Basis of Presentation

9 Months Ended

Feb. 29, 2012

Basis of Presentation [Abstract]

Basis of Presentation

Note 1: Basis of Presentation

The unaudited condensed 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 condensed consolidated financial statements include the accounts of Electro Rent Corporation and its wholly owned subsidiaries, Genstar Rental Electronics, Inc., Electro Rent, LLC, ER International, Inc., Electro Rent Europe NV, Electro Rent Asia, Inc., Electro Rent (Beijing) Test and Measurement Equipment Rental Co., Ltd., and Electro Rent (Tianjin) 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 condensed or omitted pursuant to such SEC rules and regulations. These condensed consolidated financial statements reflect all 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 condensed 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 8, 2011.

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 for the full year.

Material Agreement

We sell new test and measurement (“T&M”) equipment through our resale agreement with Agilent Technologies, Inc. (“Agilent”), which commenced in fiscal 2010 and was recently extended through January 31, 2014. Our resale agreement with Agilent gives us the exclusive right to sell Agilent’s more complex T&M equipment to small and medium size customers (who previously purchased directly from Agilent) in the United States and Canada. In connection with the execution of this agreement, we terminated our prior distribution agreement with Agilent, which was our largest distribution agreement and related to less complex T&M equipment.

Foreign Currency

The U.S. dollar has been determined to be our functional currency. The assets and liabilities of our foreign subsidiaries are remeasured from their functional 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 selling, general and administrative 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.

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. Such 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 condensed consolidated statements of operations.

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	February 29, 2012		May 31, 2011
Foreign exchange forward contracts	Other assets	$	—	$	15
Foreign exchange forward contracts	Accrued expenses		51		—

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

	0000000000		0000000000			0000000000
Derivatives Not Designated as Hedging Instruments	Location of Loss Recognized in Income on Derivatives	Three Months Ended February  29, 2012			Three Months Ended February  28, 2011
Foreign exchange forward contracts	Selling, general and administrative expenses	$	(29	)	$	(250	)

	0000000000		0000000000		0000000000
Derivatives Not Designated as Hedging Instruments	Location of Gain/(Loss) Recognized in Income on Derivatives	Nine Months Ended February  29, 2012		Nine Months Ended February  28, 2011
Foreign exchange forward contracts	Selling, general and administrative expenses	$	212	$	(420	)

Other Assets

We include demonstration equipment used in connection with our resale activity of $5,108 and $3,894 as of February 29, 2012 and May 31, 2011, 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.

Other assets consisted of the following:

	February 29, 2012		May 31, 2011
Net investment in sales-type leases	$	9,403	$	7,478
Demonstration equipment		5,108		3,894
Supplemental executive retirement plan assets		2,566		2,671
Income taxes receivable		—		3,066
Prepaid expenses and other		3,706		2,679
	$	20,783	$	19,788

Recent Accounting Pronouncements

In December 2010, the FASB issued an update to its existing guidance for goodwill and other intangible assets. This guidance modifies testing for reporting units with zero or negative carrying amounts. For those reporting units, in addition to evaluating whether the carrying amount of a reporting unit exceeds fair value, an entity must assess whether it is more likely than not that a goodwill impairment exists. To make that determination, an entity must consider whether there are any adverse qualitative factors indicating potential impairment. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. We do not anticipate that the adoption of this guidance will have a material impact on our financial condition, results of operations or cash flows.

In May 2011, the FASB issued guidance to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. generally accepted accounting principles and International Financial Reporting Standards. The guidance also changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. This guidance is effective for reporting periods beginning on or after December 15, 2011, with early adoption prohibited. We will be required to adopt this guidance beginning with our fourth quarter of fiscal 2012. We do not anticipate that the adoption of this guidance will have a material impact on our financial condition, results of operations or cash flows.

In June 2011, the FASB issued guidance on presentation of comprehensive income. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. Instead, an entity will be required to present either a continuous statement of net income and other comprehensive income or in two separate but consecutive statements. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption of the new guidance is permitted and full retrospective application is required. We will be required to adopt this guidance beginning with our first quarter of fiscal 2013. We do not anticipate that the adoption of this guidance will have a material impact on our financial condition, results of operations or cash flows.

In September 2011, the FASB issued guidance to simplify how an entity tests goodwill for impairment. The amendments in the update provide for an option to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity that adopts this option will no longer be required to calculate the fair value of a reporting unit (Step 1) unless the entity determines, based on a qualitative assessment, that it is more likely than not that the fair value of the reporting unit is less than its carrying amount. This guidance is effective for fiscal years beginning after December 15, 2011. We will have the option to adopt the qualitative process beginning with our first quarter of fiscal 2013. We do not anticipate that the adoption of this guidance will have a material impact on our financial condition, results of operations or cash flows.

Reclassifications

We have reclassified our gain on bargain purchase, net of deferred taxes of $0 and $202 for the three and nine months ended February 28, 2011, respectively, from operating expenses to a component of income before income taxes to conform to the current year presentation. As a result, our operating expenses increased, and our operating profit decreased, by $0 and $202 for the three and nine months ended February 28, 2011, respectively.