UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20042005
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No.Number 1-14387
United Rentals, Inc.
Commission File No.Number 1-13663
United Rentals (North America), Inc.
(Exact namesNames of registrantsRegistrants as specifiedSpecified in their charters)Their Charters)
Delaware Delaware | 06-1522496 | |
06-1493538 | ||
| (State | (I.R.S. Employer Identification Nos.) |
Five Greenwich Office Park, Greenwich, Connecticut | ||
| (Address of | (Zip |
(203) 622-3131
(Registrants’ telephone number, including area code)code: (203) 622-3131
Indicate by check mark whether the registrantsregistrant: (1) havehas 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 registrants wereregistrant was required to file such reports), and (2) havehas been subject to such filing requirements for the past 90 days. xþ Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act).
Large Accelerated Filer þ | Accelerated Filer ¨ | Non-Accelerated Filer ¨ |
Indicate by check mark whether the registrant is an accelerated filera shell company (as defined in Rule 12b-2 of the Exchange Act). x Yes ¨ Yes þNo
As of November 4, 2004,March 1, 2006, there were 77,842,80277,520,680 shares of the United Rentals, Inc. common stock,Common Stock, $.01 par value, outstanding. There is no market for the common stock of United Rentals (North America), Inc., all outstanding shares of which are owned by United Rentals, Inc.
This combined Form 10-Q is separately filed by (i) United Rentals, Inc. and (ii) United Rentals (North America), Inc. (which is a wholly owned subsidiary of United Rentals, Inc.). United Rentals (North America), Inc. meets the conditions set forth in general instruction H(1)General Instruction (H)(1) (a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format permitted by such instruction.
UNITED RENTALS (NORTH AMERICA), INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 20042005
| Page | ||||||
PART I | ||||||
Item 1 | 4 | |||||
| 4 | ||||||
| 5 | ||||||
| 6 | ||||||
| 7 | ||||||
Notes to Unaudited Condensed Consolidated Financial Statements | ||||||
Item 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||||
Item 3 | ||||||
Item 4 | ||||||
PART II | ||||||
Item 1 | ||||||
Item 1A | 52 | |||||
Item 2 | ||||||
Item 6 | ||||||
EXPLANATORY NOTE
We were unable to timely file this quarterly report on Form 10-Q, our quarterly reports on Form 10-Q for the quarters ended June 30, 2005 and September 30, 2005 and our annual report on Form 10-K for 2004 as a result of the previously announced SEC inquiry and related review by a Special Committee of our board of directors and the restatement of our consolidated financial statements for 2003 and 2002. We filed our annual report on Form 10-K for 2004, including restated consolidated financial statements for 2003 and 2002, on March 31, 2006 (the “2004 Form 10-K”). The restatement corrected accounting errors related to the recognition of equipment rental revenue, self-insurance reserves, customer relationships and the provision for income taxes, and the accounting for certain short-term sale-leaseback transactions that constituted irregularities (the “Restatement”).
For information concerning the Restatement, see note 2 to our condensed consolidated financial statements included in this report. For additional information regarding the background and effects of the Restatement, see our annual report on Form 10-K for 2005, which we filed contemporaneously with our 2004 Form 10-K on March 31, 2006.
Contemporaneous with the filing of this quarterly report on Form 10-Q for the quarter ended September 30, 2005, we are filing our quarterly reports on Form 10-Q for the quarters ended March 31, 2005 and June 30, 2005.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Reportreport are forward-looking in nature. Such statements can be identified by the use of forward-looking terminology such as “believe,” “expect,” “may,” “will,” “should,” “seek,” “on-track,” “plan,” “intend” or “anticipate,” or the negative thereof or comparable terminology, or by discussions of strategy. You are cautioned that our business and operations are subject to a variety of risks and uncertainties and, consequently, our actual results may materially differ from those projected by any forward-looking statements. Certain of these factorssuch risks and uncertainties are discussed inbelow under Item 2 of Part I of this Report under the caption “—Factors that May Influence Future Results and Accuracy of Forward-Looking Statements.”1A – Risk Factors. We make no commitment to revise or update any forward-looking statements in order to reflect events or circumstances after the date any such statement is made.
We make available on our internet website free of charge our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports as soon as practicable after we electronically file such reports with the SEC. Our website address is www.unitedrentals.com. The information contained in our website is not incorporated by reference in this Report.3
UNITED RENTALSPART I. FINANCIAL INFORMATION
United Rentals is the largest equipment rental company in the world with a network of more than 730 rental locations in the United States, Canada and Mexico. We offer for rent over 600 types of equipment, everything from heavy machines to hand tools, to customers that include construction and industrial companies, manufacturers, utilities, municipalities, homeowners and others.
Our fleet of rental equipment includes over 500,000 units having an original purchase price of approximately $3.7 billion. The fleet includes:
In addition to renting equipment, we sell used rental equipment, act as a dealer for new equipment and sell related contractor supplies, parts and service.
Industry Background
We estimate that the U.S. equipment rental industry has grown from approximately $6.6 billion in annual rental revenues in 1990 to about $23.5 billion in 2003. This represents a compound annual growth rate of approximately 10.3%, although in 2002 and 2003 industry rental revenues decreased by about $1.3 billion from the level reached in 2001. This decrease reflected significant weakness in private non-residential construction activity, which declined 13% in 2002 and 7% in 2003 according to Department of Commerce data. Our industry is particularly sensitive to changes in private non-residential construction activity because to date the principal end market for rental equipment has been private non-residential construction.
We have recently begun to see early signs of a rebound in private non-residential construction. According to Department of Commerce data, private non-residential construction activity was up 3.7% in the first nine months of 2004 compared with the same period last year. With a sustained rebound in private non-residential construction, we would expect to see our industry resume its long-term growth trend.
We believe that long-term industry growth, in addition to reflecting general economic expansion, is driven by an end-user market that increasingly recognizes the many advantages of renting equipment rather than owning. Customers recognize that by renting they can:
While the construction industry has to date been the principal user of rental equipment, industrial companies, utilities and others are increasingly using rental equipment for plant maintenance, plant turnarounds and other operations requiring the periodic use of equipment. We believe that over the long term, increasing rentals by the industrial sector could become a more significant factor in driving our industry’s growth.
Competitive Advantages
We believe that we benefit from the following competitive advantages:
Large and Diverse Rental Fleet. Our rental fleet is the largest and most comprehensive in the industry, which allows us to
Significant Purchasing Power. We purchase large amounts of equipment, contractor supplies and other items, which enables us to negotiate favorable pricing, warranty and other terms with our vendors.
Operating Efficiencies. We benefit from the following operating efficiencies:
Equipment Sharing Among Branches. We generally group our branches into clusters of 10 to 30 locations that are in the same geographic area. Each branch within a cluster can access all available equipment in the cluster area. This increases equipment utilization because equipment that is idle at one branch can be marketed and rented through other branches. In the third quarter of 2004, the sharing of equipment among branches accounted for approximately 12.6%, or $74 million, of the total rental revenues of our general rentals segment.
Ability to Transfer Equipment Among Branches. The size of our branch network gives us the ability to take advantage of strength at a particular branch or in a particular region by permanently transferring underutilized equipment from weaker to stronger areas.
Consolidation of Common Functions. We reduce costs through the consolidation of functions that are common to our more than 730 branches, such as payroll, accounts payable, benefits and risk management, information technology, legal, and credit and collection.
State-of-the-Art Information Technology Systems. We have state-of-the-art information technology systems that facilitate our ability to make rapid and informed decisions, respond quickly to changing market conditions, and share equipment among branches. We have an in-house team of information technology specialists that supports our systems.
Strong Brand Recognition. We have strong brand recognition, which helps us to attract new customers and build customer loyalty.
Geographic and Customer Diversity. We have more than 730 branches in 47 states, ten Canadian provinces and Mexico and serve customers that range from Fortune 500 companies to small companies and homeowners. In 2003, our top ten customers accounted for less than 3% of our revenues. We believe that our geographic and customer diversity provide us with many advantages including: (1) enabling us to better serve National Account customers with multiple locations, (2) helping us achieve favorable resale prices by allowing us to access used equipment resale markets across the country, (3) reducing our dependence on any particular customer and (4) reducing the impact that fluctuations in regional economic conditions have on our overall financial performance.
National Account Program. Our National Account sales force is dedicated to establishing and expanding relationships with large companies, particularly those with a national or multi-regional presence. We offer our National Account customers the benefits of a consistent level of service across North America, a wide selection of equipment and a single point of contact for all their equipment needs. We currently serve approximately 1,800 National Account customers.
Strong and Motivated Branch Management. Each of our branches has a full-time branch manager who is supervised by a district manager from one of our 60 districts and a vice president from one of our nine regions. We believe that our managers are among the most knowledgeable and experienced in the industry, and we empower them, within budgetary guidelines, to make day-to-day decisions concerning branch matters. Senior management closely tracks branch, district and regional performance with extensive systems and controls, including performance benchmarks and detailed monthly operating reviews. The compensation of branch managers and certain other branch personnel is linked to their branch’s financial performance and return on assets. This incentivizes branch personnel to control costs, optimize pricing, share equipment with other branches and manage fleet efficiently.
Risk Management and Safety Programs. We believe that we have one of the most comprehensive risk management and safety programs in the industry. Our risk management department is staffed by experienced professionals and is responsible for implementing our safety programs and procedures, developing our employee and customer training programs and managing any claims against us.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(Unaudited)(In millions, except per share data and unless otherwise indicated)
September 30, 2004 | December 31, 2003 | |||||||
| (In thousands, except share data) | ||||||||
ASSETS | ||||||||
Cash and cash equivalents | $ | 149,167 | $ | 79,449 | ||||
Accounts receivable, net of allowance for doubtful accounts of $48,304 in 2004 and $47,439 in 2003 | 547,450 | 499,433 | ||||||
Inventory | 123,242 | 105,987 | ||||||
Prepaid expenses and other assets | 114,515 | 118,145 | ||||||
Rental equipment, net | 2,163,200 | 2,071,492 | ||||||
Property and equipment, net | 423,564 | 406,601 | ||||||
Goodwill, net | 1,325,462 | 1,437,809 | ||||||
Other intangible assets, net | 2,135 | 3,225 | ||||||
| $ | 4,848,735 | $ | 4,722,141 | |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Liabilities: | ||||||||
Accounts payable | $ | 262,128 | $ | 150,796 | ||||
Debt | 2,921,170 | 2,817,088 | ||||||
Subordinated convertible debentures | 221,550 | 221,550 | ||||||
Deferred taxes | 138,999 | 165,052 | ||||||
Accrued expenses and other liabilities | 279,082 | 226,780 | ||||||
Total liabilities | 3,822,929 | 3,581,266 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock—$.01 par value, 5,000,000 shares authorized: | ||||||||
Series C perpetual convertible preferred stock—$300,000 liquidation preference, 300,000 shares issued and outstanding | 3 | 3 | ||||||
Series D perpetual convertible preferred stock—$150,000 liquidation preference, 150,000 shares issued and outstanding | 2 | 2 | ||||||
Common stock—$.01 par value, 500,000,000 shares authorized, 77,879,864 shares issued and outstanding in 2004 and 77,150,277 in 2003 | 779 | 771 | ||||||
Additional paid-in capital | 1,345,812 | 1,329,946 | ||||||
Deferred compensation | (22,458 | ) | (25,646 | ) | ||||
Accumulated deficit | (325,322 | ) | (189,300 | ) | ||||
Accumulated other comprehensive income | 26,990 | 25,099 | ||||||
Total stockholders’ equity | 1,025,806 | 1,140,875 | ||||||
| $ | 4,848,735 | $ | 4,722,141 | |||||
September 30, 2005 | December 31, 2004 | |||||||
ASSETS | ||||||||
Cash and cash equivalents | $ | 151 | $ | 303 | ||||
Accounts receivable, net of allowance for doubtful accounts of $43 in 2005 and $53 in 2004 | 584 | 490 | ||||||
Inventory | 180 | 119 | ||||||
Prepaid expenses and other assets | 158 | 120 | ||||||
Rental equipment, net | 2,348 | 2,123 | ||||||
Property and equipment, net | 433 | 397 | ||||||
Goodwill | 1,300 | 1,293 | ||||||
Other intangible assets, net | 34 | 37 | ||||||
| $ | 5,188 | $ | 4,882 | |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Liabilities: | ||||||||
Accounts payable | $ | 243 | $ | 217 | ||||
Accrued expenses and other liabilities | 367 | 323 | ||||||
Debt | 2,936 | 2,945 | ||||||
Subordinated convertible debentures | 222 | 222 | ||||||
Deferred taxes | 239 | 149 | ||||||
Total liabilities | 4,007 | 3,856 | ||||||
Stockholders’ equity: | ||||||||
Preferred stock—$0.01 par value, 5,000,000 shares authorized: | ||||||||
Series C perpetual convertible preferred stock—$.30 liquidation preference, 300,000 shares issued and outstanding | — | — | ||||||
Series D perpetual convertible preferred stock—$.15 liquidation preference, 150,000 shares issued and outstanding | — | — | ||||||
Common stock—$.01 par value, 500,000,000 shares authorized, 77,443,139 shares issued and outstanding on September 30, 2005 and 77,869,576 shares issued and outstanding on December 31, 2004 | 1 | 1 | ||||||
Additional paid-in capital | 1,349 | 1,349 | ||||||
Deferred compensation | (15 | ) | (19 | ) | ||||
Accumulated deficit | (204 | ) | (342 | ) | ||||
Accumulated other comprehensive income | 50 | 37 | ||||||
Total stockholders’ equity | 1,181 | 1,026 | ||||||
| $ | 5,188 | $ | 4,882 | |||||
See accompanying notes.
4
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Unaudited)(In millions, except per share data and unless otherwise indicated)
Nine Months Ended September 30 | Three Months Ended September 30 | |||||||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||||||
| (In thousands, except per share data) | ||||||||||||||||
Revenues: | ||||||||||||||||
Equipment rentals | $ | 1,692,103 | $ | 1,619,783 | $ | 655,186 | $ | 625,748 | ||||||||
Sales of rental equipment | 159,321 | 120,977 | 48,424 | 44,391 | ||||||||||||
Sales of equipment and contractor supplies and other revenues | 419,047 | 384,281 | 146,108 | 134,995 | ||||||||||||
Total revenues | 2,270,471 | 2,125,041 | 849,718 | 805,134 | ||||||||||||
Cost of revenues: | ||||||||||||||||
Cost of equipment rentals, excluding depreciation | 895,770 | 880,435 | 337,319 | 330,978 | ||||||||||||
Depreciation of rental equipment | 278,577 | 248,888 | 95,124 | 85,722 | ||||||||||||
Cost of rental equipment sales | 111,254 | 79,665 | 34,032 | 28,717 | ||||||||||||
Cost of equipment and contractor supplies sales and other operating costs | 302,750 | 280,439 | 105,625 | 101,158 | ||||||||||||
Total cost of revenues | 1,588,351 | 1,489,427 | 572,100 | 546,575 | ||||||||||||
Gross profit | 682,120 | 635,614 | 277,618 | 258,559 | ||||||||||||
Selling, general and administrative expenses | 361,146 | 335,814 | 128,769 | 127,490 | ||||||||||||
Goodwill impairment | 139,306 | 139,306 | ||||||||||||||
Non-rental depreciation and amortization | 47,537 | 51,510 | 15,416 | 17,663 | ||||||||||||
Operating income (loss) | 134,131 | 248,290 | (5,873 | ) | 113,406 | |||||||||||
Interest expense | 115,881 | 158,796 | 35,562 | 53,420 | ||||||||||||
Interest expense—subordinated convertible debentures | 10,827 | 3,600 | ||||||||||||||
Preferred dividends of a subsidiary trust | 10,989 | 3,627 | ||||||||||||||
Other (income) expense, net | 174,966 | (1,831 | ) | 1,503 | (223 | ) | ||||||||||
Income (loss) before provision (benefit) for income taxes | (167,543 | ) | 80,336 | (46,538 | ) | 56,582 | ||||||||||
Provision (benefit) for income taxes | (31,521 | ) | 33,784 | 17,843 | 24,698 | |||||||||||
Net income (loss) | $ | (136,022 | ) | $ | 46,552 | $ | (64,381 | ) | $ | 31,884 | ||||||
Earnings (loss) per share: | ||||||||||||||||
Basic | $ | (1.75 | ) | $ | 0.62 | $ | (0.83 | ) | $ | 0.43 | ||||||
Diluted | $ | (1.75 | ) | $ | 0.50 | $ | (0.83 | ) | $ | 0.34 | ||||||
Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
2005
| 2004 (Restated) | 2005
| 2004 (Restated) | |||||||||||||
Revenues: | ||||||||||||||||
Equipment rentals | $ | 1,879 | $ | 1,694 | $ | 738 | $ | 663 | ||||||||
Sales of rental equipment | 228 | 193 | 61 | 58 | ||||||||||||
New equipment sales | 151 | 128 | 55 | 44 | ||||||||||||
Contractor supplies sales | 238 | 163 | 89 | 61 | ||||||||||||
Service and other revenues | 104 | 94 | 37 | 32 | ||||||||||||
Total revenues | 2,600 | 2,272 | 980 | 858 | ||||||||||||
Cost of revenues: | ||||||||||||||||
Cost of equipment rentals, excluding depreciation | 955 | 871 | 354 | 322 | ||||||||||||
Depreciation of rental equipment | 287 | 277 | 98 | 95 | ||||||||||||
Cost of rental equipment sales | 165 | 137 | 43 | 41 | ||||||||||||
Cost of new equipment sales | 124 | 109 | 45 | 37 | ||||||||||||
Cost of contractor supplies sales | 181 | 120 | 69 | 45 | ||||||||||||
Cost of service and other revenue | 51 | 49 | 19 | 17 | ||||||||||||
Total cost of revenues | 1,763 | 1,563 | 628 | 557 | ||||||||||||
Gross profit | 837 | 709 | 352 | 301 | ||||||||||||
Selling, general and administrative expenses | 422 | 353 | 164 | 123 | ||||||||||||
Goodwill impairment | — | 139 | — | 139 | ||||||||||||
Non-rental depreciation and amortization | 49 | 49 | 17 | 16 | ||||||||||||
Operating income | 366 | 168 | 171 | 23 | ||||||||||||
Interest expense | 135 | 115 | 48 | 35 | ||||||||||||
Interest expense—subordinated convertible debentures | 12 | 12 | 4 | 4 | ||||||||||||
Other (income) expense, net | (8 | ) | 174 | (7 | ) | 1 | ||||||||||
Income (loss) before provision (benefit) for income taxes | 227 | (133 | ) | 126 | (17 | ) | ||||||||||
Provision (benefit) for income taxes | 89 | (19 | ) | 50 | 29 | |||||||||||
Net income (loss) | $ | 138 | $ | (114 | ) | $ | 76 | $ | (46 | ) | ||||||
Earnings (loss) per share—basic: | ||||||||||||||||
Income (loss) available to common stockholders | $ | 1.45 | $ | (1.46 | ) | $ | 0.80 | $ | (0.58 | ) | ||||||
Earnings (loss) per share—diluted: | ||||||||||||||||
Income (loss) available to common stockholders | $ | 1.32 | $ | (1.46 | ) | $ | 0.71 | $ | (0.58 | ) | ||||||
See accompanying notes.
5
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)
(Unaudited)(In millions, except per share data and unless otherwise indicated)
Series C Perpetual Convertible Preferred Stock | Series D Perpetual Convertible Preferred Stock | Common Stock | Additional Paid-in Capital | Deferred Compensation | Accumulated Deficit | Comprehensive Loss | Accumulated Other Comprehensive Income | ||||||||||||||||||||||||||
Number of Shares | Amount | ||||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||
Balance, December 31, 2003 | $ | 3 | $ | 2 | 77,150 | $ | 771 | $ | 1,329,946 | $ | (25,646 | ) | $ | (189,300 | ) | $ | 25,099 | ||||||||||||||||
Comprehensive income (loss): | |||||||||||||||||||||||||||||||||
Net loss | (136,022 | ) | $ | (136,022 | ) | ||||||||||||||||||||||||||||
Other comprehensive income (loss): | |||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | 6,126 | 6,126 | |||||||||||||||||||||||||||||||
Derivatives qualifying as hedges | (4,235 | ) | (4,235 | ) | |||||||||||||||||||||||||||||
Comprehensive loss | $ | (134,131 | ) | ||||||||||||||||||||||||||||||
Issuance of common stock under deferred compensation plans, net of forfeitures | 695 | 7 | 13,304 | (13,310 | ) | ||||||||||||||||||||||||||||
Exercise of common stock options and warrants | 295 | 3 | 5,070 | ||||||||||||||||||||||||||||||
Amortization of stock compensation | 1,611 | 16,498 | |||||||||||||||||||||||||||||||
Tax benefit related to vesting | 712 | ||||||||||||||||||||||||||||||||
Shares repurchased and retired | (260 | ) | (2 | ) | (4,831 | ) | |||||||||||||||||||||||||||
Balance, September 30, 2004 | $ | 3 | $ | 2 | 77,880 | $ | 779 | $ | 1,345,812 | $ | (22,458 | ) | $ | (325,322 | ) | $ | 26,990 | ||||||||||||||||
Series C Perpetual Convertible Preferred Stock | Series D Perpetual Convertible Preferred Stock | Common Stock | Additional Paid-in Capital | Deferred Compensation | Accumulated Deficit | Comprehensive Income | Accumulated Other Comprehensive Income | ||||||||||||||||||||||
| Number of Shares | Amount | ||||||||||||||||||||||||||||
Balance, December 31, 2004 | $ | — | $ | — | 78 | $ | 1 | $ | 1,349 | $ | (19 | ) | $ | (342 | ) | — | $ | 37 | |||||||||||
Comprehensive income: | |||||||||||||||||||||||||||||
Net income | 138 | 138 | |||||||||||||||||||||||||||
Other comprehensive income: | |||||||||||||||||||||||||||||
Foreign currency translation adjustments | 8 | 8 | |||||||||||||||||||||||||||
Derivatives qualifying as hedges, net of tax | 5 | 5 | |||||||||||||||||||||||||||
Comprehensive income | $ | 151 | |||||||||||||||||||||||||||
Exercise of common stock options and warrants | 2 | ||||||||||||||||||||||||||||
Amortization of deferred compensation | 4 | ||||||||||||||||||||||||||||
Founders shares repurchased and retired | (2 | ) | |||||||||||||||||||||||||||
Balance, September 30, 2005 | $ | — | $ | — | 78 | $ | 1 | $ | 1,349 | $ | (15 | ) | $ | (204 | ) | $ | 50 | ||||||||||||
See accompanying notes.6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Unaudited)(In millions, except per share data and unless otherwise indicated)
Nine Months Ended September 30 | ||||||||
| 2004 | 2003 | |||||||
| (In thousands) | ||||||||
Cash Flows From Operating Activities: | ||||||||
Net income (loss) | $ | (136,022 | ) | $ | 46,552 | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 326,114 | 300,398 | ||||||
Gain on sales of rental equipment | (48,067 | ) | (41,312 | ) | ||||
Deferred taxes | (31,521 | ) | 25,920 | |||||
Amortization of deferred compensation | 18,109 | 23,902 | ||||||
Goodwill impairment | 139,306 | |||||||
Repurchase premiums for debt refinancing | 150,255 | |||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (44,850 | ) | (69,180 | ) | ||||
Inventory | 2,409 | (7,659 | ) | |||||
Prepaid expenses and other assets | 43,177 | (5,515 | ) | |||||
Accounts payable | 110,976 | 5,065 | ||||||
Accrued expenses and other liabilities | 34,283 | 48,298 | ||||||
Net cash provided by operating activities | 564,169 | 326,469 | ||||||
Cash Flows From Investing Activities: | ||||||||
Purchases of rental equipment | (465,209 | ) | (320,578 | ) | ||||
Purchases of property and equipment | (58,916 | ) | (26,501 | ) | ||||
Proceeds from sales of rental equipment | 159,321 | 120,977 | ||||||
Deposits on rental equipment purchases | (10,929 | ) | ||||||
Buy-outs of operating leases | (56,529 | ) | ||||||
Purchases of other companies | (61,026 | ) | (5,001 | ) | ||||
Net cash used in investing activities | (425,830 | ) | (298,561 | ) | ||||
Cash Flows From Financing Activities: | ||||||||
Proceeds from debt | 2,195,940 | 247,191 | ||||||
Payments of debt | (2,213,801 | ) | (215,175 | ) | ||||
Payments of financing costs | (36,820 | ) | (10,763 | ) | ||||
Purchases of interest rate caps | (13,646 | ) | ||||||
Shares repurchased and retired | (4,833 | ) | ||||||
Proceeds from the exercise of common stock options and warrants | 4,069 | 237 | ||||||
Company-obligated mandatorily redeemable convertible preferred securities of a subsidiary trust repurchased and retired | (3,575 | ) | ||||||
Net cash provided by (used in) financing activities | (69,091 | ) | 17,915 | |||||
Effect of foreign exchange rates | 470 | 11,294 | ||||||
Net increase in cash and cash equivalents | 69,718 | 57,117 | ||||||
Cash and cash equivalents at beginning of period | 79,449 | 19,231 | ||||||
Cash and cash equivalents at end of period | $ | 149,167 | $ | 76,348 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid for interest | $ | 143,888 | $ | 145,118 | ||||
Cash paid for income taxes, net of refunds | $ | 1,337 | $ | (342 | ) | |||
Supplemental disclosure of non-cash investing and financing activities: | ||||||||
The Company acquired the net assets and assumed certain liabilities of other companies as follows: | ||||||||
Assets, net of cash acquired | $ | 66,126 | $ | 3,314 | ||||
Liabilities assumed | (5,788 | ) | (50 | ) | ||||
| 60,338 | 3,264 | |||||||
Due to seller and other payments | 688 | 1,737 | ||||||
Net cash paid | $ | 61,026 | $ | 5,001 | ||||
Nine Months Ended September 30, | ||||||||
| 2005 | 2004 (Restated) | |||||||
Cash Flows From Operating Activities: | ||||||||
Net income (loss) | $ | 138 | $ | (114 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 336 | 326 | ||||||
Gain on sales of rental equipment | (63 | ) | (56 | ) | ||||
Amortization of deferred compensation | 6 | 18 | ||||||
Goodwill impairment | — | 139 | ||||||
Repurchase premiums for debt refinancing— | — | 150 | ||||||
Deferred taxes | 87 | (18 | ) | |||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (95 | ) | (48 | ) | ||||
Inventory | (41 | ) | (9 | ) | ||||
Prepaid expenses and other assets | 2 | 43 | ||||||
Accounts payable | 26 | 111 | ||||||
Accrued expenses and other liabilities | 28 | 3 | ||||||
Net cash provided by operating activities | 424 | 545 | ||||||
Cash Flows From Investing Activities: | ||||||||
Purchases of rental equipment | (680 | ) | (479 | ) | ||||
Purchases of property and equipment | (56 | ) | (42 | ) | ||||
Proceeds from sales of rental equipment | 228 | 192 | ||||||
Purchases of other companies | (3 | ) | (61 | ) | ||||
Proceeds from sale of branches | 2 | — | ||||||
Net cash used in investing activities | (509 | ) | (390 | ) | ||||
Cash Flows From Financing Activities: | ||||||||
Proceeds from debt | — | 2,179 | ||||||
Payments of debt | (32 | ) | (2,214 | ) | ||||
Purchase of interest rate caps | — | (14 | ) | |||||
Payments of financing costs | (34 | ) | (37 | ) | ||||
Proceeds from the exercise of common stock options | 1 | 4 | ||||||
Shares repurchased and retired | (2 | ) | (4 | ) | ||||
Net cash used in financing activities | (67 | ) | (86 | ) | ||||
Effect of foreign exchange rates | — | 1 | ||||||
Net increase (decrease) in cash and cash equivalents | (152 | ) | 70 | |||||
Cash and cash equivalents at beginning of period | 303 | 79 | ||||||
Cash and cash equivalents at end of period | $ | 151 | $ | 149 | ||||
See accompanying notes.
UNITED RENTALS (NORTH AMERICA), INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, 2004 | December 31, 2003 | |||||||
(In thousands, except share data) | ||||||||
ASSETS | ||||||||
Cash and cash equivalents | $ | 149,167 | $ | 79,449 | ||||
Accounts receivable, net of allowance for doubtful accounts of $48,304 in 2004 and $47,439 in 2003 | 547,450 | 499,433 | ||||||
Inventory | 123,242 | 105,987 | ||||||
Prepaid expenses and other assets | 106,612 | 109,992 | ||||||
Rental equipment, net | 2,163,200 | 2,071,492 | ||||||
Property and equipment, net | 399,196 | 381,345 | ||||||
Goodwill, net | 1,325,462 | 1,437,809 | ||||||
Other intangible assets, net | 2,135 | 3,225 | ||||||
| $ | 4,816,464 | $ | 4,688,732 | |||||
LIABILITIES AND STOCKHOLDER’S EQUITY | ||||||||
Liabilities: | ||||||||
Accounts payable | $ | 262,128 | $ | 150,796 | ||||
Debt | 2,921,170 | 2,817,088 | ||||||
Deferred taxes | 138,999 | 165,052 | ||||||
Due to parent | 58,869 | 37,287 | ||||||
Accrued expenses and other liabilities | 279,082 | 226,780 | ||||||
Total liabilities | 3,660,248 | 3,397,003 | ||||||
Commitments and contingencies | ||||||||
Stockholder’s equity: | ||||||||
Common stock—$.01 par value, 3,000 shares authorized, 1,000 shares issued and outstanding | ||||||||
Additional paid-in capital | 1,587,004 | 1,582,935 | ||||||
Accumulated deficit | (457,778 | ) | (316,305 | ) | ||||
Accumulated other comprehensive income | 26,990 | 25,099 | ||||||
Total stockholder’s equity | 1,156,216 | 1,291,729 | ||||||
| $ | 4,816,464 | $ | 4,688,732 | |||||
See accompanying notes.7
UNITED RENTALS (NORTH AMERICA), INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended September 30 | Three Months Ended September 30 | |||||||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||||||
| (In thousands) | ||||||||||||||||
Revenues: | ||||||||||||||||
Equipment rentals | $ | 1,692,103 | $ | 1,619,783 | $ | 655,186 | $ | 625,748 | ||||||||
Sales of rental equipment | 159,321 | 120,977 | 48,424 | 44,391 | ||||||||||||
Sales of equipment and contractor supplies and other revenues | 419,047 | 384,281 | 146,108 | 134,995 | ||||||||||||
Total revenues | 2,270,471 | 2,125,041 | 849,718 | 805,134 | ||||||||||||
Cost of revenues: | ||||||||||||||||
Cost of equipment rentals, excluding depreciation | 895,770 | 880,435 | 337,319 | 330,978 | ||||||||||||
Depreciation of rental equipment | 278,577 | 248,888 | 95,124 | 85,722 | ||||||||||||
Cost of rental equipment sales | 111,254 | 79,665 | 34,032 | 28,717 | ||||||||||||
Cost of equipment and contractor supplies sales and other operating costs | 302,750 | 280,439 | 105,625 | 101,158 | ||||||||||||
Total cost of revenues | 1,588,351 | 1,489,427 | 572,100 | 546,575 | ||||||||||||
Gross profit | 682,120 | 635,614 | 277,618 | 258,559 | ||||||||||||
Selling, general and administrative expenses | 361,146 | 335,814 | 128,769 | 127,490 | ||||||||||||
Goodwill impairment | 139,306 | 139,306 | ||||||||||||||
Non-rental depreciation and amortization | 41,820 | 44,772 | 13,600 | 15,443 | ||||||||||||
Operating income (loss) | 139,848 | 255,028 | (4,057 | ) | 115,626 | |||||||||||
Interest expense | 115,881 | 158,796 | 35,562 | 53,420 | ||||||||||||
Other (income) expense, net | 174,966 | (1,831 | ) | 1,503 | (223 | ) | ||||||||||
Income (loss) before provision (benefit) for income taxes | (150,999 | ) | 98,063 | (41,122 | ) | 62,429 | ||||||||||
Provision (benefit) for income taxes | (25,187 | ) | 40,926 | 19,899 | 27,250 | |||||||||||
Net income (loss) | $ | (125,812 | ) | $ | 57,137 | $ | (61,021 | ) | $ | 35,179 | ||||||
See accompanying notes.
UNITED RENTALS (NORTH AMERICA), INC.
CONSOLIDATED STATEMENT OF STOCKHOLDER’S EQUITY
(Unaudited)
| Common Stock | Additional Paid-In Capital | Accumulated Deficit | Comprehensive Loss | Accumulated Other Comprehensive Income | |||||||||||||||
Number of Shares | Amount | ||||||||||||||||||
| (In thousands, except share data) | |||||||||||||||||||
Balance, December 31, 2003 | 1,000 | $ | 1,582,935 | $ | (316,305 | ) | $ | 25,099 | |||||||||||
Comprehensive income (loss): | |||||||||||||||||||
Net loss | (125,812 | ) | $ | (125,812 | ) | ||||||||||||||
Other comprehensive income (loss): | |||||||||||||||||||
Foreign currency translation adjustments | 6,126 | 6,126 | |||||||||||||||||
Derivatives qualifying as hedges | (4,235 | ) | (4,235 | ) | |||||||||||||||
Comprehensive loss | $ | (123,921 | ) | ||||||||||||||||
Contributed capital from parent | 4,069 | ||||||||||||||||||
Dividend distributions to parent | (15,661 | ) | |||||||||||||||||
Balance, September 30, 2004 | 1,000 | $ | 1,587,004 | $ | (457,778 | ) | $ | 26,990 | |||||||||||
See accompanying notes.
UNITED RENTALS (NORTH AMERICA), INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30 | ||||||||
| 2004 | 2003 | |||||||
| (In thousands) | ||||||||
Cash Flows From Operating Activities: | ||||||||
Net income (loss) | $ | (125,812 | ) | $ | 57,137 | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 320,397 | 293,660 | ||||||
Gain on sales of rental equipment | (48,067 | ) | (41,312 | ) | ||||
Deferred taxes | (25,208 | ) | 25,920 | |||||
Goodwill impairment | 139,306 | |||||||
Repurchase premiums for debt refinancing | 150,255 | |||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (44,850 | ) | (69,180 | ) | ||||
Inventory | 2,409 | (7,659 | ) | |||||
Prepaid expenses and other assets | 41,831 | (599 | ) | |||||
Accounts payable | 110,976 | 5,065 | ||||||
Accrued expenses and other liabilities | 47,836 | 74,743 | ||||||
Net cash provided by operating activities | 569,073 | 337,775 | ||||||
Cash Flows From Investing Activities: | ||||||||
Purchases of rental equipment | (465,209 | ) | (320,578 | ) | ||||
Purchases of property and equipment | (52,992 | ) | (26,818 | ) | ||||
Proceeds from sales of rental equipment | 159,321 | 120,977 | ||||||
Deposits on rental equipment purchases | (10,929 | ) | ||||||
Buy-outs of operating leases | (56,529 | ) | ||||||
Purchases of other companies | (61,026 | ) | (5,001 | ) | ||||
Net cash used in investing activities | (419,906 | ) | (298,878 | ) | ||||
Cash Flows From Financing Activities: | ||||||||
Proceeds from debt | 2,195,940 | 247,191 | ||||||
Payments of debt | (2,213,801 | ) | (215,175 | ) | ||||
Payments of financing costs | (36,820 | ) | (10,763 | ) | ||||
Purchases of interest rate caps | (13,646 | ) | ||||||
Capital contributions by parent | 4,069 | 237 | ||||||
Dividend distributions to parent | (15,661 | ) | (14,564 | ) | ||||
Net cash provided by financing activities | (79,919 | ) | 6,926 | |||||
Effect of foreign exchange rates | 470 | 11,294 | ||||||
Net increase in cash and cash equivalents | 69,718 | 57,117 | ||||||
Cash and cash equivalents at beginning of period | 79,449 | 19,231 | ||||||
Cash and cash equivalents at end of period | $ | 149,167 | $ | 76,348 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid for interest | $ | 133,060 | $ | 134,075 | ||||
Cash paid for income taxes, net of refunds | $ | 1,337 | $ | (342 | ) | |||
Supplemental disclosure of non-cash investing and financing activities: | ||||||||
The Company acquired the net assets and assumed certain liabilities of other companies as follows: | ||||||||
Assets, net of cash acquired | $ | 66,126 | $ | 3,314 | ||||
Liabilities assumed | (5,788 | ) | (50 | ) | ||||
| 60,338 | 3,264 | |||||||
Due to seller and other payments | 688 | 1,737 | ||||||
Net cash paid | $ | 61,026 | $ | 5,001 | ||||
See accompanying notes.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data unless otherwise indicated)
1. Organization and Basis of Presentation
General
United Rentals, Inc., (“Holdings”Holdings,” “United Rentals” or the “Company”) is principally a holding company and conducts its operations primarily through its wholly owned subsidiary United Rentals (North America), Inc. (“URI”) and subsidiaries of URI. Separate footnoteHoldings’ primary asset is its sole ownership of all issued and outstanding shares of common stock of URI. URI’s various credit agreements and debt instruments place restrictions on its ability to transfer funds to its shareholder.
We rent equipment to a diverse customer base that includes construction and industrial companies, manufacturers, utilities, municipalities, homeowners and others in the United States, Canada and Mexico. In addition to renting equipment, we sell new and used rental equipment, as well as related contractor supplies, parts and service. The nature of our business is such that short-term obligations are typically met by cash flow generated from long-term assets. Therefore, the accompanying balance sheets are presented on an unclassified basis.
We have prepared the accompanying unaudited condensed consolidated interim financials statements in accordance with the accounting policies described in our 2004 Form 10-K and the interim reporting requirements of Form 10-Q. Accordingly, certain information is not presented for theand note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the 2004 Form 10-K.
In our opinion, all adjustments which are necessary for a fair statement of URI and subsidiaries as that information is substantially equivalent to that presented below. Earnings per share data is not provided for thefinancial position, operating results of URI and its subsidiaries as they are wholly owned subsidiaries of Holdings.
The Consolidated Financial Statements of the Company included herein are unaudited and, in the opinion of management, such financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the results ofcash flows for the interim periods presented. Interim financial statements do not require all disclosures normally presented in year-end financial statements, and, accordingly, certain disclosures have been omitted. Resultsmade. Interim results of operations for the nine and three month periods ended September 30, 2004 are not necessarily indicative of the results of the full year.
In August 2004 we received notice from the SEC that may be expectedit was conducting a non-public, fact-finding inquiry of the Company. The SEC inquiry appears to relate to a broad range of the Company’s accounting practices and is not confined to a specific period. In March 2005, our board of directors formed a Special Committee of independent directors to review matters related to the SEC inquiry. Our board of directors received and acted upon findings of the Special Committee in January 2006. The actions that we took with respect to the Special Committee’s findings and actions that we took with respect to certain other accounting matters, including the restatement of previously issued consolidated financial statements for 2003 and 2002, are discussed in note 2 below (the “Restatement Note”). The unaudited condensed consolidated interim financial statements for the year ending December 31, 2004. The Consolidated Financial Statements included herein should2004 interim period have been restated to reflect the matters discussed in the Restatement Note.
Cash Equivalents
We consider all highly liquid instruments with maturities of three months or less when purchased to be readcash equivalents. Included in conjunctionthe cash balance at September 30, 2005 is $75 that we agreed to maintain in an investment account for a traffic control subsidiary to conduct traffic control business with the Company’s Consolidated Financial Statements and related Notes thereto includedstate of Florida. In March 2006, we signed an agreement with the state of Florida whereby we are no longer required to maintain these funds in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.any type of account.
Stock-Based Compensation
The Company accounts for its stock-based compensation arrangements using the intrinsic value method under the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to
8
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share data unless otherwise indicated)
Employees.” At September 30, 2004,2005, the Company had six stock-based compensation plans. Since stock options arehave been granted by the Company with exercise prices at or greater than the fair value of the shares at the date of grant, no compensation expense ishas been recognized. Restricted stock awards granted by the Company are recognized as deferred compensation. The Company recognizes compensation expense related to these restricted stock awards over their vesting periods or earlier upon acceleration of vesting. During the secondfirst quarter of 2003,2004, the Companycompany accelerated the vesting of approximately 230,000 shares of restricted stock and in the first quarter of 2004 accelerated the vesting of approximately 400,000404,000 shares of restricted stock. The following table provides additional information related to the Company’s stock-based compensation arrangements for the nine and three months ended September 30, 2004 and 2003 (in thousands, except per share data):arrangements:
Nine Months Ended September 30 | Three Months Ended September 30 | |||||||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||||||
Net income (loss), as reported | $ | (136,022 | ) | $ | 46,552 | $ | (64,381 | ) | $ | 31,884 | ||||||
Plus: Stock-based compensation expense included in reported net income (loss), net of tax | 12,375 | 17,486 | 3,471 | 11,710 | ||||||||||||
Less: Stock-based compensation expense determined using the fair value method, net of tax | (13,501 | ) | (19,372 | ) | (3,848 | ) | (12,322 | ) | ||||||||
Pro forma net income (loss) | $ | (137,148 | ) | $ | 44,666 | $ | (64,758 | ) | $ | 31,272 | ||||||
Basic earnings (loss) per share: | ||||||||||||||||
As reported | $ | (1.75 | ) | $ | 0.62 | $ | (0.83 | ) | $ | 0.43 | ||||||
Pro forma | $ | (1.77 | ) | $ | 0.59 | $ | (0.83 | ) | $ | 0.42 | ||||||
Diluted earnings (loss) per share: | ||||||||||||||||
As reported | $ | (1.75 | ) | $ | 0.50 | $ | (0.83 | ) | $ | 0.34 | ||||||
Pro forma | $ | (1.77 | ) | $ | 0.48 | $ | (0.83 | ) | $ | 0.33 | ||||||
Nine Months Ended September 30, Three Months Ended September 30, 2005 2004 (Restated) 2005 2004 (Restated) Net income (loss), as reported Plus: Stock-based compensation expense included in reported net income (loss), net of tax Less: Stock-based compensation expense determined using the fair value method, net of tax Pro forma net income (loss) Basic earnings (loss) per share: As reported Pro forma Diluted earnings (loss) per share: As reported Pro forma $ 138 $ (114 ) $ 76 $ (46 ) 4 11 — 2 (5 ) (21 ) (1 ) (6 ) $ 137 $ (124 ) $ 75 $ (50 ) $ 1.45 $ (1.46 ) $ 0.80 $ (0.58 ) $ 1.45 $ (1.58 ) $ 0.79 $ (0.63 ) $ 1.32 $ (1.46 ) $ 0.71 $ (0.58 ) $ 1.32 $ (1.58 ) $ 0.70 $ (0.63 )
UNITED RENTALS, INC.New Accounting Pronouncements
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Impact of Recently Issued Accounting Standards
In January 2003,During the years ended December 31, 2005 and 2004, the Financial Accounting Standards Board (“FASB”) issued Interpretationseveral pronouncements of significance to us which are discussed in detail below. In addition, the FASB issued several other pronouncements, including standards on inventory (SFAS No. 46 (“FIN 46”151 “Inventory Costs, an amendment of ARB 43, Chapter 4”), revised December 2003)exchanges of nonmonetary assets (SFAS No. 153 “Exchanges of Nonmonetary Assets”), “Consolidation of Variable Interest Entities,”and accounting changes (SFAS No. 154 “Accounting Changes and Error Corrections”), which addresses consolidation of variable interest entities (“VIEs”). FIN 46 requireswe either currently comply with or are not anticipating to have a VIE to be consolidated by a parent company if that company is subject to the majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. A VIE is a corporation, partnership, trust or any other legal structure used for business purposes that either does not have equity investors with voting rights or has equity investors that do not provide sufficientsignificant impact on our future financial resources for the entity to support its activities. The consolidation requirements of FIN 46 apply immediately to VIEs created after January 31, 2003. For entities created prior to February 1, 2003 the effective date of these requirements, which originally was July 1, 2003, was deferred so as not to apply until the first period ending after December 15, 2003. Upon adoption of this standard, as of December 31, 2003, the Company deconsolidated a subsidiary trust that had issued trust preferred securities. As a result of such deconsolidation (i) the trust preferred securities issued by the Company’s subsidiary trust, which had previously been reflected on the Company’s consolidated balance sheets, were removed from its consolidated balance sheets at December 31, 2003, (ii) the subordinated convertible debentures that the Company issued to the subsidiary trust, which previously had been eliminated in the Company’s consolidated balance sheets, were no longer eliminated in its consolidated balance sheets as of December 31, 2003 and (iii) commencing January 1, 2004, the interest on the subordinated convertible debentures is reflected as interest expense on the Company’s consolidated statement of operations instead of the dividends on the trust preferred securities. The carrying amount of the trust preferred securities removed from the consolidated balance sheets was the same as the carrying amount of the subordinated convertible debentures added to the consolidated balance sheets; however, the subordinated convertible debentures are reflected as a component of liabilities on the consolidated balance sheets at September 30, 2004 and December 31, 2003, whereas the trust preferred securities were reflected as a separate category prior to December 31, 2003. The adoption of this standard did not otherwise have an effect on the Company’s statements of financial positioncondition or results of operations.
In OctoberDecember 2004, the FASB ratified Emerging Issues Task Forceissued Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment” (“EITF”FAS 123(R)”) Issue, an amendment of FAS No. 04-8, “The Effect123, “Accounting for Stock-Based Compensation,” which supersedes APB 25 and requires companies to recognize compensation expense using a fair value based method for costs related to share-based payments, including stock options. As permitted by the SEC, the requirements of Contingently Convertible DebtFAS 123(R) are effective for our fiscal year beginning January 1, 2006. Upon adoption, we will elect to apply the modified prospective transition method and therefore we will not restate the results of prior periods. The implementation of FAS 123(R) is not expected to have a material impact on Diluted Earnings Per Share.” Their conclusion wasthe Company.
FAS 123(R) also requires that beginning with reportingthe benefits of tax deductions in excess of recognized compensation cost are reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods ending after December 15, 2004 (i) contingently convertible debt instruments are subject to the if-converted method under SFAS No. 128, “Earnings Per Share,” regardless of the contingent features includedeffective date. While we can not estimate what those amounts will be in the instrument,future (because they depend on, among other things, when employees exercise stock options and (ii) prior period earningsthe fair value of our common stock on the date of exercise), the amount of operating cash flows recognized in 2005 for such excess tax deductions was $1.
9
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share would have to be restated. The Company’s 1 7/8% convertible notes are contingently convertible debt instruments that are potentially convertible into approximately 5.6 million shares of common stock. Under accounting rules that were in effect prior to the ratification of EITF Issue No. 04-8, such potentially issuable shares were not required to be included in the Company’s diluted earnings per share calculation. With the ratification of EITF Issue No. 04-8, the Company will be required to include such potentially issuable shares, if dilutive, in its diluted earnings per share calculation beginning with the fourth quarter 2004 reporting period.data unless otherwise indicated)
In March 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations—an interpretation of FASB Statement No. 143” (“FIN 47”). FIN 47 requires an entity to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value can be reasonably estimated. A conditional asset retirement obligation is a legal obligation to perform an asset retirement activity in which the timing or method of settlement are conditional upon a future event that may or may not be within control of the entity. The adoption of FIN 47 in 2005 did not have a material impact on the Company.
2. AcquisitionsRestatement
Restatement and Reclassification of Previously Issued Consolidated Financial Statements and Related Matters
The Company completed one acquisitionAs previously reported and discussed in eachgreater detail in our 2004 Form 10-K, subsequent to the filing of (i) the nine-month period ended September 30, 2004, and (ii)our Form 10-K for the year ended December 31, 2003, which included our consolidated financial statements for the years ended December 31, 2003 and 2002, it was determined that the Company’s originally issued financial statements for those periods required restatement to correct the accounting for (i) the recognition of equipment rental revenue;
(ii) irregularities identified by the Special Committee with respect to six short-term, or minor, equipment sale-leaseback transactions; (iii) self-insurance reserves; (iv) customer relationships; and (v) the provision for income taxes.
The effects of the restatement adjustments on our originally reported results of operations for the years ended December 31, 2003 and 2002 and on our originally reported retained earnings at December 31, 2001, are summarized below.
Net Loss Year Ended December 31, | Retained at December 31, 2001 | |||||||||||
| 2003 | 2002 | |||||||||||
As originally reported | $ | (259 | ) | $ | (398 | ) | $ | 467 | ||||
Adjustments for: | ||||||||||||
Equipment rental revenues (a) | (2 | ) | (3 | ) | (17 | ) | ||||||
Sale-leaseback transactions (b) | 20 | 2 | (33 | ) | ||||||||
Self-insurance reserves (c) | 8 | (13 | ) | (41 | ) | |||||||
Customer relationships (d) | (2 | ) | (1 | ) | — | |||||||
Pre-tax impact | 24 | (15 | ) | (91 | ) | |||||||
Related tax effects | (9 | ) | 6 | 35 | ||||||||
Adjustments, net of tax | 15 | (9 | ) | (56 | ) | |||||||
Income taxes (e) | (10 | ) | 1 | (9 | ) | |||||||
Total adjustments, net of tax | 5 | (8 | ) | (65 | ) | |||||||
As restated | $ | (254 | ) | $ | (406 | ) | $ | 402 | ||||
Below is a summary of the nature and amount of the adjustments reflected in the restatement (all amounts are presented on a pre-tax basis unless otherwise noted). We have provided below the impact on originally reported pre-tax and/or net income for 2001 and 2000 of certain of the items for which we are restating.
(a) Recognition of equipment rental revenues. Our originally reported results reflected the recognition of equipment rental revenues based on the minimum amounts which became due and payable under the
10
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share data unless otherwise indicated)
terms of our applicable rental contracts. We have determined that equipment rental revenues should be recognized on a straight-line basis and have restated our previously reported results to reflect this correction of an error. Our restatement had the impact of increasing/(decreasing) originally reported pre-tax income for 2001, 2000 and for periods prior to 2000 by $6, $4 and $(27), respectively.
(b)Sale-leaseback transactions. In 2002, 2001, and 2000 we previously recognized gross profits of $1, $20 and $12, respectively, in conjunction with six minor sale-leaseback transactions. It has been determined that the accounting for these transactions constituted irregularities and we are restating our financial statements to properly reflect the accounting for these six transactions. At the dates of the original minor sale-leaseback transactions, we recognized a premium (excess profit above fair value) on these transactions. In exchange for receiving this profit premium, we agreed to disburse cash in later periods as well as pay premiums for subsequent equipment purchases (“subsequent purchases”).
Our restatement for the sale-leaseback transactions had the impact of increasing/(decreasing) originally reported pre-tax income for 2003, 2002, 2001 and 2000 by $20, $2, $(21), and $(12), respectively. These restatement adjustments reflect the elimination of the premium originally received in the minor sale-leaseback transactions as well as the deferral of any profit until all of our obligations associated with the originally received premiums were settled. Additionally, the adjustments reflect a reduction in previously recorded depreciation expense because this expense reflected capitalized equipment costs for subsequent purchases that were overstated.
(c)Self-insurance reserves. We self-insure for certain types of claims associated with our business, including (i) workers compensation claims and (ii) claims by third parties for injury or property damage caused by our equipment or personnel. These types of claims may take a substantial amount of time to resolve and, accordingly, the ultimate liability associated with a particular claim may not be known for an extended period of time. Our prior methodology for developing self-insurance reserves was based on management estimates of ultimate liability which were developed without obtaining actuarial valuations. In 2004, management adopted an estimation approach based on third party actuarial calculations that properly reflects and incorporates actuarial assumptions. Based on actuarial calculations performed by our third party actuaries in late 2004 and 2005, we concluded that the estimation process we previously used did not adequately take into account certain factors and that, as a result, a restatement was required. The factors that were not adequately addressed by our historical estimation process included future changes in the cost of known claims over time, cost inflation and incurred but not reported claims. Our restatement for the self-insurance reserves had the impact of increasing/(decreasing) originally reported pre-tax income for 2003, 2002, 2001, 2000 and for periods prior to 2000 by $8, $(13), $(11), $(18) and $(12), respectively.
(d)Customer relationships. In 2001, the FASB issued Statement of Financial Accounting Standards No. 141, “Business Combinations” (“SFAS No. 141”), which required the use of the purchase method of accounting for business combinations and prohibited the use of the pooling of interests method. SFAS No. 141 also changed the definition of intangible assets acquired in a purchase business combination, providing specific criteria for the initial recognition and measurement of intangible assets apart from goodwill. SFAS 141 applied to all business combinations accounted for using the purchase method for which the acquisition date is July 1, 2001, or later.
We have reviewed acquisitions we made since July 1, 2001 and have determined that a portion of the purchase price for these acquisitions previously allocated to goodwill should be recorded as a separate intangible asset—customer relationships. This restatement reflects the amortization expense associated with the reallocation of a portion of the purchase price from goodwill (which is not amortized) to customer relationships (which are amortized). This correction of an error had the impact of decreasing originally reported pre-tax income for 2003 and 2002 by $2 and $1, respectively.
11
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share data unless otherwise indicated)
(e)Income taxes. We have restated our income tax provision to (i) correctly reflect all book-to-tax temporary differences (primarily depreciation and nondeductible reserves and accruals); (ii) reflect appropriate tax benefits for net operating loss and alternative minimum tax credits; (iii) calculate deferred taxes at appropriate legal entity tax rates; and (iv) account for the settlement of an IRS audit examination. Our restatement for income taxes had the impact of increasing/(decreasing) originally reported net income for 2003, 2002, 2001, 2000 and for periods prior to 2000 by $(10), $1, $(3), $(2) and $(4), respectively.
Buy-out of operating lease
In addition to the restatement matters discussed above, we have determined that $88 of costs for the year ended December 31, 2003 previously classified below operating income should be reclassified to cost of equipment rentals and included in operating income. This amount primarily represents the amount in excess of the fair value related to the buy-out of equipment under operating leases. This reclassification, which has the effect of reducing gross profit and other expense (income), net by $88, has no impact on originally reported net income or earnings per share for the year ended December 31, 2003.
Trade packages
During the period from the fourth quarter of 2000 through 2002, the Company sold used equipment to certain suppliers (referred to as “trade packages”). In certain of the trade packages, prices may have included a premium above fair value. In order to induce these suppliers to buy used equipment at premium prices, the Company made commitments or concessions to the suppliers. It has been determined that the accounting for those transactions involved irregularities and that the Company improperly recognized revenue from the transactions involving the undisclosed inducements. However, because records were not created that would have permitted the linkage of the sales and inducements (as a result of instructions given by certain former employees of the Company), the Company is unable to determine the portion of the revenue and gross profit recognized in connection with trade packages with these suppliers between 2000 and 2002 that was improperly recognized. During this period, all sales of used equipment to these suppliers (which includes all trade package transactions) generated total revenues and gross profits of $38 and $9, respectively. Notwithstanding the lack of records relating to these transactions, the Company believes that its financial statements from and after 2002 are materially correct with respect to the effect of these transactions.
The Special Committee concluded that, based on the evidence it reviewed, the practices regarding certain trade packages and minor sale-leaseback transactions described above appear to have been directed by the Company’s two former chief financial officers. Both of these individuals, who are no longer with the Company, declined to cooperate with the Special Committee’s investigation. Based upon recommendations of the Special Committee, the Company’s board of directors directed the Company, among other things, to evaluate potential claims relating to certain former company personnel, including these individuals and compensation and benefits previously received by them.
Purchase Accounting
The Company was formed and began operations in 1997 with the acquisition of six equipment rental companies. During the subsequent three year period, we grew rapidly and completed approximately 230 additional acquisitions. By the end of 1999, we were the largest equipment rental company in the world, with annual revenues of approximately $2.9 billion. With management’s focus now turned toward organic growth, the pace of our acquisitions significantly slowed and from September 2001 through the date of this report we completed only eight acquisitions. Substantially all of the business combinations that we have completed since the inception of the Company were accounted for as purchases, however, there were several significant business combinations accounted for in the earlier period that were accounted for as poolings.
12
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share data unless otherwise indicated)
Accounting standards applicable to purchase business combinations require the acquiring company to recognize the assets acquired and the liabilities assumed based on their fair values at the time of acquisition.Any excess between the cost of an acquired company and the sum of the fair values of tangible and identifiable intangible assets less liabilities assumed should be recognized as goodwill.
In our historical accounting for these purchase business combinations, long-lived fixed assets (comprised primarily of rental equipment) and goodwill generally represented the largest components of our acquisitions. As a result, when we performed our purchase price allocation process, the purchase price was primarily allocated to these assets.
As discussed above, in March 2005, our Board of Directors formed a Special Committee of independent directors to review matters related to the SEC inquiry. The Special Committee made certain findings related to the Company’s historical practices concerning the valuation of rental equipment acquired in purchase business combinations. The committee concluded that certain of these practices were not adequate between 1997 and August 2000. These practices included, among other things, the use of inconsistent valuation methodologies, some of which were reflected in memoranda that were not provided to or reviewed by the Company’s auditors, suggestions contained in those memoranda that improper methods of valuation be used (although the committee did not find evidence that such improper methods were generally applied), inadequate supervision of personnel, inadequate coordination with providers of outside valuations and apparent confusion on the part of one of those providers. The Special Committee concluded that certain Company personnel (whom the committee was unable to identify) may have sought to manipulate opening balance sheet values for equipment acquired in purchase business combinations by causing them to be understated and that these opening balance sheet values may have been understated by an amount the committee was unable to determine.
Following our review of our historical practices and the findings of the Special Committee, the Company considered whether the effect of the deficiencies identified by the committee required a restatement of previously reported results. These deficiencies in our historical practices between 1997 and August 2000 may have resulted in inaccurate values being ascribed to rental equipment that we acquired in purchase business combinations, including in some cases values that may have been below fair value. However, we do not have the ability to revalue this equipment because we are unable to currently determine its historical physical condition and the records that currently exist for this equipment are not sufficient to establish the physical condition of the equipment at the time of its acquisition.
The equipment valuations performed at the time of the acquisition, some of which included a physical inspection, reflected an assessment of the condition of the equipment. While, as the Special Committee identified, there were various deficiencies in our historical valuation practices, it is not possible to accurately revalue this equipment to assess the reasonableness of specific valuations. Therefore, we believe the only feasible approach is to give effect to the valuations that were performed contemporaneously with these acquisitions. Accordingly, notwithstanding deficiencies in the Company’s historical valuation process as it relates to purchase business combinations, the Company does not believe a restatement is required and believes that its financial statements from and after 2002 are materially correct with respect to the effect of equipment valuations.
13
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share data unless otherwise indicated)
The following table presents the effects of the foregoing restatements on a condensed basis on our quarterly results for the three and nine months ended September 30, 2004:
| Three Months Ended September 30, 2004 | Nine Months Ended September 30, 2004 | |||||||||||||||
| Amount Originally Reported | Restated | Amount Originally Reported | Restated | |||||||||||||
Statements of Operations: | ||||||||||||||||
Revenues | $ | 850 | $ | 858 | $ | 2,270 | $ | 2,272 | ||||||||
Operating income | (6 | ) | 24 | 134 | 168 | |||||||||||
Net income | (64 | ) | (46 | ) | (136 | ) | (114 | ) | ||||||||
Basic loss per share | $ | (0.83 | ) | $ | (0.58 | ) | $ | (1.75 | ) | $ | (1.46 | ) | ||||
Diluted loss per share | $ | (0.83 | ) | $ | (0.58 | ) | $ | (1.75 | ) | $ | (1.46 | ) | ||||
3. Acquisitions
We completed two and three acquisitions during the years ended December 31, 2005 and 2004 respectively. The results of operations of the businesses acquired in these acquisitions have been included in the Company’sour results of operations from their respective acquisition dates.
In December 2005, we acquired Sandvick Equipment & Supply Company, a trench safety company, with annual revenues of approximately $21. In June 2005, we acquired HSS RentX branch locations in Colorado. Total 2004 revenues of the acquired branches were approximately $9. The aggregate purchase price for these 2005 acquisitions was approximately $42, less liabilities assumed of approximately $10.
In October 2004, we acquired Atlantic Rentals Ltd., which had revenues in 2003 of approximately $32. In February 2004, the Companywe acquired 843504 Alberta Ltd. (formerly known as Skyreach Equipment, Ltd.) with, which had annual revenues in 2003 of approximately $40 million$35. The aggregate purchase price for these 2004 acquisitions was approximately $60 million.
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
$91, less liabilities assumed of $22.
The purchase prices for all acquisitions have been allocated to the assets acquired and liabilities assumed based on their respective fair values at their respective acquisition dates. Purchase price allocations are subject to change when additional information concerning asset and liability valuations areis completed. The preliminary purchase price allocations that are subject to change primarily consist of rental and non-rental equipment valuations. These allocations are finalized within 12twelve months of the acquisition date and are not expected to result in significant differences between the preliminary and final allocations.
The following table summarizes, on an unaudited proPro forma basis, thecombined results of operations of the Company for the nine and three months ended September 30, 2004 and 2003 as though each acquisition which was consummated during the period January 1, 2003giving effect to September 30, 2004 as mentioned above and in note 3 to the notes to consolidated financial statements included in the Company’s 2003 Annual Report on Form 10-K was made on January 1, 2003 (in thousands, except per share data):
Nine Months Ended September 30 | Three Months Ended September 30 | |||||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||||
Revenues | $ | 2,277,444 | $ | 2,157,398 | $ | 849,718 | $ | 815,745 | ||||||
Net income (loss) | $ | (138,164 | ) | $ | 42,797 | $ | (64,381 | ) | $ | 30,980 | ||||
Basic earnings (loss) per share | $ | (1.77 | ) | $ | 0.57 | $ | (0.83 | ) | $ | 0.41 | ||||
Diluted earnings (loss) per share | $ | (1.77 | ) | $ | 0.46 | $ | (0.83 | ) | $ | 0.33 | ||||
| �� | ||||||||||||||
The unaudited pro forma results are based upon certain assumptions and estimates which are subject to change. These results arethese acquisitions would not necessarily indicative of the actual results of operations that might have occurred, nor are they necessarily indicative of expected results in the future.
In October 2004, the Company acquired Atlantic Rentals Ltd. with annual revenues of approximately $35 million for approximately $29 million.
vary materially from historical results.
3.4. Goodwill and Other Intangible Assets
Changes in the Company’s carrying amount of goodwill for the first nine months of 2004ended September 30, 2005 are as follows (in thousands):follows:
Balance at December 31, 2003 | $ | 1,437,809 | ||
Impairment charges | (139,306 | ) | ||
Goodwill related to acquisitions | 37,347 | |||
Foreign currency translation and other adjustments | (10,388 | ) | ||
Balance at September 30, 2004 | $ | 1,325,462 | ||
Balance at December 31, 2004 | $ | 1,293 | |
Goodwill related to acquisitions | 2 | ||
Foreign currency translation and other adjustments | 5 | ||
Balance at September 30, 2005 | $ | 1,300 | |
The Company is required to periodically review its goodwill for impairment. In general this means that the Company must determine whether the fair value of the goodwill, calculated14
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in accordance with applicable accounting standards, is at least equal to the recorded value shown on its balance sheet. If the fair value of the goodwill is less than the recorded value, the Company is required to write off the excess goodwill as expense.millions, except per share data unless otherwise indicated)
The Company generally isWe are required to review itsour goodwill for impairment annually as of a scheduled review date; however,date. However, if events or circumstances suggest that its goodwill could be impaired, the Companywe may be required to
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
conduct an earlier review. The scheduled review date is October 1 of each year; however, the Companywe reviewed itsour traffic control segment goodwill as of September 30, 2004 because continued weakness in this segment suggested that the goodwill associated with this segment could bemay have been impaired. Based on this review, the Companywe recorded a non-cashan impairment charge of approximately $139.3 million ($121.9 million, net of tax at a rate of 12.5%)$139 to write offwrite-off the remaining goodwill balance that was associated with itsour traffic control segment. This charge is reflected on the Company’s statement of operations as “goodwill impairment” and is included in the operating loss of the traffic control segment.
Other intangible assets consist of customer relationships and non-compete agreements and are amortized over periods ranging from three to eighttwelve years. Amortization expense for other intangible assets was $3 for the nine months ended September 30, 2005 and September 30, 2004. The cost of other intangible assets and the related accumulated amortization was as follows as of September 30, 2004 were $18.5 million and $16.4 million, respectively ($2.1 million, net). Amortization expense of other intangible assets was $1.8 million for the first nine months of 2004 and $3.0 million for the first nine months of 2003.2005:
As of September 30, 2004, estimated amortization expense of other intangible assets for the remainder of 2004 and for each of the next five years is as follows (in thousands):
Remainder of 2004 | $ | 297 | |
2005 | 916 | ||
2006 | 581 | ||
2007 | 151 | ||
2008 | 141 | ||
2009 | 49 | ||
| $ | 2,135 | ||
| September 30, 2005 | ||||
Gross carrying amount | $ | 60 | ||
Accumulated amortization | (26 | ) | ||
Net Amount | $ | 34 | ||
4.5. Restructuring Charges
The Company adopted a restructuring plan in 2001 and a second restructuring plan in 2002 as described below. In connection with these plans, the CompanyWe recorded restructuring charges of $28.9 million in 2001$28 (including a non-cash component of approximately $10.9 million)$3) and $28.3 million in the fourth quarter of 2002$29 (including a non-cash component of approximately $2.5 million).$11) in 2002 and 2001, respectively. Restructuring program activity during the nine months ended September 30, 2005 is outlined below:
The 2001 plan involved the following principal elements: (i) 31 underperforming branches were closed or consolidated with other locations, (ii) five administrative offices were closed or consolidated with other locations; (iii) the reduction of the Company’s workforce by 489 through the termination of branch and administrative personnel and (iv) certain information technology hardware and software was no longer used.
| Restructuring reserve (1) | ||||
Balance at December 31, 2004 | $ | 8 | ||
Cash payments charged against reserve | (2 | ) | ||
Balance at September 30, 2005 | $ | 6 | ||
| (1) | Balance relates to costs to vacate facilities |
The 2002 plan involved the following key elements: (i) 40 underperforming branches and five administrative offices were closed or consolidated with other locations; (ii) reduction of the Company’s workforce by 412 through the termination of branch and administrative personnel, and (iii) a certain information technology project was abandoned.
The costs to vacate facilities primarily represent the payment of obligations under leases offset by estimated sublease opportunities, the write-off of capital improvements made to such facilities and the write-off of related goodwill (only in 2001). The workforce reduction costs primarily represent severance. The information technology costs represent the payment of obligations under equipment leases relating to the abandonment of certain information technology projects.15
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The aggregate balance of the 2001 and 2002 charges was $14.2 million as of September 30, 2004 consisting of $0.7 million for the 2001 charge and $13.5 million for the 2002 charge. The Company estimates that approximately $0.8 million of the aggregate amount will be incurred by December 31, 2004 and approximately $13.4 million will be paid(Dollars in future periods.millions, except per share data unless otherwise indicated)
Components of the restructuring charges are as follows (in thousands):
Balance 2003 | Activity in 2004 | Balance 2004 | |||||||
Costs to vacate facilities | $ | 14,960 | $ | 2,574 | $ | 12,386 | |||
Workforce reduction costs | 1,756 | 199 | 1,557 | ||||||
Information technology costs | 613 | 406 | 207 | ||||||
| $ | 17,329 | $ | 3,179 | $ | 14,150 | ||||
5.6. Earnings Per Share
Basic earnings per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding and, if dilutive, the Series C and Series D preferred shares as if converted to common shares since such shares are participating securities. Diluted earnings per share includes the impact of other diluted securities. The diluted share base for periods where the numerator represents a loss excludes incremental weighted shares for the below-captioned “Effect of dilutive securities” due to their antidilutive effect. The following table sets forth the computation of basic and diluted earnings (loss) per share (in thousands, except per share data):share:
| Nine Months Ended September 30 | Three Months Ended September 30 | |||||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||||
Numerator: | ||||||||||||||
Net income (loss) | $ | (136,022 | ) | $ | 46,552 | $ | (64,381 | ) | $ | 31,884 | ||||
Plus: Liquidation preference in excess of amounts paid for convertible preferred securities | 896 | 896 | ||||||||||||
Income (loss) available to common stockholders | $ | (136,022 | ) | $ | 47,448 | $ | (64,381 | ) | $ | 32,780 | ||||
Denominator: | ||||||||||||||
Denominator for basic earnings per share—weighted-average shares | 77,505 | 76,920 | 77,844 | 76,956 | ||||||||||
Effect of dilutive securities: | ||||||||||||||
Stock options and warrants | 1,411 | 3,060 | ||||||||||||
Series C perpetual convertible preferred stock | 12,000 | 12,000 | ||||||||||||
Series D perpetual convertible preferred stock | 5,000 | 5,000 | ||||||||||||
Denominator for diluted earnings per share—adjusted weighted-average shares | 77,505 | 95,331 | 77,844 | 97,016 | ||||||||||
Earnings (loss) per share—basic | $ | (1.75 | ) | $ | 0.62 | $ | (0.83 | ) | $ | 0.43 | ||||
Earnings (loss) per share—diluted | $ | (1.75 | ) | $ | 0.50 | $ | (0.83 | ) | $ | 0.34 | ||||
The diluted share base for the nine and three months ended September 30, 2004, where the numerator represents a loss, excludes incremental weighted shares for the effect of dilutive securities due to their antidilutive effect.
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
6. Comprehensive Income
The following table sets forth the Company’s comprehensive income (loss) (in thousands):
| Nine Months Ended September 30 | Three Months Ended September 30 | |||||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||||
Net income (loss) | $ | (136,022 | ) | $ | 46,552 | $ | (64,381 | ) | $ | 31,884 | ||||
Other comprehensive income (loss): | ||||||||||||||
Foreign currency translation adjustment | 6,126 | 34,448 | 12,446 | 955 | ||||||||||
Derivatives qualifying as hedges | (4,235 | ) | 4,625 | (4,080 | ) | 2,014 | ||||||||
Comprehensive income (loss) | $ | (134,131 | ) | $ | 85,625 | $ | (56,015 | ) | $ | 34,853 | ||||
| Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||
2005 | 2004 (Restated) | 2005 | 2004 (Restated) | |||||||||||
Numerator: | ||||||||||||||
Net income (loss) | $ | 138 | $ | (114 | ) | $ | 76 | $ | (46 | ) | ||||
Plus: | ||||||||||||||
Convertible debt interest | 1 | — | 1 | — | ||||||||||
QUIPS interest | 7 | — | 2 | — | ||||||||||
Income (loss) available to common stockholders | $ | 146 | $ | (114 | ) | $ | 79 | $ | (46 | ) | ||||
Denominator: | ||||||||||||||
Weighted-average common shares | 77,960,242 | 77,505,171 | 78,010,517 | 77,843,606 | ||||||||||
Series C preferred | 12,000,000 | — | 12,000,000 | — | ||||||||||
Series D preferred | 5,000,000 | — | 5,000,000 | — | ||||||||||
Denominator for basic earnings per share—weighted-average | 94,960,242 | 77,505,171 | 95,010,517 | 77,843,606 | ||||||||||
Effect of dilutive securities: | ||||||||||||||
Employee stock options | 4,128,840 | — | 3,974,510 | — | ||||||||||
Convertible shares | 5,634,055 | — | 5,702,334 | — | ||||||||||
QUIPS shares | 5,077,926 | — | 5,077,926 | — | ||||||||||
Restricted stock units and phantom shares | 175,617 | — | 150,334 | — | ||||||||||
Denominator for diluted earnings per share—adjusted weighted-average shares | 109,976,680 | 77,505,191 | 109,915,621 | 77,843,606 | ||||||||||
Earnings (loss) per share—basic: | ||||||||||||||
Income (loss) available to common stockholders | $ | 1.45 | $ | (1.46 | ) | $ | 0.80 | (0.58 | ) | |||||
Earnings (loss) per share—diluted: | ||||||||||||||
Income (loss) available to common stockholders | $ | 1.32 | $ | (1.46 | ) | $ | 0.71 | $ | (0.58 | ) | ||||
7. Segment Information
Commencing in the first quarter of 2004, the Company began to report data for two operating segments:Our reportable segments are general rentals, traffic control and traffic control.trench safety, pump and power. The general rentals segment includes the rental of construction, aerial, industrial and homeowner equipment and related services and activities. The general rentals segment’s customers include construction and industrial companies, manufacturers, utilities, municipalities and homeowners. The general rentals segment operates throughout the United States and Canada and has one location in Mexico. The trench safety, pump and power segment includes
16
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share data unless otherwise indicated)
the rental of specialty construction products and related services. The trench safety, pump and power segment’s customers include construction companies involved in infrastructure projects, municipalities and industrial companies. This segment operates in the United States and has one location in Canada. The traffic control segment includes the rental of equipment for controlling traffic and relatedused in the management of traffic-related services and activities. The traffic control segment’s customers include construction companies involved in infrastructure projects and municipalities. The traffic control segment operates in the United States. In the tables below, the Company has restated its segment information for prior periods to reflect the change in operating segments. The new segments align the Company’sOur external segment reporting to howis aligned with the manner in which management evaluates and allocates resources and provide more transparent disclosure to the Company’s investors. The Company evaluatesresources. We evaluate segment performance based on segment operating results. The change in segments was attributable to a change inresults which exclude goodwill impairment and restructuring and asset impairment charges.
Operating segment revenues and profitability for the role of the chief operating decision makerthree and nine month periods ended September 30, 2005 and 2004 were as defined in accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information”.follows:
Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
2005 | 2004 (Restated) | 2005 | 2004 (Restated) | |||||||||||||
Total revenues | ||||||||||||||||
General rentals | $ | 2,270 | $ | 1,989 | $ | 845 | $ | 742 | ||||||||
Trench safety, pump and power | 130 | 93 | 52 | 38 | ||||||||||||
Traffic control | 200 | 190 | 83 | 78 | ||||||||||||
Total revenues | $ | 2,600 | $ | 2,272 | $ | 980 | $ | 858 | ||||||||
Total Depreciation and Amortization Expense | ||||||||||||||||
General rentals | $ | 305 | $ | 294 | $ | 106 | $ | 100 | ||||||||
Trench safety, pump and power | 14 | 11 | 4 | 4 | ||||||||||||
Traffic control | 17 | 21 | 5 | 7 | ||||||||||||
Total depreciation and amortization expense | $ | 336 | $ | 326 | $ | 115 | $ | 111 | ||||||||
Segment operating income (loss) | ||||||||||||||||
General rentals | $ | 345 | $ | 310 | $ | 154 | $ | 154 | ||||||||
Trench safety, pump and power | 35 | 26 | 18 | 12 | ||||||||||||
Traffic control | (14 | ) | (29 | ) | (1 | ) | (4 | ) | ||||||||
Segment operating income | $ | 366 | $ | 307 | $ | 171 | $ | 162 | ||||||||
Total capital expenditures | ||||||||||||||||
General rentals | $ | 687 | $ | 487 | $ | 201 | $ | 146 | ||||||||
Trench safety, pump and power | 33 | 23 | 14 | 10 | ||||||||||||
Traffic control | 16 | 11 | 6 | 5 | ||||||||||||
Total capital expenditures | $ | 736 | $ | 521 | $ | 221 | $ | 161 | ||||||||
The accounting policies of the Company’s segments are the same as those described in the summary of significant accounting policies in note 2 to the notes to consolidated financial statements included in the Company’s 2003 Annual Report on Form 10-K. Certain corporate costs, including those related to selling, finance, legal, risk management, human resources, corporate management and information technology systems, are deemed to be of an operating nature and are allocated to each of the operating segments. The charge for the vesting of restricted stock granted to executives in 2001 has not been allocated to either segment. The charge for goodwill impairment is related entirely to the traffic control segment and is therefore reflected in that segment’s operating results.
| September 30, 2005 | December 31, 2004 | |||||
Total assets | ||||||
General rentals | $ | 4,811 | $ | 4,613 | ||
Trench safety, pump and power | 123 | 92 | ||||
Traffic control | 254 | 177 | ||||
Total assets | $ | 5,188 | $ | 4,882 | ||
17
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share data unless otherwise indicated)
The following table sets forth financial information by operating segment (in thousands):
Nine Months Ended September 30 | Three Months Ended September 30 | |||||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||||
Total Revenues | ||||||||||||||
General rentals | $ | 2,080,242 | $ | 1,869,727 | $ | 771,516 | $ | 696,929 | ||||||
Traffic control | 190,229 | 255,314 | 78,202 | 108,205 | ||||||||||
Total revenues | $ | 2,270,471 | $ | 2,125,041 | $ | 849,718 | $ | 805,134 | ||||||
Total Depreciation and Amortization Expense | ||||||||||||||
General rentals | $ | 306,347 | $ | 280,098 | $ | 103,803 | $ | 96,299 | ||||||
Traffic control | 19,767 | 20,300 | 6,737 | 7,086 | ||||||||||
Total depreciation and amortization expense | $ | 326,114 | $ | 300,398 | $ | 110,540 | $ | 103,385 | ||||||
Segment Operating Income (Loss) | ||||||||||||||
General rentals | $ | 314,496 | $ | 247,376 | $ | 142,551 | $ | 110,130 | ||||||
Traffic control(1) | (173,384 | ) | 12,660 | (148,424 | ) | 15,022 | ||||||||
Segment operating income (loss) | $ | 141,112 | $ | 260,036 | $ | (5,873 | ) | $ | 125,152 | |||||
Total Capital Expenditures | ||||||||||||||
General rentals | $ | 507,979 | $ | 329,583 | $ | 159,385 | $ | 53,519 | ||||||
Traffic control | 16,146 | 17,496 | 5,209 | 3,925 | ||||||||||
Total capital expenditures | $ | 524,125 | $ | 347,079 | $ | 164,594 | $ | 57,444 | ||||||
September 30, 2004 | December 31, 2003 | |||||
Total Assets | ||||||
General rentals | $ | 4,645,455 | $ | 4,348,012 | ||
Traffic control | 203,280 | 374,129 | ||||
Total assets | $ | 4,848,735 | $ | 4,722,141 | ||
The following table sets forthis a reconciliation betweenof segment operating income and loss before income taxes (in thousands):to total company operating income:
Nine Months Ended September 30 | Three Months Ended September 30 | |||||||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||||||
Segment operating income (loss) | $ | 141,112 | $ | 260,036 | $ | (5,873 | ) | $ | 125,152 | |||||||
Vesting of restricted shares granted to executives in 2001 (included in selling, general and administrative expenses) | 6,981 | 11,746 | 11,746 | |||||||||||||
Operating income (loss) | 134,131 | 248,290 | (5,873 | ) | 113,406 | |||||||||||
Interest expense | 115,881 | 158,796 | 35,562 | 53,420 | ||||||||||||
Interest expense—subordinated convertible debentures | 10,827 | 3,600 | ||||||||||||||
Preferred dividends of a subsidiary trust | 10,989 | 3,627 | ||||||||||||||
Other (income) expense, net | 174,966 | (1,831 | ) | 1,503 | (223 | ) | ||||||||||
Income (loss) before provision (benefit) for income taxes | $ | (167,543 | ) | $ | 80,336 | $ | (46,538 | ) | $ | 56,582 | ||||||
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||
| 2005 | 2004 (Restated) | 2005 | 2004 (Restated) | |||||||||
Total segment profits | ||||||||||||
Unallocated items: | $ | 366 | $ | 307 | $ | 171 | $ | 162 | ||||
Goodwill impairment charges | — | 139 | — | 139 | ||||||||
Consolidated operating income | $ | 366 | $ | 168 | $ | 171 | $ | 23 | ||||
8. Financing Transactions / Debt
Transactions Completed in 2004
The CompanyWe refinanced approximately $2.1 billion of its debt in 2004.2004 (“the Refinancing”). The Refinancing extended debt maturities, reduced interest expense going forward and provided the Company with greater financial flexibility. As part of this refinancing,the Refinancing, the Company:
| • | sold $1 billion of URI’s 6 1/2 |
| • | repurchased $845 |
| • | redeemed $300 |
The refinancing described aboveRefinancing was completed during the first quarter of 2004, except that (i) the redemption of the 9%9 percent Notes was completed on April 1, 2004 and (ii) a portion of the term loan that is part of the new senior secured credit facilityNew Credit Facility was drawn on such date.
date and (ii) an additional $4 of the 10 3/4 percent Notes were repurchased on April 7, 2004.
In connection with the refinancings in 2004,Refinancing, the Company incurred aggregate pre-tax charges of approximately $161 million in the first quarter and incurred additional charges of approximately $11 million in the second quarter.$171. These charges arewere attributable primarily to (i) the redemption and tender premiums for notes redeemed or repurchased as part of the refinancingRefinancing and (ii) the write-off of previously capitalized costs relating to the debt refinanced. These charges wereare recorded in other (income) expense,income (expense), net.
7%7 percent Senior Subordinated Notes. In January 2004, as part of the refinancing in 2004Refinancing described above, URI issued $375 million aggregate principal amount of 7%7 percent Senior Subordinated Notes (the “7%“7 percent Notes”) which are due February 15, 2014. The net proceeds from the sale of the 7%7 percent Notes were approximately $369, million (afterafter deducting the initial purchasers’ discount and offering expenses).expenses. The 7%7 percent Notes are unsecured and are guaranteed by Holdings and, subject to limited exceptions, URI’s domestic subsidiaries. The 7%7 percent Notes mature on February 15, 2014 and may be redeemed by URI on or after February 15, 2009, at specified redemption prices that range from 103.5%103.5 percent in 2009 to 100.0%100.0 percent in 2012 and thereafter. In addition, on or prior to February 15, 2007, URI may, at its option, use the proceeds of a public equity offeringofferings to redeem up to 35%an aggregate of
18
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share data unless otherwise indicated)
35 percent of the outstanding 7%7 percent Notes at a redemption price of 107.0%.107.0 percent. The indenture governing the 7%7 percent Notes contains certain restrictive covenants, including limitations on (i) additional indebtedness, (ii) restricted payments, (iii) liens, (iv) dividends and other payments, (v) preferred stock of certain subsidiaries, (vi) transactions with affiliates, (vii) the disposition of proceeds of asset sales and (viii) the Company’s ability to consolidate, merge or sell all or substantially all of its assets.
6 1/2% percent Senior Notes. In February 2004, as part of the refinancing in 2004Refinancing described above, URI issued $1 billion aggregate principal amount of 6 1/2% percent Senior Notes (the “6 1/2% percent Notes”) which are due February 15, 2012. The net proceeds from the sale of the 6 1/2% percent Notes were approximately $984 million (after$985, after deducting the initial purchasers’ discount and offering expenses).expenses. The 6 1/2% percent Notes are unsecured and are guaranteed by Holdings and, subject to limited exceptions, URI’s domestic subsidiaries. The 6 1/2% percent Notes mature on February 15, 2012 and may be redeemed by URI on or after February 15, 2008, at specified redemption prices that range from 103.25%103.25 percent in 2008 to 100.0%100.0 percent in 2010 and thereafter. In addition, on or prior to February 15, 2007, URI may, at its
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
option, use the proceeds of a public equity offeringofferings to redeem up to 35%an aggregate of 35 percent of the outstanding 6 1/2% percent Notes at a redemption price of 106.5%.106.5 percent. The indenture governing the 6 1/2% percent Notes contains certain restrictive covenants, including limitations on (i) additional indebtedness, (ii) restricted payments, (iii) liens, (iv) dividends and other payments, (v) preferred stock of certain subsidiaries, (vi) transactions with affiliates, (vii) the disposition of proceeds of asset sales, (viii) the Company’s ability to consolidate, merge or sell all or substantially all of its assets and (ix) sale-leaseback transactions.
New Credit Facility. In the first quarter of 2004, as part of the refinancing in 2004Refinancing described above, the Company obtained a newamended and restated its senior secured credit facility. The newamended and restated facility includes (i) a $650 million revolving credit facility, (ii) a $150 million institutional letter of credit facility and (iii) a $750 million term loan. The revolving credit facility, institutional letter of credit facility and term loan are governed by the same credit agreement. URI’s obligations under the credit facility are guaranteed by Holdings and, subject to limited exceptions, URI’s domestic subsidiaries and are secured by liens on substantially all of the assets of URI, Holdings and URI’s domestic subsidiaries. Set forth below is certain additional information concerning the revolving credit facility, institutional letter of credit facilityamended and term loan.restated facility.
Revolving Credit Facility. The revolving credit facility enables URI to borrow up to $650 million on a revolving basis and enables certain of the Company’s Canadian subsidiaries to borrow up to $150 million (provided that the aggregate borrowings of URI and the Canadian subsidiaries may not exceed $650 million)$650). A portion of the revolving credit facility, up to $250, million, is available in the formfor issuance of letters of credit. The revolving credit facility is scheduled to mature and terminate in February 2009. As of September 30, 2005 and December 31, 2004, the outstanding borrowings under this facility were approximately $97 million$137 and the face amount of undrawn$133 and utilized letters of credit obtainedwere $65 and $50, respectively. All outstanding borrowings under thisthe revolving credit facility at September 30, 2005 were Canadian subsidiary borrowings.
U.S. dollar borrowings under the revolving credit facility accrue interest, at the option of URI’s Canadian subsidiaries, at either (a) the ABR rate (which is equal to the greater of (i) the Federal Funds Rate plus 0.5 percent and (ii) JPMorgan Chase Bank’s prime rate) plus a margin of 1.25 percent, or (b) an adjusted LIBOR rate plus a maximum margin of 2.25 percent.
Canadian dollar borrowings under the revolving credit facility accrue interest, at the option of URI’s Canadian subsidiaries, at either (a) the ABR rate (which is equal to the greater of (i) the Federal Funds Rate plus 0.5 percent and (ii) JPMorgan Chase Bank’s prime rate) plus a margin of 1.25 percent, or (b) an adjusted LIBOR rate plus a maximum margin of 2.25 percent. The rate applicable to Canadian borrowings outstanding under the revolving credit facility was approximately $55 million.4.8 percent at September 30, 2005 and December 31, 2004.
19
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share data unless otherwise indicated)
URI is also required to pay the lenders a commitment fee equal to 0.5 percent per annum, payable quarterly, in respect of undrawn commitments under the revolving credit facility.
Institutional Letter of Credit Facility (“ILCF”). The ILCF provides for up to $150 million in letters of credit. The ILCF is in addition to the letter of credit capacity under the revolving credit facility. The total combined letter of credit capacity under the revolving credit facility and the ILCF is $400 million.$400. Subject to certain conditions, all or part of the ILCF may be converted into term loans. The ILCF is scheduled to terminate in February 2011. As of both September 30, 2005 and December 31, 2004, the outstanding letters of credit under the ILCF were approximately $150.
URI is required to pay a fee which accrues at the rate of 0.1 percent per annum on the amount of the ILCF. In addition, URI is required to pay participation and other fees in respect of letters of credit. For letters of credit obtained under both the ILCF and the revolving credit facility, these fees accrue at a maximum rate of 2.25 percent per annum.
Term Loan. The term loan was obtained in two draws. An initial draw of $550 million was obtainedmade upon the closing of the credit facility in February 2004 and an additional draw of $200 million was obtainedmade on April 1, 2004. Amounts repaid in respect of the term loan may not be reborrowed.
The term loan must be repaid in installments as follows: (i) during the period from and including June 30, 2004 to and including March 31, 2010, URI must repay on each March 31, June 30, September 30 and December 31 of each year an amount equal to one-fourth of 1%1 percent of the original aggregate principal amount of the term loan and (ii) URI must repay on each of June 30, 2010, September 30, 2010, December 31, 2010, and at maturity on February 14, 2011 an amount equal to 23.5%23.5 percent of the original aggregate principal amount of the term loan.
Interest. Borrowings by URI As of September 30, 2005 and December 31, 2004, amounts outstanding under the revolving credit facility accrue interest, at URI’s option, at either (A) the ABR rate (which is equal to the greater of (i) the Federal Funds Rate plus 0.5%term loan were approximately $739 and (ii) JPMorgan Chase Bank’s prime rate) plus a margin of 1.25%, or (B) an adjusted LIBOR rate plus a margin of 2.25%. The above interest rate margins are adjusted quarterly based on the Company’s Funded Debt to Cash Flow Ratio, up to the maximum margins described in the preceding sentence and down to minimum margins of 0.75% and 1.75% for revolving loans based on the ABR rate and the adjusted LIBOR rate,$744, respectively.
Canadian dollar borrowings under the revolving credit facility accrue interest, at the borrower’s option, at either (A) the Canadian prime rate (which is equal to the greater of (i) the CDOR rate plus 1% and (ii) JPMorgan Chase Bank, Toronto Branch’s prime rate) plus a margin of 1.25%, or (B) the B/A rate (which is equal to JPMorgan Chase Bank, Toronto Branch’s B/A rate) plus a margin of 2.25%. These above interest rate margins
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
are adjusted quarterly based on the Company’s Funded Debt to Cash Flow Ratio, up to the maximum margins described in the preceding sentence and down to minimum margins of 0.75% and 1.75% for revolving loans based on the Canadian prime rate and the B/A rate, respectively.
URI is also required to pay the lenders a commitment fee equal to 0.5% per annum in respect of undrawn commitments under the revolving credit facility.
Borrowings under the term loan accrue interest, at URI’s option, at either (a) the ABR rate (which is equal to the greater of (i) the Federal Funds Rate plus 0.5% and (ii) JPMorgan Chase Bank’s prime rate) plus a maximum margin of 1.25%,1.25 percent, or (b) an adjusted LIBOR rate plus a maximum margin of 2.25% (which margins may be reduced to 1.00%2.25 percent. The rate was 6.1 and 2.00%, respectively, for certain periods based on our Funded Debt to Cash Flow Ratio).
If4.67 at any time an event of default under the credit agreement exists, the interest rate applicable to each revolving loanSeptember 30, 2005 and term loan will be based on the highest margins described above plus 2%. URI is required to pay a fee which accrues at the rate of 0.10% per annum on the amount of the ILCF. In addition, URI is required to pay participation fees and fronting fees in respect of letters of credit. For letters of credit obtained under the ILCF, these fees accrue at the rate of 2.25% and 0.25% per annum,December 31, 2004, respectively.
Covenants. Under the agreement governing the Company’s senior secured credit facility,New Credit Facility, the Company is required to, among other things, satisfy certain financial tests relating to: (a) interest coverage ratio, (b) the ratio of funded debt to cash flow, (c) the ratio of senior secured debt to tangible assets and (d) the ratio of senior secured debt to cash flow. If the Company is unable to satisfy any of these covenants, the lenders could elect to terminate the credit facility and require the Company to repay the outstanding borrowings under the credit facility. The Company is also subject to various other covenants under the agreements governing its credit facility and other indebtedness. These covenants require the Company to timely file audited annual and quarterly financial statements with the SEC and limit or prohibit, among other things, the Company’s ability to incur indebtedness, make prepayments of certain indebtedness, pay dividends, make investments, create liens, make acquisitions, sell assets and engage in mergers and acquisitions. If at any time an event of default under the New Credit Facility exists, the interest rate applicable to each revolving and term loan will be based on the highest margins above plus 2 percent.
Transactions Completed in 2005
Matters Relating to Consent Solicitation:In 2005, the Company successfully solicited consents for amendments to the indentures governing the following securities:
| • | 6 1/2 percent Senior Notes due 2012 |
20
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share data unless otherwise indicated)
| • | 7 3/4 percent Senior Subordinated Notes due 2013 |
| • | 1 7/8 percent Convertible Senior Subordinated Notes due 2023 (“Convertible Notes”) |
| • | 6 1/2 percent Convertible Quarterly Income Preferred Securities due 2028 (“QUIPs”) |
The indentures for these securities require the Company to file annual and other periodic reports with the SEC. On September 19, 2005, the Company obtained consents from holders of these securities and entered into supplemental indentures amending the applicable covenants to allow the Company until March 31, 2006 to comply with the requirement to make timely SEC filings (and waiving related defaults that occurred prior to the effectiveness of the amendments). In addition, the supplemental indenture relating to the Convertible Notes changed the conversion rate from 38.9520 to 44.9438 shares of United Rentals common stock for each $1,000 (“one thousand dollars”) principal amount of Convertible Notes. Pursuant to the terms of the consent solicitation, the company paid aggregate consent fees of approximately $34 to holders of its nonconvertible notes and QUIPs. The costs are being amortized through the maturity dates of the nonconvertible notes and QUIPs.
In March 2005, the Company successfully obtained its lenders’ consent to an amendment to the New Credit Facility that waived the covenant violation from the delay in making certain SEC filings and extended the Company’s deadline to comply with the requirements to make timely SEC filings until June 29, 2005 for our 2004 Annual Report on Form 10-K and until August 15, 2005 for our first quarter 2005 Form 10-Q. In June 2005, the Company successfully obtained its lenders’ consent to an amendment to the New Credit Facility that waived the covenant violation from the delay in making certain SEC filings and extended the Company’s deadline to comply with the requirements to make timely SEC filings until December 31, 2005 for our 2004 Annual Report on Form 10-K and for our 2005 Form 10-Qs. Both of these consents were obtained without the payment of any consent fees. In November 2005, the Company successfully obtained its lenders’ consent to an amendment to the New Credit Facility that waived the covenant violation from the delay in making certain SEC filings and extended the Company’s deadline to comply with the requirements to make timely SEC filings until March 31, 2006. Consent fees in the amount of $1 were paid to the lenders under the New Credit Facility. On March 31, 2006, the Company obtained its lenders’ consent to an additional amendment to the New Credit Facility that (1) waived the covenant violation from the delay in making certain SEC filings, (2) extended the Company’s deadline to make its SEC filings until April 28, 2006 and (3) limited the Company’s ability to borrow under the New Credit Facility to amounts necessary to find obligations to be paid in the ordinary course during the one-week period following the applicable borrowing until these SEC filings are made.
Accounts Receivable Securitization:On May 31, 2005, we obtained a new $200 accounts receivable securitization facility and terminated our then existing $250 accounts receivable securitization facility. The new facility provides for generally lower borrowing costs than the old facility. In addition, the new facility provides for a substantially longer term, with the scheduled termination date being May 29, 2009, compared with September 30, 2006 under the old facility. There were no outstanding borrowings under the old facility at the time it was terminated. In connection with terminating the old facility, we incurred a charge of approximately $1, representing the write-off of previously capitalized costs relating to the old facility.
The new facility enables one of our subsidiaries to borrow up to $200 against a collateral pool of eligible accounts receivable. Consistent with the old facility, the borrowings under the new facility will be reflected as debt on our consolidated balance sheets and the receivables in the collateral pool will be reflected as assets on our consolidated balance sheets. However, such assets are only available to satisfy the obligations of the borrower subsidiary, and once the obligations of the borrower subsidiary are satisfied, the remaining assets will be available to be dividended to the parent.
21
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share data unless otherwise indicated)
Key terms of this facility include:
Outstanding borrowings under the facility generally accrue interest at the commercial paper rate plus a specified spread not to exceed 1.0 percent. There were no outstanding borrowings under this facility at September 30, 2005 and December 31, 2004. We are also required to pay a commitment fee based on the long-term senior secured ratings of URI. This commitment fee was .55 percent at September 30, 2005.
Interest Rate SwapRedemption of remaining 10 3/4 Senior Notes: In April 2005, the Company redeemed $12 principal amount of URI’s 10 3/4 Senior Notes due 2008 (the “10 3/4 Notes”). The principal repurchased represented the amounts of the 10 3/4 Notes still outstanding after the 2004 tender offer. In connection with this redemption, the Company incurred charges of approximately $1. These charges were attributed primarily to (i) the redemption for notes redeemed and Cap Agreements.(ii) the write-off of previously capitalized costs.
Loan Covenants and Compliance
As of September 30, 2004,2005, we were in compliance with the Company had swap agreements with an aggregate notional amount of $1,345 million. The effect of these agreements was to convert $1,345 millioncovenants of the Company’s fixed rate notes to floating rate instruments. The fixed rate notes converted consist of: (i) $445 million of7 percent Notes and the Company’s 6 1/2% senior notes through 2012, (ii) $525 million percent Notes, as amended as discussed above, as well as the covenants of the Company’sour 7 3/4% senior subordinated notes through percent Senior Subordinated Notes due 2013, Convertible Notes due 2023, the QUIPs and (iii) $375 millionthe New Credit Facility. As described above, as of March 31, 2006, the Company obtained its lenders’ consent to an additional amendment to the New Credit Facility that extended the Company’s deadline to make its SEC filings until April 28, 2006.
As of March 31, 2006, although we filed our annual reports on Form 10-K for the years ended December 31, 2004 and 2005, we had not yet filed our quarterly reports on Form 10-Q for the periods ended in 2005. Therefore, we were in violation of the Company’s 7% senior subordinated notes through 2014. The Company’s swap agreements that convert its fixed rate notesamendments to floating rate instrumentsour indentures due to not filing our quarterly reports. We are designated as fair value hedges. Changes in the fair valuesfiling each of the Company’s fair value hedges, as well as the offsetting fair value changes in the hedged items, are recordedthese quarterly reports on Form 10-Q on the statementdate hereof. The Company is currently in compliance with its New Credit Facility, as amended, as of operations. There was no ineffectiveness related to the Company’s fair value hedges. March 31, 2006.
9. Legal and Regulatory Matters
SEC Non-Public Fact Finding Inquiry and Special Committee Review
As of September 30,previously announced, on August 25, 2004, the Company hadreceived a letter from the SEC in which the SEC referred to an unrealized lossinquiry of $24.3 million based upon the fair valueCompany. The letter transmitted a subpoena requesting certain of its fair value hedges.the
As of September 30, 2004, the Company had interest rate cap agreements that effectively limit the interest rate on $725 million of its term loan. One cap agreement limits $75 million of its term loan to a maximum of 6.25% through June 2007. Additional interest rate cap agreements effectively limit the interest rate on an additional $650 million of its term loan to a maximum of 4.25% through June 2005, 5.25% through June 2006 and 6.25% through June 2007. The foregoing cap agreements would apply whenever the interest rate on the term loan (including the applicable margin spread) exceeds the applicable maximum interest rate specified by the relevant cap agreement. The Company’s cap agreements are designated as cash flow hedges. Changes in the fair values of the Company’s cash flow hedges are recorded in other comprehensive income and reclassified into earnings in the same periods during which the hedged transactions affect earnings. There was no ineffectiveness related to the Company’s cash flow hedges. As of September 30, 2004, the Company had an unrealized loss of $4.2 million based upon the fair value of its cash flow hedges.22
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
9. Restricted Stock and Operating Leases(Dollars in millions, except per share data unless otherwise indicated)
Restricted Stock
Company’s documents. The Company has grantedletter and the subpoena referred to employees other than executive officers and directors approximately 900,000 sharesan SEC investigation entitledIn the Matter of restricted stock that contain the following provisions. The shares vest in 2005, 2006 or 2007 or earlier upon a change in control of the Company, death, disability, retirement or certain terminations of employment, and are subject to forfeiture prior to vesting on certain other terminations of employment, the violation of non-compete provisions and certain other events. If a holder of restricted stock sells his stock and receives sales proceeds that are less than a specified guaranteed amount set forth in the grant instrument, the Company has agreed to pay the holder the shortfall between the amount received and such specified amount; however, the foregoing only applies to sales that are made within five trading days of the vesting date. The specified guaranteed amount is (i) $27.26 per share with respect to approximately 300,000 shares scheduled to vest in 2005, (ii) $9.18 per share with respect to approximately 400,000 shares scheduled to vest in 2006 and (iii) $17.20 per share with respect to approximately 200,000 shares scheduled to vest in 2007.
Operating LeasesUnited Rentals, Inc
As part of certain of its equipment operating leases, the Company guarantees that the value of the equipment at the end of the lease term will not be less than a specified projected residual value. If the actual residual value for all equipment subject to such guarantees were to be zero, then the Company’s maximum potential liability under these guarantees would be approximately $33.9 million. Under current circumstances, the Company does not anticipate paying significant amounts under these guarantees; however, it cannot be certain that changes in market conditions or other factors will not cause the actual residual values to be lower than those currently anticipated. In accordance with FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” this potential liability was not reflected on the Company’s balance sheet as of September 30, 2004, or any prior date because the leases associated with such guarantees were entered into prior to January 1, 2003.
10. SEC Non-public Fact Finding Inquiry and Class Action Lawsuit
SEC Non-public Fact Finding Inquiry
As previously reported, the Company was notified by the SEC that it is conducting a non-public, fact-finding inquiry of the Company and has subpoenaed documents relating to certain of its accounting records.. The notice from the SEC states that the inquiry does not mean that the SEC has concluded that the Company or anyone else has broken the law or that the SEC has a negative opinion of any person, entity or security. As previously announced, the inquiry appears to relate to a broad range of our accounting practices and is not confined to a specific period or the matters discussed in this report.
The Company has since received additional document subpoenas from the SEC. As previously announced, in March 2005, the Company’s board of directors formed the Special Committee to review matters related to the SEC inquiry. The Special Committee retained independent counsel. The board of directors received and acted upon findings of the Special Committee on January 26, 2006. The conclusions and recommendations of the Special Committee are discussed above in the Restatement Note and summarized in the Company’s press release and the related current report on Form 8-K dated January 26, 2006.
The Company has provided documents in response to the SEC subpoenas to the SEC or to the Special Committee, which has, in turn, provided documents to the SEC. The Company is cooperating fully with the SEC; however, it cannot predictSEC in complying with the outcomesubpoenas. The Company is also responding to the SEC’s informal requests for information.
Shareholder Class Action Lawsuits and Derivative Litigation
As previously announced, following our public announcement of the SEC inquiry whether the SEC will bring any proceeding relatingreferred to the Company or when this matter might be resolved.
Class Action Lawsuit
Aabove, three purported class action lawsuit has beenlawsuits were filed against us in the Company.United States District Court for the District of Connecticut. The lawsuit namesplaintiff in each of the lawsuits seeks to sue on behalf of a purported class comprised of purchasers of our securities from October 23, 2003 to August 30, 2004. The lawsuits name as the defendants the Companyour company, our chairman, our vice chairman and certain officers and/or directors of the Company.chief executive officer, our former president and chief financial officer, and our former corporate controller. The complaint alleges,complaints allege, among other things, that (i) certain of the Company’sour SEC filings and other public statements contained false and misleading statements which resulted in damages to the plaintiffplaintiffs and the members of the purported class when they purchased our securities. On the Company’s securities and (ii) the conductbasis of those allegations, plaintiffs in connection therewith violatedeach action assert claims (a) against all defendants under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and in the case(b) against one or more of the individual defendants under Section 20(a) of such Act. The complaints seek unspecified compensatory damages, costs and expenses. On February 1, 2005, the Court entered an order consolidating the three actions. On November 8, 2005, the Court appointed City of Pontiac Policeman’s and Fireman’s Retirement System as lead plaintiff for the purported class. The consolidated action is now entitledIn re United Rentals, Inc. Securities Litigation. The court has directed the parties to submit, by April 17, 2006, a proposed schedule for the filing of a consolidated amended complaint and responses to any amended pleading. We intend to defend against these actions vigorously.
In January 2005, an alleged shareholder filed an action in Connecticut State Superior Court, Judicial District of Norwalk/Stamford at Stamford, purportedly suing derivatively on our behalf. The action, entitledGregory Riegel v. John N. Milne, et al., names as defendants certain of our current and/or former directors and/or officers, and us as a nominal defendant. The complaint asserts, among other things, that the defendants breached their fiduciary duties to us by causing or allowing us to disseminate misleading and inaccurate information to shareholders and the market and by failing to establish and maintain adequate accounting controls, thus exposing us to damages. The complaint seeks unspecified compensatory damages, costs and expenses.expenses against the defendants. The Company intendsparties to defend againsttheRiegelaction have agreed that the proceedings in this action vigorously.will be stayed pending the resolution of the anticipated motions to dismiss in the purported shareholder class actions.
In November 2004, we received a letter from counsel for an alleged shareholder, raising allegations similar to the ones set forth in the derivative complaint described above and demanding that we take action in response to those allegations against certain of our current and/or former directors and/or officers. Following receipt of the
23
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share data unless otherwise indicated)
letter, the board of directors formed a special committee of the board to consider the letter. In August 2005, this alleged shareholder commenced an action in Connecticut State Superior Court, Judicial District of Norwalk/Stamford at Stamford, purporting to sue derivatively on our behalf. The action, entitledNathan Brundridge v. Leon D. Black, et al., names as defendants certain of our current and/or former directors and/or officers, and names us as a nominal defendant. The complaint in this action asserts, among other things, that all of the defendants breached fiduciary obligations to us by causing or allowing us to disseminate misleading and inaccurate information to shareholders and the market, and by failing to establish and maintain adequate accounting controls, thus exposing us to damages. The complaint in this action also asserts a claim for unjust enrichment against our chairman, our vice chairman and chief executive officer, and our former president and chief financial officer. The complaint seeks unspecified compensatory damages, equitable relief, costs and expenses against all of the defendants. The complaint also seeks an order, in connection with plaintiff’s unjust enrichment claim, directing the defendants against whom that claim is asserted to disgorge certain compensation they received from us with respect to fiscal years 2001, 2002 and 2003. The parties have agreed to submit to the court, by April 17, 2006, a proposed schedule for the filing of any amended complaint and responses to the operative complaint in the action. The parties’ agreement further provides that the time by which all defendants must answer, move or otherwise respond to the complaint shall be adjourned pending the parties’ submission of the aforementioned schedule.
In August 2005, another alleged shareholder filed an action in the United States District Court for the District of Connecticut, purporting to sue derivatively on our behalf. The action, entitledNatalie Gordon v. Wayland R. Hicks, et al., names as defendants certain of our current and/or former directors and/or officers, and names us as a nominal defendant. The complaint in this action asserts claims against each of the defendants for breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment. Each of these claims is premised on, among other things, the theory that the individual defendants caused or permitted us to disseminate misleading and inaccurate information to shareholders and to the market, and failed to establish and maintain adequate accounting controls, thus exposing us to damages. The complaint also asserts (a) a claim that a former director breached fiduciary obligations by selling shares of our common stock while in possession of material, non-public information, and (b) a claim against our chairman, our vice chairman and chief executive officer, and our former president and chief financial officer for recovery of certain incentive-based compensation under section 304 of the Sarbanes-Oxley Act. The complaint seeks unspecified compensatory damages, equitable relief, restitution, costs and expenses against all of the defendants. The complaint also seeks an order declaring that the defendants against whom the section 304 claim is directed are liable under the Sarbanes-Oxley Act and directing them to reimburse us for all bonuses or other incentive-based or equity-based compensation they received for the fiscal years 1999 through 2004. The court has directed the parties to submit, on or before April 17, 2006, a proposed schedule for the filing of any amended complaint and responses to the operative complaint in the action. Pending the submission and approval of the aforementioned schedule, the court has adjourned the time by which all defendants must answer, move, or otherwise respond to the complaint in this action.
We are also a party to various other litigation matters, in most cases involving ordinary and routine claims incidental to our business. We cannot estimate with certainty our ultimate legal and financial liability with respect to such pending litigation matters. However, we believe, based on our examination of such matters, that our ultimate liability will not have a material adverse effect on our financial position, results of operations or cash flows.
Indemnification
The Company indemnifies its officers and directors pursuant to indemnification agreements and may in addition indemnify these individuals as permitted by Delaware law. Accordingly, in connection with the purported class action lawsuit, three purported shareholder derivative lawsuits and the SEC inquiry and related
24
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share data unless otherwise indicated)
review of the Special Committee described above, the Company advanced counsel fees and other reasonable fees and expenses, actually and necessarily incurred by the present and former directors and officers who are involved, in an aggregate amount of approximately $2.6 during fiscal 2005. Each of the individuals is required to execute an undertaking to repay such expenses if he or she is finally found not to be entitled to indemnification.
11.10. Condensed Consolidating Financial Information of Guarantor Subsidiaries
URI a whollyis 100 percent owned subsidiary ofby Holdings (the “Parent”), and has outstanding (i) certain indebtedness that is guaranteed by the Parent and (ii) certain indebtedness that is guaranteed by both Parent and substantially all of URI’s United States subsidiaries (the “guarantor subsidiaries”); however,. However, this indebtedness is not guaranteed by URI’s foreign subsidiaries (the “non-guarantor subsidiaries”) and certain of its United States subsidiaries. The guarantor subsidiaries are all 100%-owned100 percent-owned and the guarantees are made on a joint and several basis and are full and unconditional (subject to subordination provisions and subject to a standard limitation which provides that the maximum amount guaranteed by each guarantor will not exceed the maximum amount that can be guaranteed without making the guarantee void under fraudulent conveyance laws). Separate consolidated financial statements of the guarantor subsidiaries have not been presented because management believes that such information would not be material to investors; however, condensed consolidating financial information as of September 30, 2004 and December 31, 2003, and for each of the nine and three month periods ended September 30, 2004 and 2003, areis presented. The condensed consolidating financial information of the Company and its subsidiaries is as follows:
CONDENSED CONSOLIDATING BALANCE SHEET
September 30, 20042005
| Parent | URI | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Other & Eliminations | Consolidated Total | Parent | URI | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Other & Eliminations | Consolidated Total | ||||||||||||||||||||||||||||||||||
ASSETS | |||||||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 143,003 | $ | 6,164 | $ | 149,167 | $ | 142 | $ | 9 | $ | 151 | |||||||||||||||||||||||||||||||||
Accounts receivable, net | $ | 55,186 | 446,330 | 45,934 | 547,450 | $ | 38 | 483 | 63 | 584 | |||||||||||||||||||||||||||||||||||
Intercompany receivable (payable) | 516,746 | (379,730 | ) | (137,016 | ) | 610 | (458 | ) | (152 | ) | — | ||||||||||||||||||||||||||||||||||
Inventory | 45,826 | 70,025 | 7,391 | 123,242 | 76 | 90 | 14 | 180 | |||||||||||||||||||||||||||||||||||||
Prepaid expenses and other assets | 46,395 | 58,729 | 1,488 | 106,612 | 72 | 74 | 1 | 147 | |||||||||||||||||||||||||||||||||||||
Rental equipment, net | 1,188,481 | 789,249 | 185,470 | 2,163,200 | 1,267 | 849 | 232 | 2,348 | |||||||||||||||||||||||||||||||||||||
Property and equipment, net | $ | 24,368 | 120,680 | 256,689 | 21,827 | 423,564 | $ | 33 | 126 | 248 | 26 | 433 | |||||||||||||||||||||||||||||||||
Investment in subsidiaries | 1,222,988 | 2,018,884 | $ | (3,233,969 | ) | 7,903 | 1,370 | 2,151 | — | — | $ | (3,510 | ) | 11 | |||||||||||||||||||||||||||||||
Intangible assets, net | 195,914 | 1,012,932 | 118,751 | 1,327,597 | |||||||||||||||||||||||||||||||||||||||||
Goodwill and other intangible assets, net | — | 165 | 1,021 | 148 | — | 1,334 | |||||||||||||||||||||||||||||||||||||||
| $ | 1,247,356 | $ | 4,188,112 | $ | 2,397,227 | $ | 250,009 | $ | (3,233,969 | ) | $ | 4,848,735 | $ | 1,403 | $ | 4,505 | $ | 2,449 | $ | 341 | $ | (3,510 | ) | $ | 5,188 | ||||||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||||||||||||||||||||||||||||||||||||
Liabilities: | |||||||||||||||||||||||||||||||||||||||||||||
Accounts payable | $ | 246,038 | $ | 16,090 | $ | 262,128 | $ | 43 | $ | 180 | $ | 20 | $ | 243 | |||||||||||||||||||||||||||||||
Accrued expenses and other liabilities | 136 | 280 | 7 | $ | (56 | ) | 367 | ||||||||||||||||||||||||||||||||||||||
Debt | $ | 2,823,952 | 33 | 97,185 | 2,921,170 | 2,799 | — | 137 | — | 2,936 | |||||||||||||||||||||||||||||||||||
Subordinated convertible debentures | $ | 221,550 | 221,550 | $ | 222 | — | — | — | — | 222 | |||||||||||||||||||||||||||||||||||
Deferred taxes | 113,526 | (805 | ) | 26,278 | 138,999 | — | 224 | (15 | ) | 30 | — | 239 | |||||||||||||||||||||||||||||||||
Accrued expenses and other liabilities | 121,408 | 211,877 | 4,666 | $ | (58,869 | ) | 279,082 | ||||||||||||||||||||||||||||||||||||||
Total liabilities | 221,550 | 3,058,886 | 457,143 | 144,219 | (58,869 | ) | 3,822,929 | 222 | 3,202 | 445 | 194 | (56 | ) | 4,007 | |||||||||||||||||||||||||||||||
Commitments and contingencies | |||||||||||||||||||||||||||||||||||||||||||||
Stockholders’ equity: | |||||||||||||||||||||||||||||||||||||||||||||
Preferred stock | 5 | 5 | |||||||||||||||||||||||||||||||||||||||||||
Common stock | 779 | 779 | |||||||||||||||||||||||||||||||||||||||||||
Additional paid-in capital | 1,345,812 | 1,587,004 | 1,907,073 | 68,395 | (3,562,472 | ) | 1,345,812 | ||||||||||||||||||||||||||||||||||||||
Deferred compensation | (22,458 | ) | (22,458 | ) | |||||||||||||||||||||||||||||||||||||||||
(Accumulated deficit) retained earnings | (325,322 | ) | (457,778 | ) | 37,139 | 6,277 | 414,362 | (325,322 | ) | ||||||||||||||||||||||||||||||||||||
Accumulated translation adjustments | 26,990 | (4,128 | ) | 31,118 | (26,990 | ) | 26,990 | ||||||||||||||||||||||||||||||||||||||
Total stockholders’ equity | 1,025,806 | 1,129,226 | 1,940,084 | 105,790 | (3,175,100 | ) | 1,025,806 | 1,181 | 1,303 | 2,004 | 147 | (3,454 | ) | 1,181 | |||||||||||||||||||||||||||||||
Total liabilities and stockholder’s equity | $ | 1,403 | $ | 4,505 | $ | 2,449 | $ | 341 | $ | (3,510 | ) | $ | 5,188 | ||||||||||||||||||||||||||||||||
| $ | 1,247,356 | $ | 4,188,112 | $ | 2,397,227 | $ | 250,009 | $ | (3,233,969 | ) | $ | 4,848,735 | |||||||||||||||||||||||||||||||||
25
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share data unless otherwise indicated)
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 20032004
| Parent | URI | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Other and Eliminations | Consolidated Total | ||||||||||||||||||||||||||||||||||||||||
| (In thousands) | Parent | URI | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Other and Eliminations | Consolidated Total | |||||||||||||||||||||||||||||||||||||||
ASSETS | |||||||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 42,066 | $ | 32,339 | $ | 5,044 | $ | 79,449 | $ | 247 | $ | 34 | $ | 22 | $ | 303 | |||||||||||||||||||||||||||||
Accounts receivable, net | 14,198 | 445,984 | 39,251 | 499,433 | 20 | 419 | 51 | 490 | |||||||||||||||||||||||||||||||||||||
Intercompany receivable (payable) | 434,759 | (303,585 | ) | (131,174 | ) | 231 | (85 | ) | (146 | ) | — | ||||||||||||||||||||||||||||||||||
Inventory | 43,683 | 55,910 | 6,394 | 105,987 | 46 | 61 | 12 | 119 | |||||||||||||||||||||||||||||||||||||
Prepaid expenses and other assets | 32,981 | 73,648 | 3,363 | 109,992 | 46 | 66 | — | 112 | |||||||||||||||||||||||||||||||||||||
Rental equipment, net | 1,242,652 | 672,497 | 156,343 | 2,071,492 | 1,153 | 764 | 206 | 2,123 | |||||||||||||||||||||||||||||||||||||
Property and equipment, net | $ | 25,256 | 109,831 | 253,814 | 17,700 | 406,601 | $ | 22 | 120 | 231 | 24 | 397 | |||||||||||||||||||||||||||||||||
Investment in subsidiaries | 1,337,169 | 2,066,111 | $ | (3,395,127 | ) | 8,153 | 1,226 | 2,039 | — | — | $ | (3,257 | ) | 8 | |||||||||||||||||||||||||||||||
Intangible assets, net | 315,419 | 1,045,990 | 79,625 | 1,441,034 | |||||||||||||||||||||||||||||||||||||||||
Goodwill and other intangible assets, net | 362 | 827 | 141 | 1,330 | |||||||||||||||||||||||||||||||||||||||||
| $ | 1,362,425 | $ | 4,301,700 | $ | 2,276,597 | $ | 176,546 | $ | (3,395,127 | ) | $ | 4,722,141 | $ | 1,248 | $ | 4,264 | $ | 2,317 | $ | 310 | $ | (3,257 | ) | $ | 4,882 | ||||||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||||||||||||||||||||||||||||||||||||
Liabilities: | |||||||||||||||||||||||||||||||||||||||||||||
Accounts payable | $ | 32,529 | $ | 106,814 | $ | 11,453 | $ | 150,796 | — | $ | 36 | $ | 156 | $ | 25 | — | $ | 217 | |||||||||||||||||||||||||||
Accrued expenses and other liabilities | — | 140 | 240 | 8 | $ | (65 | ) | 323 | |||||||||||||||||||||||||||||||||||||
Debt | 2,758,417 | 6,079 | 52,592 | 2,817,088 | — | 2,812 | — | 133 | — | 2,945 | |||||||||||||||||||||||||||||||||||
Subordinated convertible debentures | $ | 221,550 | 221,550 | $ | 222 | — | — | — | — | 222 | |||||||||||||||||||||||||||||||||||
Deferred taxes | 151,410 | (805 | ) | 14,447 | 165,052 | — | 126 | (5 | ) | 28 | — | 149 | |||||||||||||||||||||||||||||||||
Accrued expenses and other liabilities | 112,137 | 145,200 | 6,730 | $ | (37,287 | ) | 226,780 | ||||||||||||||||||||||||||||||||||||||
Total liabilities | 221,550 | 3,054,493 | 257,288 | 85,222 | (37,287 | ) | 3,581,266 | 222 | 3,114 | 391 | 194 | (65 | ) | 3,856 | |||||||||||||||||||||||||||||||
Commitments and contingencies | |||||||||||||||||||||||||||||||||||||||||||||
Stockholders’ equity: | |||||||||||||||||||||||||||||||||||||||||||||
Preferred stock | 5 | 5 | |||||||||||||||||||||||||||||||||||||||||||
Common stock | 771 | 771 | |||||||||||||||||||||||||||||||||||||||||||
Additional paid-in capital | 1,329,946 | 1,563,512 | 1,903,038 | 68,395 | (3,534,945 | ) | 1,329,946 | ||||||||||||||||||||||||||||||||||||||
Deferred compensation | (25,646 | ) | (25,646 | ) | |||||||||||||||||||||||||||||||||||||||||
(Accumulated deficit) retained earnings | (189,300 | ) | (316,305 | ) | 116,271 | (2,170 | ) | 202,204 | (189,300 | ) | |||||||||||||||||||||||||||||||||||
Accumulated other comprehensive income | 25,099 | 25,099 | (25,099 | ) | 25,099 | ||||||||||||||||||||||||||||||||||||||||
Total stockholders’ equity | 1,140,875 | 1,247,207 | 2,019,309 | 91,324 | (3,357,840 | ) | 1,140,875 | 1,026 | 1,150 | 1,926 | 116 | (3,192 | ) | 1,026 | |||||||||||||||||||||||||||||||
Total liabilities and stockholder’s equity | $ | 1,248 | $ | 4,264 | $ | 2,317 | $ | 310 | $ | (3,257 | ) | $ | 4,882 | ||||||||||||||||||||||||||||||||
| $ | 1,362,425 | $ | 4,301,700 | $ | 2,276,597 | $ | 176,546 | $ | (3,395,127 | ) | $ | 4,722,141 | |||||||||||||||||||||||||||||||||
| �� | |||||||||||||||||||||||||||||||||||||||||||||
26
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share data unless otherwise indicated)
CONDENSED CONSOLIDATING STATEMENTSTATEMENTS OF OPERATIONS
| For the Nine Months Ended September 30, 2004 | ||||||||||||||||||||||||||||||||||||||||||||||
| Parent | URI | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Other and Eliminations | Consolidated Total | For the Three Months Ended September 30, 2005 | ||||||||||||||||||||||||||||||||||||||||
| (In thousands) | Parent | URI | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Other and Eliminations | Consolidated Total | ||||||||||||||||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||||||||||||||||
Equipment rentals | $ | 767,211 | $ | 809,481 | $ | 115,411 | $ | 1,692,103 | $ | 321 | $ | 354 | $ | 63 | $ | 738 | ||||||||||||||||||||||||||||||
Sales of rental equipment | 67,595 | 74,641 | 17,085 | 159,321 | 25 | 29 | 7 | 61 | ||||||||||||||||||||||||||||||||||||||
Sales of equipment and contractor supplies and other revenues | 204,613 | 178,347 | 36,087 | 419,047 | ||||||||||||||||||||||||||||||||||||||||||
New equipment sales | 28 | 21 | 6 | 55 | ||||||||||||||||||||||||||||||||||||||||||
Contractor supplies sales | 34 | 46 | 9 | 89 | ||||||||||||||||||||||||||||||||||||||||||
Service and other revenues | 20 | 13 | 4 | 37 | ||||||||||||||||||||||||||||||||||||||||||
Total revenues | 1,039,419 | 1,062,469 | 168,583 | 2,270,471 | 428 | 463 | 89 | 980 | ||||||||||||||||||||||||||||||||||||||
Cost of revenues: | ||||||||||||||||||||||||||||||||||||||||||||||
Cost of equipment rentals, excluding depreciation | 347,107 | 491,694 | 56,969 | 895,770 | 140 | 186 | 28 | 354 | ||||||||||||||||||||||||||||||||||||||
Depreciation of rental equipment | 135,297 | 118,483 | 24,797 | 278,577 | 48 | 40 | 10 | 98 | ||||||||||||||||||||||||||||||||||||||
Cost of rental equipment sales | 47,502 | 52,772 | 10,980 | 111,254 | 18 | 20 | 5 | 43 | ||||||||||||||||||||||||||||||||||||||
Cost of equipment and contractor supplies sales and other operating costs | 145,474 | 130,995 | 26,281 | 302,750 | ||||||||||||||||||||||||||||||||||||||||||
Cost of new equipment sales | 22 | 18 | 5 | 45 | ||||||||||||||||||||||||||||||||||||||||||
Cost of contractor supplies sales | 31 | 31 | 7 | 69 | ||||||||||||||||||||||||||||||||||||||||||
Cost of service and other revenue | 10 | 7 | 2 | 19 | ||||||||||||||||||||||||||||||||||||||||||
Total cost of revenues | 675,380 | 793,944 | 119,027 | 1,588,351 | 269 | 302 | 57 | 628 | ||||||||||||||||||||||||||||||||||||||
Gross profit | 364,039 | 268,525 | 49,556 | 682,120 | 159 | 161 | 32 | 352 | ||||||||||||||||||||||||||||||||||||||
Selling, general and administrative expenses | 153,762 | 180,379 | 27,005 | 361,146 | 59 | 93 | 12 | 164 | ||||||||||||||||||||||||||||||||||||||
Goodwill impairment | 139,306 | 139,306 | ||||||||||||||||||||||||||||||||||||||||||||
Non-rental depreciation and amortization | $ | 5,717 | 19,503 | 19,640 | 2,677 | 47,537 | $ | 2 | 8 | 6 | 1 | 17 | ||||||||||||||||||||||||||||||||||
Operating income (loss) | (5,717 | ) | 190,774 | (70,800 | ) | 19,874 | 134,131 | (2 | ) | 92 | 62 | 19 | 171 | |||||||||||||||||||||||||||||||||
Interest expense | 10,827 | 111,252 | 1,536 | 3,093 | $ | (10,827 | ) | 115,881 | 4 | 43 | 3 | 2 | $ | (4 | ) | 48 | ||||||||||||||||||||||||||||||
Interest expense—subordinated convertible debentures | 10,827 | 10,827 | ||||||||||||||||||||||||||||||||||||||||||||
Interest expense—subordinated convertible debentures—Quips | — | — | — | — | 4 | 4 | ||||||||||||||||||||||||||||||||||||||||
Other (income) expense, net | 173,623 | (1,667 | ) | 3,010 | 174,966 | — | 1 | (7 | ) | (1 | ) | — | (7 | ) | ||||||||||||||||||||||||||||||||
Income (loss) before provision (benefit) for income taxes | (16,544 | ) | (94,101 | ) | (70,669 | ) | 13,771 | (167,543 | ) | (6 | ) | 48 | 66 | 18 | — | 126 | ||||||||||||||||||||||||||||||
Provision (benefit) for income taxes | (6,368 | ) | (38,940 | ) | 8,463 | 5,324 | (31,521 | ) | (2 | ) | 19 | 26 | 7 | — | 50 | |||||||||||||||||||||||||||||||
Income (loss) before equity in net earnings of subsidiaries | (10,176 | ) | (55,161 | ) | (79,132 | ) | 8,447 | (136,022 | ) | (4 | ) | 29 | 40 | 11 | 76 | |||||||||||||||||||||||||||||||
Equity in net earnings of subsidiaries | (125,846 | ) | (70,685 | ) | 196,531 | 80 | 51 | — | — | (131 | ) | — | ||||||||||||||||||||||||||||||||||
Net income (loss) | $ | (136,022 | ) | $ | (125,846 | ) | $ | (79,132 | ) | $ | 8,447 | $ | 196,531 | $ | (136,022 | ) | $ | 76 | $ | 80 | $ | 40 | $ | 11 | $ | (131 | ) | $ | 76 | |||||||||||||||||
27
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share data unless otherwise indicated)
CONDENSED CONSOLIDATING STATEMENTSTATEMENTS OF OPERATIONS
| For the Nine Months Ended September 30, 2003 | ||||||||||||||||||||||||||||||||||||||||||||||
| Parent | URI | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Other and Eliminations | Consolidated Total | For the Three Months Ended September 30, 2004 (Restated) | ||||||||||||||||||||||||||||||||||||||||
| (In thousands) | Parent | URI | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Other and Eliminations | Consolidated Total | ||||||||||||||||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||||||||||||||||
Equipment rentals | $ | 693,212 | $ | 825,354 | $ | 101,217 | $ | 1,619,783 | $ | 295 | $ | 321 | $ | 47 | $ | 663 | ||||||||||||||||||||||||||||||
Sales of rental equipment | 54,976 | 54,935 | 11,066 | 120,977 | 23 | 29 | 6 | 58 | ||||||||||||||||||||||||||||||||||||||
Sales of equipment and contractor supplies and other revenues | 185,380 | 170,003 | 28,898 | 384,281 | ||||||||||||||||||||||||||||||||||||||||||
New equipment sales | 25 | 15 | 4 | 44 | ||||||||||||||||||||||||||||||||||||||||||
Contractor supplies sales | 23 | 32 | 6 | 61 | ||||||||||||||||||||||||||||||||||||||||||
Service and other revenues | 18 | 11 | 3 | 32 | ||||||||||||||||||||||||||||||||||||||||||
Total revenues | 933,568 | 1,050,292 | 141,181 | 2,125,041 | 384 | 408 | 66 | 858 | ||||||||||||||||||||||||||||||||||||||
Cost of revenues: | ||||||||||||||||||||||||||||||||||||||||||||||
Cost of equipment rentals, excluding depreciation | 339,191 | 492,901 | 48,343 | 880,435 | 117 | 185 | 20 | 322 | ||||||||||||||||||||||||||||||||||||||
Depreciation of rental equipment | 118,640 | 109,846 | 20,402 | 248,888 | 46 | 40 | 9 | 95 | ||||||||||||||||||||||||||||||||||||||
Cost of rental equipment sales | 36,065 | 36,868 | 6,732 | 79,665 | 16 | 21 | 4 | 41 | ||||||||||||||||||||||||||||||||||||||
Cost of equipment and contractor supplies sales and other operating costs | 135,326 | 123,598 | 21,515 | 280,439 | ||||||||||||||||||||||||||||||||||||||||||
Cost of new equipment sales | 21 | 13 | 3 | 37 | ||||||||||||||||||||||||||||||||||||||||||
Cost of contractor supplies sales | 18 | 23 | 4 | 45 | ||||||||||||||||||||||||||||||||||||||||||
Cost of service and other revenue | 9 | 6 | 2 | 17 | ||||||||||||||||||||||||||||||||||||||||||
Total cost of revenues | 629,222 | 763,213 | 96,992 | 1,489,427 | 227 | 288 | 42 | 557 | ||||||||||||||||||||||||||||||||||||||
Gross profit | 304,346 | 287,079 | 44,189 | 635,614 | 157 | 120 | 24 | 301 | ||||||||||||||||||||||||||||||||||||||
Selling, general and administrative expenses | 149,650 | 164,848 | 21,316 | 335,814 | 52 | 62 | 9 | 123 | ||||||||||||||||||||||||||||||||||||||
Goodwill impairment | — | 139 | — | 139 | ||||||||||||||||||||||||||||||||||||||||||
Non-rental depreciation and amortization | $ | 6,488 | 22,865 | 19,664 | 2,244 | $ | 249 | 51,510 | $ | 2 | 7 | 6 | 1 | 16 | ||||||||||||||||||||||||||||||||
Operating income (loss) | (6,488 | ) | 131,831 | 102,567 | 20,629 | (249 | ) | 248,290 | (2 | ) | 98 | (87 | ) | 14 | 23 | |||||||||||||||||||||||||||||||
Interest expense | 10,989 | 153,625 | 2,477 | 2,694 | (10,989 | ) | 158,796 | 4 | 34 | — | 1 | $ | (4 | ) | 35 | |||||||||||||||||||||||||||||||
Preferred dividends of a subsidiary trust | 10,989 | 10,989 | ||||||||||||||||||||||||||||||||||||||||||||
Interest expense—subordinated convertible debentures | — | — | — | — | 4 | 4 | ||||||||||||||||||||||||||||||||||||||||
Other (income) expense, net | 7,929 | (11,050 | ) | 1,290 | (1,831 | ) | — | 2 | (1 | ) | — | — | 1 | |||||||||||||||||||||||||||||||||
Income (loss) before provision (benefit) for income taxes | (17,477 | ) | (29,723 | ) | 111,140 | 16,645 | (249 | ) | 80,336 | (6 | ) | 62 | (86 | ) | 13 | — | (17 | ) | ||||||||||||||||||||||||||||
Provision (benefit) for income taxes | (7,041 | ) | (11,243 | ) | 46,220 | 5,948 | (100 | ) | 33,784 | (2 | ) | 24 | 2 | 5 | — | 29 | ||||||||||||||||||||||||||||||
Income (loss) before equity in net income (loss) of subsidiaries | (10,436 | ) | (18,480 | ) | 64,920 | 10,697 | (149 | ) | 46,552 | |||||||||||||||||||||||||||||||||||||
Equity in net income (loss) of subsidiaries | 56,988 | 75,617 | (132,605 | ) | ||||||||||||||||||||||||||||||||||||||||||
Income (loss) before equity in net earnings of subsidiaries | (4 | ) | 38 | (88 | ) | 8 | — | (46 | ) | |||||||||||||||||||||||||||||||||||||
Equity in net earnings of subsidiaries | (42 | ) | (80 | ) | — | 122 | — | |||||||||||||||||||||||||||||||||||||||
Net income | $ | 46,552 | $ | 57,137 | $ | 64,920 | $ | 10,697 | $ | (132,754 | ) | $ | 46,552 | |||||||||||||||||||||||||||||||||
Net income (loss) | $ | (46 | ) | $ | (42 | ) | $ | (88 | ) | $ | 8 | $ | 122 | $ | (46 | ) | ||||||||||||||||||||||||||||||
28
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share data unless otherwise indicated)
CONDENSED CONSOLIDATING STATEMENTSTATEMENTS OF OPERATIONS
| For the Three Months Ended September 30, 2004 | |||||||||||||||||||||||||||||||||||||||||||||
| Parent | URI | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Other and Eliminations | Consolidated Total | For the Nine Months Ended September 30, 2005 | |||||||||||||||||||||||||||||||||||||||
| (In thousands) | Parent | URI | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Other and Eliminations | Consolidated Total | |||||||||||||||||||||||||||||||||||||||
Revenues: | |||||||||||||||||||||||||||||||||||||||||||||
Equipment rentals | $ | 291,641 | $ | 317,042 | $ | 46,503 | $ | 655,186 | $ | 844 | $ | 881 | $ | 154 | $ | 1,879 | |||||||||||||||||||||||||||||
Sales of rental equipment | 17,368 | 25,058 | 5,998 | 48,424 | 106 | 95 | 27 | 228 | |||||||||||||||||||||||||||||||||||||
Sales of equipment and contractor supplies and other revenues | 71,554 | 62,460 | 12,094 | 146,108 | |||||||||||||||||||||||||||||||||||||||||
New equipment sales | 77 | 57 | 17 | 151 | |||||||||||||||||||||||||||||||||||||||||
Contractor supplies sales | 89 | 124 | 25 | 238 | |||||||||||||||||||||||||||||||||||||||||
Service and other revenues | 58 | 35 | 11 | 104 | |||||||||||||||||||||||||||||||||||||||||
Total revenues | 380,563 | 404,560 | 64,595 | 849,718 | 1,174 | 1,192 | 234 | 2,600 | |||||||||||||||||||||||||||||||||||||
Cost of revenues: | |||||||||||||||||||||||||||||||||||||||||||||
Cost of equipment rentals, excluding depreciation | 124,374 | 192,313 | 20,632 | 337,319 | 384 | 495 | 76 | 955 | |||||||||||||||||||||||||||||||||||||
Depreciation of rental equipment | 45,998 | 40,457 | 8,669 | 95,124 | 139 | 117 | 31 | 287 | |||||||||||||||||||||||||||||||||||||
Cost of rental equipment sales | 12,335 | 17,995 | 3,702 | 34,032 | 77 | 69 | 19 | 165 | |||||||||||||||||||||||||||||||||||||
Cost of equipment and contractor supplies sales and other operating costs | 51,446 | 45,329 | 8,850 | 105,625 | |||||||||||||||||||||||||||||||||||||||||
Cost of new equipment sales | 62 | 48 | 14 | 124 | |||||||||||||||||||||||||||||||||||||||||
Cost of contractor supplies sales | 75 | 87 | 19 | 181 | |||||||||||||||||||||||||||||||||||||||||
Cost of service and other revenue | 28 | 17 | 6 | 51 | |||||||||||||||||||||||||||||||||||||||||
Total cost of revenues | 234,153 | 296,094 | 41,853 | 572,100 | 765 | 833 | 165 | 1,763 | |||||||||||||||||||||||||||||||||||||
Gross profit | 146,410 | 108,466 | 22,742 | 277,618 | 409 | 359 | 69 | 837 | |||||||||||||||||||||||||||||||||||||
Selling, general and administrative expenses | 53,561 | 65,564 | 9,644 | 128,769 | 170 | 218 | 34 | 422 | |||||||||||||||||||||||||||||||||||||
Goodwill impairment | 139,306 | 139,306 | |||||||||||||||||||||||||||||||||||||||||||
Non-rental depreciation and amortization | $ | 1,816 | 6,434 | 6,212 | 954 | 15,416 | $ | 5 | 23 | 18 | 3 | 49 | |||||||||||||||||||||||||||||||||
Operating income (loss) | (1,816 | ) | 86,415 | (102,616 | ) | 12,144 | (5,873 | ) | (5 | ) | 216 | 123 | 32 | 366 | |||||||||||||||||||||||||||||||
Interest expense | 3,600 | 33,939 | 495 | 1,128 | $ | (3,600 | ) | 35,562 | 11 | 126 | 4 | 5 | $ | (11 | ) | 135 | |||||||||||||||||||||||||||||
Interest expense—subordinated convertible debentures | 3,600 | 3,600 | |||||||||||||||||||||||||||||||||||||||||||
Preferred dividends of a subsidiary trust | — | — | 1 | — | 11 | 12 | |||||||||||||||||||||||||||||||||||||||
Other (income) expense, net | 2,038 | (562 | ) | 27 | 1,503 | — | 3 | (11 | ) | — | — | (8 | ) | ||||||||||||||||||||||||||||||||
Income (loss) before provision (benefit) for income taxes | (5,416 | ) | 50,438 | (102,549 | ) | 10,989 | (46,538 | ) | (16 | ) | 87 | 129 | 27 | — | 227 | ||||||||||||||||||||||||||||||
Provision (benefit) for income taxes | (2,090 | ) | 19,152 | (3,429 | ) | 4,210 | 17,843 | (6 | ) | 34 | 51 | 10 | — | 89 | |||||||||||||||||||||||||||||||
Income (loss) before equity in net earnings of subsidiaries | (3,326 | ) | 31,286 | (99,120 | ) | 6,779 | (64,381 | ) | |||||||||||||||||||||||||||||||||||||
Equity in net earnings of subsidiaries | (61,055 | ) | (92,341 | ) | 153,396 | ||||||||||||||||||||||||||||||||||||||||
Income (loss) before equity in net income (loss) of subsidiaries | (10 | ) | 53 | 78 | 17 | — | 138 | ||||||||||||||||||||||||||||||||||||||
Equity in net income (loss) of subsidiaries | 148 | 95 | — | — | (243 | ) | — | ||||||||||||||||||||||||||||||||||||||
Net income | $ | (64,381 | ) | $ | (61,055 | ) | $ | (99,120 | ) | $ | 6,779 | $ | 153,396 | $ | (64,381 | ) | $ | 138 | $ | 148 | $ | 78 | $ | 17 | $ | (243 | ) | $ | 138 | ||||||||||||||||
29
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share data unless otherwise indicated)
CONDENSED CONSOLIDATING STATEMENTSTATEMENTS OF OPERATIONS
| For the Three Months Ended September 30, 2003 | |||||||||||||||||||||||||||||||||||||||||||||
| Parent | URI | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Other and Eliminations | Consolidated Total | For the Nine Months Ended September 30, 2004 (Restated) | |||||||||||||||||||||||||||||||||||||||
| (In thousands) | Parent | URI | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Other and Eliminations | Consolidated Total | |||||||||||||||||||||||||||||||||||||||
Revenues: | |||||||||||||||||||||||||||||||||||||||||||||
Equipment rentals | $ | 258,228 | $ | 326,459 | $ | 41,061 | $ | 625,748 | $ | 768 | $ | 811 | $ | 115 | $ | 1,694 | |||||||||||||||||||||||||||||
Sales of rental equipment | 20,816 | 19,297 | 4,278 | 44,391 | 84 | 92 | 17 | 193 | |||||||||||||||||||||||||||||||||||||
Sales of equipment and contractor supplies and other revenues | 67,126 | 57,944 | 9,925 | 134,995 | |||||||||||||||||||||||||||||||||||||||||
New equipment sales | 71 | 44 | 13 | 128 | |||||||||||||||||||||||||||||||||||||||||
Contractor supplies sales | 61 | 86 | 16 | 163 | |||||||||||||||||||||||||||||||||||||||||
Service and other revenues | 54 | 32 | 8 | 94 | |||||||||||||||||||||||||||||||||||||||||
Total revenues | 346,170 | 403,700 | 55,264 | 805,134 | 1,038 | 1,065 | 169 | 2,272 | |||||||||||||||||||||||||||||||||||||
Cost of revenues: | |||||||||||||||||||||||||||||||||||||||||||||
Cost of equipment rentals, excluding depreciation | 122,437 | 191,785 | 16,756 | 330,978 | 336 | 479 | 56 | 871 | |||||||||||||||||||||||||||||||||||||
Depreciation of rental equipment | 40,692 | 37,749 | 7,281 | 85,722 | 133 | 118 | 26 | 277 | |||||||||||||||||||||||||||||||||||||
Cost of rental equipment sales | 13,386 | 12,549 | 2,782 | 28,717 | 60 | 65 | 12 | 137 | |||||||||||||||||||||||||||||||||||||
Cost of equipment and contractor supplies sales and other operating costs | 49,544 | 44,222 | 7,392 | 101,158 | |||||||||||||||||||||||||||||||||||||||||
Cost of new equipment sales | 60 | 39 | 10 | 109 | |||||||||||||||||||||||||||||||||||||||||
Cost of contractor supplies sales | 46 | 62 | 12 | 120 | |||||||||||||||||||||||||||||||||||||||||
Cost of service and other revenue | 26 | 19 | 4 | 49 | |||||||||||||||||||||||||||||||||||||||||
Total cost of revenues | 226,059 | 286,305 | 34,211 | 546,575 | 661 | 782 | 120 | 1,563 | |||||||||||||||||||||||||||||||||||||
Gross profit | 120,111 | 117,395 | 21,053 | 258,559 | 377 | 283 | 49 | 709 | |||||||||||||||||||||||||||||||||||||
Selling, general and administrative expenses | 52,583 | 67,664 | 7,243 | 127,490 | 149 | 178 | 26 | 353 | |||||||||||||||||||||||||||||||||||||
| 139 | — | 139 | |||||||||||||||||||||||||||||||||||||||||||
Non-rental depreciation and amortization | $ | 2,136 | 7,728 | 6,934 | 782 | $ | 83 | 17,663 | $ | 6 | 21 | 19 | 3 | $ | 49 | ||||||||||||||||||||||||||||||
Operating income (loss) | (2,136 | ) | 59,800 | 42,797 | 13,028 | (83 | ) | 113,406 | (6 | ) | 207 | (53 | ) | 20 | 168 | ||||||||||||||||||||||||||||||
Interest expense | 3,627 | 51,380 | 1,189 | 851 | (3,627 | ) | 53,420 | 12 | 112 | — | 3 | $ | (12 | ) | 115 | ||||||||||||||||||||||||||||||
Preferred dividends of a subsidiary trust | 3,627 | 3,627 | — | (1 | ) | 1 | — | 12 | 12 | ||||||||||||||||||||||||||||||||||||
Other (income) expense, net | 2,145 | (3,284 | ) | 916 | (223 | ) | — | 173 | (2 | ) | 3 | — | 174 | ||||||||||||||||||||||||||||||||
Income (loss) before provision (benefit) for income taxes | (5,763 | ) | 6,275 | 44,892 | 11,261 | (83 | ) | 56,582 | (18 | ) | (77 | ) | (52 | ) | 14 | — | (133 | ) | |||||||||||||||||||||||||||
Provision (benefit) for income taxes | (2,515 | ) | 2,739 | 20,727 | 3,783 | (36 | ) | 24,698 | (6 | ) | (34 | ) | 14 | 7 | — | (19 | ) | ||||||||||||||||||||||||||||
Income (loss) before equity in net earnings of subsidiaries | (3,248 | ) | 3,536 | 24,165 | 7,478 | (47 | ) | 31,884 | (12 | ) | (43 | ) | (66 | ) | 7 | — | (114 | ) | |||||||||||||||||||||||||||
Equity in net earnings of subsidiaries | 35,132 | 31,643 | (66,775 | ) | (102 | ) | (59 | ) | — | — | 161 | — | |||||||||||||||||||||||||||||||||
Net income | $ | 31,884 | $ | 35,179 | $ | 24,165 | $ | 7,478 | $ | (66,822 | ) | $ | 31,884 | $ | (114 | ) | $ | (102 | ) | $ | (66 | ) | $ | 7 | $ | 161 | $ | (114 | ) | ||||||||||||||||
30
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share data unless otherwise indicated)
CONDENSED CONSOLIDATING CASH FLOW INFORMATION
| For the Nine Months Ended September 30, 2004 | ||||||||||||||||||||||||
| Parent | URI | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Other and Eliminations | Consolidated | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
Net cash provided by (used in) operating activities | $ | (5,325 | ) | $ | 277,523 | $ | 250,468 | $ | 41,503 | $ | 564,169 | |||||||||||||
Cash flows from investing activities: | ||||||||||||||||||||||||
Purchases of rental equipment | (239,117 | ) | (188,242 | ) | (37,850 | ) | (465,209 | ) | ||||||||||||||||
Purchases of property and equipment | (5,503 | ) | (26,663 | ) | (25,046 | ) | (1,704 | ) | (58,916 | ) | ||||||||||||||
Proceeds from sales of rental equipment | 67,595 | 74,641 | 17,085 | 159,321 | ||||||||||||||||||||
Capital contributed to subsidiary | (4,069 | ) | $ | 4,069 | ||||||||||||||||||||
Purchases of other companies | (688 | ) | (60,338 | ) | (61,026 | ) | ||||||||||||||||||
Net cash used in investing activities | (9,572 | ) | (198,873 | ) | (138,647 | ) | (82,807 | ) | 4,069 | (425,830 | ) | |||||||||||||
Cash flows from financing activities: | ||||||||||||||||||||||||
Proceeds from debt | 2,153,954 | 41,986 | 2,195,940 | |||||||||||||||||||||
Payments of debt | (2,213,539 | ) | (262 | ) | (2,213,801 | ) | ||||||||||||||||||
Payments of financing costs | (35,893 | ) | (895 | ) | (32 | ) | (36,820 | ) | ||||||||||||||||
Purchases of interest rate caps | (13,646 | ) | (13,646 | ) | ||||||||||||||||||||
Shares repurchased and retired | (4,833 | ) | (4,833 | ) | ||||||||||||||||||||
Capital contributions by parent | 4,069 | (4,069 | ) | |||||||||||||||||||||
Dividend distributions to parent | (15,661 | ) | 15,661 | |||||||||||||||||||||
Proceeds from the exercise of common stock options and warrants | 4,069 | 4,069 | ||||||||||||||||||||||
Proceeds from dividends from subsidiary | 15,661 | (15,661 | ) | |||||||||||||||||||||
Net cash provided by (used in) financing activities | 14,897 | (120,716 | ) | (1,157 | ) | 41,954 | (4,069 | ) | (69,091 | ) | ||||||||||||||
Effect of foreign exchange rates | 470 | 470 | ||||||||||||||||||||||
Net increase (decrease) in cash and cash equivalents | (42,066 | ) | 110,664 | 1,120 | 69,718 | |||||||||||||||||||
Cash and cash equivalents at beginning of period | 42,066 | 32,339 | 5,044 | 79,449 | ||||||||||||||||||||
Cash and cash equivalents at end of period | $ | 143,003 | $ | 6,164 | $ | 149,167 | ||||||||||||||||||
Supplemental disclosure of cash flow information: | ||||||||||||||||||||||||
Cash paid for interest | $ | 10,828 | $ | 128,406 | $ | 1,564 | $ | 3,090 | $ | 143,888 | ||||||||||||||
Cash paid for income taxes, net of refunds | $ | 3 | $ | 1,334 | $ | 1,337 | ||||||||||||||||||
Supplemental disclosure of non-cash investing and financing activities: | ||||||||||||||||||||||||
The Company acquired the net assets and assumed certain liabilities of other companies as follows: | ||||||||||||||||||||||||
Assets, net of cash acquired | $ | 66,126 | $ | 66,126 | ||||||||||||||||||||
Liabilities assumed | (5,788 | ) | (5,788 | ) | ||||||||||||||||||||
| 60,338 | 60,338 | |||||||||||||||||||||||
Due to seller and other payments | $ | 688 | 688 | |||||||||||||||||||||
Net cash paid | $ | 688 | $ | 60,338 | $ | 61,026 | ||||||||||||||||||
UNITED RENTALS, INC.For the nine months ended September 30, 2005
| Parent | URI | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Other and Eliminations | Consolidated Total | |||||||||||||||||||
Net cash provided by (used in) operating activities | $ | — | $ | 73 | $ | 323 | $ | 28 | $ | — | $ | 424 | ||||||||||||
Net cash used in investing activities | (9 | ) | (247 | ) | (214 | ) | (41 | ) | 2 | (509 | ) | |||||||||||||
Net cash provided by (used in) financing activities | 9 | (73 | ) | (1 | ) | — | (2 | ) | (67 | ) | ||||||||||||||
Effect of foreign exchange rate changes on cash and cash equivalents | — | — | — | — | — | — | ||||||||||||||||||
Increase (decrease) in cash and cash equivalents | — | (247 | ) | 108 | (13 | ) | — | (152 | ) | |||||||||||||||
Cash and cash equivalents at beginning of period | — | 247 | 34 | 22 | — | 303 | ||||||||||||||||||
Cash and cash equivalents at end of period | $ | — | $ | — | $ | 142 | $ | 9 | $ | — | $ | 151 | ||||||||||||
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)For the nine months ended September 30, 2004 (Restated)
CONDENSED CONSOLIDATING CASH FLOW INFORMATION
| Parent | URI | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Other and Eliminations | Consolidated Total | |||||||||||||||||||
Net cash provided by (used in) operating activities | $ | (6 | ) | $ | 274 | $ | 235 | $ | 42 | $ | — | $ | 545 | |||||||||||
Net cash used in investing activities | (9 | ) | (178 | ) | (123 | ) | (84 | ) | 4 | (390 | ) | |||||||||||||
Net cash provided by (used in) financing activities | 15 | (138 | ) | (1 | ) | 42 | (4 | ) | (86 | ) | ||||||||||||||
Effect of foreign exchange rate changes on cash and cash equivalents | — | — | — | 1 | — | 1 | ||||||||||||||||||
Increase (decrease) in cash and cash equivalents | — | (42 | ) | 111 | 1 | — | 70 | |||||||||||||||||
Cash and cash equivalents at beginning of period | — | 42 | 32 | 5 | — | 79 | ||||||||||||||||||
Cash and cash equivalents at end of period | $ | — | $ | — | $ | 143 | $ | 6 | $ | — | $ | 149 | ||||||||||||
| For the Nine Months Ended September 30, 2003 | ||||||||||||||||||||||||
| Parent | URI | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Other and Eliminations | Consolidated | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
Net cash provided by (used in) operating activities | $ | (8,234 | ) | $ | 154,026 | $ | 123,674 | $ | 57,003 | $ | 326,469 | |||||||||||||
Cash flows from investing activities: | ||||||||||||||||||||||||
Purchases of rental equipment | (214,071 | ) | (135,539 | ) | (27,497 | ) | (377,107 | ) | ||||||||||||||||
Purchases of property and equipment | (2,755 | ) | (1,710 | ) | (20,653 | ) | (1,383 | ) | (26,501 | ) | ||||||||||||||
Proceeds from sales of rental equipment | 54,976 | 54,935 | 11,066 | 120,977 | ||||||||||||||||||||
Capital contributed to subsidiary | (237 | ) | $ | 237 | ||||||||||||||||||||
Purchases of other companies | (5,001 | ) | (5,001 | ) | ||||||||||||||||||||
Deposits on rental equipment purchases | (10,929 | ) | (10,929 | ) | ||||||||||||||||||||
Net cash used in investing activities | (2,992 | ) | (176,735 | ) | (101,257 | ) | (17,814 | ) | 237 | (298,561 | ) | |||||||||||||
Cash flows from financing activities: | ||||||||||||||||||||||||
Proceeds from debt | 247,191 | 247,191 | ||||||||||||||||||||||
Payments of debt | (199,392 | ) | (738 | ) | (15,045 | ) | (215,175 | ) | ||||||||||||||||
Payments of financing costs | (10,763 | ) | (10,763 | ) | ||||||||||||||||||||
Capital contributions by parent | 237 | (237 | ) | |||||||||||||||||||||
Company-obligated mandatorily redeemable convertible preferred securities of a subsidiary trust repurchased and retired | (3,575 | ) | (3,575 | ) | ||||||||||||||||||||
Proceeds from the exercise of common stock options | 237 | 237 | ||||||||||||||||||||||
Dividend distributions to parent | (14,564 | ) | 14,564 | |||||||||||||||||||||
Proceeds from dividends from subsidiary | 10,989 | (10,989 | ) | |||||||||||||||||||||
Net cash provided by (used in) financing activities | 11,226 | 22,709 | (738 | ) | (15,045 | ) | (237 | ) | 17,915 | |||||||||||||||
Effect of foreign exchange rates | 11,294 | 11,294 | ||||||||||||||||||||||
Net increase in cash and cash equivalents | 21,679 | 35,438 | 57,117 | |||||||||||||||||||||
Cash and cash equivalents at beginning of period | 16,908 | 2,323 | 19,231 | |||||||||||||||||||||
Cash and cash equivalents at end of period | $ | 38,587 | $ | 37,761 | $ | 76,348 | ||||||||||||||||||
Supplemental disclosure of cash flow information: | ||||||||||||||||||||||||
Cash paid for interest | $ | 11,043 | $ | 128,509 | $ | 2,788 | $ | 2,778 | $ | 145,118 | ||||||||||||||
Cash paid for income taxes, net of refunds | $ | (1,208 | ) | $ | 866 | $ | (342 | ) | ||||||||||||||||
Supplemental disclosure of non-cash investing and financing activities: | ||||||||||||||||||||||||
The Company acquired the net assets and assumed certain liabilities of other companies as follows: | ||||||||||||||||||||||||
Assets, net of cash acquired | $ | 3,314 | $ | 3,314 | ||||||||||||||||||||
Liabilities assumed | (50 | ) | (50 | ) | ||||||||||||||||||||
| 3,264 | 3,264 | |||||||||||||||||||||||
Due to seller and other payments | 1,737 | 1,737 | ||||||||||||||||||||||
Net cash paid | $ | 5,001 | $ | 5,001 | ||||||||||||||||||||
31
| Item 2. |
The following management’s discussion and analysis gives effect to the restatement discussed in the Explanatory Note to this Report and in note 2 to our condensed consolidated financial statements included in this Report.
Results of Operations
As discussed in note 7 to our condensed consolidated financial statements included in this Report, our reportable segments are general rentals, traffic control and trench safety, pump and power. The general rentals segment includes the rental of construction, aerial, industrial and homeowner equipment and related services and activities. The general rentals segment’s customers include construction and industrial companies, manufacturers, utilities, municipalities and homeowners. The general rentals segment operates throughout the United States and Canada and has one location in Mexico. The trench safety, pump and power segment includes the rental of specialty construction products and related services. The trench safety, pump and power segment’s customers include construction companies involved in infrastructure projects, municipalities and industrial companies. This segment operates in the United States and has one location in Canada. The traffic control segment includes the rental of equipment used in the management of traffic-related services and activities. The traffic control segment’s customers include construction companies involved in infrastructure projects and municipalities. The traffic control segment operates in the United States. The Company’s external segment reporting is aligned with how management evaluates and allocates resources. The Company evaluates segment performance based on segment operating results which exclude goodwill impairment and restructuring and asset impairment charges.
32
Revenues by segment were as follows:
General rentals | Trench safety, pump and power | Traffic control | Total | |||||||||
Three months ended September 30, 2005 | ||||||||||||
Equipment rentals | $ | 621 | $ | 42 | $ | 75 | $ | 738 | ||||
Sales of rental equipment | 57 | 3 | 1 | 61 | ||||||||
Sales of new equipment | 51 | 3 | 1 | 55 | ||||||||
Contractor supplies sales | 80 | 3 | 6 | 89 | ||||||||
Service and other | 36 | 1 | — | 37 | ||||||||
Total revenue | $ | 845 | $ | 52 | $ | 83 | $ | 980 | ||||
Three months ended September 30, 2004 | ||||||||||||
Equipment rentals | $ | 562 | $ | 30 | $ | 71 | $ | 663 | ||||
Sales of rental equipment | 54 | 3 | 1 | 58 | ||||||||
Sales of new equipment | 42 | 2 | — | 44 | ||||||||
Contractor supplies sales | 53 | 2 | 6 | 61 | ||||||||
Service and other | 31 | 1 | — | 32 | ||||||||
Total revenue | $ | 742 | $ | 38 | $ | 78 | $ | 858 | ||||
Nine months ended September 30, 2005 | ||||||||||||
Equipment rentals | $ | 1,601 | $ | 100 | $ | 178 | $ | 1,879 | ||||
Sales of rental equipment | 215 | 9 | 4 | 228 | ||||||||
Sales of new equipment | 139 | 10 | 2 | 151 | ||||||||
Contractor supplies sales | 213 | 9 | 16 | 238 | ||||||||
Service and other | 102 | 2 | — | 104 | ||||||||
Total revenue | $ | 2,270 | $ | 130 | $ | 200 | $ | 2,600 | ||||
Nine months ended September 30, 2004 | ||||||||||||
Equipment rentals | $ | 1,452 | $ | 73 | $ | 169 | $ | 1,694 | ||||
Sales of rental equipment | 181 | 8 | 4 | 193 | ||||||||
Sales of new equipment | 123 | 5 | — | 128 | ||||||||
Contractor supplies sales | 142 | 4 | 17 | 163 | ||||||||
Service and other | 91 | 3 | — | 94 | ||||||||
Total revenue | $ | 1,989 | $ | 93 | $ | 190 | $ | 2,272 | ||||
Equipment rentals. Equipment rentals represent our revenues from renting equipment.
Three months ended September 30, 2005 and 2004.2005 equipment rentals of $738 increased $75, or 11 percent, reflecting a 5.0 percent increase in rental rates and a 13 percent increase in same-store rental revenues, partially offset by declines due to store closures in 2004. The following discussion reviewsincrease also reflects an increase in our operationsdollar equipment utilization rate from 68.4 percent for the nine and three months ended September 30, 2004 to 72.4 percent for the three months ended September 30, 2005. Equipment rentals represented approximately 75 percent of total revenues for the three months ended September 30, 2005. On a segment basis, equipment rentals represented approximately 74 percent, 81 percent and 200391 percent of total revenues for general rentals, trench safety, pump and should be readpower and traffic control, respectively. General rentals equipment rentals increased $59, or 10 percent, reflecting increased rental rates and a 12 percent increase in conjunction with the unaudited consolidated financial statementssame-store rental revenues. Trench safety, pump and related notes included herein and the consolidated financial statements and related notes includedpower equipment rentals increased $12, or 39 percent, reflecting a 32 percent increase in our 2003 Annual Report on Form 10-K.
same-store rental revenues.
GeneralNine months ended September 30, 2005 and 2004.2005 equipment rentals of $1,879 increased $185, or 11 percent, reflecting a 6.3 percent increase in rental rates and a 12 percent increase in same-store rental revenues,
We are33
partially offset by declines due to store closures in 2004. The increase also reflects an increase in our dollar equipment utilization rate which increased from 59.3 percent for the largestnine months ended September 30, 2004 to 63.5 percent for the nine months ended September 30, 2005. Equipment rentals represented approximately 72 percent of total revenues for the nine months ended September 30, 2005. On a segment basis, equipment rentals represented approximately 71 percent, 77 percent and 89 percent of total revenues for general rentals, trench safety, pump and power and traffic control, respectively. General rentals equipment rentals increased $151, or 10 percent, reflecting increased rental companyrates and an 11 percent increase in same-store rental revenues. Trench safety, pump and power equipment rentals increased $27, or 35 percent, reflecting a 28 percent increase in same-store rental revenues. Traffic control equipment rentals increased $9, or 5 percent, reflecting a 9 percent increase in same-store rental revenues.
Sales of rental equipment. Sales of rental equipment represent revenues associated with selling used equipment. For the three months ended September 30, 2005 and 2004, sales of rental equipment represented approximately 10 percent of our total revenues and our general rentals segment accounted for approximately 95 percent of these sales. Sales of rental equipment for traffic control and trench safety, pump and power were insignificant. For the three months ended September 30, 2005, sales of rental equipment increased 5 percent as compared to the same period in 2004, primarily reflecting an increase in the world. Our revenues are divided into three categories:
Our costvolume of operations consists primarily of: (i) depreciation costs relatingequipment sold. For the nine months ended September 30, 2005, sales of rental equipment increased 18 percent as compared to the rentalcomparable period in 2004. The increase primarily reflects an increase in the volume of equipment that we ownsold.
Sales of new equipment. For the three and lease paymentsnine months ended September 30, 2005 and 2004, sales of new equipment represented approximately 6 percent of our total revenues. Our general rentals segment accounted for approximately 95 percent of these sales. Sales of new equipment for traffic control and trench safety, pump and power were insignificant. For the rentalthree and nine months ended September 30, 2005, sales of new equipment that we hold under operating leases, (ii)increased by 25 and 18 percent as compared to the costsame periods in 2004, respectively. The increases reflect increases in the volume of repairingequipment sold.
Sales of contractor supplies. Sales of contractor supplies represent our revenues associated with selling a variety of contractor supplies including construction consumables, tools, small equipment and maintainingsafety supplies. Consistent with sales of rental equipment, (iii) the cost of the items that we sell including new and used equipment, and related parts, andgeneral rentals accounts for substantially all of our contractor supplies sales. General rentals accounted for approximately 90 percent of total sales of contractor supplies. For the three and (iv) personnel costs, occupancy costsnine months ended September 30, 2005, sales of contractor supplies increased 46 percent as compared to the comparable periods in 2004. The increases reflect an increase in the volume of supplies sold.
Service and supply costs.other. Service and other represent our revenues earned from providing services (including parts sales). Consistent with sales of rental and new equipment as well as sales of contractor supplies, general rentals accounts for substantially all of our service and other revenue. For the three months ended September 30, 2005, service and other revenue increased 16 percent as compared to the same period in 2004. For the nine months ended September 30, 2005 service and other revenue increased 12 percent as compared to the same period in 2004. The increases primarily reflect increased parts sales.
We record34
Segment Operating Profit
Segment operating profit and operating margin were as follows:
| General rentals | Trench safety, pump and power | Traffic control | Total | |||||||||||||
Three months ended September 30, 2005 | ||||||||||||||||
Operating Profit (Loss) | $ | 154 | $ | 18 | $ | (1 | ) | $ | 171 | |||||||
Operating Margin | 18 | % | 35 | % | -1 | % | 17 | % | ||||||||
Three months ended September 30, 2004 | ||||||||||||||||
Operating Profit (Loss) | $ | 154 | $ | 12 | $ | (4 | ) | $ | 162 | |||||||
Operating Margin | 21 | % | 32 | % | -5 | % | 19 | % | ||||||||
Nine months ended September 30, 2005 | ||||||||||||||||
Operating Profit (Loss) | $ | 345 | $ | 35 | $ | (14 | ) | $ | 366 | |||||||
Operating Margin | 15 | % | 27 | % | -7 | % | 14 | % | ||||||||
Nine months ended September 30, 2004 | ||||||||||||||||
Operating Profit (Loss) | $ | 310 | $ | 26 | $ | (29 | ) | $ | 307 | |||||||
Operating Margin | 16 | % | 28 | % | -15 | % | 14 | % | ||||||||
The following is a reconciliation of segment profit to total company operating income:
| Three Months Ended | ||||||
| September 30, 2005 | September 30, 2004 | |||||
Total segment profit | $ | 171 | $ | 162 | ||
Unallocated item: | ||||||
Goodwill impairment charge | — | 139 | ||||
Operating income | $ | 171 | $ | 23 | ||
| Nine Months Ended | ||||||
| September 30, 2005 | September 30, 2004 | |||||
Total segment profit | $ | 366 | $ | 307 | ||
Unallocated item: | ||||||
Goodwill impairment charge | — | 139 | ||||
Operating income | $ | 366 | $ | 168 | ||
General rentals.For the three months ended September 30, 2005, operating margin declined 3 percentage points as compared to the same period in 2004 primarily due to higher selling, general and administrative costs resulting from normal inflationary increases, partially offset by the benefit resulting from increased rental rates.
For the nine months ended September 30, 2005, operating margin was essentially flat as compared to same period in 2004. Gains from higher rental rates were offset by higher costs for labor, benefits and delivery resulting from normal inflationary increases as well as costs associated with the opening of new contractor supply distribution centers. Additionally, there were increased professional costs related to regulatory issues and related matters.
Trench safety, pump and power. Trench safety, pump and power operating profit increased 3 percentage points for the three months ended September 30, 2005 as compared to the same period in 2004, reflecting increased revenues of 37 percent.
For the nine months ended September 30, 2005, operating margin was essentially flat as compared to the same period in 2004. Operating profit growth reflects 35 percent revenue growth for the period, driven by a 28 percent increase in same store rental revenues.
35
Traffic control.Traffic control operating loss decreased by $3 for the three months ended September 30, 2005 as compared to the same period in 2004 primarily due to the closure and/or divestiture of unprofitable branches as well as reduced operating costs due to cost reductions and improved efficiencies.
Traffic control operating loss decreased by $15 for the nine months ended September 30, 2005 as compared to the same period in 2004 due to increased revenues of approximately 5 percent and reduced costs as a result of closure / divestiture of unprofitable branches as well as reduced operating costs due to cost reductions and improved efficiencies.
Gross Margin. Gross margins by revenue classification were as follows:
| Three Months Ended | ||||||
September 30, 2005 | September 30, 2004 | |||||
Total gross margin | 35.9 | % | 35.1 | % | ||
Equipment rentals | 38.8 | % | 37.1 | % | ||
Sales of rental equipment | 29.4 | % | 28.7 | % | ||
Sales of new equipment | 18.5 | % | 15.5 | % | ||
Contractor supplies sales | 22.4 | % | 26.6 | % | ||
Service and other | 48.8 | % | 47.8 | % | ||
| Nine Months Ended | ||||||
September 30, 2005 | September 30, 2004 | |||||
Total gross margin | 32.2 | % | 31.2 | % | ||
Equipment rentals | 34.0 | % | 32.2 | % | ||
Sales of rental equipment | 27.4 | % | 28.9 | % | ||
Sales of new equipment | 18.2 | % | 15.0 | % | ||
Contractor supplies sales | 23.9 | % | 26.7 | % | ||
Service and other | 49.5 | % | 48.7 | % | ||
For the three months ended September 30, 2005, total gross profit margin improved by 0.8 percentage points as compared to the same period in 2004. Equipment rentals gross margin improved 1.7 percentage points primarily due to increased rental rates of 5.0 percent, revenue growth in the trench safety, pump and power segment of 37 percent and cost reductions in traffic control. The 4.2 percentage point reduction in gross margins on contractor supplies sales resulted primarily from increased costs related to the opening of new distribution centers. The fluctuations in margins on sales of rental equipment expenditures atand new equipment primarily reflect changes in the mix of equipment sold, partially offset by improved pricing.
For the nine months ended September 30, 2005, total gross profit margin improved by 1.0 percentage point as compared to the same period in 2004. Equipment rentals gross margin improved 1.8 percentage points primarily due to increased rental rates of 6.3 percent, revenue growth in the trench safety, pump and power segment of 37 percent and cost reductions in traffic control. The 2.8 percentage point reduction in gross margin on contractor supplies sales resulted primarily from increased costs related to the opening of new distribution centers. The fluctuations in margins on sales of rental equipment and depreciatenew equipment usingprimarily reflect changes in the straight-line method over the estimated useful life (which ranges from two to ten years), after giving effect to an estimated salvage valuemix of 0% to 10% of cost.equipment sold, partially offset by improved pricing.
Selling, general and administrative expenses (SG&A). SG&A expense information for the three months and nine months ended September 30, 2005 and 2004 was as follows:
| Three Months Ended | ||||||||
September 30, 2005 | September 30, 2004 | |||||||
Total SG&A expenses | $ | 164 | $ | 123 | ||||
SG&A as a percentage of revenue | 16.7 | % | 14.3 | % | ||||
36
| Nine Months Ended | ||||||||
September 30, 2005 | September 30, 2004 | |||||||
Total SG&A expenses | $ | 422 | $ | 353 | ||||
SG&A as a percentage of revenue | 16.2 | % | 15.5 | % | ||||
SG&A expense primarily includeincludes sales commissions and salaries and benefits,force compensation, bad debt expense, advertising and marketing expenses, third party professional fees, management salaries and benefits, and clerical and administrative overhead.
For the three months ended September 30, 2005, SG&A expense increased $41 as compared to the same period in 2004. In addition to normal inflationary increases and higher selling and administrative costs related to growth in the business, the year-over-year growth in SG&A expense reflects increased professional costs related to regulatory issues and related matters of $12.
For the nine months ended September 30, 2005, SG&A expense increased $69 as compared to the same period in 2004. In addition to normal inflationary increases as well as higher selling and administrative costs related to growth in the business, the year-over-year growth in SG&A expense reflects increased professional costs related to regulatory issues and related matters of $20 for the nine months ended September 30, 2005.
Non-rental depreciation and amortizationfor the three months and nine months ended September 30, 2005 and 2004 was as follows:
| Three Months Ended | ||||||||
September 30, 2005 | September 30, 2004 | |||||||
Non-rental depreciation and amortization | $ | 17 | $ | 16 | ||||
Non-rental depreciation and amortization as a percent of revenues | 2 | % | 2 | % | ||||
| Nine Months Ended | ||||||||
September 30, 2005 | September 30, 2004 | |||||||
Non-rental depreciation and amortization | $ | 49 | $ | 49 | ||||
Non-rental depreciation and amortization as a percent of revenues | 2 | % | 2 | % | ||||
Non-rental depreciation and amortization includes (i) depreciation expense associated with equipment that is not offered for rent (such as vehicles, computers and office equipment) and amortization expense associated with leasehold improvements, (ii) the amortization of deferred financing costs and (iii) the amortization of other intangible assets. Our other intangible assets primarily consist of customer relationships and non-compete agreements.
Interest expensefor the three months and nine months ended September 30, 2005 and 2004 was as follows:
We completed acquisitions
| Three Months Ended | ||||||
September 30, 2005 | September 30, 2004 | |||||
Interest expense | $ | 48 | $ | 35 | ||
| Nine Months Ended | ||||||
September 30, 2005 | September 30, 2004 | |||||
Interest expense | $ | 135 | $ | 115 | ||
37
Interest expense for the three months ended September 30, 2005 increased $13 as compared to the same period in each of 2004, and 2003. See note 2reflecting the increase in interest rates applicable to our notes to unaudited consolidated financial statements included elsewhere in this Report. In view offloating rate debt. Interest expense for the fact that our operating results for these years were affected by acquisitions, we believe that our results for these periods are not directly comparable.
Goodwill and Other Intangible Assets
Pursuant to an accounting standard adopted in 2002, we no longer amortize goodwill. Instead, we are required to periodically review our goodwill for impairment. In general, this means that we must determine whether the fair value of the goodwill, calculated in accordance with applicable accounting standards, is at least equalnine months ended September 30, 2005 increased $20 as compared to the recorded value shown onsame period in 2004, reflecting the increase in interest rates applicable to our balance sheet. If the fair value of the goodwill is less than the recorded value, we are required to write off the excess goodwill as an expense. Our other intangible assets continue to be amortized over their estimated useful lives.
We generally are required to review our goodwill for impairment annually as of a scheduled review date; however, if events or circumstances suggest that our goodwill could be impaired, we may be required to conduct an earlier review. Our scheduled review date is October 1 of each year; however, we reviewed our traffic control segment goodwill as of September 30, 2004 because continued weakness in this segment suggested that the goodwill associated with this segment could be impaired. Based on this review, we recorded a non-cash impairment charge of approximately $139.3 million to write off the remaining goodwill balance that was associated with our traffic control segment.
floating rate debt. As of September 30, 2004, after giving effect to such write-off, we had on our balance sheet net goodwill in the amount of $1,325.5 million. All of this goodwill is associated with our general rentals segment. Based on the current performance2005, approximately 42 percent of our general rentals segment and current market valuations, we do not currently foresee any additional goodwill write-offs; however, we cannot be certain that a future downturn in the business or changes in market valuations will not necessitate additional write-offs in future periods.
Restructuring Plans in 2001 and 2002
We adopted a restructuring plan in April 2001 and a second restructuring plan in October 2002 as described below. In connection with these plans, we recorded a restructuring charge of $28.9 million in 2001 and $28.3 million in the fourth quarter of 2002.
The 2001 plan involved the following principal elements: (i) 31 underperforming branches and five administrative offices were closed or consolidated with other locations, (ii) the reduction of our workforce by 489 through the termination of branch and administrative personnel, and (iii) certain information technology hardware and softwaredebt was no longer used.
The 2002 plan involved the following principal elements: (i) 40 underperforming branches and five administrative offices were closed or consolidated with other locations; (ii) the reduction of our workforce by 412 through the termination of branch and administrative personnel, and (iii) a certain information technology project was abandoned.
Components of the restructuring charges are as follows (in thousands):
| Balance December 31, 2003(1) | Activity in 2004(2) | Balance September 30, 2004(3) | |||||||
Costs to vacate facilities(4) | $ | 14,960 | $ | 2,574 | $ | 12,386 | |||
Workforce reduction costs(5) | 1,756 | 199 | 1,557 | ||||||
Information technology costs(6) | 613 | 406 | 207 | ||||||
| $ | 17,329 | $ | 3,179 | $ | 14,150 | ||||
As indicated in the table above, the aggregate balance of the 2001 and 2002 charges was $14.2 million as of September 30, 2004 consisting of $0.7 million for the 2001 charge and $13.5 million for the 2002 charge. We estimate that approximately $0.8 million of the remaining 2001 and 2002 charges will be paid by December 31, 2004 and approximately $13.4 million in future periods. These payments will not affect our future earnings because the charges associated with these payments have already been recorded in our 2001 or 2002 results. We expect to make these payments with cash from our operations.
Charges Related to Debt Refinancings and Vesting of Restricted Stock
During 2004, we refinanced approximately $2.1 billion of ourfloating rate debt. See “—Liquidity and Capital Resources—Recent Financing Transactions.” In connection with the refinancing, we recorded: (i) aggregate pre-tax charges of $161.1 million ($95.2 million, net of tax) in the first quarter of 2004 and (ii) aggregate pre-tax charges of $11.1 million ($6.5 million, net of tax) in the second quarter of 2004. These charges were primarily attributable to (a) the redemption and tender premiums for notes redeemed and tendered as part of the refinancing and (b) the write-off of previously capitalized costs relating to the debt refinanced. These charges were recorded in other (income) expense, net.
We incurred a pre-tax, non-cash charge of $11.7 million ($10.2 million, net of tax) in the third quarter of 2003 and $7.0 million ($5.5 million, net of tax) in the first quarter of 2004 due to the vesting in each such period of restricted shares granted to executives in 2001. The charge in each period represented the portion of the deferred compensation charge associated with these shares that was unamortized at the time of vesting.
Certain Information Concerning Reserve for Claims
We are exposed to various claims relating to our business. We establish reserves for reported claims that are asserted against us and for claims that we believe have been incurred but not reported. These reserves reflect our estimate of the ultimate amounts that we will be required to pay in connection with these claims net of expected insurance recoveries. These estimates may change based on, among other things, changes in our claims experience, actuarial studies or expert opinions and receipt of additional information relevant to assessing the claims. We refer to our reserve for claims as our “insurance reserve.” Any increase in the insurance reserve results in a corresponding expense being recorded on our income statement.
Our insurance reserve increased from $46.2 million on December 31, 2003 to $68.7 million on September 30, 2004 (including $10.9 million of reserve added in the third quarter of 2004). This increase primarily reflected a change in our assessment of the potential ultimate losses typically associated with the following types of claims that arise in the ordinary course of business: (i) personal injury or death caused by equipment rented or sold by us, (ii) motor vehicle accidents involving our personnel and (iii) job-related injuries sustained by our personnel. This increase was principally driven by additional actuarial information received during 2004. The expense associated with the increase in our insurance reserve is reflected on our income statement primarily in cost of rental revenues and, to a lesser extent, in selling, general and administrative expense.
Information Concerning Segments
We currently have two business segments: general rentals and traffic control. The general rentals segment includes all aspects of our business, other than the rental of traffic control equipment and related services and activities. That portion of our business forms the separate traffic control segment. Data for periods prior to 2004 have been reclassified to conform to the current organization of our segments. See note 7 to our notes to unaudited consolidated financial statements included elsewhere in this Report.
The following table shows certain results of our segments for the nine and three months periods ended September 30, 2004 and 2003 (in millions):
| Nine Months Ended September 30 | Three Months Ended September 30 | |||||||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||||||
General Rentals Segment | ||||||||||||||||
Revenues | ||||||||||||||||
Equipment rentals | $ | 1,523.1 | $ | 1,389.3 | $ | 584.3 | $ | 526.2 | ||||||||
Sales of rental equipment | 157.3 | 120.9 | 47.9 | 44.3 | ||||||||||||
Sales of equipment and contractor supplies and other revenues | 399.8 | 359.5 | 139.3 | 126.4 | ||||||||||||
Total revenues | 2,080.2 | 1,869.7 | 771.5 | 696.9 | ||||||||||||
Cost of revenues | ||||||||||||||||
Cost of equipment rentals, excluding depreciation | 744.0 | 712.2 | 276.3 | 266.4 | ||||||||||||
Depreciation of rental equipment | 259.8 | 229.8 | 88.7 | 79.0 | ||||||||||||
Cost of rental equipment sales | 110.3 | 79.6 | 33.8 | 28.7 | ||||||||||||
Cost of equipment and contractor supplies sales and other operating expenses | 290.6 | 266.0 | 101.3 | 96.3 | ||||||||||||
Total cost of revenues | 1,404.7 | 1,287.6 | 500.1 | 470.5 | ||||||||||||
Gross profit | 675.6 | 582.1 | 271.4 | 226.4 | ||||||||||||
Selling, general and administrative expenses | 314.5 | 284.5 | 113.8 | 99.1 | ||||||||||||
Non-rental depreciation and amortization | 46.6 | 50.3 | 15.1 | 17.3 | ||||||||||||
Segment operating income | $ | 314.5 | $ | 247.4 | $ | 142.5 | $ | 110.1 | ||||||||
Traffic Control Segment | ||||||||||||||||
Revenues | ||||||||||||||||
Equipment rentals | $ | 169.0 | $ | 230.5 | $ | 70.9 | $ | 99.5 | ||||||||
Sales of rental equipment | 2.0 | 0.1 | 0.5 | 0.1 | ||||||||||||
Sales of equipment and contractor supplies and other revenues | 19.2 | 24.8 | 6.8 | 8.6 | ||||||||||||
Total revenues | 190.2 | 255.3 | 78.2 | 108.2 | ||||||||||||
Cost of revenues | ||||||||||||||||
Cost of equipment rentals, excluding depreciation | 151.8 | 168.3 | 61.0 | 64.6 | ||||||||||||
Depreciation of rental equipment | 18.8 | 19.1 | 6.4 | 6.7 | ||||||||||||
Cost of rental equipment sales | 0.9 | 0.1 | 0.2 | |||||||||||||
Cost of equipment and contractor supplies sales and other operating expenses | 12.2 | 14.4 | 4.4 | 4.8 | ||||||||||||
Total cost of revenues | 183.7 | 201.8 | 72.0 | 76.0 | ||||||||||||
Gross profit | 6.5 | 53.5 | 6.2 | 32.2 | ||||||||||||
Selling, general and administrative expenses | 39.6 | 39.6 | 15.0 | 16.7 | ||||||||||||
Goodwill impairment | 139.3 | 139.3 | ||||||||||||||
Non-rental depreciation and amortization | 1.0 | 1.2 | 0.3 | 0.4 | ||||||||||||
Segment operating income (loss)(1) | $ | (173.4 | ) | $ | 12.7 | $ | (148.4 | ) | $ | 15.0 | ||||||
Consolidated Results | ||||||||||||||||
General rentals segment operating income | $ | 314.5 | $ | 247.4 | $ | 142.5 | $ | 110.1 | ||||||||
Traffic control segment operating income (loss)(1) | (173.4 | ) | 12.7 | (148.4 | ) | 15.0 | ||||||||||
Vesting of restricted shares granted to executives in 2001(2) | (7.0 | ) | (11.7 | ) | (11.7 | ) | ||||||||||
Operating income (loss) | 134.1 | 248.3 | (5.9 | ) | 113.4 | |||||||||||
Interest expense | 115.9 | 158.8 | 35.6 | 53.4 | ||||||||||||
Interest expense—subordinated convertible debentures | 10.8 | 3.6 | ||||||||||||||
Preferred dividends of a subsidiary trust | 11.0 | 3.6 | ||||||||||||||
Other (income) expense, net(3) | 175.0 | (1.8 | ) | 1.5 | (0.2 | ) | ||||||||||
Income (loss) before provision (benefit) for income taxes | (167.5 | ) | 80.3 | (46.5 | ) | 56.6 | ||||||||||
Provision (benefit) for income taxes | (31.5 | ) | 33.8 | 17.8 | 24.7 | |||||||||||
Net income (loss) | $ | (136.0 | ) | $ | 46.6 | $ | (64.4 | ) | $ | 31.9 | ||||||
Columns may not add due to rounding
Discussion of Results
Generally Accepted Accounting Principles (“GAAP”) Results and Adjusted ResultsOther (income) expenses, net
Our results for the three month period ended September 30, 2004, were impacted by a goodwill impairment charge for $139.3 million ($121.9 million, net of tax). See “—Goodwill and Other Intangible Assets.” Our results for the nine month period ended September 30, 2004 were impacted by such charge and by the following additional charges: (i) $172.2 million ($101.7 million, net of tax) related to debt refinancings that we completed in 2004 and (ii) $7.0 million ($5.5 million, net of tax) related to the vesting of restricted stock granted to executives in 2001. Our results for the three and nine month periodsmonths ended September 30, 2003 were impacted by an $11.7 million ($10.2 million, net of tax) charge related to the vesting of restricted stock granted to executives in 2001. See “—Charges Related to Debt Refinancings2005 and Vesting of Restricted Stock.”2004 was as follows:
| Three Months Ended | |||||||
September 30, 2005 | September 30, 2004 | ||||||
Other (income) expense, net | $ | (7 | ) | $ | 1 | ||
| Nine Months Ended | |||||||
September 30, 2005 | September 30, 2004 | ||||||
Other (income) expense, net | $ | (8 | ) | $ | 174 | ||
The table below shows (i) our operating income and results in accordance with GAAP and (ii) our operating income and results adjusted to excludeOther expense of $174 for the foregoing charges. We provide this adjusted data because we believe that this data may be useful to investors in analyzing the period-to-period changes in our results that are due to changes in business conditions and that are not due to the write off of goodwill.
Nine Months Ended September 30 | Three Months Ended September 30 | |||||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||||
Operating income (loss) (GAAP) | $ | 134.1 | $ | 248.3 | $ | (5.9 | ) | $ | 113.4 | |||||
Goodwill impairment | 139.3 | 139.3 | ||||||||||||
Vesting of restricted shares granted to executives in 2001 | 7.0 | 11.7 | 11.7 | |||||||||||
Operating income, as adjusted | $ | 280.4 | $ | 260.0 | $ | 133.4 | $ | 125.1 | ||||||
Net income (loss) (GAAP) | $ | (136.0 | ) | $ | 46.6 | $ | (64.4 | ) | $ | 31.9 | ||||
Goodwill impairment, net of tax | 121.9 | 121.9 | ||||||||||||
Refinancing costs, net of tax | 101.7 | |||||||||||||
Vesting of restricted shares granted to executives in 2001, net of tax | 5.5 | 10.2 | 10.2 | |||||||||||
Net income (loss), as adjusted | $ | 93.2 | $ | 56.7 | $ | 57.5 | $ | 42.0 | ||||||
Columns may not add due to rounding
Nine Months Endednine months ended September 30, 2004 relates primarily to approximately $171 of charges associated with the refinancing of approximately $2.1 billion of debt. This refinancing is discussed further below; see “Liquidity and 2003Capital Resources.”
Income taxes. The following table summarizes our consolidated provision (benefit) for income taxes and the related effective tax rate for the three and nine months ended September 30, 2005 and 2004:
| Three Months Ended | ||||||||
September 30, 2005 | September 30, 2004 | |||||||
Pre-tax income (loss) | $ | 126 | $ | (17 | ) | |||
Provision (benefit) for income taxes | $ | 50 | $ | 29 | ||||
Effective tax rate | 40 | % | (2 | )% | ||||
| Nine Months Ended | ||||||||
| September 30, 2005 | September 30, 2004 | |||||||
Pre-tax income (loss) | $ | 227 | $ | (133 | ) | |||
Provision (benefit) for income taxes | $ | 89 | $ | (19 | ) | |||
Effective tax rate | 39 | % | 14 | % | ||||
The difference between the U.S. federal statutory income tax rate of 35 percent and the consolidated effective tax rates for the three and nine months ended September 30, 2005 and 2004 primarily relate to goodwill impairment charges, states taxes, as well as certain nondeductible charges.
New Accounting Pronouncements. See note 1 to our consolidated financial statements for a full description of recent accounting pronouncements including the respective dates of adoption and effects on results of operations and financial condition.
Liquidity and Capital Resources
Liquidity. We manage our liquidity using internal cash management practices, which are subject to (1) the statutes, regulations and practices of each of the local jurisdictions in which we operate, (2) the legal requirements of the agreements to which we are a party and (3) the policies and cooperation of the financial institutions we utilize to maintain and provide cash management services.
Revenues38
1. General Rentals Segment Revenues.Our general rentals segment had total revenuesprincipal existing sources of $2,080.2 million in the first nine months of 2004, an increase of 11.3% compared with $1,869.7 million in the first nine months of 2003. The revenuescash are cash generated from this segment accounted for 91.6% of our total revenues in the first nine months of 2004operations and 88.0% during the first nine months of 2003. The components of this segment’s revenues are discussed below.
A. Equipment Rentals. Revenues from equipment rentals at the general rentals segment were $1,523.1 million in the first nine months of 2004, an increase of 9.6% compared with revenues of $1,389.3 million in the first nine months of 2003. These revenues accounted for 73.2% of the segment’s total revenues in the first nine months of 2004 compared with 74.3% in the same period last year. Rental rates for this segment increased 7.5% during the first nine months of 2004 compared with the same period last year.
The increase in rental revenues at this segment during the first nine months of 2004 principally reflected the following:
B. Sales of Rental Equipment. Revenues from the sale of rental equipment atand borrowings available under our revolving credit facility and receivables securitization facility. As of September 30, 2005, we had (i) $448 of borrowing capacity available under the general rentals segment were $157.3 million inrevolving credit facility portion of our $1.55 billion senior secured credit facility and (ii) $200 of borrowing capacity available under our receivables securitization facility (reflecting the first nine months of 2004, representing a 30.1% increase from $120.9 million in the first nine months of 2003. These revenues accounted for 7.6%size of the segment’s total revenues ineligible collateral pool as of such date and no loans outstanding. We believe that our existing sources of cash will be sufficient to support our existing operations over the first ninenext twelve months.
We expect that our principal needs for cash relating to our existing operations over the next twelve months of 2004 compared with 6.5% inwill be to fund (i) operating activities and working capital, (ii) the same period last year. The increase in these revenues in 2004 primarily reflected an increase in the volume of equipment sold.
C. Sales of Equipment and Contractor Supplies and Other Revenues. Revenues from “sales of equipment and contractor supplies and other revenues” at the general rentals segment were $399.8 million in the first nine months of 2004, representing an 11.2% increase from $359.5 million in the first nine months of 2003. These revenues accounted for 19.2% of the segment’s total revenues in the first nine months of 2004 and 2003. The increase in these revenues in 2004 principally reflected a 26.5% increase in contractor supplies sales.
2. Traffic Control Segment Revenues. Our traffic control segment had total revenues of $190.2 million in the first nine months of 2004, representing a decrease of 25.5% from $255.3 million in the first nine months of 2003. The revenues from this segment accounted for 8.4% of our total revenues in the first nine months of 2004 and 12.0% during the first nine months of 2003. The components of this segment’s revenues are discussed below.
A. Equipment Rentals. Revenues from equipment rentals at the traffic control segment were $169.0 million in the first nine months of 2004, representing a decrease of 26.7% from $230.5 million in the first nine months of 2003. These revenues accounted for 88.8% of the segment’s total revenues in the first nine months of 2004 and 90.3% in the same period last year. The decrease in rental revenues at this segment principally reflected a 27.2% decrease in same store revenues.
B. Sales of Rental Equipment. Revenues from the salepurchase of rental equipment atand inventory items offered for sale, (iii) payments due under operating leases, (iv) debt service and (v) acquisitions. We plan to fund such cash requirements from our existing sources of cash. In addition, we may seek additional financing through the traffic control segment were $2.0 million in the first nine monthssecuritization of 2004 and $0.1 million in the first nine months of 2003. These revenues accounted for 1.0% of the segment’s total revenues in the first nine months of 2004 compared with 0% in the same period last year.
C. Sales of Equipment and Contractor Supplies and Other Revenues. Revenues from “sales of equipment and contractor supplies and other revenues” at the traffic control segment were $19.2 million in the first nine months of 2004, representing a 22.2% decrease from $24.8 million in the first nine months of 2003. These revenues accounted for 10.1% of the segment’s total revenues in the first nine months of 2004 and 9.7% in the same period last year. The decrease in these revenues in 2004 principally reflected a decrease in this segment’s sales of traffic control related supplies.
3. Total Consolidated Revenues. We had total revenues of $2,270.5 million in the first nine months of 2004, an increase of 6.8% compared with total revenues of $2,125.0 million in the first nine months of 2003. The increase reflected the higher revenues at our general rentals segment partially offset by the lower revenues at our traffic control segment. Dollar equipment utilization for the first nine months of 2004 was 59.2%, an increase of 2.5 percentage points from the first nine months of 2003.
Gross Profit
1. General Rentals Segment Gross Profit. Our general rentals segment had total gross profit of $675.6 million in the first nine months of 2004, an increase of 16.1% compared with $582.1 million in the first nine months of 2003. This increase primarily reflected the increase in revenues described above partially offset by the
decrease in gross profit margin described below from the sale of rental equipment. Information concerning the gross profit margin of the general rentals segment by source of revenue is set forth below:
A. Equipment Rentals. The gross profit margin from equipment rental revenues was 34.1% in the first nine months of 2004 and 32.2% in the first nine months of 2003. The increase in 2004 principally reflected the increase in rental revenues described above partially offset by cost increases. The cost increases impacted several areas including employee wages and benefits, reserves for claims and repairs and maintenance.
B. Sales of Rental Equipment. The gross profit margin from the sale of rental equipment was 29.9% in the first nine months of 2004 and 34.2% in the first nine months of 2003. The decrease in 2004 primarily reflected a shift in mix in the 2004 period to the sale of more under-utilized equipment and equipment with relatively lower resale values.
C. Sales of Equipment and Contractor Supplies and Other Revenues. The gross profit margin from “sales of equipment and contractor supplies and other revenues” was 27.3% in the first nine months of 2004 and 26.0% in the first nine months of 2003. The increase in 2004 primarily reflected an increase in contractor supplies margins and the volume of contractor supplies sold.
2. Traffic Control Segment Gross Profit. Our traffic control segment had total gross profit of $6.5 million in the first nine months of 2004 compared with gross profit of $53.5 million in the first nine months of 2003. The decrease in 2004 was the result of the substantial decrease in rental revenues described above partially offset by a decrease in costs.
3. Total Consolidated Gross Profit. We had total gross profit of $682.1 million in the first nine months of 2004, representing an increase of 7.3% from $635.6 million in the first nine months of 2003. The increase reflected the higher gross profit at our general rentals segment partially offset by the lower gross profit at our traffic control segment.
Selling, General and Administrative Expense (“SG&A”)
1. General Rentals Segment SG&A. SG&A at our general rentals segment was $314.5 million, or 15.1% of total segment revenues, during the first nine months of 2004 and $284.5 million, or 15.2% of total segment revenues, during the first nine months of 2003. The decrease in SG&A as a percentage of revenues in the 2004 period reflected the increase in revenues described above without a commensurate increase in SG&A expense. The increase in the dollar amount of SG&A in the 2004 period primarily reflected higher costs related to selling commissions, professional fees, employee benefits and reserves for claims.
2. Traffic Control Segment SG&A. SG&A at our traffic control segment was $39.6 million, or 20.8% of total segment revenues, during the first nine months of 2004 and $39.6 million, or 15.5% of total segment revenues, during the first nine months of 2003. The increase in SG&A as a percentage of revenues during the 2004 period primarily reflected the reduction in revenues described above.
3. Total Consolidated SG&A. Total SG&A expense was $361.1 million, or 15.9% of total revenues, during the first nine months of 2004 and $335.8 million, or 15.8% of total revenues, during the first nine months of 2003. Total SG&A expense in both 2004 and 2003 include charges for the vesting of restricted stock granted to executives in 2001. The charge in 2004 was $7.0 million and the charge in 2003 was $11.7 million. These charges have not been allocated to eithersome of our segments.
Excludingequipment or real estate or through the aforementioned charges, SG&A would have been $354.2 million, or 15.6%use of total revenues, inadditional operating leases. For information on the first nine months of 2004 compared with $324.1 million, or 15.2% of total revenues, during the first nine months of 2003. The increase in the dollar amount of SG&A, excluding the aforementioned charges, in the 2004
period reflected higher SG&A expenses at our general rentals segment as described above. The increase in SG&A, excluding the aforementioned charges, as a percentage of revenues during the 2004 period reflected the foregoingscheduled principal and the decrease in revenues at our traffic control segment as described above.
Goodwill Impairment
We recorded a non-cash goodwill impairment charge of $139.3 million in the third quarter of 2004 attributable to the write-off of the goodwill that was associated with our traffic control segment. See “—Goodwill and Other Intangible Assets.”
Non-rental Depreciation and Amortization
1. General Rentals Segment Non-rental Depreciation and Amortization. Non-rental depreciation and amortization for the general rentals segment was $46.6 million, or 2.2% of total segment revenues, in the first nine months of 2004 and $50.3 million, or 2.7% of total segment revenues, in the first nine months of 2003. The decrease in the dollar amount of this expense in 2004 was primarilyinterest payments coming due to a reduction in the aggregate amount of our deferred financing fees as a result of the debt refinancing transactions that we completed in the fourth quarter of 2003 and in 2004. The decrease in such expense as percentage of revenues primarily reflected the foregoing and the increase in revenues described above.
2. Traffic Control Segment Non-rental Depreciation and Amortization. Non-rental depreciation and amortization for the traffic control segment was $1.0 million in the first nine months of 2004 and $1.2 million in the first nine months of 2003.
3. Total Consolidated Non-rental Depreciation and Amortization. Total non-rental depreciation and amortization was $47.5 million, or 2.1% of total revenues, in the first nine months of 2004 and $51.5 million, or 2.4% of total revenues, in the first nine months of 2003. The decrease in 2004 primarily reflected the decrease at the general rentals segment discussed above.
Operating Income (Loss)
1. General Rentals Operating Income. Our general rentals segment had operating income of $314.5 million in the first nine months of 2004 and $247.4 million in the first nine months of 2003. The increase in 2004 reflected the higher revenues and gross profit at this segment described above.
2. Traffic Control SegmentOperating Income (Loss). Our traffic control segment had an operating loss of $173.4 million in the first nine months of 2004 and operating income of $12.7 million in the first nine months of 2003. The operating loss in 2004 includes the non-cash, goodwill impairment charge of $139.3 million discussed above. If the segment operating loss is adjusted to exclude this charge, the adjusted operating loss at the traffic control segment was $34.1 million in the first nine months of 2004. The adjusted operating loss in 2004 reflected the decrease in revenues and gross profit at this segment.
3. Total Consolidated Operating Income. Total operating income was $134.1 million in the first nine months of 2004 and $248.3 million in the first nine months of 2003. Total operating income in 2004 was impacted by the $139.3 million charge for goodwill impairment discussed above and a $7.0 million charge for the vesting of restricted stock granted to executives in 2001. Total operating income in 2003 was impacted by an $11.7 million charge for the vesting of restricted stock granted to executives in 2001. If our operating income is adjusted to exclude such charges, we had total adjusted operating income of $280.4 million in the first nine months of 2004 and total adjusted operating income of $260.0 million in the first nine months of 2003. The increase in total adjusted operating income in 2004 reflected the increase in operating income at the general
rentals segment partially offset by the adjusted operating loss at the traffic control segment. For a reconciliation of the adjusted results to our GAAP results, see “—Generally Accepted Accounting Principles (“GAAP”) Results and Adjusted Results.”
Interest Expense
Interest expense was $115.9 million in the first nine months of 2004 and $158.8 million in the first nine months of 2003. The decrease in interest expense was attributable to lower interest rates on our outstanding debt primarilyand on the payments coming due to (i) the debt refinancings that we completed in the fourth quarter of 2003 and in 2004 and (ii) the positive impact of interest rate swaps that increased the portion ofunder our interest expense that is based on floating interest rates.
Interest Expense—Subordinated Convertible Debentures and Preferred Dividends of a Subsidiary Trust
In August 1998, a subsidiary trust of United Rentals, Inc. (“Holdings”) sold certain trust preferred securities and used the proceeds from such sale to purchase certain convertible subordinated debentures from Holdings. Seeexisting operating leases, see “—Certain Information Concerning Trust Preferred Securities.Contractual Obligations.” The subsidiary trust
While emphasizing internal growth, we intend to continue to expand through a disciplined acquisition program. We will consider potential transactions of varying sizes and may, on a selective basis, pursue acquisition or consolidation opportunities involving other public companies or large privately-held companies. We expect to pay for future acquisitions using cash, capital stock, notes and/or assumption of indebtedness. To the extent that issuedour existing sources of cash described above are not sufficient to fund such future acquisitions, we will require additional debt or equity financing and, consequently, our indebtedness may increase or the trust preferred securities was consolidated with Holdings until December 31, 2003, when it was deconsolidated following the adoptionownership of a new accounting principle. See “—Impact of Recently Issued Accounting Standards.”
For periods prior to the deconsolidation, the dividends on the trust preferred securities were reflectedexisting stockholders may be diluted as an expense onwe implement our consolidated statement of operations and the interest on the subordinated convertible debentures was eliminated in consolidation and thus was not reflected as an expense on our consolidated statement of operations. For periods after the deconsolidation, the dividends on the trust preferred securities are no longer reflected as an expense on our consolidated statement of operations and the interest on the subordinated convertible debentures is no longer eliminated in consolidation and thus is now reflected as an expense on our consolidated statement of operations. Because the interest on the subordinated convertible debentures corresponds to the dividends on the trust preferred securities, this change does not alter the total amount of expense required to be recorded.
The expense recorded in connection with the foregoing securities was $10.8 million in the first nine months of 2004 and $11.0 million in the first nine months of 2003. The expense in the 2004 period is recorded on the statement of operations as “Interest Expense—Subordinated Convertible Debentures” and the expense in the 2003 period is recorded as “Preferred Dividends of a Subsidiary Trust.”
growth strategy.
Other (Income) Expense, netTransactions Completed in 2004
Other expense was $175.0 million in the first nine months of 2004 compared with other income of $1.8 million in the first nine months of 2003. The other expense in the first nine months of 2004 was primarily attributable to the charges related to debt refinancings described under “—Charges Related to Debt Refinancings and Vesting of Restricted Stock.” Excluding these charges, we would have had other expense of $2.8 million in the 2004 period. The other expense, excluding such charges, in the 2004 period was primarily due to the write off of a note receivable and the write off of certain assets in connection with the settlement of a legal matter.
Provision (Benefit) for Income Taxes
Income taxes were a benefit of $31.5 million, or an effective rate of 18.8%, in the first nine months of 2004 and an expense of $33.8 million, or an effective rate of 42.1%, in the first nine months of 2003. Excluding the effects on our 2004 results of (i) the vesting of restricted stock granted to executives in 2001, (ii) the goodwill impairment charge and (iii) the refinancing charges discussed above, we would have had an effective rate of 38.3% in the first nine months of 2004. Excluding the effect on our 2003 results of the vesting of restricted stock granted to executives in 2001, we would have had an effective rate of 38.4% in the first nine months of 2003.
Net Income (Loss)
We had a net loss of $136.0 million in the first nine months of 2004 compared with net income of $46.6 million in the first nine months of 2003. The loss in 2004 reflected the charges described above relating to our debt refinancings, goodwill impairment and the vesting of restricted stock granted to executives in 2001. If our results are adjusted to exclude these charges, we had adjusted net income of $93.2 million in the first nine months of 2004. Net income in 2003 included a charge relating to the vesting of restricted stock granted to executives in 2001. If our results are adjusted to exclude this charge, we had adjusted net income of $56.7 million in the first nine months of 2003. The increase in adjusted net income in the first nine months of 2004 relative to adjusted net income in the first nine months of 2003 primarily reflected the increase in adjusted operating income and the reduction in interest expense described above. For a reconciliation of the adjusted results to our GAAP results, see “—Generally Accepted Accounting Principles (“GAAP”) Results and Adjusted Results.”
Three Months Ended September 30, 2004 and 2003
Revenues
1. General Rentals Segment Revenues. Our general rentals segment had total revenues of $771.5 million in the third quarter of 2004, an increase of 10.7% compared with $696.9 million in the third quarter of 2003. The revenues from this segment accounted for 90.8% of our total revenues in the third quarter of 2004 and 86.6% during the third quarter of 2003. The components of this segment’s revenues are discussed below.
A. Equipment Rentals. Revenues from equipment rentals at the general rentals segment were $584.3 million in the third quarter of 2004, an increase of 11.0% compared with revenues of $526.2 million in the third quarter of 2003. These revenues accounted for 75.7% of the segment’s total revenues in the third quarter of 2004 compared with 75.5% in the same period last year. Rental rates for this segment increased 8.5% during the third quarter of 2004 compared with the same period last year.
The increase in rental revenues at this segment during the third quarter of 2004 principally reflected the following:
B. Sales of Rental Equipment. Revenues from the sale of rental equipment at the general rentals segment were $47.9 million in the third quarter of 2004, representing an 8.0% increase from $44.3 million in the third quarter of 2003. These revenues accounted for 6.2% of the segment’s total revenues in the third quarter of 2004 compared with 6.4% in the same period last year. The increase in these revenues in 2004 primarily reflected an increase in the volume of equipment sold.
C. Sales of Equipment and Contractor Supplies and Other Revenues. Revenues from “sales of equipment and contractor supplies and other revenues” at the general rentals segment were $139.3 million in the third quarter of 2004, representing a 10.2% increase from $126.4 million in the third quarter of 2003. These revenues accounted for 18.1% of the segment’s total revenues in the third quarter of 2004 compared with 18.1% in the same period last year. The increase in these revenues in 2004 principally reflected a 25.1% increase in contractor supplies sales.
2. Traffic Control Segment Revenues. Our traffic control segment had total revenues of $78.2 million in the third quarter of 2004, representing a decrease of 27.7% from $108.2 million in the third quarter of 2003. The
revenues from this segment accounted for 9.2% of our total revenues in the third quarter of 2004 and 13.4% during the third quarter of 2003. The components of this segment’s revenues are discussed below.
A. Equipment Rentals. Revenues from equipment rentals at the traffic control segment were $70.9 million in the third quarter of 2004, representing a decrease of 28.8% from $99.5 million in the third quarter of 2003. These revenues accounted for 90.7% of the segment’s total revenues in the third quarter of 2004 and 92.0% in the same period last year. The decrease in rental revenues at this segment principally reflected a 29.5% decrease in same store revenues.
B. Sales of Rental Equipment. Revenues from the sale of rental equipment at the traffic control segment were $0.5 million in the third quarter of 2004 and $0.1 million in the third quarter of 2003. These revenues accounted for 0.7% of the segment’s total revenues in the third quarter of 2004 compared with 0% in the same period last year.
C. Sales of Equipment and Contractor Supplies and Other Revenues. Revenues from “sales of equipment and contractor supplies and other revenues” at the traffic control segment were $6.8 million in the third quarter of 2004, representing a 21.3% decrease from $8.6 million in the third quarter of 2003. These revenues accounted for 8.7% of the segment’s total revenues in the third quarter of 2004 and 8.0% in the same period last year. The decrease in these revenues in 2004 principally reflected a decrease in this segment’s sales of traffic control related supplies.
3. Total Consolidated Revenues. We had total revenues of $849.7 million in the third quarter of 2004, an increase of 5.5% compared with total revenues of $805.1 million in the third quarter of 2003. The increase reflected the higher revenues at our general rentals segment partially offset by the lower revenues at our traffic control segment. Dollar equipment utilization for the third quarter of 2004 was 67.4%, an increase of 2.3 percentage points from the third quarter of 2003.
Gross Profit
1. General Rentals Segment Gross Profit. Our general rentals segment had total gross profit of $271.4 million in the third quarter of 2004, an increase of 19.9% compared with $226.4 million in the third quarter of 2003. This increase primarily reflected the increase in revenues described above partially offset by the decrease in gross profit margin described below from the sale of rental equipment. Information concerning the gross profit margin of the general rentals segment by source of revenue is set forth below:
A. Equipment Rentals. The gross profit margin from equipment rental revenues was 37.5% in the third quarter of 2004 and 34.3% in the third quarter of 2003. The increase in 2004 principally reflected the increase in rental revenues described above partially offset by cost increases. The cost increases primarily impacted employee wages and benefits and reserves for claims.
B. Sales of Rental Equipment. The gross profit margin from the sale of rental equipment was 29.4% in the third quarter of 2004 and 35.3% in the third quarter of 2003. The decrease in 2004 primarily reflected a shift in mix in the 2004 period to the sale of more under-utilized equipment and equipment with relatively lower resale values.
C. Sales of Equipment and Contractor Supplies and Other Revenues. The gross profit margin from “sales of equipment and contractor supplies and other revenues” was 27.3% in the third quarter of 2004 and 23.8% in the third quarter of 2003. The increase in 2004 primarily reflected an increase in contractor supplies margins and the volume of contractor supplies sold.
2. Traffic Control Segment Gross Profit. Our traffic control segment had gross profit of $6.2 million in the third quarter of 2004 compared with gross profit of $32.2 million in the third quarter of 2003. The decrease in 2004 was the result of the substantial decrease in rental revenues described above partially offset by a decrease in costs.
3. Total Consolidated Gross Profit. We had total gross profit of $277.6 million in the third quarter of 2004, representing an increase of 7.4% from $258.6 million in the third quarter of 2003. The increase reflected the higher gross profit at our general rentals segment partially offset by the lower gross profit at our traffic control segment.
Selling, General and Administrative Expense
1. General Rentals Segment SG&A. SG&A at our general rentals segment was $113.8 million, or 14.7% of total segment revenues, during the third quarter of 2004 and $99.1 million, or 14.2% of total segment revenues, during the third quarter of 2003. The dollar and percentage increases in SG&A in the 2004 period primarily reflected higher costs related to selling commissions, professional fees, employee benefits and reserves for claims.
2. Traffic Control Segment SG&A. SG&A at our traffic control segment was $15.0 million, or 19.2% of total segment revenues, during the third quarter of 2004 and $16.7 million, or 15.4% of total segment revenues, during the third quarter of 2003. The increase in SG&A as a percentage of revenues during the 2004 period primarily reflected the reduction in revenues described above.
3. Total Consolidated SG&A. Total SG&A expense was $128.8 million, or 15.2% of total revenues, during the third quarter of 2004 and $127.5 million, or 15.8% of total revenues, during the third quarter of 2003. Total SG&A expense in 2003 included a charge of $11.7 million for the vesting of restricted stock granted to executives in 2001. This charge has not been allocated to either of our segments.
If the aforementioned charge is excluded in 2003, adjusted SG&A in the third quarter of 2003 was $115.7 million, or 14.4% of revenues. The increase in the dollar amount of SG&A in 2004 relative to adjusted SG&A in 2003 reflected higher SG&A expenses in our general rentals segment as described above. The increase in SG&A as a percentage of revenue in 2004 relative to adjusted SG&A as a percentage of revenues in 2003 primarily reflected the decrease in revenues at our traffic control segment as described above.
Goodwill Impairment
We recorded a non-cash goodwill impairment charge of $139.3 million in the third quarter of 2004 attributable to the write-off of the goodwill that was associated with our traffic control segment. See “—Goodwill and Other Intangible Assets.”
Non-rental Depreciation and Amortization
1. General Rentals Segment Non-rental Depreciation and Amortization. Non-rental depreciation and amortization for the general rentals segment was $15.1 million, or 2.0% of total segment revenues, in the third quarter of 2004 and $17.3 million, or 2.5% of total segment revenues, in the third quarter of 2003. The decrease in the dollar amount of this expense in 2004 was primarily due to a reduction in the aggregate amount of our deferred financing fees as a result of the debt refinancing transactions that we completed in the fourth quarter of 2003 and in 2004. The decrease in such expense as a percentage of revenues primarily reflected the foregoing and the increase in revenues described above.
2. Traffic Control Segment Non-rental Depreciation and Amortization. Non-rental depreciation and amortization for the traffic control segment was $0.3 million in the third quarter of 2004 and $0.4 million in the third quarter of 2003.
3. Total Consolidated Non-rental Depreciation and Amortization. Total non-rental depreciation and amortization was $15.4 million, or 1.8% of total revenues, in the third quarter of 2004 and $17.7 million, or 2.2% of total revenues, in the third quarter of 2003. The decrease in 2004 primarily reflected the decrease at the general rentals segment discussed above.
Operating Income (Loss)
1. General Rentals Segment Operating Income. Our general rentals segment had operating income of $142.5 million in third quarter of 2004 and $110.1 million in the third quarter of 2003. The increase in 2004 reflected the higher revenues and gross profit at this segment described above partially offset by increased SG&A costs.
2. Traffic Control SegmentOperating Income (Loss). Our traffic control segment had an operating loss of $148.4 million in the third quarter of 2004 and operating income of $15.0 million in the third quarter of 2003. The operating loss in 2004 includes the non-cash, goodwill impairment charge of $139.3 million discussed above. If the segment operating loss is adjusted to exclude this charge, the adjusted operating loss at the traffic control segment was $9.1 million in the third quarter of 2004. The adjusted operating loss in 2004 reflected the decrease in revenues and gross profit at this segment.
3. Total Consolidated Operating Income (Loss). Total operating loss was $5.9 million in the third quarter of 2004 compared to total operating income of $113.4 million in the third quarter of 2003. Total operating results in 2004 were impacted by the non-cash, goodwill impairment charge of $139.3 million discussed above. Total operating results in 2003 were impacted by an $11.7 million charge for the vesting of restricted stock granted to executives in 2001. If our operating results are adjusted to exclude these charges, we had total adjusted operating income of $133.4 million in the third quarter of 2004 and $125.1 million in the third quarter of 2003. The increase in our adjusted operating income in 2004 reflected the increase in operating income at the general rentals segment partially offset by the operating loss at the traffic control segment. For a reconciliation of the adjusted results to our GAAP results, see “—Generally Accepted Accounting Principles (“GAAP”) Results and Adjusted Results.”
Interest Expense
Interest expense was $35.6 million in the third quarter of 2004 and $53.4 million in the third quarter of 2003. The decrease in interest expense was attributable to lower interest rates on our debt primarily due to the debt refinancings that we completed in the fourth quarter of 2003.
Interest Expense—Subordinated Convertible Debentures and Preferred Dividends of a Subsidiary Trust.
The expense recorded in connection with these securities was $3.6 million in the third quarter of 2004 and $3.6 million in the third quarter of 2003. The expense in the 2004 period is recorded on the statement of operations as “Interest Expense—Subordinated Convertible Debentures” and the expense in the 2003 period is recorded as “Preferred Dividends of a Subsidiary Trust.”
Other (Income) Expense, net
Other expense was $1.5 million in the third quarter of 2004 compared with other income of $0.2 million in the third quarter of 2003. The other expense in the 2004 period was primarily due to the write off of a note receivable.
Provision (Benefit) for Income Taxes
Income taxes were an expense of $17.8 million in the third quarter of 2004 and $24.7 million in the third quarter of 2003. Excluding the effect on our 2004 results of the goodwill impairment charge discussed above, we would have had an effective rate of 38.0% in the third quarter of 2004. Excluding the effect on our 2003 results of the vesting of restricted stock granted to executives in 2001, we would have had an effective rate of 38.5% in the third quarter of 2003. The decline in the effective rate in 2004 primarily reflected a decrease in the deferred tax rate related to our Canadian operations.
Net Income (Loss)
We had a net loss of $64.4 million in the third quarter of 2004 compared with net income of $31.9 million in the third quarter of 2003. Our results in the third quarter of 2004 were impacted by the goodwill impairment charge of $139.3 million described above. Our results in the third quarter of 2003 were impacted by the $11.7 million charge for the vesting of restricted stock granted to executives in 2001 described above. If our results are adjusted to exclude these charges, we had adjusted net income of $57.5 million in the third quarter of 2004 and $42.0 million in the third quarter of 2003. The increase in adjusted net income in the third quarter of 2004 relative to adjusted net income in the third quarter of 2003 primarily reflected the increase in operating income and the reduction in interest expense described above. For a reconciliation of the adjusted results to our GAAP results see “—Generally Accepted Accounting Principles (“GAAP”) Results and Adjusted Results”.
Liquidity and Capital Resources
Recent Financing Transactions
We refinanced approximately $2.1 billion of our debt in 2004. This refinancing was completed in 2004 (“the first quarter of 2004, except as described below.Refinancing”). The purpose of this refinancing was to reduce ourRefinancing extended debt maturities, reduced interest expense going forward and extendprovided the maturities on a substantial amount of our debt.Company with greater financial flexibility. As part of this refinancing, we:the Refinancing, the Company:
| • | sold $1 billion of URI’s 6 1/2 |
| • | repurchased $845 |
| • | redeemed $300 |
The refinancing described aboveRefinancing was completed during the first quarter of 2004, except that (i) the redemption of the 9% Senior Subordinated9 percent Notes Due 2009 was completed on April 1, 2004 and (ii) a portion of the term loan that is part of the new senior secured credit facilityNew Credit Facility was drawn on such date.date and (ii) an additional $4 of the 10 3/4 percent Notes were repurchased on April 7, 2004.
For further39
In connection with the Refinancing, the Company incurred aggregate charges of approximately $171. These charges were attributable primarily to (i) the redemption and tender premiums for notes redeemed or repurchased as part of the Refinancing and (ii) the write-off of previously capitalized costs relating to the debt refinanced.
7 percent Senior Subordinated Notes. In January 2004, as part of the Refinancing described above, URI issued $375 aggregate principal amount of 7 percent Senior Subordinated Notes (the “7 percent Notes”) which are due February 15, 2014. The net proceeds from the sale of the 7 percent Notes were approximately $369, after deducting offering expenses. The 7 percent Notes are unsecured and are guaranteed by Holdings and, subject to limited exceptions, URI’s domestic subsidiaries. The 7 percent Notes mature on February 15, 2014 and may be redeemed by URI on or after February 15, 2009, at specified redemption prices that range from 103.5 percent in 2009 to 100.0 percent in 2012 and thereafter. In addition, on or prior to February 15, 2007, URI may, at its option, use the proceeds of public equity offerings to redeem up to an aggregate of 35 percent of the outstanding 7 percent Notes at a redemption price of 107.0 percent. The indenture governing the 7 percent Notes contains certain restrictive covenants, including limitations on (i) additional indebtedness, (ii) restricted payments, (iii) liens, (iv) dividends and other payments, (v) preferred stock of certain subsidiaries, (vi) transactions with affiliates, (vii) the disposition of proceeds of asset sales and (viii) the Company’s ability to consolidate, merge or sell all or substantially all of its assets.
6 1/2 percent Senior Notes. In February 2004, as part of the Refinancing described above, URI issued $1 billion aggregate principal amount of 6 1/2 percent Senior Notes (the “6 1/2 percent Notes”) which are due February 15, 2012. The net proceeds from the sale of the 6 1/2 percent Notes were approximately $985, after deducting offering expenses. The 6 1/2 percent Notes are unsecured and are guaranteed by Holdings and, subject to limited exceptions, URI’s domestic subsidiaries. The 6 1/2 percent Notes mature on February 15, 2012 and may be redeemed by URI on or after February 15, 2008, at specified redemption prices that range from 103.25 percent in 2008 to 100.0 percent in 2010 and thereafter. In addition, on or prior to February 15, 2007, URI may, at its option, use the proceeds of public equity offerings to redeem up to an aggregate of 35 percent of the outstanding 6 1/2 percent Notes at a redemption price of 106.5 percent. The indenture governing the 6 1/2 percent Notes contains certain restrictive covenants, including limitations on (i) additional indebtedness, (ii) restricted payments, (iii) liens, (iv) dividends and other payments, (v) preferred stock of certain subsidiaries, (vi) transactions with affiliates, (vii) the disposition of proceeds of asset sales, (viii) the Company’s ability to consolidate, merge or sell all or substantially all of its assets and (ix) sale-leaseback transactions.
New Credit Facility. In the first quarter of 2004, as part of the Refinancing described above, the Company amended and restated URI’s senior secured credit facility. The amended and restated facility includes (i) a $650 revolving credit facility, (ii) a $150 institutional letter of credit facility and (iii) a $750 term loan. The revolving credit facility, institutional letter of credit facility and term loan are governed by the same credit agreement. URI’s obligations under the credit facility are guaranteed by Holdings and, subject to limited exceptions, URI’s domestic subsidiaries and are secured by liens on substantially all of the assets of URI, Holdings and URI’s domestic subsidiaries. Set forth below is certain additional information concerning ourthe amended and restated facility.
Revolving Credit Facility. The revolving credit facility enables URI to borrow up to $650 on a revolving basis and enables certain of the Company’s Canadian subsidiaries to borrow up to $150 (provided that the aggregate borrowings of URI and the Canadian subsidiaries may not exceed $650). A portion of the revolving credit facility, up to $250, is available for issuance of letters of credit. The revolving credit facility is scheduled to mature and terminate in February 2009. As of September 30, 2005 and December 31, 2004, the outstanding borrowings under this facility were approximately $137 and $133, and utilized letters of credit were $65 and $50, respectively. All outstanding borrowings under the revolving credit facility at September 30, 2005 were Canadian subsidiary borrowings.
U.S. dollar borrowings under the revolving credit facility accrue interest, at the option of URI’s Canadian subsidiaries, at either (a) the ABR rate (which is equal to the greater of (i) the Federal Funds Rate plus 0.5 percent and (ii) JPMorgan Chase Bank’s prime rate) plus a margin of 1.25 percent, or (b) an adjusted LIBOR rate plus a maximum margin of 2.25 percent.
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Canadian dollar borrowings under the revolving credit facility accrue interest, at the borrower’s option, at either (a) the Canadian prime rate (which is equal to the greater of (i) the CDOR rate plus 1 percent and (ii) JPMorgan Chase Bank, Toronto Branch’s prime rate) plus a margin of 1.25 percent, or (b) the B/A rate (which is equal to JPMorgan Chase Bank, Toronto Branch’s B/A rate) plus a maximum margin of 2.25 percent. The rate applicable to Canadian borrowings outstanding under the revolving credit facility was 4.8 at September 30, 2005 and December 31, 2004, respectively.
URI is also required to pay the lenders a commitment fee equal to 0.5 percent per annum, payable quarterly, in respect of undrawn commitments under the revolving credit facility.
Institutional Letter of Credit Facility (“ILCF”). The ILCF provides for up to $150 in letters of credit. The ILCF is in addition to the letter of credit capacity under the revolving credit facility. The total combined letter of credit capacity under the revolving credit facility and the ILCF is $400. Subject to certain conditions, all or part of the ILCF may be converted into term loans. The ILCF is scheduled to terminate in February 2011. As of both September 30, 2005 and December 31, 2004, the outstanding letters of credit under the ILCF were approximately $150.
URI is required to pay a fee which accrues at the rate of 0.1 percent per annum on the amount of the ILCF. In addition, URI is required to pay participation and other fees in respect of letters of credit. For letters of credit obtained under both the ILCF and the revolving credit facility, these fees accrue at a maximum rate of 2.25 percent per annum.
Term Loan. The term loan was obtained in two draws. An initial draw of $550 was made upon the closing of the credit facility in February 2004 and an additional draw of $200 was made on April 1, 2004. Amounts repaid in respect of the term loan may not be reborrowed.
The term loan must be repaid in installments as follows: (i) during the period from and including June 30, 2004 to and including March 31, 2010, URI must repay on each March 31, June 30, September 30 and December 31 of each year an amount equal to one-fourth of 1 percent of the original aggregate principal amount of the term loan and (ii) URI must repay on each of June 30, 2010, September 30, 2010, December 31, 2010, and at maturity on February 14, 2011 an amount equal to 23.5 percent of the original aggregate principal amount of the term loan. As of September 30, 2005 and December 31, 2004, amounts outstanding under the term loan were approximately $739 and $744, respectively.
Borrowings under the term loan accrue interest, at URI’s option, at either (a) the ABR rate plus a maximum margin of 1.25 percent, or (b) an adjusted LIBOR rate plus a maximum margin of 2.25 percent. The rate was 6.1 and 4.67 at September 30, 2005 and December 31, 2004, respectively.
Covenants. Under the agreement governing the New Credit Facility, the Company is required to, among other things, satisfy certain financial tests relating to: (a) interest coverage ratio, (b) the ratio of funded debt see note 8 to our notescash flow, (c) the ratio of senior secured debt to unaudited consolidatedtangible assets and (d) the ratio of senior secured debt to cash flow. If the Company is unable to satisfy any of these covenants, the lenders could elect to terminate the credit facility and require the Company to repay the outstanding borrowings under the credit facility. The Company is also subject to various other covenants under the agreements governing its credit facility and other indebtedness. These covenants require the Company to timely file audited annual and quarterly financial statements included elsewhere hereinwith the SEC and note 9limit or prohibit, among other things, the Company’s ability to incur indebtedness, make prepayments of certain indebtedness, pay dividends, make investments, create liens, make acquisitions, sell assets and engage in mergers and acquisitions. If at any time an event of default under the New Credit Facility exists, the interest rate applicable to each revolving and term loan will be based on the highest margins above plus 2 percent.
Transactions Completed in 2005
Matters Relating to Consent Solicitation:In 2005, the Company successfully solicited consents for amendments to the indentures governing the following securities:
| • | 6 1/2 percent Senior Notes due 2012 |
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| • | 7 3/4 percent Senior Subordinated Notes due 2013 |
| • | 1 7/8 percent Convertible Senior Subordinated Notes due 2023 (“Convertible Notes”) |
| • | 6 1/2 percent Convertible Quarterly Income Preferred Securities due 2028 (“QUIPs”) |
The indentures for these securities require annual and other periodic reports to be filed with the SEC. On September 19, 2005, the Company obtained consents from holders of these securities and entered into supplemental indentures amending the applicable covenants to allow the Company until March 31, 2006 to comply with the requirement to make timely SEC filings (and waiving related defaults that occurred prior to the effectiveness of the amendments). In addition, the supplemental indenture relating to the Convertible Notes changed the conversion rate from 38.9520 to 44.9438 shares of United Rentals common stock for each $1,000 (“one thousand dollars”) principal amount of Convertible Notes. Pursuant to the terms of the consent solicitation, the Company paid aggregate consent fees of approximately $34 to holders of its nonconvertible notes and QUIPs. These costs are being amortized through the maturity dates of the nonconvertible notes and QUIPs.
In March 2005, the Company successfully obtained its lenders’ consent to an amendment to the New Credit Facility that waived the covenant violation from the delay in making certain SEC filings and extended the Company’s deadline to make SEC filings until June 29, 2005 for our notes to consolidated financial statements included in our 20032004 Annual Report on Form 10-K.10-K and until August 15, 2005 for our first quarter 2005 Form 10-Q. In June 2005, the Company successfully obtained its lenders’ consent to an amendment to the New Credit Facility that waived the covenant violation from the delay in making certain SEC filings and extended the Company’s deadline to make SEC filings until December 31, 2005 for our 2004 Annual Report on Form 10-K and for our 2005 Form 10-Qs. Both of these consents were obtained without the payment of any consent fees. In November 2005, the Company successfully obtained its lenders’ consent to an amendment to the New Credit Facility that waived the covenant violation from the delay in making certain SEC filings and extended the Company’s deadline to make SEC filings until March 31, 2006. Consent fees in the amount of $1 were paid to the lenders under the New Credit Facility. On March 31, 2006, the Company obtained its lenders’ consent to an additional amendment to the New Credit Facility that (1) waived the covenant violation from the delay in making certain SEC filings, (2) extended the Company’s deadline to make its SEC filings until April 28, 2006 and (3) limited the Company’s ability to borrow under the New Credit Facility to amounts necessary to find obligations to be paid in the ordinary course during the one-week period following the applicable borrowing until these SEC filings are made.
Accounts Receivable Securitization:On May 31, 2005, we obtained a new $200 accounts receivable securitization facility and terminated our then existing $250 accounts receivable securitization facility. The new facility provides for generally lower borrowing costs than the old facility. In addition, the new facility provides for a substantially longer term, with the scheduled termination date being May 29, 2009, compared with September 30, 2006 under the old facility. There were no outstanding borrowings under the old facility at the time it was terminated. In connection with terminating the old facility, we incurred a charge of approximately $1, representing the write-off of previously capitalized costs relating to the old facility.
The new facility enables one of our subsidiaries to borrow up to $200 against a collateral pool of eligible accounts receivable. Consistent with the old facility, the borrowings under the new facility will be reflected as debt on our consolidated balance sheets and the receivables in the collateral pool will be reflected as assets on our consolidated balance sheets. However, such assets are only available to satisfy the obligations of the borrower subsidiary, and once the obligations of the borrower subsidiary are satisfied, the remaining assets will be available to be dividended to the parent.
Key terms of this facility include:
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Outstanding borrowings under the facility generally accrue interest at the commercial paper rate plus a specified spread not to exceed 1.0 percent. There were no outstanding borrowings under this facility at September 30, 2005 and December 31, 2004. We are also required to pay a commitment fee based on the long-term senior secured ratings of URI. This commitment fee was .55 percent at September 30, 2005.
Redemption of remaining 10 3/4 Senior Notes: In April 2005, the Company redeemed $12 principal amount of URI’s 10 3/4 Senior Notes due 2008 (the “10 3/4 Notes”). The principal repurchased represented the amounts of the 10 3/4 Notes still outstanding after the 2004 tender offer. In connection with this redemption, the Company incurred charges of approximately $1. These charges were attributed primarily to (i) the redemption for notes redeemed and (ii) the write-off of previously capitalized costs.
Loan Covenants and Compliance
As of September 30, 2005, we were in compliance with the covenants of the 7 percent Notes and the 6 1/2 percent Notes, as amended, as discussed above, as well as the covenants of our 7 3/4 percent Senior Subordinated Notes due 2013, Convertible Notes, the QUIPs and the New Credit Facility. As described above, on March 31, 2006 the Company obtained its lenders’ consent to an additional amendment to the New Credit Facility that extended the Company’s deadline to make its SEC filings until April 28, 2006.
As of March 31, 2006, although we filed our annual reports on Form 10-K for the years ended December 31, 2005 and 2004, we had not yet filed our quarterly reports on Form 10-Q for the periods ended in 2005. Therefore, we were in violation of the amendments to our indentures due to not filing our quarterly reports. We are filing each of these quarterly reports on Form 10-Q on the date hereof. The Company is currently in compliance with the New Credit Facility, as amended, as of March 31, 2006.
Sources and Uses of Cash
. During the first nine months of 2004,ended September 30, 2005, we (i) generated cash from operations of $564.2 million$424 and (ii) generated cash from the sale of rental equipment of $159.3 million.$228. We used cash during this period principally to (i) pay consideration for acquisitions of $61.0 million, (ii) purchase rental equipment of $465.2 million, (iii)$680, (ii) purchase other property and equipment of $58.9 million, (iv) repay borrowings of $17.9 million, (v) pay$56 and (iii) utilize cash for debt repayments and financing costs of $36.8 million and (vi) purchase interest rate caps for $13.6 million.
Cash Requirements Related to Operations$66.
Our principal existing sources ofDuring the nine months ended September 30, 2004, we (i) generated cash are cash generated from operations andof $545, (ii) generated cash from the sale of rental equipment of $192 and (iii) utilized cash for borrowings, available under our revolvingnet of debt repayments and financing costs, of $72. We used cash during this period principally to (i) purchase rental equipment of $479, (ii) purchase other property and equipment of $42 and (iii) purchase other companies, net of cash acquired, of $61.
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Our credit facility and receivables securitization facility. As of November 1, 2004, we had (i) $468.7 million of borrowing capacity available under our $650 million revolving credit facility (reflecting outstanding loans of approximately $131.0 million and outstanding letters of credit in the amount of approximately $50.3 million) and (ii) $244.0 million of borrowing capacity available under our receivables securitization facility (reflecting the size of the eligible collateral poolratings as of such date and no loans being outstanding). We believe that our existing sources of cash will be sufficient to support our existing operations over the next twelve months.April 12, 2006 were as follows:
We expect that our principal needs for cash relating to our existing operations over the next twelve months will be to fund (i) operating activities and working capital, (ii) the purchase of rental equipment and inventory items offered for sale, (iii) payments due under operating leases, (iv) debt service, (v) costs relating to our restructuring plans and (vi) acquisitions. We plan to fund such cash requirements relating to our existing operations from our existing sources of cash described above. In addition, we may seek additional financing through the securitization of some of our equipment or real estate or through the use of additional operating leases. For information on the scheduled principal payments coming due on our outstanding debt and on the payments coming due under our existing operating leases, see “—Certain Information Concerning Contractual Obligations.”
Our capital expenditures for the first nine months of 2004 amounted to $524.1 million. These expenditures are comprised of (i) approximately $465.2 million of expenditures for the purchase of rental equipment and (ii) $58.9 million of expenditures for the purchase of property and equipment. Our capital expenditures in future periods will depend on a number of factors, including general economic conditions and growth prospects. Based on current conditions, we estimate that capital expenditures for the balance of 2004 will be approximately $65 million to $95 million for our existing operations. These expenditures are comprised of approximately: (i) $60 million to $90 million of expenditures for the purchase of rental equipment and (ii) $5.0 million of expenditures for the purchase of property and equipment. We expect that we will fund such expenditures from proceeds from the sale of used equipment, cash generated from operations and, if required, borrowings available under our revolving credit facility and receivables securitization facility.
While emphasizing internal growth, we may also continue to expand through a disciplined acquisition program. We will consider potential transactions of varying sizes and may, on a selective basis, pursue acquisition or consolidation opportunities involving other public companies or large privately-held companies. We expect to pay for future acquisitions using cash, capital stock, notes and/or assumption of indebtedness. To the extent that our existing sources of cash described above are not sufficient to fund such future acquisitions, we will require additional debt or equity financing and, consequently, our indebtedness may increase or the ownership of existing stockholders may be diluted as we implement our growth strategy.
In October 2004, we acquired Atlantic Rentals Ltd. for approximately $29 million in cash. Atlantic Rentals provides construction equipment rentals in Canada’s Maritime Provinces through 16 locations in Nova Scotia, New Brunswick and Prince Edward Island.
Certain Information Concerning Contractual Obligations
The table below provides certain information concerning the payments coming due under certain categories of our existing contractual obligations:
| Remainder of 2004 | 2005 | 2006 | 2007 | 2008 | Thereafter | Total | |||||||||||||||
| (in thousands) | |||||||||||||||||||||
Debt excluding capital leases(1) | $ | 6,220 | $ | 7,720 | $ | 7,500 | $ | 7,500 | $ | 19,162 | $ | 2,835,274 | $ | 2,883,376 | |||||||
Capital leases (1) | 3,640 | 11,853 | 11,171 | 7,555 | 3,263 | 312 | 37,794 | ||||||||||||||
Operating leases(1): | |||||||||||||||||||||
Real estate | 17,352 | 65,838 | 60,363 | 55,767 | 46,240 | 117,857 | 363,417 | ||||||||||||||
Rental equipment | 26,068 | 60,479 | 63,386 | 37,551 | 31,542 | 9,527 | 228,553 | ||||||||||||||
Other equipment | 5,402 | 15,055 | 12,475 | 6,839 | 3,642 | 608 | 44,021 | ||||||||||||||
Purchase obligations | |||||||||||||||||||||
Other liabilities reflected on balance sheet in accordance with GAAP(2) | 221,550 | 221,550 | |||||||||||||||||||
Total | $ | 58,682 | $ | 160,945 | $ | 154,895 | $ | 115,212 | $ | 103,849 | $ | 3,185,128 | $ | 3,778,711 | |||||||
| Corporate Rating | Outlook (1) | |||
Moody’s | B2 | Developing | ||
S&P | BB- | Negative | ||
Fitch | BB | Negative |
| (1) |
Both our ability to obtain financing and the related cost of borrowing are affected by our credit ratings, which are periodically reviewed by these rating agencies. Our current credit ratings are below investment grade and we expect our access to the public debt markets to be limited to the non-investment grade segment until our ratings reflect an investment grade rating.
Certain Information Concerning Related Party
We have from time to time purchased equipment from Terex Corporation (“Terex”) and expect to do so in the future. One of the directors of our company is chief executive officer and a director of Terex. We purchased approximately $81 million of equipment from Terex during the first nine months of 2004.
Certain Information Concerning Off-Balance Sheet Arrangements
Restricted Stock. We have granted to employees other than executive officers and directors approximately 900,000 shares of restricted stock that contain the following provisions. The shares vest in 2005, 2006 or 2007 or earlier upon a change in control of the Company, death, disability, retirement or certain terminations of employment, and are subject to forfeiture prior to vesting on certain other terminations of employment, the violation of non-compete provisions and certain other events. If a holder of restricted stock sells his stock and receives sales proceeds that are less than a specified guaranteed amount set forth in the grant instrument, we have agreed to pay the holder the shortfall between the amount received and such specified amount; however, the foregoing only applies to sales that are made within five trading days of the vesting date. The specified guaranteed amount is (i) $27.26 per share with respect to approximately 300,000 shares scheduled to vest in 2005, (ii) $9.18 per share with respect to approximately 400,000 shares scheduled to vest in 2006 and (iii) $17.20 per share with respect to approximately 200,000 shares scheduled to vest in 2007.
Operating Leases.We lease real estate, rental equipment and non-rental equipment under operating leases as a regular`regular business activity. As part of some of our equipment operating leases, we guarantee that the value of the equipment at the end of the term will not be less than a specified projected residual value. If the actual residual value for all equipment subject to such guarantees were to be zero, then our maximum potential liability under these guarantees would be approximately $33.9 million.$26. Under current circumstances we do not anticipate paying significant amounts under these guarantees; however, we cannot be certain that changes in market conditions or other factors will not cause the actual residual values to be lower than those currently anticipated. In accordance with FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others,” this potential liability was not reflected on our balance sheet as of September 30, 2005 and December 31, 2004 or any prior date because the leases associated with such guarantees were entered into prior to January 1, 2003. For additional information concerning lease payment obligations under our operating leases, see “—Certain Information Concerning Contractual Obligations” above.
Certain Information Concerning Trust Preferred Securities
In August 1998, a subsidiary trust of United Rentals, Inc. (“Holdings”)Holdings sold six million shares$300 of 6 1/2% Convertible Quarterly Income Preferred Securities (“trust preferred securities”) for aggregate consideration of $300 million.QUIPs. The trust used the proceeds from the sale of these securities to purchase 6 1/2% percent subordinated convertible debentures due 2028 from Holdings which resulted in Holdings receiving all of the net proceeds of the sale. The subsidiary trust that issued the trust preferred securities was consolidated with Holdings until December 31, 2003, when it was deconsolidated following the adoption of a new accounting principle. See “—Impact of Recently Issued Accounting Standards.”deconsolidated.
For periods prior to the deconsolidation, the dividends on the trust preferred securities were reflected as an expense on our consolidated statement of operations and the interest on the subordinated convertible debentures was eliminated in consolidation and thus was not reflected as an expense on our consolidated statement of operations. For periods after the deconsolidation, the dividends on the trust preferred securities are no longer reflected as an expense on our consolidated statement of operations and the interest on the subordinated convertible debentures is no longer eliminated in consolidation and thus is now reflected as an expense on our consolidated statement of operations. Because the interest on the subordinated convertible debentures corresponds to the dividends on the trust preferred securities, this change does not alter the total amount of expense required to be recorded.
Relationship Between Holdings and URI
Holdings is principally a holding company and primarily conducts its operations through its wholly owned subsidiary United Rentals (North America), Inc. (“URI”)URI and subsidiaries of URI. Holdings provides certain services to URI in connection with its operations. These services principally include: (i) senior management services, (ii) finance and tax related services and support, (iii) information technology systems and support, (iv) acquisition related services, (v) legal services, and (vi) human resource support. In addition, Holdings leases certain equipment and real property that are made available for use by URI and its subsidiaries. URI has made, and expects to continue to make, certain payments to Holdings in respect of the services provided by Holdings to URI. The expenses relating to URI’s payments to Holdings are reflected on URI’s financial statements as selling, general and administrative expenses. In addition, although not legally obligated to do so, URI has in the past made, and expects that it will in the future make, distributions to Holdings to, among other things, enable Holdings to pay interest on the convertible debentures that were issued to a subsidiary trust of Holdings as described above.
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
As discussed above,Our exposure to market risk primarily consists of (1) interest rate risk associated with our consolidated financial statements reflect (i) for periods prior to January 1, 2004, expenses related to dividends on certain trust preferred securities issued by a subsidiary trust of Holdingsvariable rate debt and (ii) for periods after January 1, 2004, expenses related to certain subordinated convertible debentures issued by Holdings to such subsidiary trust; however, the foregoing expenses are not reflected on the consolidated financial statements of URI because URI is not obligated(2) foreign currency exchange rate risk primarily associated with respect to the foregoing securities. This is the principal reason for the difference in the historical net income (loss) reported on the consolidated financial statements of URI and the net income (loss) reported on the consolidated financial statements of Holdings.
Seasonality
Our business is seasonal with demand for our rental equipment tending to be lower in the winter months. The seasonality of our business is heightened because we offer for rent traffic control equipment. Branches that rent a significant amount of this type of equipment tend to generate most of their revenues and profits in the
second and third quarters of the year, slow down during the fourth quarter and operate at a loss during the first quarter.
Inflation
Although we cannot accurately anticipate the effect of inflation on our operations, we believe that inflation has not had, and is not likely in the foreseeable future to have, a material impact on our results of operations; however, as described above, cost increases have, from time to time, impacted our results and may continue to do so in the future.
Impact of Recently Issued Accounting Standards
In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”, revised December 2003), “Consolidation of Variable Interest Entities,” which addresses consolidation of variable interest entities (“VIEs”). FIN 46 requires a VIE to be consolidated by a parent company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. A VIE is a corporation, partnership, trust or any other legal structure used for business purposes that either does not have equity investors with voting rights or has equity investors that do not provide sufficient financial resources for the entity to support its activities. The consolidation requirements of FIN 46 apply immediately to VIEs created after January 31, 2003. For entities created prior to February 1, 2003, the effective date of these requirements, which originally was July 1, 2003, was deferred so as not to apply until the first period ending after December 15, 2003. Upon adoption of this standard, as of December 31, 2003, we deconsolidated a subsidiary trust that had issued trust preferred securities as described above. As a result of such deconsolidation, (i) the trust preferred securities issued by our subsidiary trust, which had previously been reflected on our consolidated balance sheets, were removed from our consolidated balance sheets at December 31, 2003, (ii) the subordinated convertible debentures that we issued to the subsidiary trust, which previously had been eliminated in our consolidated balance sheets, were no longer eliminated in our consolidated balance sheets at December 31, 2003 and (iii) commencing January 1, 2004, the interest on the subordinated convertible debentures is reflected as interest expense on our consolidated statement of operations instead of the dividends on the trust preferred securities. The carrying amount of the trust preferred securities removed from the consolidated balance sheets was the same as the carrying amount of the subordinated convertible debentures added to the consolidated balance sheets; however, the subordinated convertible debentures are reflected as a component of liabilities on the consolidated balance sheets at September 30, 2004 and December 31, 2003, whereas the trust preferred securities were reflected as a separate category prior to December 31, 2003. The adoption of this standard did not otherwise have an effect on our statements of financial position or results ofCanadian operations.
In October 2004, the FASB ratified Emerging Issues Task Force (“EITF”) Issue No. 04-8, “The Effect of Contingently Convertible Debt on Diluted Earnings Per Share.” Their conclusion was that beginning with reporting periods ending after December 15, 2004 (i) contingently convertible debt instruments are subject to the if-converted method under SFAS No. 128, “Earnings Per Share,” regardless of the contingent features included in the instrument, and (ii) prior period earnings per share would have to be restated. Our 1 7/8% convertible notes are contingently convertible debt instruments that are potentially convertible into approximately 5.6 million shares of common stock. Under accounting rules that were in effect prior to the ratification of EITF Issue No. 04-8, such potentially issuable shares were not required to be included in our diluted earnings per share calculation. With the ratification of EITF Issue No. 04-8, we will be required to include such potentially issuable shares in our diluted earnings per share calculation beginning with our fourth quarter 2004 reporting period. We estimate that this change, when the effect is dilutive, will decrease our diluted earnings per share by approximately $0.05 per share for full-year 2004 and approximately $0.01 per share for the fourth quarter of 2004.44
Factors that May Influence Future Results and Accuracy of Forward-Looking Statements
Sensitivity to Changes in Construction and Industrial ActivitiesInterest Rate Risk
Our general rental equipment is principally used in connection with construction and industrial activities and our traffic control equipment is principally used in connection with the construction or repair of roads and
bridges and similar infrastructure projects. Weakness in our end markets, such as a decline in construction or industrial activity or a reduction in infrastructure projects, may lead to a decrease in the demand for our equipment or the prices that we can charge. Any such decrease could adversely affect our operating results by decreasing revenues and gross profit margins. For example, there were significant declines in non-residential construction activity in 2002 and 2003 and reductions in government spending on infrastructure projects in several key states. This weakness in our end markets adversely affected our results in 2002 and 2003 as discussed in our 2003 Report on Form 10-K.
We have identified below certain factors that may cause weakness in our end markets, either temporarily or long-term:
Fluctuations of Operating Results
We expect that our revenues and operating results may fluctuate from quarter to quarter or over the longer term due to a number of factors. These factors include:
Substantial Goodwill
At September 30, 2004, we had on our balance sheet net goodwill in the amount of $1,325.5 million, which represented approximately 27% of our total assets at such date. This goodwill is an intangible asset and represents the excess of the purchase price that we paid for acquired businesses over the estimated fair value of the net assets of those businesses. All of the goodwill currently on our balance sheet is associated with our
general rentals segment. We are required to test our goodwill for impairment at least annually. In general, this means that we must determine whether the fair value of the goodwill, calculated in accordance with applicable accounting standards, is at least equal to the recorded value shown on our balance sheet. If the fair value of the goodwill is less than the recorded value, we are required to write off the excess goodwill as an expense. Our results in the third quarter of 2004 were adversely affected by the write-off of approximately $139.3 million of goodwill related to our traffic control segment as described above in this Report, and our results in the preceding two years were adversely affected by significant goodwill write-offs as described in our 2003 Report on Form 10-K. Based on the current performance of our general rentals segment and current market valuations, we do not currently foresee any additional goodwill write-offs; however, we cannot be certain that a future downturn in the business or changes in market valuations will not necessitate additional write-offs in future periods.
Substantial Indebtedness
At September 30, 2004, our total indebtedness was approximately $3,142.7 million, which includes $221.6 million in subordinated convertible debentures. Our substantial indebtedness has the potential to affect us adversely in a number of ways. For example, it will or could:
Furthermore, if we are unable to service our indebtedness and fund our business, we will be forced to adopt an alternative strategy that may include:
Even if we adopt an alternative strategy, the strategy may not be successful and we may continue to be unable to service our indebtedness and fund our business.
A portion of our indebtedness bears interest at variable rates that are linked to changing market interest rates. As a result, an increase in market interest rates would increase our interest expense and our debt service obligations. At September 30, 2004, taking into account our interest rate swap agreements, we had $2,188.4 million of variable rate indebtedness; however, we have interest rate caps that limit $725 million of our variable rate indebtedness to certain maximum rates. See “Part I—Item 3—Quantitative and Qualitative Disclosure About Market Risk.”
Need to Satisfy Financial and Other Covenants in Debt Agreements
Under the agreement governing our senior secured credit facility, we are required to, among other things, satisfy certain financial tests relating to: (a) the interest coverage ratio, (b) the ratio of funded debt to cash flow, (c) the ratio of senior secured debt to tangible assets and (d) the ratio of senior secured debt to cash flow. If we are unable to satisfy any of these covenants, the lenders could elect to terminate the credit facility and require us to repay the outstanding borrowings under the credit facility. In such event, unless we are able to refinance the indebtedness coming due and replace the credit facility, we would likely not have sufficient liquidity for our
business needs and be forced to adopt an alternative strategy as described above. Even if we adopt an alternative strategy, the strategy may not be successful and we may not have sufficient liquidity for our business.
We are also subject to various other covenants under the agreements governing our credit facility and other indebtedness. These covenants limit or prohibit, among other things, our ability to incur indebtedness, make prepayments of certain indebtedness, pay dividends, make investments, create liens, make acquisitions, sell assets and engage in mergers and acquisitions. These covenants could adversely affect our operating results by significantly limiting our operating and financial flexibility.
Dependence on Additional Capital
If the cash that we generate from our business, together with cash that we may borrow under our credit facility, is not sufficient to fund our capital requirements, we will require additional debt and/or equity financing; however, we may not succeed in obtaining the requisite additional financing on terms that are satisfactory to us or at all. If we are unable to obtain sufficient additional capital in the future, we may be unable to fund the capital outlays required for the success of our business, including those relating to purchasing equipment, making acquisitions, opening new rental locations and refinancing existing indebtedness.
Certain Risks Relating to Acquisitions
We have grown in part through acquisitions and may continue to do so. We will consider potential acquisitions of varying sizes and may, on a selective basis, pursue acquisitions or consolidation opportunities involving other public companies or large privately-held companies. We expect to pay for future acquisitions using cash, capital stock, notes and/or assumption of indebtedness. To the extent that our existing sources of cash are not sufficient to fund future acquisitions, we will require additional debt or equity financing and, consequently, our indebtedness may increase as we implement our growth strategy. The making of acquisitions entails certain risks, including:
It is possible that we will not realize the expected benefits from our acquisitions or that our existing operations will be harmed as a result of acquisitions.
Dependence on Management
Our success is highly dependent on the experience and skills of our senior management team. If we lose the services of any member of this team and are unable to find a suitable replacement, we may not have the depth of senior management resources required to efficiently manage our business and execute our strategy. We do not maintain “key man” life insurance on the lives of members of senior management.
Competition
The equipment rental industry is highly fragmented and competitive. Our competitors primarily include small, independent businesses with one or two rental locations, regional competitors which operate in one or more states, public companies or divisions of public companies, and equipment vendors and dealers who both sell and rent equipment directly to customers. We may in the future encounter increased competition from our existing competitors or from new companies. Competitive pressures could adversely affect our revenues and operating results by decreasing our market share or depressing the prices that we can charge.
Dependence on Information Technology Systems
Our information technology systems facilitate our ability to monitor and control our operations and adjust to changing market conditions. Any disruptions in these systems or the failure of these systems to operate as expected could, depending on the magnitude of the problem, adversely affect our operating results by limiting our capacity to effectively monitor and control our operations and adjust to changing market conditions.
Requirements of Section 404 of the Sarbanes-Oxley Act
Under Section 404 of the Sarbanes-Oxley Act, we will be required to include in our 2004 annual report on Form 10-K our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004. We will also be required to include a report by our independent auditors which, among other things, contains the auditors’ opinion on: (i) whether such assessment by management is fairly stated in all material respects and (ii) whether our company maintained in all material respects effective internal control over financial reporting as of December 31, 2004. Under SEC rules, the existence of any “material weaknesses” in such internal control would require us to conclude that the control was ineffective.
In anticipation of these requirements, we have been reviewing our internal control over financial reporting, improving the documentation relating thereto, identifying and remediating deficiencies and developing and implementing a testing process to assess effectiveness. Based on our review to date, we believe that, as of December 31, 2004, we will have effective internal control over financial reporting and should be able to obtain an unqualified opinion from our auditors. However, we cannot be certain of a different outcome as a result of several uncertainties, including the following:
If either we or our auditors ultimately conclude that our internal control over financial reporting is not effective, the perception of our company may be adversely affected which could adversely affect the price of our securities, our access to the capital markets and/or our borrowing costs.
SEC Non-public Fact Finding Inquiry
As previously reported, the SEC has notified us that it is conducting a non-public, fact-finding inquiry of our company and has subpoenaed documents relating to certain of our accounting records. The notice from the SEC states that the inquiry does not mean that the SEC has concluded that the company or anyone else has broken the law or that the SEC has a negative opinion of any person, entity or security. We are cooperating with the SEC; however, we cannot predict the outcome of the SEC inquiry, whether the SEC will bring any proceeding relating to us or when this matter might be resolved. This matter has the potential to adversely affect us in a number of ways including:
If we are ultimately required to pay significant amounts and/or take significant corrective actions, such outcome could materially and adversely affect our results and liquidity. In addition, regardless of the outcome, the publicity surrounding the inquiry and the potential risks associated with the inquiry could negatively impact the perception of our company by investors and others which could adversely affect the price of our securities, our access to the capital markets or our borrowing costs.
Class Action Lawsuit
A class action lawsuit has been filed against us as described under “Part II—Item 1—Legal Proceedings.” We intend to defend against this action vigorously; however, we do not know what the outcome of this proceeding will be and, if we do not prevail, we may be required to pay substantial damages or settlement amounts. Furthermore, regardless of the outcome, we may incur significant defense costs, and the time and attention of our management may be diverted from normal business operations. If we are ultimately required to pay significant defense costs, damages or settlement amounts, such payments could materially and adversely affect our results to the extent not covered by our D&O insurance.
Liability and Insurance
We are exposed to various possible claims relating to our business. These possible claims include those relating to (1) personal injury or death caused by equipment rented or sold by us, (2) motor vehicle accidents involving our delivery and service personnel and (3) employment related claims. Furthermore, as described elsewhere in this Report, a class action lawsuit was recently filed against us. We carry a broad range of insurance for the protection of our assets and operations; however, such insurance may not fully protect us for a number of reasons, including:
If we are found liable for any significant claims that are not covered by insurance, our operating results could be adversely affected because our expenses related to claims would increase. It is possible that some or all of the insurance that is currently available to us will not be available in the future on economically reasonable terms or at all.
Environmental and Safety Regulations
Our operations are subject to numerous laws governing environmental protection and occupational health and safety matters. These laws regulate such issues as wastewater, stormwater, solid and hazardous wastes and materials, and air quality. Under these laws, we may be liable for, among other things, (1) the costs of investigating and remediating contamination at our sites as well as sites to which we sent hazardous wastes for disposal or treatment regardless of fault and (2) fines and penalties for non-compliance. Our operations generally
do not raise significant environmental risks, but we use hazardous materials to clean and maintain equipment, and dispose of solid and hazardous waste and wastewater from equipment washing, and store and dispense petroleum products from underground and above-ground storage tanks located at certain of our locations.
Based on the conditions currently known to us, we do not believe that any pending or likely remediation and compliance costs will have a material adverse effect on our business. We cannot be certain, however, as to the potential financial impact on our business if new adverse environmental conditions are discovered or environmental and safety requirements become more stringent. If we are required to incur environmental compliance or remediation costs that are not currently anticipated by us, our operating results could be adversely affected depending on the magnitude of the cost.
Labor Matters
We currently have approximately 1,300 employees that are represented by unions and covered by collective bargaining agreements and approximately 11,900 employees that are not represented by unions; however, various unions periodically seek to organize certain of our non-union employees. Union organizing efforts or collective bargaining negotiations could potentially lead to work stoppages, slowdowns or strikes by certain of our employees, which could adversely affect our ability to serve our customers. In addition, these efforts could negatively affect our relationship with certain customers. Furthermore, our labor costs could increase as a result of the settlement of actual or threatened labor disputes or an increase in the number of our employees covered by collective bargaining agreements.
Operations Outside the United States
Our operations in Canada and Mexico are subject to the risks normally associated with international operations. These include (1) the need to convert currencies, which could result in a gain or loss depending on fluctuations in exchange rates, (2) the need to comply with foreign laws and (3) the possibility of political or economic instability in foreign countries.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
. We periodically utilize interest rate swap agreements and interest rate cap agreements to manage our interest costs and exposure to changes in interest rates. AtAs of September 30, 2004,2005, we had swap agreements with an aggregate notional amount of $1,345 million.$1.2 billion and cap agreements with an agreement notional amount of $725. The effect of these agreementsthe swap agreement was, at September 30, 2005, to convert $1,345 million$1.2 billion of our fixed rate notes to floating rate instruments. The fixed rate notes being converted consisted of:of (i) $445 million of our 6 1/2% senior percent notes through 2012, (ii) $375 million of our 7% senior subordinated7 percent notes, through 2014, and (iii) $525 million$375 of our 7 3/4% percent senior subordinated notes through 2013.
As of September 30, 2004, we also had two interest rate cap agreements covering $725 million of debt. The first effectively limits the interest rate on $75 million of our term loan to a maximum of 6.25% through June 2007. The second agreement effectively limits the interest rate on an additional $650 million of our term loan to a maximum of 4.25% through June 2005, 5.25% through June 2006 and 6.25% through June 2007. The foregoing cap agreements would apply whenever the interest rate on the term loan (including the applicable margin spread) exceeds the applicable maximum interest rate specified by the relevant cap agreement.
As of November 1, 2004, after giving effect to our interest rate swap and cap agreements, we had an aggregate of $2,222 million$1.3 billion of indebtedness that bears interest at variable rates. This debt includes, in addition toFor this purpose, the $1,345 millionportion of debtthe term loan subject to the swap agreements described above, (i) allcap is considered fixed. The debt that is subject to fluctuations in interest rates includes $137 of borrowings under our $650 million revolving creditrevolver Canadian facility, ($131 million outstanding)$1.2 billion in swaps, and (ii) our$14 of term loan ($746 million outstanding). As described above, $725 million of our term loan isloans not subject to cap agreements.an interest rate cap. The weighted averageweighted-average effective interest rates applicable to our variable rate debt on November 1, 2004September 30, 2005 were (i) 4.88%4.8 percent for the revolving credit facility (represents the Canadian rate since the amount outstanding was Canadian borrowings), (ii) 4.17%6.1 percent for the term loan and (iii) 4.64%6.7 percent for the debt subject to our swap agreements. As of November 1, 2004,September 30, 2005, based upon the
amount of our variable rate debt outstanding, after giving effect to our interest rate swap and cap agreements, our annual earnings would decrease by approximately $9.0 million$13 for each one percentage point increase in the interest rates applicable to our variable rate debt.
The amount of our variable rate indebtedness may fluctuate significantly as a result of changes in the amount of indebtedness outstanding under our revolving credit facility and receivables securitization facility from time to time. For additional information concerning the terms of our variable rate debt, see note 98 to our notes to consolidated financial statements includedstatements.
Currency Exchange Risk.The functional currency for our Canadian operations is the Canadian dollar. As a result, our future earnings could be affected by fluctuations in our 2003 Annual Report on Form 10-K.
Market risk relating to changes in foreign currency exchanges rates were reported in Item 7Athe exchange rate between the U.S. and Canadian dollars. Based upon the level of our 2003 Annual Report on Form 10-K. There has been no materialCanadian operations during 2005 relative to the company as a whole, a 10 percent change in this market risk since the endexchange rate would not have a material impact on our earnings. In addition, we periodically enter into foreign exchange contracts to hedge our transaction exposures. We had no outstanding foreign exchange contracts as of the fiscal year 2003.September 30, 2005. We do not engage in purchasing forward exchange contracts for speculative purposes.
| Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
An evaluation has been carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and the operation of our “disclosureThe Company maintains disclosure controls and procedures” (as such term is definedprocedures that are designed to ensure that information required to be disclosed in Rules 13a-15(e)the Company’s reports under the Securities Exchange Act of 1934)1934, as of September 30, 2004. Based on such evaluation, except for the matters described below, our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2004, the disclosure controls and procedures were reasonably designed and effective at the reasonable assurance level to ensure that (i) information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii)that such information is accumulated and communicated to our management, including ourthe Company’s Chief Executive OfficerOffer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As of December 31, 2004 and September 30, 2005, the Company’s management carried out an evaluation, under the supervision and with participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on the evaluation and the identification of the material weaknesses in internal control over financial reporting described below, as well as our inability to timely file our 2004 Annual Report on Form 10-K and this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2005, the Company’s disclosure controls and procedures were not effective. In addition, as a result of the subsequent identification of material weaknesses in internal control as of December 31, 2004, as reported below and in the Company’s Annual Report on Form 10-K for 2004 filed on March 31, 2006, our Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures as of September 30, 2004 were not effective.
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In connection withlight of the preparationmaterial weaknesses in internal control described below, and as a result of the SEC inquiry and review of the Special Committee as discussed elsewhere in this Quarterly Report on Form 10-Q, we performed additional procedures to ensure that our unaudited condensed consolidated financial statements included in this report and our audited consolidated financial statements in our Annual Reports on Form 10-K for the years ended December 31, 2005 and December 31, 2004 were prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). These steps included, among other actions, expansion of our year-end closing procedures, including performing detailed analyses of accounts and review of subsequent transactions to affirm year-end account balances, and dedication of significant internal resources and external consultants to validating financial statement account balances and disclosures.
These and other procedures resulted in the identification of accounting and audit adjustments to our consolidated financial statements for the year ended December 31, 2004, which significantly delayed the filing of our Annual Report we identifiedon Form 10-K for the following significantyear ended December 31, 2004. These adjustments also required us to restate our previously filed unaudited condensed consolidated financial statements for the quarters ended March 31, June 30 and September 30, 2004, respectively, and our audited consolidated financial statements for the years ended December 31, 2003 and 2002. The restatement adjustments are further described in Note 2 to our unaudited condensed consolidated financial statements included within this Form 10-Q.
As a result of the additional procedures and related adjustments and restatements described above, management has concluded that the condensed consolidated financial statements for the periods included in this quarterly report are fairly stated, in all material respects, in accordance with GAAP.
Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. The Company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision of our Chief Executive Officer and Chief Financial Officer, our management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004. In making this assessment, management used the criteria set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of annual or interim financial statements will not be prevented or detected. In connection with management’s assessment of the effectiveness of our internal control over financial reporting: (i) instances whenreporting, we identified the accounting department didfollowing material weaknesses in internal control over financial reporting as of December 31, 2004 (and as of September 30, 2004), which had not receive timely information regarding stock compensation or vesting events, (ii) insufficient documentationbeen effectively remediated, and therefore continued to exist, as of certain steps inSeptember 30, 2005.
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Financial statement close process. Internal controls over the financial statement close process including those relating to resolution of any unreconciled differences that may arise in the close process, (iii) certain reconciliations needed to be redone outside the normal financial statement close process,were not effective and (iv) insufficient documentation to support the estimation process for our self insurance reserve. These deficiencies are indicators that the controls throughout the financial statement close process may not be designed effectively and in the aggregate constitutedrepresented a material weakness in our internal control over financial reporting. The primary factors contributing to this material weakness were:
Income taxes. Internal controls surrounding the accounting for income taxes were not effective and represented a material weakness in our internal control over financial reporting. The primary factors contributing to the material weakness in accounting for income taxes were failure to maintain tax basis balance sheets permitting effective reconciliation of cumulative book to tax differences, including book versus tax fixed asset records; failure to annually evaluate state tax rates; and failure to adequately verify data used in computations, particularly as it pertains to historical deferred tax liabilities and assets.
Self-insurance reserves. Internal controls pertaining to the self-insurance reserve estimation process were not effective and represented a material weakness in our internal control over financial reporting. The primary factors contributing to these deficiencies was a lack of effective reconciliation of claims data and evaluation of recorded liabilities associated with workers’ compensation claims and claims by third-parties for damage or injury caused by the Company.
Bulk rental assets. Internal controls regarding the manner that certain types of bulk rental assets are recorded, tracked and relieved from the accounts upon disposal or sale were not effective and represented a material weakness in our internal control over financial reporting. The primary factor contributing to the material weakness was a deficiency in the perpetual inventory system which did not provide for complete data regarding bulk rental asset quantities and unit costs, which in turn impaired the ability to compute depreciation expense, record accurate cost of sales upon disposal and to complete fully effective physical inventories of these bulk rental assets.
As a result of the material weaknesses described above, our management has concluded that the Company did not maintain effective internal control over financial reporting as of September 30, 2004. 2005 (or as of September 30, 2004).
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Remediation of Material Weaknesses in Internal Control over Financial Reporting
Material Weaknesses as of September 30, 2005
During fiscal 2005, we engaged in substantial efforts to address the material weaknesses in our internal control over financial reporting and related ineffectiveness of our disclosure controls and procedures. The following paragraphs describe the on-going changes to our internal control over financial reporting subsequent to December 31, 2004 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting:
To correct the control deficiencies in our financial statement close process, we took the following actions in 2005:
Several changes in our corporate tax function were adopted to remediate the material weakness in our accounting for income taxes as of December 31, 2005. These included procedures to ensure that the income tax provision and related tax assets and liabilities are reconciled accurately and timely; maintaining tax basis balance sheets and effective reconciliation of the cumulative book-to-tax differences, including book and tax fixed asset records; and annually evaluating the appropriate state tax rates. Additionally, the Company has enhanced communications between business unit, tax and accounting department personnel, and completed, with the assistance of consultants, a thorough analysis of historical acquisitions and other activities supporting deferred tax liabilities and assets. To further strengthen the Company’s tax function, a search for an experienced Vice President of Taxes was initiated in late 2005, with successful recruitment of this problemnew hire in January 2006.
The material weakness pertaining to our self-insurance estimation and evaluation process was remediated as of December 31, 2005 through our engaging qualified, third-party actuaries to perform actuarial calculations of the liabilities for outstanding and incurred-but-not-reported claims, and by properly analyzing and reconciling claims data recorded in the general ledger with the data used by the actuaries. These actuarial calculations incorporate appropriate actuarial assumptions and represent a substantial improvement from the former practice of estimating our liability with limited actuarial input. This more formal and complete analysis and evaluation of the estimated self-insurance liabilities is now completed semi-annually by the corporate accounting and risk management functions.
To correct the control deficiencies surrounding accounting for bulk rental assets, as of December 31, 2005 the Company completed a thorough analysis of the bulk assets accounting practices within each of our three reportable business segments, and implemented appropriate actions to ensure that the bulk asset accounting properly reflects the transactions within each segment. These actions included standardizing bulk rental asset policies and practices across all locations within each segment, modifying the inventory system and updating procedures to capture asset quantities and unit costs and to properly track bulk rental asset changes.
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We believe that we can complete thisthe foregoing actions have improved and will continue to improve our internal control over financial reporting, as well as our disclosure controls and procedures. However, the material weakness in our financial close process priorwas not remediated by December 31, 2005 and, accordingly, as reported in our Annual Report on Form 10-K for the year ended December 31, 2005 our internal control over financial reporting and our disclosure controls and procedures remain ineffective as of December 31, 2005.
The remediation efforts noted above are subject to the endCompany’s ongoing internal control assessment, testing and evaluation processes. While these remediation efforts continue, we will utilize additional analyses and other detailed procedures and other appropriate measures to assist us with meeting the objectives otherwise fulfilled by an effective internal control environment.
Material Weakness Remediated as of 2004. See “Managements’ DiscussionSeptember 30, 2005
In addition to the efforts described above to remediate material weaknesses that existed as of September 30, 2005, during fiscal 2005 we also engaged in substantial efforts to address the material weakness in our control environment as reported in our Quarterly Reports on Form 10-Q for the periods ended March 31, 2005 and June 30, 2005, which resulted in the effective remediation of this material weakness as of September 30, 2005, as described below:
Changes in Internal Control over Financial Reporting
Except as discussed above, there were no changes in our internal control over financial reporting during the quarter ended September 30, 2005 that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.
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| Item 1. | Legal Proceedings |
Item 1. Legal ProceedingsSEC Non-Public Fact Finding Inquiry and Special Committee Review
As previously reported,announced, on August 25, 2004, the Company received a letter from the SEC has notified us that it is conducting a non-public, fact-findingin which the SEC referred to an inquiry of our company and has subpoenaed documents relating tothe Company. The letter transmitted a subpoena requesting certain of our accounting records.the Company’s documents. The letter and the subpoena referred to an SEC investigation entitledIn the Matter of United Rentals, Inc. The notice from the SEC states that the inquiry does not mean that the SEC has concluded that the companyCompany or anyone else has broken the law or that the SEC has a negative opinion of any person, entity or security. As previously announced, the inquiry appears to relate to a broad range of our accounting practices and is not confined to a specific period or the matters discussed in this report.
The Company has since received additional document subpoenas from the SEC. As previously announced, in March 2005, the Company’s board of directors formed the Special Committee to review matters related to the SEC inquiry. The Special Committee retained independent counsel. The board of directors received and acted upon findings of the Special Committee on January 26, 2006. The conclusions and recommendations of the Special Committee are discussed above in note 2—Restatement, to our unaudited condensed consolidated financial statements included in this report and summarized in the Company’s press release and the related current report on Form 8-K dated January 26, 2006.
On September 27, 2004,The Company has provided documents in response to the SEC subpoenas to the SEC or to the Special Committee, which has, in turn, provided documents to the SEC. The Company is cooperating fully with the SEC in complying with the subpoenas. The Company is also responding to the SEC’s informal requests for information.
Shareholder Class Action Lawsuits and Derivative Litigation
As previously announced, following our public announcement of the SEC subpoena, ainquiry referred to above, three purported class action lawsuit waslawsuits were filed against us in the United States District Court for the District of Connecticut. The lawsuit names asplaintiff in each of the plaintiff Barry Schimmel, individually andlawsuits seeks to sue on behalf of a purported class comprised of purchasers of our securities from October 23, 2003 to August 30, 2004. The lawsuit nameslawsuits name as the defendants our company, and the following officers and/or directors of our company: Wayland Hicks (vicechairman, our vice chairman and chief executive officer), Bradley Jacobs (chairman), John Milne (presidentofficer, our former president and chief financial officer, and a director) and Joseph Sherk (vice president andour former corporate controller).controller. The complaint alleges,complaints allege, among other things, that (i) certain of our SEC filings and other public statements contained false and misleading statements which resulted in damages to the plaintiffplaintiffs and the members of the purported class when they purchased our securities and (ii)securities. On the defendants’ conductbasis of those allegations, plaintiffs in connection therewith violatedeach action assert claims (a) against all defendants under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and in the case(b) against one or more of the individual defendants under Section 20(a) of such Act. The complaints seek unspecified compensatory damages, costs and expenses. On February 1, 2005, the Court entered an order consolidating the three actions. On November 8, 2005, the Court appointed City of Pontiac Policeman’s and Fireman’s Retirement System as lead plaintiff for the purported class. The consolidated action is now entitledIn re United Rentals, Inc. Securities Litigation. The court has directed the parties to submit, by April 17, 2006, a proposed schedule for the filing of a consolidated amended complaint and responses to any amended pleading. We intend to defend against these actions vigorously.
In January 2005, an alleged shareholder filed an action in Connecticut State Superior Court, Judicial District of Norwalk/Stamford at Stamford, purportedly suing derivatively on our behalf. The action, entitledGregory Riegel v. John N. Milne, et al., names as defendants certain of our current and/or former directors and/or officers, and us as a nominal defendant. The complaint asserts, among other things, that the defendants breached their fiduciary duties to us by causing or allowing us to disseminate misleading and inaccurate information to shareholders and the market and by failing to establish and maintain adequate accounting controls, thus exposing us to damages. The complaint seeks unspecified compensatory damages, costs and expenses. We intendexpenses against the defendants. The parties to defend againsttheRiegelaction have agreed that the proceedings in this action vigorously.will be stayed pending the resolution of the anticipated motions to dismiss in the purported shareholder class actions.
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In November 2004, we received a letter from counsel for an alleged shareholder, raising allegations similar to the ones set forth in the derivative complaint described above and demanding that we take action in response to those allegations against certain of our current and/or former directors and/or officers. Following receipt of the letter, the board of directors formed a special committee of the board to consider the letter. In August 2005, this alleged shareholder commenced an action in Connecticut State Superior Court, Judicial District of Norwalk/Stamford at Stamford, purporting to sue derivatively on our behalf. The action, entitledNathan Brundridge v. Leon D. Black, et al., names as defendants certain of our current and/or former directors and/or officers, and names us as a nominal defendant. The complaint in this action asserts, among other things, that all of the defendants breached fiduciary obligations to us by causing or allowing us to disseminate misleading and inaccurate information to shareholders and the market, and by failing to establish and maintain adequate accounting controls, thus exposing us to damages. The complaint in this action also asserts a claim for unjust enrichment against our chairman, our vice chairman and chief executive officer, and our subsidiariesformer president and chief financial officer. The complaint seeks unspecified compensatory damages, equitable relief, costs and expenses against all of the defendants. The complaint also seeks an order, in connection with plaintiff’s unjust enrichment claim, directing the defendants against whom that claim is asserted to disgorge certain compensation they received from us with respect to fiscal years 2001, 2002 and 2003. The parties have agreed to submit to the court, by April 17, 2006, a proposed schedule for the filing of any amended complaint and responses to the operative complaint in the action. The parties’ agreement further provides that the time by which all defendants must answer, move or otherwise respond to the complaint shall be adjourned pending the parties’ submission of the aforementioned schedule.
In August 2005, another alleged shareholder filed an action in the United States District Court for the District of Connecticut, purporting to sue derivatively on our behalf. The action, entitledNatalie Gordon v. Wayland R. Hicks, et al., names as defendants certain of our current and/or former directors and/or officers, and names us as a nominal defendant. The complaint in this action asserts claims against each of the defendants for breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment. Each of these claims is premised on, among other things, the theory that the individual defendants caused or permitted us to disseminate misleading and inaccurate information to shareholders and to the market, and failed to establish and maintain adequate accounting controls, thus exposing us to damages. The complaint also asserts (a) a claim that a former director breached fiduciary obligations by selling shares of our common stock while in possession of material, non-public information, and (b) a claim against our chairman, our vice chairman and chief executive officer, and our former president and chief financial officer for recovery of certain incentive-based compensation under section 304 of the Sarbanes-Oxley Act. The complaint seeks unspecified compensatory damages, equitable relief, restitution, costs and expenses against all of the defendants. The complaint also seeks an order declaring that the defendants against whom the section 304 claim is directed are liable under the Sarbanes-Oxley Act and directing them to reimburse us for all bonuses or other incentive-based or equity-based compensation they received for the fiscal years 1999 through 2004. The court has directed the parties to submit, on or before April 17, 2006, a proposed schedule for the filing of any amended complaint and responses to the operative complaint in the action. Pending the submission and approval of the aforementioned schedule, the court has adjourned the time by which all defendants must answer, move, or otherwise respond to the complaint in this action.
We are also partiesa party to various other litigation matters, in most cases involving ordinary and routine claims incidental to our business. OurWe cannot estimate with certainty our ultimate legal and financial liability with respect to such pending litigation cannot be estimated with certainty butmatters. However, we believe, based on our examination of such matters, that suchour ultimate liability will not have a material adverse effect on our consolidated financial position, or results of operations.operations or cash flows.
Indemnification
The Company indemnifies its officers and directors pursuant to indemnification agreements and may in addition indemnify these individuals as permitted by Delaware law. Accordingly, in connection with the
purported class action lawsuit, three purported shareholder derivative lawsuits and the SEC inquiry and related review of Equity Securitiesthe Special Committee described above, the Company advanced counsel fees and Useother reasonable fees and expenses, actually and necessarily incurred by the present and former directors and officers who are involved, in an aggregate amount of Proceedsapproximately $2.6 during fiscal 2005. Each of the individuals is required to execute an undertaking to repay such expenses if he or she is finally found not to be entitled to indemnification.
| Item 1A. | Risk Factors |
Our results of operations and financial condition are subject to numerous risks and uncertainties described in our annual report on Form 10-K for 2005, filed on March 31, 2006, and incorporated herein by reference. You should carefully consider these risk factors in conjunction with the other information contained in this report. Should any of these risks materialize, our business, financial condition and future prospects could be negatively impacted.
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| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Issuer Purchases of Equity Securities
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs | ||||||||
7/1/04 through 7/31/04 | — | — | — | |||||||||
8/1/04 through 8/31/04 | 3,523 | (1) | $ | 19.91 | — | |||||||
9/1/04 through 9/30/04 | 8,785 | (1) | $ | 16.06 | — | |||||||
Total | 12,308 | $ | 17.16 | $ | 196,425,000 | (2) | ||||||
Period | Total Number of Shares Purchased | Average Price Paid per Share | ||||
7/1/05 through 7/31/05 | 1,749 | (1) | $ | 20.05 | ||
8/1/05 through 8/31/05 | 507,251 | (2) | 11.65 | |||
9/1/05 through 9/30/05 | 72,232 | (3) | 11.65 | |||
Total | 581,232 | |||||
| (1) | The shares were surrendered to the Company by employees in order to satisfy tax withholding obligations upon the vesting of restricted stock. These shares were not acquired pursuant to any repurchase plan or program. |
| (2) |
| (3) | On September 21, 2005, the Company exercised its right to repurchase an aggregate of 72,232 shares of common stock from |
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| Item 6. | Exhibits |
(a) Exhibits:
Exhibit Number | Description of Exhibit | ||
| 3 | (a) | Amended and Restated Certificate of Incorporation of United Rentals, Inc., | |
| 3 | (b) | Certificate of Amendment to the United Rentals, Inc. Amended and Restated Certificate of Incorporation dated, September 29, 1998 (incorporated by reference to Exhibit 4.2 to the United Rentals, Inc. Registration Statement on Form S-3, No. 333-70151) | |
| 3 | (c) | By-laws of United Rentals, Inc. | |
| 3 | (d) | Form of Certificate of Designation for Series C Perpetual Convertible Preferred Stock (incorporated by reference to exhibit 3(f) of United Rentals, Inc. Report on Form 10-Q for the quarter ended September 30, 2001) | |
| 3 | (e) | Form of Certificate of Designation for Series D Perpetual Convertible Preferred Stock (incorporated by reference to exhibit 3(g) of United Rentals, Inc. Report on Form 10-Q for the quarter ended September 30, 2001) | |
| 3 | (f) | Form of Certificate of Designation for Series E Junior Participating Preferred Stock (incorporated by reference to Exhibit A of Exhibit 4 of the United Rentals, Inc. Current | |
| 3 | (g) | Rights Agreement dated September 28, 2001 between United Rentals, Inc. and American Stock Transfer & Trust Co., as Rights Agent (incorporated by reference to Exhibit 4 | |
| 3 | (h) | Amended and Restated Certificate of Incorporation of United Rentals (North America), Inc., | |
| 3 | (i) | By-laws of United Rentals (North America), Inc., | |
| 4 | (e) | Supplement relating to the QUIPs securities (incorporated by reference to Exhibit 4.5 to United Rentals, Inc. Report on Form 8-K filed on September 23, 2005) | |
| 4 | (i) | Consent Solicitation Statement (QUIPs) (incorporated by reference to Exhibit 99.4 to United Rentals, Inc. Report on Form 8-K filed on August 22, 2005) | |
| 4 | (j) | Consent Form (QUIPs) (incorporated by reference to Exhibit 99.5 to United Rentals, Inc. Report on Form 8-K filed on August 22, 2005) | |
| 4 | (k) | Consent Solicitation Statement (QUIPs) (incorporated by reference to Exhibit 99.4 to United Rentals, Inc. Report on Form 8-K filed on September 12, 2005) | |
| 4 | (l) | Consent Form (QUIPs) (incorporated by reference to Exhibit 99.5 to United Rentals, Inc. Report on Form 8-K filed on September 12, 2005) | |
| 4 | (n) | Supplemental Indenture relating to 1 7/8 percent Convertible Senior Subordinated Notes due 2023 (incorporated by reference to Exhibit 4.4 to United Rentals, Inc. Report on Form 8-K filed on September 23, 2005) | |
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Exhibit Number | Description of Exhibit | ||
| 4 | (p) | Supplemental Indenture relating to 7 3/4 percent Senior Subordinated Notes due 2013 (incorporated by reference to Exhibit 4.2 to United Rentals, Inc. Report on Form 8-K filed on September 23, 2005) | |
| 4 | (r) | Supplemental Indenture relating to 7 percent Senior Subordinated Notes due 2014 (incorporated by reference to Exhibit 4.3 to United Rentals, Inc. Report on Form 8-K filed on September 23, 2005) | |
| 4 | (t) | Supplemental Indenture relating to 6 1/2 percent Senior Notes due 2012 (incorporated by reference to Exhibit 4.1 to United Rentals, Inc. Report on Form 8-K filed on September 23, 2005) | |
| 4 | (u) | Consent Solicitation Statement (Senior Notes, Senior Subordinated Notes, and Convertible Senior Subordinated Notes) (incorporated by reference to Exhibit 99.2 to United Rentals, Inc. Report on Form 8-K filed on August 22, 2005) | |
| 4 | (v) | Consent Form (Senior Notes, Senior Subordinated Notes, and Convertible Senior Subordinated Notes) (incorporated by reference to Exhibit 99.3 to United Rentals, Inc. Report on Form 8-K filed on August 22, 2005) | |
| 4 | (w) | Consent Solicitation Statement (Senior Notes, Senior Subordinated Notes, and Convertible Senior Subordinated Notes) (incorporated by reference to Exhibit 99.2 to United Rentals, Inc. Report on Form 8-K filed on September 12, 2005) | |
| 4 | (x) | Consent Form (Senior Notes, Senior Subordinated Notes, and Convertible Senior Subordinated Notes) (incorporated by reference to Exhibit 99.3 to United Rentals, Inc. Report on Form 8-K filed on September 12, 2005) | |
| 10 | (u) | Amendment Agreement dated as of August 22, 2005, between United Rentals, Inc., and Joseph Ehrenreich (incorporated by reference to exhibit 99.1 of the United Rentals, Inc. Report on Form | |
| 10 | |||
| 10 | Agreement dated as of September 22, 2005, between United Rentals, Inc. and Michael Kneeland (incorporated by reference to exhibit 99.1 of the United Rentals, Inc. Report on Form 8-K filed September 23, 2005)‡ | ||
| 10 | (ii) | Agreement dated as of September 22, 2005, between United Rentals, Inc. and Joseph Sherk (incorporated by reference to exhibit 99.2 of the United Rentals, Inc. Report on Form 8-K filed September 23, 2005)‡ | |
| 10 | (oo) | Indemnification Agreement, dated as of September | |
| 10 | |||
August 24, 2005)‡ | |||
| 10 | |||
| 31 | (a)* | Rule 13a-14(a) Certification by Chief Executive Officer | |
| 31 | (b)* | Rule 13a-14(a) Certification by Chief Financial Officer | |
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Exhibit Number | Description of Exhibit | ||
| 32 | (a)* | Section 1350 Certification by Chief Executive Officer | |
| 32 | (b)* | Section 1350 Certification by Chief Financial Officer | |
| Filed herewith. |
| ‡ | This document is a management contract or compensatory plan or arrangement. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, each registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
UNITED RENTALS, INC. | ||||||||
| Dated: | April 12, 2006 | By: | /s/ MARTIN E. WELCH III | |||||
Chief Financial Officer (Principal Financial and Accounting Officer) | ||||||||
UNITED RENTALS (NORTH AMERICA), INC. | ||||||||
Dated: | April 12, 2006 | By: | /s/ | |||||
(Principal Financial | ||||||||
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