demand for the equipment we supply declines, we can be left with equipment that we are unable to rent or sell for a profit. We assess the carrying value of the equipment pool on an annual basis or more frequently when factors indicating potential impairment are present.

Profitability and Key Business Trends

Comparing the first six months of fiscal 2015 to the first six months of fiscal 2014, our revenues increased by 3.0% to $121.6 million from $118.0 million, our operating profit decreased 22.7% to $13.7 million from $17.7 million, and our net income decreased 15.2% to $9.6 million from $11.3 million. The decrease in our operating profit is attributable to a 4.9% decrease in our higher margin rental and lease revenues partially offset by a 14.9% increase in our lower margin new equipment sales revenues.

Our rental and lease revenues decreased $3.5 million, or 4.9%, from $70.9 million for the first six months of fiscal 2014 to $67.4 million for the first six months of fiscal 2015. During the first six months of fiscal 2015 and 2014, respectively, 86% and 87% of our rental and lease revenues were derived from T&M equipment. Our T&M rental revenues decreased $3.1 million primarily due to a decrease in demand of $1.9 million, particularly in our North American operations, and a decrease in rental rates of $1.2 million driven by an increase in competition. Our T&M lease revenues decreased by $0.7 million, or 12.7%, as compared to the same period in fiscal 2014. Our rental and lease business is being negatively affected by uncertainty regarding U.S. government spending and by increased competition due to reduced industry demand. Rental and lease revenues in our DP segment increased to $9.3 million, or 3.8%, for the first six months of fiscal 2015 compared to $9.0 million in fiscal 2014.

Our sales of equipment and other revenues increased $7.0 million, or 14.9%, from $47.2 million for the first six months of fiscal 2014 to $54.2 million for the first six months of fiscal 2015. This increase was primarily due to an increase in used equipment sales, essentially due to a large buyout, and an increase in new equipment sales due to an increase in demand, an expansion of our customer base, and access to a wider range of products from Keysight. We will continue to enhance our product offerings and support revenue growth.

Our operating profit decreased 22.7%, or $4.0 million, from $17.7 million for the first six months of fiscal 2014 to $13.7 million for the first six months of fiscal 2015. As compared to the same period in the prior fiscal year, our rental and lease business contributed $3.0 million less to operating profit, resulting from a $3.5 million, or 4.9%, decrease in rental and lease revenues, offset by a decrease in our costs of rentals and leases of $0.5 million, or 5.1%,while depreciation expense remained stable. Operating profit from sales of equipment and other revenue decreased by $0.3 million as compared to the fiscal 2014 as our sales of equipment and other revenue increased by $7.0 million, or 14.9%, while our costs increased by $7.3 million, or 22.1%. Our SG&A expenses increased $0.7 million, or 2.5%, from $28.9 million for the first six months of 2014 to $29.6 million for the first six months of fiscal 2015.

Some of our key profitability measurements are presented below for the six months ended November 30, 2014 and 2013:



	Fiscal 2015			Fiscal 2014
Net income per diluted common share (EPS)	$	0.39		$	0.46
Net income (annualized) as a percentage of average assets	6.4		%	7.0		%
Net income (annualized) as a percentage of average equity	8.3		%	9.6		%

Due to our foreign operations, we have revenues, expenses, assets and liabilities in foreign currencies, primarily the euro, Canadian dollar and Chinese yuan. While our exposure to fluctuations in the Chinese yuan is not significant, we enter into

Page 18

Table of Contents

forward contracts to hedge against unfavorable currency fluctuations in our monetary assets and liabilities in our European and Canadian operations. These contracts are designed to minimize the effect of fluctuations in foreign currencies. As a result of these forward contracts, as well as the relative stability of these foreign currencies, the impact on our operating results from foreign currency fluctuations has been insignificant.



Average acquisition cost of equipment (in millions)	Three Months Ended November 30,						Six Months Ended November 30,
Average acquisition cost of equipment (in millions)	2014		2013		Change		2014		2013		Change
on rent	$	241.0	$	245.7	(1.9	)%	$	236.4	$	244.9	(3.5	)%
on lease	$	36.1	$	35.9	0.6	%	$	36.9	$	36.3	1.7	%

The decrease in our average equipment on rent in fiscal 2015 is due to a decline in demand in our T&M North American operations, partially offset by increased demand in our T&M European operations. Our average equipment on lease increased slightly as compared to fiscal 2014 as increased demand for DP leases was offset by a decline in T&M lease business resulting in an overall decrease in lease revenue as compared to prior fiscal year.

Average rental rates decreased by 4.0% and 2.0% for the three and six months ending November 30, 2014, respectively, while average lease rates increased by 1.1% and 0.8% for the three and six months ended November 30, 2014, respectively, as compared to the prior fiscal year. Average utilization for our T&M equipment pool, calculated based on average acquisition cost of equipment on rent and lease compared to the average total equipment pool, increased from 65.6% for the three months ended November 30, 2013 to 66.0% for the three months ended November 30, 2014 while average utilization declined from 65.5% to 64.9%, or 1.0%, for the six months ended November 30, 2013 and 2014, respectively. The average utilization of our DP equipment pool, based on the same method of calculation, increased from 34.8% to 39.2% for the three months ended November 30, 2013 and 2014, respectively, while average utilization increased from 37.3% to 38.6% for the six months ended November 30, 2013 and 2014, respectively. The decrease in rental rates is due to increased competition in the marketplace while the increase in lease rates is the result of an increase in demand for DP leases, which generally carry higher rates, while the demand for T&M leases decreased. Our utilization rate fluctuates frequently, and is impacted by new equipment purchases in support of existing and potential business, and sales of used equipment.

Comparison of Three Months Ended November 30, 2014 and November 30, 2013

Revenues

Total revenues for the three months ended November 30, 2014 and 2013 were $59.7 million and $57.9 million, respectively. The 3.2% increase in total revenues was due to a 15.7% increase in sales of equipment and other revenues offset by a 4.9% decrease in rental and lease revenues.

Rental and lease revenues for the three months ended November 30, 2014 were $33.5 million, compared to $35.2 million for the same period of the prior fiscal year. This decrease is primarily due to a decrease in rental and lease rates and decrease in demand in our T&M segment. Our rental and lease business is being negatively affected by uncertainty regarding U.S. government spending and by increased competition due to reduced demand. The decrease in T&M rental/lease business was partially offset by an increase in rental and lease revenues in our DP segment driven by an increase in demand.

Sales of equipment and other revenues increased from $22.7 million for the second quarter of fiscal 2014 to $26.2 million for the second quarter of fiscal 2015. Sales of used equipment increased from $7.2 million for the three months ended November 30, 2013 to $9.4 million for the three months ended November 30, 2014. Sales of new equipment also increased from $14.0 million for the three months ended November 30, 2013 to $16.5 million for the three months ended November 30, 2014. We saw an increase in sales of equipment as a result of a large buyout in the second quarter of fiscal 2015, increased demand and expansion of our customer base. Other revenue for the second quarter of fiscal 2015 was negatively impacted by a $1.3 million non-recurring, out-of-period adjustment.

Operating Expenses

Depreciation of rental and lease equipment increased in the second quarter of fiscal 2015 to $14.7 million, or 43.8% of rental and lease revenues, from $14.2 million, or 40.5% of rental and lease revenues, in the second quarter of fiscal 2014. The increased depreciation expense in fiscal 2015 was due to an increase in rental equipment purchases. The depreciation ratio, as a percentage of rental and lease revenues, increased slightly as rental and lease rates decreased while utilization stayed relatively flat.

Costs of rentals and leases, excluding depreciation, which primarily includes labor related costs of our operations personnel, supplies, repairs, equipment subrentals and insurance and warehousing costs associated with our rental and lease equipment, remained relatively flat at $4.5 million for the three months ended November 30, 2014 compared to $4.8 million the three

Page 19

Table of Contents

months ended November, 2013. This expense generally remains stable as our rental and lease business does not significantly fluctuate from period to period, and our existing infrastructure is capable of handling moderate changes in rental and lease activity.

Costs of sales of equipment and other revenues, which primarily include the cost of equipment sales, increased to $19.7 million in the second quarter of fiscal 2015 from $15.7 million in the same period of fiscal 2014. Costs of sales of equipment and other revenues increased as a percentage of sales of equipment and other revenues to 74.9% in the second quarter of fiscal 2015 from 69.2% in the second quarter of fiscal 2014. This increase is primarily due to a greater increase in sales of new T&M equipment, which generally carry a lower margin than used equipment sales, as compared to the increase in used equipment. Our sales margin percentage is expected to fluctuate depending on the mix of used and new equipment sales and is impacted by competition, economic uncertainty, changes in U.S. governmental policies, and customer requirements and funding.

Selling, general and administrative expenses ("SG&A") remained relatively unchanged at $14.6 million and $14.2 million in the second quarter of fiscal 2015 and fiscal 2014, respectively. As a percentage of total revenues, selling, general and administrative expenses decreased to 24.5% in the second quarter of fiscal 2015 from 24.6% in the second quarter of fiscal 2014, due to an increase in our sales of equipment without a commensurate increase in selling, general and administrative expenses.

Other Income

Income Tax Provision

Our effective tax rate remained stable at 37.7% in the second quarter of fiscal 2015 compared to 38.0% in the second quarter of fiscal 2014.

Comparison of Six Months Ended November 30, 2014 and November 30, 2013

Revenues

Total revenues for the six months ended November 30, 2014 and 2013 were $121.6 million and $118.0 million, respectively. The 3% increase in total revenues was due to a 14.9% increase in sales of equipment and other revenues offset by a 4.9% decrease in rental and lease revenues.

Rental and lease revenues for the six months ended November 30, 2014 were $67.4 million, compared to $70.9 million for the same period of the prior fiscal year. Our rental and lease business is being negatively affected by uncertainty regarding U.S. government spending and by increased competition due to reduced industry demand.

Sales of equipment and other revenues increased to $54.2 million for the first six months of fiscal 2015 from $47.2 million in the prior fiscal year. Sales of used equipment, including finance leases, increased to $16.5 million for the six months ended November 30, 2014, compared to $13.3 million for the prior year period, while sales of new equipment also increased to $36.3 million for the six months ended November 30, 2014 compared to $30.7 million for the six months ended November 30, 2013. We saw an increase in sales of equipment as a result of a large buyout in the second quarter of fiscal 2015, increased demand and expansion of our customer base. Other revenue for the first six months of fiscal 2015 was negatively impacted by a $1.3 million non-recurring, out-of-period adjustment.

Operating Expenses

Depreciation of rental and lease equipment for the first six months of fiscal 2015 and 2014 was $28.6 million. While the depreciation expense was flat, the depreciation ratio, as a percentage of rental and lease revenues, increased slightly from 40.4% to 42.4% for the six months ended November 30, 2014 and 2013, respectively, due to an increase in rental equipment purchases.

Costs of rentals and leases, excluding depreciation, which primarily include labor related costs of our operations personnel, supplies, repairs, equipment subrentals and insurance and warehousing costs associated with our rental and lease equipment, remained relatively flat at $9.1 million for the six months ended November 30, 2014 compared to $9.6 million for the six months ended November 30, 2013. This expense generally remains stable as our rental and lease business does not significantly fluctuate from period to period, and our existing infrastructure is capable of handling moderate changes in rental and lease activity.

Page 20

Table of Contents

Costs of sales of equipment and other revenues, which primarily include the cost of equipment sales, increased to $40.6 million in the first six months of fiscal 2015 from $33.2 million in the same period of fiscal 2014. Costs of sales of equipment and other revenues as a percentage of sales of equipment and other revenues increased to 74.8% in the first six months of fiscal 2015 from 70.4% in the first quarter of fiscal 2014. This increase is primarily due a greater increase in new equipment sales, which generally exhibit lower margins, as compared to the increase in used equipment sales. Our sales margin percentage is expected to fluctuate depending on the mix of used and new equipment sales. Our sales margin is also impacted by competition, economic uncertainty, changes in U.S. governmental policies, and customer requirements and funding.

Selling, general and administrative expenses increased slightly to $29.6 million in the first six months of fiscal 2015 from $28.9 million in the same period of fiscal 2014. As a percentage of total revenues, SG&A expenses were stable at 24.4% in the first quarter of fiscal 2015 compared to 24.3% in the first quarter of fiscal 2014.

Other Income

Income Tax Provision

Our effective tax rate was 37.3% in the first six months of fiscal 2015, compared to 36.9% in the first six months of fiscal 2014. The lower effective rate for fiscal 2014 as compared to fiscal 2015 is due to more income being apportioned to states with lower tax rates resulting in a lower effective state rate.

Liquidity and Capital Resources

Capital Expenditures

Our primary capital expenditures have been purchases of rental and lease equipment. We generally purchase equipment throughout the year to replace equipment that has been sold and to maintain adequate levels of rental equipment to meet existing and expected customer demands. Our equipment purchases will fluctuate based on changes in our utilization, used equipment sales activity and technology trends. To meet current rental demand, support areas of potential growth for both T&M and DP equipment, and to keep our equipment pool technologically up-to-date, we paid for $33.0 million of rental and lease equipment purchases during the first six months of fiscal 2015 compared to $31.8 million during the first six months of fiscal 2014, an increase of 3.8%.

Dividends Paid

We declared dividends of $0.40 per common share amounting to an aggregate of $9.9 million during the first six months of fiscal 2015 and 2014. We expect to continue paying a quarterly dividend in future quarters, although the amount and timing of dividends, if any, will be made at the discretion of our board of directors in each quarter, subject to compliance with applicable law.

Cash

The balance of our cash was $5.2 million at November 30, 2014, a decrease of $0.7 million from May 31, 2014, primarily due to a decrease in cash provided by operating activities partially offset by a decrease in cash used in financing activities. Outside our normal operations and equipment purchases, we use our cash to pay dividends to shareholders and to take advantage of strategic acquisitions and new customer opportunities.

We expect that the level of our cash needs may increase if we increase equipment purchases in response to demand, finance another acquisition, or pursue other opportunities.

Given our historical growth record, and our available line of credit under which we have $22.2 million remaining that we may borrow as of November 30, 2014, we believe that we have ample access to borrowing capacity and that our cash flow from operations and ability to borrow will allow us to continue funding our current and future growth. We may, however, seek to expand our borrowing capacity in order to ensure sufficient resources to quickly respond to strategic growth opportunities.

Cash Flows and Credit Facility

During the first six months of fiscal 2015 and 2014, net cash provided by operating activities was $23.0 million and $26.3 million, respectively. The decrease in net cash provided by operating activities for the first six months of fiscal 2015 was due to

Page 21

Table of Contents

a decline in net income and changes in operating assets and liabilities, primarily due to a decrease in in accounts receivable and other assets partially offset by an increase in accrued expenses.

During the first six months of fiscal 2015 and 2014, net cash used in investing activities was $17.1 million and $17.0 million, respectively. The increase in cash used in investing activities for the first six months of fiscal 2015 was primarily due to an increase in proceeds from sale of rental and lease equipment of $1.0 million offset by a $1.2 million increase in payments for purchases of rental and lease equipment.

Net cash used in financing activities was $7.0 million and $11.3 million for the first six months of fiscal 2015 and 2014, respectively. Borrowings under our bank lines of credit were $31.1 million for the first six months of fiscal 2015 compared to $31.5 million for the first six months of fiscal 2014. Payments under our bank lines of credit were $28.2 million for the six months ended November 30, 2014 compared to $33.0 million for the six months ended November 30, 2013.

We believe that cash, cash flows from operating activities, proceeds from the sale of equipment and our borrowing capacity will be sufficient to fund our operations for at least the next twelve months.

Contractual Obligations

Our contractual obligations have not changed materially from those included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2014.

Critical Accounting Policies and Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“Generally Accepted Accounting Principles”) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On a regular basis, we review these estimates, including those related to asset lives and depreciation methods, impairment of long-lived assets including rental and lease equipment, goodwill and definite lived intangible assets, allowance for doubtful accounts and income taxes, and adjust them as appropriate. These estimates are based on our historical experience and on various other assumptions we believe to be reasonable under the circumstances.

These determinations, even though inherently subjective and subject to change, affect the reported amounts of our assets, liabilities and expenses. While we believe that our estimates are based on reasonable assumptions and judgments at the time they are made, some of our assumptions, estimates and judgments will inevitably prove to be incorrect. As a result, actual outcomes will likely differ from our accruals, and those differences—positive or negative—could be material.

We identified certain critical accounting policies that affect certain of our more significant estimates and assumptions used in preparing our consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended May 31, 2014. We have not made any material changes to these policies as previously disclosed.

Page 22

Table of Contents



Item 3.	Quantitative and Qualitative Disclosures About Market Risk.

During the first six months of fiscal 2015, there were no material changes in the information regarding market risk contained in our Annual Report on Form 10-K for the fiscal year ended May 31, 2014.



Item 4.	Controls and Procedures.

We maintain disclosure controls and procedures that are designed to provide reasonable assurance that material information is: (1) gathered and communicated to our management, including our principal executive and financial officers, on a timely basis; and (2) recorded, processed, summarized, reported and filed with the SEC as required under the Securities Exchange Act of 1934, as amended. As of November 30, 2014, the end of the period covered by this report, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective for their intended purpose described above.

There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls over financial reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected.

Page 23

Table of Contents

PART II—OTHER INFORMATION



Item 1.	Legal Proceedings.

From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. As of the date of this report, we are not a party to any material litigation, other than ordinary routine legal proceedings and claims incidental to our business.



Item 1A.	Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the discussion of various risks and uncertainties contained in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended May 31, 2014. We believe those risk factors are the most relevant to our business and could cause our results to differ materially from the forward-looking statements made by us. However, those are not the only risk factors that we face. Additional risks that we do not consider material, or of which we are not currently aware, may also have an adverse impact on us. Our business, financial condition, and results of operations could be seriously harmed if any of these risks or uncertainties actually occurs or materializes. In that event, the market price for our common stock could decline, and our shareholders may lose all or part of their investment.



Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.

None.



Item 3.	Defaults Upon Senior Securities.

None.



Item 4.	Mine Safety Disclosures.

Not applicable.



Item 5.	Other Information.

None.

Page 24

Table of Contents



Item 6.	Exhibits.



Exhibit No.	Document Description	Incorporation by Reference


10.1#	Amendment No. 4 to EMG Authorized Technology Partner Program Agreement / Agreement No. ANT76 effective as of January 10, 2015	Filed herewith.

10.2#	Amendment No. 5 to EMG Authorized Technology Partner Program Agreement / Agreement No. ANT76 effective as of November 1, 2014	Filed herewith.

10.3#	Amendment No. 6 to EMG Authorized Technology Partner Program Agreement / Agreement No. ANT76 effective as of November 1, 2014	Filed herewith.

31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer	Filed herewith.

31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer	Filed herewith.

32.1*	Section 1350 Certification by Chief Executive Officer	Filed herewith.

32.2*	Section 1350 Certification by Chief Financial Officer	Filed herewith.

101.INS	XBRL Instance Document.

101.SCH	XBRL Taxonomy Extension Schema Document.

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB	XBRL Taxonomy Extension Label Linkbase Document.

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.



*	This certification is being furnished solely to accompany this report pursuant to 18 U.S.C. 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and is not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
#	The Company has requested confidential treatment for portions of this agreement. Accordingly, certain portions of this agreement have been omitted in the version filed with this report and such confidential portions have been filed with the Securities and Exchange Commission.

Page 25

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.




		ELECTRO RENT CORPORATION

Date:	January 16, 2015	/s/ Craig R. Jones
		Craig R. Jones Vice President and Chief Financial Officer (Principal Financial and Accounting Officer and duly authorized to sign this report on behalf of the company)

Page 26

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company