UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended JuneSeptember 30, 2006
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 1-14387
United Rentals, Inc.
Commission File Number 1-13663
United Rentals (North America), Inc.
(Exact Names of Registrants as Specified in Their Charters)
Delaware Delaware | 06-1522496 06-1493538 | |
(States of Incorporation) | (I.R.S. Employer Identification Nos.) | |
Five Greenwich Office Park, Greenwich, Connecticut | 06831 | |
(Address of Principal Executive Offices) | (Zip code) |
Registrants’ telephone number, including area code: (203) 622-3131
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ 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 a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes þ No
As of August 4,October 20, 2006, there were 80,605,38081,109,020 shares of United Rentals, Inc. 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) (a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format permitted by such instruction.
UNITED RENTALS, INC.
UNITED RENTALS (NORTH AMERICA), INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNESEPTEMBER 30, 2006
Page | ||||||
PART I | ||||||
Item 1 | Unaudited Condensed Consolidated Financial | |||||
3 | ||||||
4 | ||||||
5 | ||||||
6 | ||||||
Notes to Unaudited Condensed Consolidated Financial Statements | 7 | |||||
Item 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||||
Item 3 | ||||||
Item 4 | ||||||
PART II | ||||||
Item 1 | ||||||
Item 1A | ||||||
Item 2 | ||||||
| ||||||
Item 6 | ||||||
Item 1. | Financial Statements |
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in millions, except per share data and unless otherwise indicated)
June 30, 2006 | June 30, 2005 | December 31, 2005 | September 30, 2006 | September 30, 2005 | December 31, 2005 | ||||||||||||||||||
ASSETS | |||||||||||||||||||||||
Cash and cash equivalents | $ | 208 | $ | 254 | $ | 316 | $ | 140 | $ | 151 | $ | 316 | |||||||||||
Accounts receivable, net of allowance for doubtful accounts of $43 on June 30, 2006, $42 on June 30, 2005 and $45 on December 31, 2005 | 566 | 517 | 572 | ||||||||||||||||||||
Accounts receivable, net of allowance for doubtful accounts of $40 on September 30, 2006, $43 on September 30, 2005 and $45 on December 31, 2005 | 615 | 584 | 572 | ||||||||||||||||||||
Inventory | 195 | 178 | 174 | 174 | 180 | 174 | |||||||||||||||||
Prepaid expenses and other assets | 140 | 120 | 154 | 123 | 158 | 154 | |||||||||||||||||
Rental equipment, net | 2,587 | 2,283 | 2,252 | 2,688 | 2,443 | 2,351 | |||||||||||||||||
Property and equipment, net | 462 | 415 | 445 | 378 | 338 | 346 | |||||||||||||||||
Goodwill | 1,341 | 1,291 | 1,328 | 1,340 | 1,300 | 1,328 | |||||||||||||||||
Other intangible assets, net | 31 | 35 | 33 | 30 | 34 | 33 | |||||||||||||||||
$ | 5,488 | $ | 5,188 | $ | 5,274 | ||||||||||||||||||
$ | 5,530 | $ | 5,093 | $ | 5,274 | ||||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||||||||||||||
Liabilities: | |||||||||||||||||||||||
Accounts payable | $ | 284 | $ | 336 | $ | 211 | $ | 267 | $ | 243 | $ | 211 | |||||||||||
Accrued expenses and other liabilities | 435 | 304 | 420 | 423 | 367 | 420 | |||||||||||||||||
Debt | 2,894 | 2,954 | 2,930 | 2,798 | 2,936 | 2,930 | |||||||||||||||||
Subordinated convertible debentures | 222 | 222 | 222 | 159 | 222 | 222 | |||||||||||||||||
Deferred taxes | 293 | 187 | 262 | 340 | 239 | 262 | |||||||||||||||||
Total liabilities | 4,128 | 4,003 | 4,045 | 3,987 | 4,007 | 4,045 | |||||||||||||||||
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, 80,620,652 shares issued and outstanding on June 30, 2006, 78,011,621 shares issued and outstanding on June 30, 2005 and 77,302,915 shares issued and outstanding on December 31, 2005 | 1 | 1 | 1 | ||||||||||||||||||||
Common stock—$.01 par value, 500,000,000 shares authorized, 80,570,247 shares issued and outstanding on September 30, 2006, 77,443,139 shares issued and outstanding on September 30, 2005 and 77,302,915 shares issued and outstanding on December 31, 2005 | 1 | 1 | 1 | ||||||||||||||||||||
Additional paid-in capital | 1,417 | 1,352 | 1,345 | 1,424 | 1,349 | 1,345 | |||||||||||||||||
Deferred compensation | — | (17 | ) | (12 | ) | — | (15 | ) | (12 | ) | |||||||||||||
Accumulated deficit | (79 | ) | (280 | ) | (155 | ) | |||||||||||||||||
Retained earnings (accumulated deficit) | 16 | (204 | ) | (155 | ) | ||||||||||||||||||
Accumulated other comprehensive income | 63 | 34 | 50 | 60 | 50 | 50 | |||||||||||||||||
Total stockholders’ equity | 1,402 | 1,090 | 1,229 | 1,501 | 1,181 | 1,229 | |||||||||||||||||
$ | 5,530 | $ | 5,093 | $ | 5,274 | $ | 5,488 | $ | 5,188 | $ | 5,274 | ||||||||||||
See accompanying notes.
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(InDollars in millions, except per share data and unless otherwise indicated)
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||
2006 | 2005 | 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | ||||||||||||||||||||
Revenues: | |||||||||||||||||||||||||||
Equipment rentals | $ | 698 | $ | 627 | $ | 1,289 | $ | 1,141 | $ | 773 | $ | 737 | $ | 2,061 | $ | 1,877 | |||||||||||
Sales of rental equipment | 85 | 87 | 163 | 167 | 87 | 61 | 250 | 228 | |||||||||||||||||||
New equipment sales | 62 | 55 | 114 | 96 | 60 | 55 | 174 | 151 | |||||||||||||||||||
Contractor supplies sales | 109 | 85 | 197 | 149 | 109 | 89 | 306 | 238 | |||||||||||||||||||
Service and other revenues | 41 | 34 | 78 | 67 | 41 | 37 | 119 | 104 | |||||||||||||||||||
Total revenues | 995 | 888 | 1,841 | 1,620 | 1,070 | 979 | 2,910 | 2,598 | |||||||||||||||||||
Cost of revenues: | |||||||||||||||||||||||||||
Cost of equipment rentals, excluding depreciation | 340 | 320 | 646 | 601 | 354 | 354 | 1,000 | 955 | |||||||||||||||||||
Depreciation of rental equipment | 99 | 95 | 195 | 189 | 112 | 103 | 319 | 303 | |||||||||||||||||||
Cost of rental equipment sales | 59 | 65 | 113 | 122 | 60 | 43 | 173 | 165 | |||||||||||||||||||
Cost of new equipment sales | 51 | 45 | 94 | 79 | 49 | 45 | 143 | 124 | |||||||||||||||||||
Cost of contractor supplies sales | 89 | 64 | 160 | 112 | 86 | 69 | 246 | 181 | |||||||||||||||||||
Cost of service and other revenue | 19 | 16 | 38 | 32 | 19 | 20 | 57 | 52 | |||||||||||||||||||
Total cost of revenues | 657 | 605 | 1,246 | 1,135 | 680 | 634 | 1,938 | 1,780 | |||||||||||||||||||
Gross profit | 338 | 283 | 595 | 485 | 390 | 345 | 972 | 818 | |||||||||||||||||||
Selling, general and administrative expenses | 164 | 136 | 317 | 258 | 164 | 162 | 480 | 419 | |||||||||||||||||||
Non-rental depreciation and amortization | 24 | 15 | 40 | 29 | 10 | 10 | 38 | 28 | |||||||||||||||||||
Operating income | 150 | 132 | 238 | 198 | 216 | 173 | 454 | 371 | |||||||||||||||||||
Interest expense, net | 52 | 43 | 102 | 86 | 58 | 48 | 160 | 134 | |||||||||||||||||||
Interest expense—subordinated convertible debentures | 3 | 4 | 7 | 8 | 4 | 4 | 11 | 12 | |||||||||||||||||||
Other (income) expense, net | (1 | ) | 3 | — | 3 | — | (5 | ) | — | (2 | ) | ||||||||||||||||
Income before provision for income taxes | 96 | 82 | 129 | 101 | 154 | 126 | 283 | 227 | |||||||||||||||||||
Provision for income taxes | 40 | 32 | 53 | 39 | 59 | 50 | 112 | 89 | |||||||||||||||||||
Net income | $ | 56 | $ | 50 | $ | 76 | $ | 62 | $ | 95 | $ | 76 | $ | 171 | $ | 138 | |||||||||||
Earnings per share—basic: | |||||||||||||||||||||||||||
Income available to common stockholders | $ | 0.58 | $ | 0.53 | $ | 0.80 | $ | 0.65 | $ | 0.97 | $ | 0.80 | $ | 1.77 | $ | 1.45 | |||||||||||
Earnings per share—diluted: | |||||||||||||||||||||||||||
Income available to common stockholders | $ | 0.51 | $ | 0.48 | $ | 0.71 | $ | 0.60 | $ | 0.85 | $ | 0.71 | $ | 1.56 | $ | 1.32 | |||||||||||
See accompanying notes.
4
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)
(In millions)
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 | Series C Perpetual Convertible Preferred Stock | Series D Perpetual Convertible Preferred Stock | Common Stock | Additional Paid-in Capital | Deferred Compensation | Retained Earnings / (Accumulated Deficit) | Comprehensive Income | Accumulated Other Comprehensive Income | |||||||||||||||||||||||||||||||||||||||||||||
Number of Shares | Amount | Number of Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2005 | $ | — | $ | — | 77 | $ | 1 | $ | 1,345 | $ | (12 | ) | $ | (155 | ) | $ | 50 | $ | — | $ | — | 77 | $ | 1 | $ | 1,345 | $ | (12 | ) | $ | (155 | ) | $ | 50 | ||||||||||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | 76 | 76 | 171 | $ | 171 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | 11 | 11 | 11 | 11 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivatives qualifying as hedges, net of tax of $1 | 2 | 2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivatives qualifying as hedges, net of tax of ($1) | (1 | ) | (1 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income | $ | 89 | $ | 181 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Reclassification of unearned stock compensation in connection with adoption of FAS 123(R) | (12 | ) | 12 | (12 | ) | 12 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exercise of common stock options and warrants | 4 | 63 | 4 | 64 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Tax benefit on vesting of restricted stock and exercise of stock options | 18 | 18 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Amortization of stock compensation | 11 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | 3 | (2 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, June 30, 2006 | $ | — | $ | — | 81 | $ | 1 | $ | 1,417 | $ | — | $ | (79 | ) | $ | 63 | ||||||||||||||||||||||||||||||||||||||||||||
Balance, September 30, 2006 | $ | — | $ | — | 81 | $ | 1 | $ | 1,424 | $ | — | $ | 16 | $ | 60 | |||||||||||||||||||||||||||||||||||||||||||||
5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(InDollars in millions)
Six Months Ended June 30, | Nine Months Ended September 30, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Cash Flows From Operating Activities: | ||||||||||||||||
Net income | $ | 76 | $ | 62 | $ | 171 | $ | 138 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Depreciation and amortization | 239 | 221 | 365 | 336 | ||||||||||||
Gain on sales of rental equipment | (50 | ) | (45 | ) | (77 | ) | (63 | ) | ||||||||
Gain on sales of non-rental equipment | (2 | ) | (1 | ) | (4 | ) | (2 | ) | ||||||||
Write-off of deferred financing fees and unamortized premiums on interest rate caps | 8 | — | ||||||||||||||
Non-cash adjustments to equipment | 11 | 19 | 17 | 21 | ||||||||||||
Amortization of deferred compensation | 5 | 5 | 11 | 6 | ||||||||||||
Increase in deferred taxes | 43 | 38 | 92 | 87 | ||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable | 8 | (28 | ) | (42 | ) | (95 | ) | |||||||||
Inventory | (21 | ) | (60 | ) | 1 | (62 | ) | |||||||||
Prepaid expenses and other assets | 9 | (6 | ) | 11 | (7 | ) | ||||||||||
Accounts payable | 73 | 119 | 56 | 26 | ||||||||||||
Accrued expenses and other liabilities | (22 | ) | (6 | ) | (3 | ) | 29 | |||||||||
Net cash provided by operating activities | 369 | 318 | 606 | 414 | ||||||||||||
Cash Flows From Investing Activities: | ||||||||||||||||
Purchases of rental equipment | (612 | ) | (484 | ) | (770 | ) | (680 | ) | ||||||||
Purchases of non-rental equipment | (47 | ) | (32 | ) | (81 | ) | (56 | ) | ||||||||
Proceeds from sales of rental equipment | 163 | 167 | 250 | 228 | ||||||||||||
Proceeds from sales of non-rental equipment | 11 | 7 | 14 | 9 | ||||||||||||
Purchases of other companies | (39 | ) | (3 | ) | (39 | ) | (3 | ) | ||||||||
Proceeds from sales of branches | — | 3 | ||||||||||||||
Proceeds from sales of rental locations | — | 2 | ||||||||||||||
Net cash used in investing activities | (524 | ) | (342 | ) | (626 | ) | (500 | ) | ||||||||
Cash Flows From Financing Activities: | ||||||||||||||||
Payments of debt | (15 | ) | (25 | ) | ||||||||||||
Cash proceeds from borrowings under credit facility | 65 | — | ||||||||||||||
Cash proceeds from borrowings under accounts receivable securitization facility | 200 | — | ||||||||||||||
Payments of financing costs | — | (34 | ) | |||||||||||||
Payments of debt, including $400 prepayment of term loan in 2006 | (423 | ) | (32 | ) | ||||||||||||
Company-obligated mandatorily redeemable convertible securities of a subsidiary trust repurchased and retired, including premium paid of $1 | (64 | ) | — | |||||||||||||
Proceeds from the exercise of common stock options | 63 | 2 | 64 | 1 | ||||||||||||
Proceeds received in conjunction with partial termination of interest rate caps | 3 | — | ||||||||||||||
Other | (1 | ) | (1 | ) | (1 | ) | (2 | ) | ||||||||
Net cash provided by (used in) financing activities | 47 | (24 | ) | |||||||||||||
Net cash used in financing activities | (156 | ) | (67 | ) | ||||||||||||
Effect of foreign exchange rates | — | (1 | ) | — | 1 | |||||||||||
Net decrease in cash and cash equivalents | (108 | ) | (49 | ) | (176 | ) | (152 | ) | ||||||||
Cash and cash equivalents at beginning of period | 316 | 303 | 316 | 303 | ||||||||||||
Cash and cash equivalents at end of period | $ | 208 | $ | 254 | $ | 140 | $ | 151 | ||||||||
See accompanying notes.
6
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data and unless otherwise indicated)
1. Organization and Basis of Presentation
General
United Rentals, Inc. (“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. (“URNA”), and subsidiaries of URNA. Holdings’ primary asset is its ownership of all of the issued and outstanding shares of common stock of URNA. URNA’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 services. 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 financial statements in accordance with the accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2005 (the “2005 Form 10-K”) and the interim reporting requirements of Form 10-Q. Accordingly, certain information and 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 2005 Form 10-K. Certain reclassifications have been made to prior year financial information to conform to the current year presentation. These reclassifications include the reclassification of the amortization of deferred financing costs from Non-rental depreciation and amortization to Interest expense, net, the reclassification of certain customer rebates from Selling, general and administrative expenses to contra revenue and the reclassification of the depreciation expense for certain vehicles from Non-rental depreciation and amortization to Depreciation of rental equipment.
In our opinion, all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair statement of financial position, operating results and cash flows for the interim periods presented have been made. Interim results of operations are not necessarily indicative of the results of the full year.
In August 2004, we received notice from the SEC that it 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 (the “Special Committee”) 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 our 2005 Form 10-K.
Recent Accounting Changes and New Accounting Standards
Effective January 1, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment” (“FAS 123(R)”), which is an amendment of SFAS No. 123, “Accounting for Stock-Based Compensation,”Compensation” (“FAS123”), using the modified prospective transition method, and therefore we did not restate the results of prior periods.
The effect of adopting FAS 123(R) on our net income for the three and sixnine months ended JuneSeptember 30, 2006 was not material. FAS 123(R) requires that cash flows from tax benefits resulting from tax deductions in
7
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share data and unless otherwise indicated)
excess of the compensation cost recognized for stock-based awards (“excess tax benefits”) be classified as financing cash flows prospectively from January 1, 2006. Prior to the adoption of FAS 123(R), such excess tax benefits were presented as operating cash flows.
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share data and unless otherwise indicated)
Refer to notes 2 and 14 in our 2005 Form 10-K for further information regarding our adoption of FAS 123(R) and our stock-based compensation arrangements, including related disclosures required upon the adoption of FAS 123(R).
Restricted stock awards are issued at the fair value of the stock on the grant date. Prior to the adoption of FAS 123(R), unearned compensation for grants of restricted stock equivalent to the fair value of the shares at the date of grant was recorded as a separate component of shareholders’stockholders’ equity and subsequently amortized to compensation expense over the awards’ vesting period. In accordance with FAS 123(R), shareholders’stockholders’ equity is credited commensurate with the recognition of compensation expense. All unamortized unearned compensation at January 1, 2006 was reclassified to additional paid-in capital.
Prior to January 1, 2006, in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” we did not recognize compensation expense relating to employee stock options because the exercise price was equal to or greater than the market price at the date of grant. If we had elected to recognize compensation expense using a fair value approach as required by FAS 123, our pro forma income and earnings per share for the three and sixnine months ended JuneSeptember 30, 2005 would have been as follows:
Three Months Ended June 30, 2005 | Six Months Ended June 30, 2005 | Three Months Ended September 30, 2005 | Nine Months Ended September 30, 2005 | |||||||||||||
Net income as reported | $ | 50 | $ | 62 | $ | 76 | $ | 138 | ||||||||
Plus: Stock-based compensation expense included in reported net income, net of tax | 2 | 4 | — | 4 | ||||||||||||
Less: Stock-based compensation expense determined using the fair value method, net of tax | (2 | ) | (4 | ) | (1 | ) | (5 | ) | ||||||||
Pro forma net income | $ | 50 | $ | 62 | $ | 75 | $ | 137 | ||||||||
Basic earnings per share: | ||||||||||||||||
As reported | $ | 0.53 | $ | 0.65 | $ | 0.80 | $ | 1.45 | ||||||||
Pro forma | $ | 0.53 | $ | 0.65 | $ | 0.79 | $ | 1.45 | ||||||||
Diluted earnings per share: | ||||||||||||||||
As reported | $ | 0.48 | $ | 0.60 | $ | 0.71 | $ | 1.32 | ||||||||
Pro forma | $ | 0.48 | $ | 0.60 | $ | 0.70 | $ | 1.32 |
In June 2006, the FASBFinancial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (an interpretation of FAS 109, “Accounting for Income Taxes”), which is effective for fiscal years beginning after December 15, 2006 with earlier adoption encouraged. This interpretation was issued to clarify the accounting for uncertainty in income taxes recognized in the financial statements by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We are currently evaluating the potential impact of this interpretation.
In September 2006, the FASB issued SFAS No. 157 “ Fair Value Measurements,” which is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. This statement provides a single definition of fair value, together with a framework for measuring it, and requires new additional disclosure about the use of fair value to measure assets and liabilities. This statement also emphasizes that fair value is a
8
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share data and unless otherwise indicated)
market-based measurement, not an entity-specific measurement, and sets out a fair value hierarchy with the highest priority being quoted prices in active markets. While this statement does not add any new fair value measurements, it may change current practice. We are currently evaluating the potential impact of this statement.
2. Segment Information
Our reportable segments are general rentals, trench safety, pump and power and traffic control. 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
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share data and 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 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. All three reporting segments generate revenues from equipment rentals as well as the sale of new and used equipment and related contractor supplies. Our external segment reporting is aligned with the manner in which management evaluates and allocates resources. We evaluate segment performance based on segment operating results.
Operating segment financial information for the three and sixnine months ended JuneSeptember 30, 2006 and 2005 were as follows:
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||
2006 | 2005 | 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | ||||||||||||||||||||||||
Total revenues: | |||||||||||||||||||||||||||||||
General rentals | $ | 865 | $ | 771 | $ | 1,615 | $ | 1,425 | $ | 921 | $ | 844 | $ | 2,535 | $ | 2,268 | |||||||||||||||
Trench safety, pump and power | 55 | 44 | 104 | 78 | 62 | 52 | 166 | 130 | |||||||||||||||||||||||
Traffic control | 75 | 73 | 122 | 117 | 87 | 83 | 209 | 200 | |||||||||||||||||||||||
Total revenues | $ | 995 | $ | 888 | $ | 1,841 | $ | 1,620 | $ | 1,070 | $ | 979 | $ | 2,910 | $ | 2,598 | |||||||||||||||
Total depreciation and amortization expense: | |||||||||||||||||||||||||||||||
General rentals | $ | 111 | $ | 99 | $ | 213 | $ | 196 | $ | 111 | $ | 104 | $ | 324 | $ | 300 | |||||||||||||||
Trench safety, pump and power | 6 | 5 | 11 | 10 | 6 | 4 | 17 | 14 | |||||||||||||||||||||||
Traffic control | 6 | 6 | 11 | 12 | 5 | 5 | 16 | 17 | |||||||||||||||||||||||
Total depreciation and amortization expense | $ | 123 | $ | 110 | $ | 235 | $ | 218 | $ | 122 | $ | 113 | $ | 357 | $ | 331 | |||||||||||||||
Segment operating income (loss): | |||||||||||||||||||||||||||||||
General rentals | $ | 142 | $ | 123 | $ | 224 | $ | 194 | $ | 190 | $ | 156 | $ | 414 | $ | 350 | |||||||||||||||
Trench safety, pump and power | 13 | 11 | 26 | 17 | 18 | 18 | 44 | 35 | |||||||||||||||||||||||
Traffic control | (5 | ) | (2 | ) | (12 | ) | (13 | ) | 8 | (1 | ) | (4 | ) | (14 | ) | ||||||||||||||||
Segment operating income | $ | 150 | $ | 132 | $ | 238 | $ | 198 | $ | 216 | $ | 173 | $ | 454 | $ | 371 | |||||||||||||||
Total capital expenditures: | |||||||||||||||||||||||||||||||
General rentals | $ | 370 | $ | 336 | $ | 623 | $ | 488 | $ | 177 | $ | 201 | $ | 800 | $ | 687 | |||||||||||||||
Trench safety, pump and power | 21 | 11 | 29 | 19 | 11 | 14 | 40 | 33 | |||||||||||||||||||||||
Traffic control | 4 | 4 | 7 | 9 | 4 | 6 | 11 | 16 | |||||||||||||||||||||||
Total capital expenditures | $ | 395 | $ | 351 | $ | 659 | $ | 516 | $ | 192 | $ | 221 | $ | 851 | $ | 736 | |||||||||||||||
June 30, 2006 | June 30, 2005 | December 31, 2005 | |||||||
Total assets: | |||||||||
General rentals | $ | 5,222 | $ | 4,802 | $ | 4,929 | |||
Trench safety, pump and power | 148 | 107 | 116 | ||||||
Traffic control | 160 | 184 | 229 | ||||||
Total assets | $ | 5,530 | $ | 5,093 | $ | 5,274 | |||
9
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share data and unless otherwise indicated)
September 30, 2006 | September 30, 2005 | December 31, 2005 | |||||||
Total assets: | |||||||||
General rentals | $ | 5,171 | $ | 4,811 | $ | 4,929 | |||
Trench safety, pump and power | 157 | 123 | 116 | ||||||
Traffic control | 160 | 254 | 229 | ||||||
Total assets | $ | 5,488 | $ | 5,188 | $ | 5,274 | |||
3. Acquisitions
We completed two acquisitions during the sixnine months ended JuneSeptember 30, 2006 and none during the sixnine months ended JuneSeptember 30, 2005. The results of operations of the businesses acquired in these acquisitions have been included in our results of operations from the respective acquisition dates. In March 2006, we acquired the equipment and sales assets of Handy Rent-All Center, which had annual revenues of approximately $16. The aggregate purchase price for this acquisition was approximately $23. In June 2006, we acquired the equipment and sales assets of D. Larry Carter, Inc., which had annual revenues of approximately $10. The aggregate purchase price for this acquisition was approximately $18. Pro forma results of operations giving effect to these acquisitions would not vary materially from our historical results.
The purchase price for these acquisitions has been allocated to the assets acquired and liabilities assumed based on their fair values at the respective acquisition dates. Purchase price allocations are subject to change when additional information concerning asset and liability valuations is 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 twelve months of the acquisition date and are not expected to result in significant differences between the preliminary and final allocations.
4. Goodwill and Other Intangible Assets
The carrying amount of the Company’s goodwill was $1,341$1,340 at JuneSeptember 30, 2006, $1,291$1,300 at JuneSeptember 30, 2005 and $1,328 at December 31, 2005. We review our goodwill for impairment annually as of a scheduled review date. However, if events or circumstances suggest that goodwill could be impaired, we may conduct an earlier review. The scheduled review date is October 1 of each year.
Prior to January 1, 2004, we tested for goodwill impairment on a branch-by-branch basis. Accordingly, a goodwill write-off was required even if only one or a limited number of our branches had an impairment as of the testing date and even if there was no impairment for all our branches on an aggregate basis. Commencing January 1, 2004, we began testing for goodwill impairment at a regional, rather than a branch, level. We began testing for impairment at this level because SFAS No. 142, “Goodwill and Other Intangible Assets” requires that goodwill impairment testing be performed at the reporting unit level. In 2004, following a reorganization of our reporting structure, our regions became our reporting units. As disclosed in our 2005 Form 10-K, this change in reporting units may impact future goodwill impairment analyses because there are substantially fewer regions (nine) than there are branches (in excess of 700). In the third quarter of 2006, there was a further reorganization of our reporting structure. As a result of this change, which has no impact on our reporting segments, we now have twelve regions rather than nine. Our regions are still our reporting units.
Other intangible assets consist of customer relationships and non-compete agreements and are amortized over periods ranging from three to twelve years. Amortization expense for other intangible assets was $1 for the
10
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share data and unless otherwise indicated)
three months ended JuneSeptember 30, 2006 and 2005 and $2$3 for the sixnine months ended JuneSeptember 30, 2006 and 2005. The cost of other intangible assets and the related accumulated amortization as of JuneSeptember 30, 2006 was as follows:$61 and $(31) respectively.
5. Debt and Subordinated Convertible Debentures
Debt consists of the following:
June 30, 2006 | ||||
Gross carrying amount | $ | 62 | ||
Accumulated amortization | (31 | ) | ||
Net amount | $ | 31 | ||
September 30, 2006 | September 30, 2005 | December 31, 2005 | |||||||
Credit Facility | $ | 208 | $ | 137 | $ | 137 | |||
Term Loan | 331 | 739 | 737 | ||||||
7 3/4 percent Senior Subordinated Notes | 525 | 525 | 525 | ||||||
7 percent Senior Subordinated Notes | 375 | 375 | 375 | ||||||
6 1/2 percent Senior Notes | 1,000 | 1,000 | 1,000 | ||||||
1 7/8 percent Convertible Senior Subordinated Notes | 144 | 144 | 144 | ||||||
Accounts Receivable Securitization Facility | 200 | — | — | ||||||
Other | 15 | 16 | 12 | ||||||
$ | 2,798 | $ | 2,936 | $ | 2,930 | ||||
During the third quarter of 2006, we prepaid $400 of our outstanding term loan using $200 of available cash and $200 borrowed under our accounts receivable securitization facility. Amounts repaid in respect of the term loan may not be reborrowed. Contemporaneous with this term loan prepayment, we terminated a portion of our interest rate caps that were hedging our interest rate exposures on the term loan. In conjunction with the termination of a portion of these interest rate caps which are designated as cash flow hedges, we recognized a pre-tax gain of $3.2 which is classified in Interest expense, net, in the accompanying unaudited condensed consolidated statements of operations. Additionally, in conjunction with this prepayment, we recorded a pre-tax charge of $2.6 related to the write-off of a portion of the unamortized premium associated with these caps. Finally, an additional pre-tax charge of $2.6 was recorded related to the partial write-off of deferred financing costs associated with the term loan. These charges were also recorded in Interest expense, net, in the accompanying unaudited condensed consolidated statements of operations. The Company’s accounts receivable securitization facility is fully drawn as of September 30, 2006.
5.Subordinated Convertible Debentures
Subordinated Convertible Debentures consist of the following:
September 30, 2006 | September 30, 2005 | December 31, 2005 | |||||||
$ | 159 | $ | 222 | $ | 222 |
The subordinated convertible debentures included in our unaudited condensed consolidated balance sheets reflect the obligation to our subsidiary trust that has issued 6 1/2% Convertible Quarterly Income Preferred Securities (“QUIPS”). This subsidiary trust is not consolidated in our financial statements because we are not the primary beneficiary of the trust. During the third quarter of 2006, we announced the redemption of $63 of QUIPS. The redemption price was 101.3%. In conjunction with the redemption, we retired $63 of our subordinated convertible debentures. This redemption was funded with the proceeds of stock option exercises received during 2006. In conjunction with this transaction, during the third quarter of 2006, we recorded a pre-tax
11
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share data and unless otherwise indicated)
charge of $3 related to the write-off of a portion of certain deferred financing costs. This charge is included in Interest expense, net, in the accompanying unaudited condensed consolidated statements of operations. Additionally, we recorded a pre-tax charge of $0.8 related to the redemption premium. This charge is included in Other (income) expense, net, in the accompanying unaudited condensed consolidated statements of operations. In October 2006, we announced the redemption, effective November 30, 2006, of an additional $12.7 of QUIPS.
6. Legal and Regulatory Matters
SEC Non-Public Fact Finding Inquiry and Special Committee Review
As previously announced, on August 25, 2004, the Company received a letter from the SEC in which the SEC referred to an inquiry of the Company. The letter transmitted a subpoena requesting certain of 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 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 the Company’s accounting practices and is not confined to a specific period.
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share data and unless otherwise indicated)
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 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 our 2005 Form 10-K.
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. The U.S. Attorney’s office has also requested information from the Company about matters related to the SEC inquiry. inquiry.The Company is cooperating fully with this office.
Shareholder Class Action Lawsuits and Derivative Litigation
As previously announced, in August 2004 the Company received notice from the SEC that it was conducting a non-public, fact-finding inquiry of the Company. As previously announced, following the Company’s public announcement of the SEC inquiry, three purported class action lawsuits were filed against the Company in the United States District Court for the District of Connecticut. The plaintiff in each of the lawsuits initially sought to sue on behalf of a purported class comprised of purchasers of the Company’s securities from October 23, 2003 to August 30, 2004. The lawsuits initially named as the defendants the Company, its chairman, its vice chairman and chief executive officer, its former president and chief financial officer, and its former corporate controller. These initial complaints alleged, among other things, that certain of the Company’s SEC filings and other public statements contained false and misleading statements which resulted in damages to the plaintiffs and the members of the purported class when they purchased the Company’s securities. On the basis of those allegations, plaintiffs in each action asserted claims (a) against all defendants under Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Rule 10b-5 promulgated thereunder, and (b) against one or more of the individual defendants under Section 20(a) of such Act. The complaints sought unspecified compensatory damages, costs and expenses. On February 1, 2005, the Court entered an order
12
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share data and unless otherwise indicated)
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 entitled In re United Rentals, Inc. Securities Litigation. The parties agreed upon, and the Court subsequently approved, a schedule for the filing of a consolidated amended complaint in this action and the briefing of any motions to dismiss directed to the operative complaint in the action. On June 5, 2006, lead plaintiff filed a consolidated amended complaint, which (a) adds allegations relating to, among other things, the conclusions of the Special Committee and to other matters disclosed in the 2005 Form 10-K, (b) amends the purported class period to include purchasers of the Company’s securities from February 28, 2001 to August 30, 2004 and (c) names as an additional defendant the Company’s first chief financial officer. In September 2006, the Company and certain of the individual defendants moved to dismiss the consolidated amended complaint in this action. Briefing with respect to these motions is in progress. The Company intends to continue to defend against this action vigorously. At this stage of the litigation, it is not possible to estimate the amount of loss or range of possible loss that might result from an adverse judgment or a settlement of this matter.
As previously announced, 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 the Company’s behalf. The action, entitled Gregory Riegel v. John N. Milne, et al., names as defendants certain of the Company’s current and/or former directors and/or officers, and names the Company as a nominal defendant. The complaint asserts, among other things, that the defendants breached their fiduciary duties to the Company by causing or allowing the Company to disseminate misleading and inaccurate information to shareholders and the
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share data and unless otherwise indicated)
market and by failing to establish and maintain adequate accounting controls, thus exposing the Company to damages. The complaint seeks unspecified compensatory damages, costs and expenses against the defendants. The parties to the Riegel action have agreed that the proceedings in this action will be stayed pending the resolution of anticipated motions to dismiss in the purported shareholder class actions.
As previously announced, in November 2004 the Company 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 the Company take action in response to those allegations against certain of the Company’s current and/or former directors and/or officers. Following receipt of the letter, the Company’s board of directors formed a special committee 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 the Company’s behalf. The action, entitled Nathan Brundridge v. Leon D. Black, et al., initially named as defendants certain of the Company’s current and/or former directors and/or officers, and named the Company as a nominal defendant. The initial complaint in this action asserted, among other things, that all of the defendants breached fiduciary obligations to the Company by causing or allowing the Company to disseminate misleading and inaccurate information to shareholders and the market, and by failing to establish and maintain adequate accounting controls, thus exposing the Company to damages. The initial complaint in this action also asserted a claim for unjust enrichment against the Company’s chairman and its vice chairman and chief executive officer. The initial complaint sought unspecified compensatory damages, equitable relief, costs and expenses against all of the defendants. The initial complaint also sought an order, in connection with plaintiff’s unjust enrichment claim, directing the defendants against whom that claim was asserted to disgorge certain compensation they received from the Company with respect to fiscal years 2001, 2002 and 2003. The parties agreed upon a schedule for the filing of an amended complaint in this action, and the briefing of any motions to dismiss directed to the operative complaint in this action. On June 5, 2006, plaintiff filed an amended complaint, which (a) adds allegations relating to, among other things, the conclusions of the Special Committee and to other matters disclosed in the 2005 Form 10-K, and (b) names as an additional defendant the Company’s former president and chief financial officer and asserts the same claims against him as it previously asserted and continues to assert against the Company’s chairman and its vice chairman and chief executive officer. In
13
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share data and unless otherwise indicated)
September 2006, the Company and certain of the individual defendants moved to dismiss the amended complaint in this action. Briefing with respect to these motions is in progress.
As previously announced, 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 the Company’s behalf. The action, entitled Natalie Gordon v. Wayland R. Hicks, et al., names as defendants certain of the Company’s current and/or former directors and/or officers, and names the Company as a nominal defendant. The initial complaint in this action asserted 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 the Company to disseminate misleading and inaccurate information to shareholders and to the market, and failed to establish and maintain adequate accounting controls, thus exposing the Company to damages. The initial complaint also asserted (a) a claim that a former director breached fiduciary obligations by selling shares of the Company’s common stock while in possession of material, non-public information, and (b) a claim against the Company’s chairman, its vice chairman and chief executive officer, and its former president and chief financial officer for recovery of certain incentive-based compensation under section 304 of the Sarbanes-Oxley Act. The initial complaint sought unspecified compensatory damages, equitable relief, restitution, costs and expenses against all of the defendants. The initial complaint also sought an order declaring that the defendants against whom the section 304 claim was directed are liable under the Sarbanes-Oxley Act and directing them to reimburse the Company for all bonuses or other incentive-based or equity-based compensation they received for the fiscal years 1999 through 2004. The parties agreed upon, and the Court approved, a schedule for the filing of an amended
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share data and unless otherwise indicated)
complaint in this action, and the briefing of any motions to dismiss directed to the operative complaint in this action. On June 5, 2006, plaintiff filed an amended complaint, which (a) adds allegations relating to, among other things, the conclusions of the Special Committee and to other matters disclosed in the 2005 Form 10-K, and (b) names as additional defendants certain other of the Company’s current and/or former directors and/or officers. The amended complaint also asserts an additional claim against certain of the Company’s current and/or former directors for violation of Section 14(a) of the Exchange Act. In September 2006, the Company and certain of the individual defendants moved to dismiss the amended complaint in this action. Briefing with respect to these motions is in progress.
We are also subject to a number of claims and proceedings that generally arise out ofin the ordinary conduct of our business. These matters include, but are not limited to, general liability claims (including personal injury, product liability, and property and auto claims), indemnification and guarantee obligations, employee injuries and employment-related claims, self-insurance obligations, tax examinations and contract and real estate matters. Based on advice of counsel and available information, including current status or stage of proceeding, and taking into account accruals for matters where we have established them, we currently believe that any liabilities ultimately resulting from these claims and proceedings will not, individually or in the aggregate, have a material adverse effect on our consolidated financial position, results of operations or cash flows.
14
6.UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share data and unless otherwise indicated)
7. Earnings Per Share
Basic earnings per share is computed by dividing net income 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 also includes the impact of other dilutive securities. The following table sets forth the computation of basic and diluted earnings per share:
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||
2006 | 2005 | 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | |||||||||||||||||
Numerator: | ||||||||||||||||||||||||
Net income | $ | 56 | $ | 50 | $ | 76 | $ | 62 | $ | 95 | $ | 76 | $ | 171 | $ | 138 | ||||||||
Plus: | ||||||||||||||||||||||||
Convertible debt interest | — | 1 | 1 | 1 | — | 1 | 1 | 1 | ||||||||||||||||
QUIPS interest | 2 | 2 | — | — | ||||||||||||||||||||
Subordinated convertible debentures interest | 2 | 2 | 6 | 7 | ||||||||||||||||||||
Income available to common stockholders | $ | 58 | $ | 53 | $ | 77 | $ | 63 | $ | 97 | $ | 79 | $ | 178 | $ | 146 | ||||||||
Denominator: | ||||||||||||||||||||||||
Weighted-average common shares | 79,430,378 | 77,992,299 | 78,373,920 | 77,956,827 | 80,598,276 | 78,010,517 | 79,123,520 | 77,960,242 | ||||||||||||||||
Series C preferred | 12,000,000 | 12,000,000 | 12,000,000 | 12,000,000 | 12,000,000 | 12,000,000 | 12,000,000 | 12,000,000 | ||||||||||||||||
Series D preferred | 5,000,000 | 5,000,000 | 5,000,000 | 5,000,000 | 5,000,000 | 5,000,000 | 5,000,000 | 5,000,000 | ||||||||||||||||
Denominator for basic earnings per share—weighted-average | 96,430,378 | 94,992,299 | 95,373,920 | 94,956,827 | 97,598,276 | 95,010,517 | 96,123,520 | 94,960,242 | ||||||||||||||||
Effect of dilutive securities: | ||||||||||||||||||||||||
Employee stock options and warrants | 6,912,243 | 4,312,370 | 6,974,184 | 4,207,225 | 4,709,591 | 3,974,510 | 6,257,446 | 4,128,840 | ||||||||||||||||
Convertible shares | 6,460,671 | 5,599,350 | 6,460,671 | 5,599,350 | 6,460,671 | 5,702,334 | 6,460,671 | 5,634,055 | ||||||||||||||||
QUIPS shares | 5,077,926 | 5,077,926 | — | — | ||||||||||||||||||||
Subordinated convertible debentures | 5,077,926 | 5,077,926 | 5,077,926 | 5,077,926 | ||||||||||||||||||||
Restricted stock units and phantom shares | 151,465 | 134,792 | 142,100 | 133,065 | 135,232 | 150,334 | 158,560 | 175,617 | ||||||||||||||||
Denominator for diluted earnings per share—adjusted weighted-average shares | 115,032,683 | 110,116,737 | 108,950,875 | 104,896,467 | 113,981,696 | 109,915,621 | 114,078,123 | 109,976,680 | ||||||||||||||||
Earnings per share—basic: | ||||||||||||||||||||||||
Income available to common stockholders | $ | 0.58 | $ | 0.53 | $ | 0.80 | $ | 0.65 | $ | 0.97 | $ | 0.80 | $ | 1.77 | $ | 1.45 | ||||||||
Earnings per share—diluted: | ||||||||||||||||||||||||
Income available to common stockholders | $ | 0.51 | $ | 0.48 | $ | 0.71 | $ | 0.60 | $ | 0.85 | $ | 0.71 | $ | 1.56 | $ | 1.32 | ||||||||
15
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share data and unless otherwise indicated)
7.8. Condensed Consolidating Financial Information of Guarantor Subsidiaries
URNA is 100 percent owned by Holdings (the “Parent”) and has outstanding (i) certain indebtedness that is guaranteed by the Parent and (ii) certain indebtedness that is guaranteed by both the Parent and substantially all of URNA’s United States subsidiaries (the “guarantor subsidiaries”). However, this indebtedness is not guaranteed by URNA’s foreign subsidiaries and certain of its United States subsidiaries (the “non-guarantor subsidiaries”). The guarantor subsidiaries are all 100 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 is presented. The condensed consolidating financial information of the Company and its subsidiaries is as follows:
CONDENSED CONSOLIDATING BALANCE SHEET
JuneSeptember 30, 2006
Parent | URNA | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Other & Eliminations | Consolidated Total | Parent | URNA | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Other and Eliminations | Consolidated Total | |||||||||||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 130 | $ | 69 | $ | 9 | $ | 208 | $ | — | $ | 20 | $ | 69 | $ | 51 | $ | — | $ | 140 | ||||||||||||||||||||||
Accounts receivable, net | 12 | 43 | 511 | 566 | — | 17 | 49 | 549 | — | 615 | ||||||||||||||||||||||||||||||||
Intercompany receivable (payable) | 639 | (108 | ) | (531 | ) | — | — | 396 | 5 | (401 | ) | — | — | |||||||||||||||||||||||||||||
Inventory | 81 | 92 | 22 | 195 | — | 69 | 85 | 20 | — | 174 | ||||||||||||||||||||||||||||||||
Prepaid expenses and other assets | 62 | 67 | 1 | 130 | 8 | 59 | 55 | 1 | — | 123 | ||||||||||||||||||||||||||||||||
Rental equipment, net | 1,390 | 948 | 249 | 2,587 | — | 1,477 | 958 | 253 | — | 2,688 | ||||||||||||||||||||||||||||||||
Property and equipment, net | $ | 42 | 130 | 262 | 28 | 462 | 40 | 85 | 224 | 29 | — | 378 | ||||||||||||||||||||||||||||||
Investment in subsidiaries | 1,582 | 2,254 | — | — | $ | (3,826 | ) | 10 | 1,612 | 2,325 | — | — | (3,937 | ) | — | |||||||||||||||||||||||||||
Goodwill and other intangible assets, net | — | 168 | 1,064 | 140 | — | 1,372 | — | 167 | 1,063 | 140 | — | 1,370 | ||||||||||||||||||||||||||||||
$ | 1,624 | $ | 4,866 | $ | 2,437 | $ | 429 | $ | (3,826 | ) | $ | 5,530 | $ | 1,660 | $ | 4,615 | $ | 2,508 | $ | 642 | $ | (3,937 | ) | $ | 5,488 | |||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||||||||||||||||
Accounts payable | $ | 79 | $ | 172 | $ | 33 | $ | 284 | $ | — | $ | 68 | $ | 166 | $ | 33 | $ | — | $ | 267 | ||||||||||||||||||||||
Accrued expenses and other liabilities | 265 | 236 | 11 | $ | (77 | ) | 435 | — | 240 | 257 | 12 | (86 | ) | 423 | ||||||||||||||||||||||||||||
Debt | 2,744 | 7 | 143 | — | 2,894 | — | 2,448 | 7 | 343 | — | 2,798 | |||||||||||||||||||||||||||||||
Subordinated convertible debentures | $ | 222 | — | — | — | — | 222 | 159 | — | — | — | — | 159 | |||||||||||||||||||||||||||||
Deferred taxes | — | 283 | (29 | ) | 39 | — | 293 | — | 333 | (32 | ) | 39 | — | 340 | ||||||||||||||||||||||||||||
Total liabilities | 222 | 3,371 | 386 | 226 | (77 | ) | 4,128 | 159 | 3,089 | 398 | 427 | (86 | ) | 3,987 | ||||||||||||||||||||||||||||
Total stockholders’ equity | 1,402 | 1,495 | 2,051 | 203 | (3,749 | ) | 1,402 | 1,501 | 1,526 | 2,110 | 215 | (3,851 | ) | 1,501 | ||||||||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 1,624 | $ | 4,866 | $ | 2,437 | $ | 429 | $ | (3,826 | ) | $ | 5,530 | $ | 1,660 | $ | 4,615 | $ | 2,508 | $ | 642 | $ | (3,937 | ) | $ | 5,488 | ||||||||||||||||
16
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share data and unless otherwise indicated)
CONDENSED CONSOLIDATING BALANCE SHEET
JuneSeptember 30, 2005
Parent | URNA | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Other & Eliminations | Consolidated Total | Parent | URNA | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Other and Eliminations | Consolidated Total | |||||||||||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 147 | $ | 98 | $ | 9 | $ | 254 | $ | — | $ | — | $ | 142 | $ | 9 | $ | — | $ | 151 | ||||||||||||||||||||||
Accounts receivable, net | 42 | 48 | 427 | 517 | — | 38 | 62 | 484 | — | 584 | ||||||||||||||||||||||||||||||||
Intercompany receivable (payable) | 477 | 17 | (494 | ) | — | — | 577 | (32 | ) | (545 | ) | — | — | |||||||||||||||||||||||||||||
Inventory | 80 | 85 | 13 | 178 | — | 76 | 90 | 14 | — | 180 | ||||||||||||||||||||||||||||||||
Prepaid expenses and other assets | 47 | 64 | 2 | 113 | 11 | 72 | 73 | 2 | — | 158 | ||||||||||||||||||||||||||||||||
Rental equipment, net | 1,238 | 825 | 220 | 2,283 | — | 1,343 | 863 | 237 | — | 2,443 | ||||||||||||||||||||||||||||||||
Property and equipment, net | $ | 27 | 124 | 239 | 25 | 415 | 33 | 83 | 201 | 21 | — | 338 | ||||||||||||||||||||||||||||||
Investment in subsidiaries | 1,285 | 2,083 | — | — | $ | (3,361 | ) | 7 | 1,359 | 2,151 | — | — | (3,510 | ) | — | |||||||||||||||||||||||||||
Goodwill and other intangible assets, net | — | 165 | 1,022 | 139 | — | 1,326 | — | 165 | 1,021 | 148 | — | 1,334 | ||||||||||||||||||||||||||||||
$ | 1,312 | $ | 4,403 | $ | 2,398 | $ | 341 | $ | (3,361 | ) | $ | 5,093 | $ | 1,403 | $ | 4,505 | $ | 2,420 | $ | 370 | $ | (3,510 | ) | $ | 5,188 | |||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||||||||||||||||
Accounts payable | $ | 48 | $ | 259 | $ | 29 | $ | 336 | $ | — | $ | 43 | $ | 180 | $ | 20 | $ | — | $ | 243 | ||||||||||||||||||||||
Accrued expenses and other liabilities | 149 | 216 | 7 | $ | (68 | ) | 304 | — | 136 | 279 | 8 | (56 | ) | 367 | ||||||||||||||||||||||||||||
Debt | 2,824 | — | 130 | — | 2,954 | — | 2,799 | — | 137 | — | 2,936 | |||||||||||||||||||||||||||||||
Subordinated convertible debentures | $ | 222 | — | — | — | — | 222 | 222 | — | — | — | — | 222 | |||||||||||||||||||||||||||||
Deferred taxes | — | 172 | (14 | ) | 29 | — | 187 | — | 224 | (15 | ) | 30 | — | 239 | ||||||||||||||||||||||||||||
Total liabilities | 222 | 3,193 | 461 | 195 | (68 | ) | 4,003 | 222 | 3,202 | 444 | 195 | (56 | ) | 4,007 | ||||||||||||||||||||||||||||
Total stockholders’ equity | 1,090 | 1,210 | 1,937 | 146 | (3,293 | ) | 1,090 | 1,181 | 1,303 | 1,976 | 175 | (3,454 | ) | 1,181 | ||||||||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 1,312 | $ | 4,403 | $ | 2,398 | $ | 341 | $ | (3,361 | ) | $ | 5,093 | $ | 1,403 | $ | 4,505 | $ | 2,420 | $ | 370 | $ | (3,510 | ) | $ | 5,188 | ||||||||||||||||
17
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share data and unless otherwise indicated)
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2005
Parent | URNA | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Other and Eliminations | Consolidated Total | Parent | URNA | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Other and Eliminations | Consolidated Total | |||||||||||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 200 | $ | 105 | $ | 11 | $ | 316 | $ | — | $ | 200 | $ | 105 | $ | 11 | $ | — | $ | 316 | ||||||||||||||||||||||
Accounts receivable, net | 11 | 47 | 514 | 572 | — | 11 | 47 | 514 | — | 572 | ||||||||||||||||||||||||||||||||
Intercompany receivable (payable) | 509 | 31 | (540 | ) | — | — | 471 | 69 | (540 | ) | — | — | ||||||||||||||||||||||||||||||
Inventory | 73 | 83 | 18 | 174 | — | 73 | 83 | 18 | — | 174 | ||||||||||||||||||||||||||||||||
Prepaid expenses and other assets | 69 | 73 | 1 | 143 | 11 | 69 | 73 | 1 | — | 154 | ||||||||||||||||||||||||||||||||
Rental equipment, net | 1,220 | 817 | 215 | 2,252 | — | 1,303 | 828 | 220 | — | 2,351 | ||||||||||||||||||||||||||||||||
Property and equipment, net | $ | 38 | 133 | 250 | 24 | 445 | 38 | 88 | 201 | 19 | — | 346 | ||||||||||||||||||||||||||||||
Investment in subsidiaries | 1,413 | 2,186 | — | — | $ | (3,588 | ) | 11 | 1,402 | 2,186 | — | — | (3,588 | ) | — | |||||||||||||||||||||||||||
Goodwill and other intangible assets, net | 163 | 1,052 | 146 | 1,361 | — | 163 | 1,052 | 146 | — | 1,361 | ||||||||||||||||||||||||||||||||
$ | 1,451 | $ | 4,564 | $ | 2,458 | $ | 389 | $ | (3,588 | ) | $ | 5,274 | $ | 1,451 | $ | 4,564 | $ | 2,458 | $ | 389 | $ | (3,588 | ) | $ | 5,274 | |||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||||||||||||||||
Accounts payable | $ | 45 | $ | 144 | $ | 22 | $ | 211 | $ | — | $ | 45 | $ | 144 | $ | 22 | $ | — | $ | 211 | ||||||||||||||||||||||
Accrued expenses and other liabilities | 150 | 318 | 10 | $ | (58 | ) | 420 | — | 150 | 318 | 10 | (58 | ) | 420 | ||||||||||||||||||||||||||||
Debt | 2,793 | — | 137 | — | 2,930 | — | 2,793 | — | 137 | — | 2,930 | |||||||||||||||||||||||||||||||
Subordinated convertible debentures | $ | 222 | — | — | — | — | 222 | 222 | — | — | — | — | 222 | |||||||||||||||||||||||||||||
Deferred taxes | — | 232 | (7 | ) | 37 | — | 262 | — | 232 | (7 | ) | 37 | — | 262 | ||||||||||||||||||||||||||||
Total liabilities | 222 | 3,220 | 455 | 206 | (58 | ) | 4,045 | 222 | 3,220 | 455 | 206 | (58 | ) | 4,045 | ||||||||||||||||||||||||||||
Total stockholders’ equity | 1,229 | 1,344 | 2,003 | 183 | (3,530 | ) | 1,229 | 1,229 | 1,344 | 2,003 | 183 | (3,530 | ) | 1,229 | ||||||||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 1,451 | $ | 4,564 | $ | 2,458 | $ | 389 | $ | (3,588 | ) | $ | 5,274 | $ | 1,451 | $ | 4,564 | $ | 2,458 | $ | 389 | $ | (3,588 | ) | $ | 5,274 | ||||||||||||||||
18
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share data and unless otherwise indicated)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Three Months Ended June 30, 2006 | For the Three Months Ended September 30, 2006 | |||||||||||||||||||||||||||||||||||||||||||
Parent | URNA | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Other and Eliminations | Consolidated Total | Parent | URNA | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Other and Eliminations | Consolidated Total | |||||||||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||||||||||||||
Equipment rentals | $ | 314 | $ | 324 | $ | 60 | $ | 698 | $ | — | $ | 335 | $ | 369 | $ | 69 | $ | — | $ | 773 | ||||||||||||||||||||||||
Sales of rental equipment | 46 | 32 | 7 | 85 | — | 41 | 36 | 10 | — | 87 | ||||||||||||||||||||||||||||||||||
New equipment sales | 28 | 25 | 9 | 62 | — | 28 | 24 | 8 | — | 60 | ||||||||||||||||||||||||||||||||||
Contractor supplies sales | 41 | 56 | 12 | 109 | — | 40 | 57 | 12 | — | 109 | ||||||||||||||||||||||||||||||||||
Service and other revenues | 22 | 14 | 5 | 41 | — | 22 | 15 | 4 | — | 41 | ||||||||||||||||||||||||||||||||||
Total revenues | 451 | 451 | 93 | 995 | — | 466 | 501 | 103 | — | 1,070 | ||||||||||||||||||||||||||||||||||
Cost of revenues: | ||||||||||||||||||||||||||||||||||||||||||||
Cost of equipment rentals, excluding depreciation | 140 | 167 | 33 | 340 | — | 145 | 177 | 32 | — | 354 | ||||||||||||||||||||||||||||||||||
Depreciation of rental equipment | 49 | 39 | 11 | 99 | — | 54 | 46 | 12 | — | 112 | ||||||||||||||||||||||||||||||||||
Cost of rental equipment sales | 32 | 22 | 5 | 59 | — | 30 | 24 | 6 | — | 60 | ||||||||||||||||||||||||||||||||||
Cost of new equipment sales | 23 | 21 | 7 | 51 | — | 22 | 20 | 7 | — | 49 | ||||||||||||||||||||||||||||||||||
Cost of contractor supplies sales | 36 | 43 | 10 | 89 | — | 32 | 45 | 9 | — | 86 | ||||||||||||||||||||||||||||||||||
Cost of service and other revenue | 11 | 5 | 3 | 19 | — | 10 | 7 | 2 | — | 19 | ||||||||||||||||||||||||||||||||||
Total cost of revenues | 291 | 297 | 69 | 657 | — | 293 | 319 | 68 | — | 680 | ||||||||||||||||||||||||||||||||||
Gross profit | 160 | 154 | 24 | 338 | — | 173 | 182 | 35 | — | 390 | ||||||||||||||||||||||||||||||||||
Selling, general and administrative expenses | 64 | 80 | 20 | 164 | — | 62 | 84 | 18 | — | 164 | ||||||||||||||||||||||||||||||||||
Non-rental depreciation and amortization | $ | 3 | 11 | 9 | 1 | 24 | 2 | 6 | 3 | (1 | ) | — | 10 | |||||||||||||||||||||||||||||||
Operating income (loss) | (3 | ) | 85 | 65 | 3 | 150 | (2 | ) | 105 | 95 | 18 | — | 216 | |||||||||||||||||||||||||||||||
Interest expense, net | 3 | 47 | 2 | 3 | $ | (3 | ) | 52 | 3 | 56 | (3 | ) | 2 | — | 58 | |||||||||||||||||||||||||||||
Interest expense—subordinated convertible debentures | — | — | — | — | 3 | 3 | 4 | — | — | — | — | 4 | ||||||||||||||||||||||||||||||||
Other (income) expense, net | — | 3 | 4 | (8 | ) | — | (1 | ) | 1 | 4 | 3 | (8 | ) | — | — | |||||||||||||||||||||||||||||
Income (loss) before provision (benefit) for income taxes | (6 | ) | 35 | 59 | 8 | — | 96 | (10 | ) | 45 | 95 | 24 | — | 154 | ||||||||||||||||||||||||||||||
Provision (benefit) for income taxes | (3 | ) | 14 | 23 | 6 | — | 40 | (4 | ) | 17 | 37 | 9 | — | 59 | ||||||||||||||||||||||||||||||
Income (loss) before equity in net earnings of subsidiaries | (3 | ) | 21 | 36 | 2 | — | 56 | (6 | ) | 28 | 58 | 15 | — | 95 | ||||||||||||||||||||||||||||||
Equity in net earnings of subsidiaries | 59 | 38 | — | — | (97 | ) | — | 101 | 73 | — | — | (174 | ) | — | ||||||||||||||||||||||||||||||
Net income (loss) | $ | 56 | $ | 59 | $ | 36 | $ | 2 | $ | (97 | ) | $ | 56 | $ | 95 | $ | 101 | $ | 58 | $ | 15 | $ | (174 | ) | $ | 95 | ||||||||||||||||||
19
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share data and unless otherwise indicated)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Three Months Ended June 30, 2005 | For the Three Months Ended September 30, 2005 | |||||||||||||||||||||||||||||||||||||||||||
Parent | URNA | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Other and Eliminations | Consolidated Total | Parent | URNA | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Other and Eliminations | Consolidated Total | |||||||||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||||||||||||||
Equipment rentals | $ | 280 | $ | 297 | $ | 50 | $ | 627 | $ | — | $ | 322 | $ | 353 | $ | 62 | $ | — | $ | 737 | ||||||||||||||||||||||||
Sales of rental equipment | 42 | 34 | 11 | 87 | — | 27 | 27 | 7 | — | 61 | ||||||||||||||||||||||||||||||||||
New equipment sales | 27 | 21 | 7 | 55 | — | 28 | 21 | 6 | — | 55 | ||||||||||||||||||||||||||||||||||
Contractor supplies sales | 32 | 44 | 9 | 85 | — | 33 | 47 | 9 | — | 89 | ||||||||||||||||||||||||||||||||||
Service and other revenues | 19 | 12 | 3 | 34 | — | 20 | 13 | 4 | — | 37 | ||||||||||||||||||||||||||||||||||
Total revenues | 400 | 408 | 80 | 888 | — | 430 | 461 | 88 | — | 979 | ||||||||||||||||||||||||||||||||||
Cost of revenues: | ||||||||||||||||||||||||||||||||||||||||||||
Cost of equipment rentals, excluding depreciation | 125 | 171 | 24 | 320 | — | 140 | 186 | 28 | — | 354 | ||||||||||||||||||||||||||||||||||
Depreciation of rental equipment | 46 | 39 | 10 | 95 | — | 51 | 41 | 11 | — | 103 | ||||||||||||||||||||||||||||||||||
Cost of rental equipment sales | 32 | 24 | 9 | 65 | — | 19 | 20 | 4 | — | 43 | ||||||||||||||||||||||||||||||||||
Cost of new equipment sales | 21 | 18 | 6 | 45 | — | 23 | 17 | 5 | — | 45 | ||||||||||||||||||||||||||||||||||
Cost of contractor supplies sales | 25 | 32 | 7 | 64 | — | 32 | 30 | 7 | — | 69 | ||||||||||||||||||||||||||||||||||
Cost of service and other revenue | 8 | 6 | 2 | 16 | — | 11 | 7 | 2 | — | 20 | ||||||||||||||||||||||||||||||||||
Total cost of revenues | 257 | 290 | 58 | 605 | — | 276 | 301 | 57 | — | 634 | ||||||||||||||||||||||||||||||||||
Gross profit | 143 | 118 | 22 | 283 | — | 154 | 160 | 31 | — | 345 | ||||||||||||||||||||||||||||||||||
Selling, general and administrative expenses | 59 | 62 | 15 | 136 | — | 59 | 86 | 17 | — | 162 | ||||||||||||||||||||||||||||||||||
Non-rental depreciation and amortization | $ | 1 | 5 | 7 | 2 | 15 | 1 | 4 | 5 | — | — | 10 | ||||||||||||||||||||||||||||||||
Operating income (loss) | (1 | ) | 79 | 49 | 5 | 132 | (1 | ) | 91 | 69 | 14 | — | 173 | |||||||||||||||||||||||||||||||
Interest expense, net | 4 | 42 | (1 | ) | 2 | $ | (4 | ) | 43 | — | 43 | 2 | 3 | — | 48 | |||||||||||||||||||||||||||||
Interest expense—subordinated convertible debentures | — | — | — | — | 4 | 4 | 4 | — | — | — | — | 4 | ||||||||||||||||||||||||||||||||
Other (income) expense, net | — | 4 | 4 | (5 | ) | — | 3 | — | 2 | — | (7 | ) | — | (5 | ) | |||||||||||||||||||||||||||||
Income (loss) before provision (benefit) for income taxes | (5 | ) | 33 | 46 | 8 | — | 82 | (5 | ) | 46 | 67 | 18 | — | 126 | ||||||||||||||||||||||||||||||
Provision (benefit) for income taxes | (2 | ) | 13 | 18 | 3 | — | 32 | (2 | ) | 19 | 26 | 7 | — | 50 | ||||||||||||||||||||||||||||||
Income (loss) before equity in net earnings of subsidiaries | (3 | ) | 20 | 28 | 5 | — | 50 | (3 | ) | 27 | 41 | 11 | — | 76 | ||||||||||||||||||||||||||||||
Equity in net earnings of subsidiaries | 53 | 33 | — | — | (86 | ) | — | 79 | 52 | — | — | (131 | ) | — | ||||||||||||||||||||||||||||||
Net income (loss) | $ | 50 | $ | 53 | $ | 28 | $ | 5 | $ | (86 | ) | $ | 50 | $ | 76 | $ | 79 | $ | 41 | $ | 11 | $ | (131 | ) | $ | 76 | ||||||||||||||||||
20
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share data and unless otherwise indicated)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 2006 | For the Nine Months Ended September 30, 2006 | |||||||||||||||||||||||||||||||||||||||||
Parent | URNA | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Other and Eliminations | Consolidated Total | Parent | URNA | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Other and Eliminations | Consolidated Total | |||||||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||||||||||||
Equipment rentals | $ | 585 | $ | 594 | $ | 110 | $ | 1,289 | $ | — | $ | 920 | $ | 962 | $ | 179 | $ | — | $ | 2,061 | ||||||||||||||||||||||
Sales of rental equipment | 82 | 65 | 16 | 163 | — | 123 | 101 | 26 | — | 250 | ||||||||||||||||||||||||||||||||
New equipment sales | 54 | 44 | 16 | 114 | — | 82 | 68 | 24 | — | 174 | ||||||||||||||||||||||||||||||||
Contractor supplies sales | 76 | 100 | 21 | 197 | — | 116 | 157 | 33 | — | 306 | ||||||||||||||||||||||||||||||||
Service and other revenues | 43 | 26 | 9 | 78 | — | 65 | 41 | 13 | — | 119 | ||||||||||||||||||||||||||||||||
Total revenues | 840 | 829 | 172 | 1,841 | — | 1,306 | 1,329 | 275 | — | 2,910 | ||||||||||||||||||||||||||||||||
Cost of revenues: | ||||||||||||||||||||||||||||||||||||||||||
Cost of equipment rentals, excluding depreciation | 272 | 314 | 60 | 646 | — | 417 | 491 | 92 | — | 1,000 | ||||||||||||||||||||||||||||||||
Depreciation of rental equipment | 95 | 79 | 21 | 195 | — | 154 | 132 | 33 | — | 319 | ||||||||||||||||||||||||||||||||
Cost of rental equipment sales | 59 | 43 | 11 | 113 | — | 89 | 67 | 17 | — | 173 | ||||||||||||||||||||||||||||||||
Cost of new equipment sales | 44 | 37 | 13 | 94 | — | 66 | 57 | 20 | — | 143 | ||||||||||||||||||||||||||||||||
Cost of contractor supplies sales | 67 | 75 | 18 | 160 | — | 99 | 120 | 27 | — | 246 | ||||||||||||||||||||||||||||||||
Cost of service and other revenue | 21 | 12 | 5 | 38 | — | 31 | 19 | 7 | — | 57 | ||||||||||||||||||||||||||||||||
Total cost of revenues | 558 | 560 | 128 | 1,246 | — | 856 | 886 | 196 | — | 1,938 | ||||||||||||||||||||||||||||||||
Gross profit | 282 | 269 | 44 | 595 | — | 450 | 443 | 79 | — | 972 | ||||||||||||||||||||||||||||||||
Selling, general and administrative expenses | 123 | 159 | 35 | 317 | — | 185 | 242 | 53 | — | 480 | ||||||||||||||||||||||||||||||||
Non-rental depreciation and amortization | $ | 5 | 15 | 16 | 4 | 40 | 7 | 16 | 12 | 3 | — | 38 | ||||||||||||||||||||||||||||||
Operating income (loss) | (5 | ) | 144 | 94 | 5 | 238 | (7 | ) | 249 | 189 | 23 | — | 454 | |||||||||||||||||||||||||||||
Interest expense, net | 7 | 94 | 3 | 5 | $ | (7 | ) | 102 | 3 | 150 | — | 7 | — | 160 | ||||||||||||||||||||||||||||
Interest expense—subordinated convertible debentures | — | — | — | — | 7 | 7 | 11 | — | — | — | — | 11 | ||||||||||||||||||||||||||||||
Other (income) expense, net | — | 7 | 7 | (14 | ) | — | — | 1 | 11 | 10 | (22 | ) | — | — | ||||||||||||||||||||||||||||
Income (loss) before provision (benefit) for income taxes | (12 | ) | 43 | 84 | 14 | — | 129 | (22 | ) | 88 | 179 | 38 | — | 283 | ||||||||||||||||||||||||||||
Provision (benefit) for income taxes | (5 | ) | 18 | 34 | 6 | — | 53 | (9 | ) | 35 | 71 | 15 | — | 112 | ||||||||||||||||||||||||||||
Income (loss) before equity in net earnings of subsidiaries | (7 | ) | 25 | 50 | 8 | — | 76 | (13 | ) | 53 | 108 | 23 | — | 171 | ||||||||||||||||||||||||||||
Equity in net earnings of subsidiaries | 83 | 58 | — | — | (141 | ) | — | 184 | 131 | — | — | (315 | ) | — | ||||||||||||||||||||||||||||
Net income (loss) | $ | 76 | $ | 83 | $ | 50 | $ | 8 | $ | (141 | ) | $ | 76 | $ | 171 | $ | 184 | $ | 108 | $ | 23 | $ | (315 | ) | $ | 171 | ||||||||||||||||
21
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share data and unless otherwise indicated)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 2005 | For the Nine Months Ended September 30, 2005 | ||||||||||||||||||||||||||||||||||||||||||
Parent | URNA | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Other and Eliminations | Consolidated Total | Parent | URNA | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Other and Eliminations | Consolidated Total | ||||||||||||||||||||||||||||||||
Revenues: | |||||||||||||||||||||||||||||||||||||||||||
Equipment rentals | $ | 522 | $ | 527 | $ | 92 | $ | 1,141 | $ | — | $ | 844 | $ | 879 | $ | 154 | $ | — | $ | 1,877 | |||||||||||||||||||||||
Sales of rental equipment | 79 | 68 | 20 | 167 | — | 106 | 95 | 27 | — | 228 | |||||||||||||||||||||||||||||||||
New equipment sales | 49 | 36 | 11 | 96 | — | 77 | 57 | 17 | — | 151 | |||||||||||||||||||||||||||||||||
Contractor supplies sales | 56 | 77 | 16 | 149 | — | 89 | 124 | 25 | — | 238 | |||||||||||||||||||||||||||||||||
Service and other revenues | 38 | 22 | 7 | 67 | — | 58 | 35 | 11 | — | 104 | |||||||||||||||||||||||||||||||||
Total revenues | 744 | 730 | 146 | 1,620 | — | 1,174 | 1,190 | 234 | — | 2,598 | |||||||||||||||||||||||||||||||||
Cost of revenues: | |||||||||||||||||||||||||||||||||||||||||||
Cost of equipment rentals, excluding depreciation | 244 | 309 | 48 | 601 | — | 384 | 495 | 76 | — | 955 | |||||||||||||||||||||||||||||||||
Depreciation of rental equipment | 92 | 77 | 20 | 189 | — | 147 | 124 | 32 | — | 303 | |||||||||||||||||||||||||||||||||
Cost of rental equipment sales | 58 | 49 | 15 | 122 | — | 77 | 69 | 19 | — | 165 | |||||||||||||||||||||||||||||||||
Cost of new equipment sales | 39 | 31 | 9 | 79 | — | 62 | 48 | 14 | — | 124 | |||||||||||||||||||||||||||||||||
Cost of contractor supplies sales | 43 | 57 | 12 | 112 | — | 75 | 87 | 19 | — | 181 | |||||||||||||||||||||||||||||||||
Cost of service and other revenue | 17 | 11 | 4 | 32 | — | 28 | 18 | 6 | — | 52 | |||||||||||||||||||||||||||||||||
Total cost of revenues | 493 | 534 | 108 | 1,135 | — | 773 | 841 | 166 | — | 1,780 | |||||||||||||||||||||||||||||||||
Gross profit | 251 | 196 | 38 | 485 | — | 401 | 349 | 68 | — | 818 | |||||||||||||||||||||||||||||||||
Selling, general and administrative expenses | 111 | 117 | 30 | 258 | — | 170 | 202 | 47 | — | 419 | |||||||||||||||||||||||||||||||||
Non-rental depreciation and amortization | $ | 3 | 10 | 13 | 3 | 29 | 4 | 10 | 12 | 2 | — | 28 | |||||||||||||||||||||||||||||||
Operating income (loss) | (3 | ) | 130 | 66 | 5 | 198 | (4 | ) | 221 | 135 | 19 | — | 371 | ||||||||||||||||||||||||||||||
Interest expense, net | 8 | 82 | — | 4 | $ | (8 | ) | 86 | — | 125 | 2 | 7 | — | 134 | |||||||||||||||||||||||||||||
Interest expense—subordinated convertible debentures | — | — | — | — | 8 | 8 | 12 | — | — | — | — | 12 | |||||||||||||||||||||||||||||||
Other (income) expense, net | — | 7 | 7 | (11 | ) | — | 3 | — | 9 | 7 | (18 | ) | — | (2 | ) | ||||||||||||||||||||||||||||
Income (loss) before provision (benefit) for income taxes | (11 | ) | 41 | 59 | 12 | — | 101 | (16 | ) | 87 | 126 | 30 | — | 227 | |||||||||||||||||||||||||||||
Provision (benefit) for income taxes | (4 | ) | 15 | 24 | 4 | — | 39 | (6 | ) | 34 | 50 | 11 | — | 89 | |||||||||||||||||||||||||||||
Income (loss) before equity in net earnings of subsidiaries | (7 | ) | 26 | 35 | 8 | — | 62 | (10 | ) | 53 | 76 | 19 | — | 138 | |||||||||||||||||||||||||||||
Equity in net earnings of subsidiaries | 69 | 43 | — | — | (112 | ) | — | 148 | 95 | — | — | (243 | ) | — | |||||||||||||||||||||||||||||
Net income (loss) | $ | 62 | $ | 69 | $ | 35 | $ | 8 | $ | (112 | ) | $ | 62 | $ | 138 | $ | 148 | $ | 76 | $ | 19 | $ | (243 | ) | $ | 138 | |||||||||||||||||
22
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share data and unless otherwise indicated)
CONDENSED CONSOLIDATING CASH FLOW INFORMATION
For the SixNine Months Ended JuneSeptember 30, 2006
Parent | URNA | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Other and Eliminations | Consolidated Total | Parent | URNA | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Other and Eliminations | Consolidated Total | |||||||||||||||||||||||||||||||||||||
Net cash provided by operating activities | $ | 2 | $ | 160 | $ | 163 | $ | 44 | $ | — | $ | 369 | ||||||||||||||||||||||||||||||||||||
Net cash provided by (used in) operating activities | $ | (1 | ) | $ | 496 | $ | 210 | $ | (99 | ) | $ | — | $ | 606 | ||||||||||||||||||||||||||||||||||
Net cash used in investing activities | (72 | ) | (275 | ) | (194 | ) | (46 | ) | 63 | (524 | ) | (74 | ) | (309 | ) | (246 | ) | (61 | ) | 64 | (626 | ) | ||||||||||||||||||||||||||
Net cash provided by (used in) financing activities | 70 | 45 | (5 | ) | — | (63 | ) | 47 | 75 | (367 | ) | — | 200 | (64 | ) | (156 | ) | |||||||||||||||||||||||||||||||
Net decrease in cash and cash equivalents | — | (70 | ) | (36 | ) | (2 | ) | — | (108 | ) | ||||||||||||||||||||||||||||||||||||||
Increase (decrease) in cash and cash equivalents | — | (180 | ) | (36 | ) | 40 | — | (176 | ) | |||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents at beginning of period | — | 200 | 105 | 11 | — | 316 | — | 200 | 105 | 11 | — | 316 | ||||||||||||||||||||||||||||||||||||
Cash and cash equivalents at end of period | $ | — | $ | 130 | $ | 69 | $ | 9 | $ | — | $ | 208 | $ | — | $ | 20 | $ | 69 | $ | 51 | $ | — | $ | 140 | ||||||||||||||||||||||||
CONDENSED CONSOLIDATING CASH FLOW INFORMATION
For the SixNine Months Ended JuneSeptember 30, 2005
Parent | URNA | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Other and Eliminations | Consolidated Total | Parent | URNA | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Other and Eliminations | Consolidated Total | |||||||||||||||||||||||||||||||||||||
Net cash provided by (used in) operating activities | $ | (7 | ) | $ | 99 | $ | 209 | $ | 17 | $ | — | $ | 318 | $ | — | $ | 71 | $ | 316 | $ | 27 | $ | — | $ | 414 | |||||||||||||||||||||||
Net cash used in investing activities | (2 | ) | (168 | ) | (145 | ) | (29 | ) | 2 | (342 | ) | (9 | ) | (245 | ) | (207 | ) | (41 | ) | 2 | (500 | ) | ||||||||||||||||||||||||||
Net cash provided by (used in) financing activities | 9 | (31 | ) | — | — | (2 | ) | (24 | ) | 9 | (73 | ) | (1 | ) | — | (2 | ) | (67 | ) | |||||||||||||||||||||||||||||
Effect of foreign exchange rate changes on cash and cash equivalents | — | — | — | (1 | ) | — | (1 | ) | — | — | — | 1 | — | 1 | ||||||||||||||||||||||||||||||||||
Increase (decrease) in cash and cash equivalents | — | (100 | ) | 64 | (13 | ) | — | (49 | ) | — | (247 | ) | 108 | (13 | ) | — | (152 | ) | ||||||||||||||||||||||||||||||
Cash and cash equivalents at beginning of period | 247 | 34 | 22 | — | 303 | — | 247 | 34 | 22 | — | 303 | |||||||||||||||||||||||||||||||||||||
Cash and cash equivalents at end of period | $ | — | $ | 147 | $ | 98 | $ | 9 | $ | — | $ | 254 | $ | — | $ | — | $ | 142 | $ | 9 | $ | — | $ | 151 | ||||||||||||||||||||||||
9. Subsequent Event
In October 2006, we amended our existing accounts receivable securitization facility. The amended facility provides for generally lower borrowing costs and the facility size has been increased from $200 to $300. Additionally, the maturity date has been extended from May 2009 to October 2011. Borrowings under the amended facility will continue to be reflected as debt on our consolidated balance sheets.
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in millions, except per share data and unless otherwise indicated) |
Executive Overview
We are the largest equipment rental company in the world, with an integrated network of more than 760 rental locations in the United States, Canada and Mexico. The equipment rental industry is highly fragmented and diverse and we believe we are well positioned to take advantage of this environment because as a larger company, we have more resources and certain competitive advantages over our smaller competitors. These advantages include greater purchasing power, the ability to provide customers with a broader range of equipment and services, as well as newer and better maintained equipment, and greater flexibility to transfer equipment among branches.
We offer for rent over 20,000 classes of rental equipment, including construction equipment, industrial and heavy machinery, aerial work platforms, traffic control equipment, trench safety equipment and homeowner items. Our revenues are derived from the following sources: equipment rentals, sales of rental (used) equipment, sales of new equipment, contractor supplies sales and service and other. Rental equipment revenues have historically accounted for more than 70 percent of our total revenues and we expect this to continue.
In August 2004, we received notice from the SEC that it 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. As previously announced, in March 2005, our board of directors formed a 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 in January 2006. The actions that we took with respect to the Special Committee’s findings, including the restatement of previously issued consolidated financial statements for 2003 and 2002, are discussed in our 2005 Form 10-K. The SEC inquiry is ongoing and we are continuing to cooperate fully with the SEC. The U.S. Attorney’s office has also requested information from the Company about matters related to the SEC inquiry. The Company is cooperating fully with this office.
As discussed in note 6 to our unaudited condensed consolidated financial statements, in addition to the SEC inquiry referenced above, we are also subject to certain ongoing class action and derivative suits. Although we have not accrued any amounts related to the ultimate disposition of these matters to date, any liabilities resulting from an adverse judgment or settlement of these matters may be material to our results of operations and cash flows during the period incurred. Other costs associated with the SEC inquiry and the class action and derivative suits, including reimbursement of attorneys’ fees incurred by indemnified officers and directors, are expensed as incurred.
As discussed in note 1 to our unaudited condensed consolidated financial statements, certain reclassifications have been made to 2005 financial information to conform to the 2006 presentation. These reclassifications had no impact on Income before provision for income taxes, Net income, Earnings per share or cash flows.
Financial Overview
Net income for the three and nine months ended September 30, 2006 and 2005 was as follows:
Three Months Ended | ||||||
September 30, 2006 | September 30, 2005 | |||||
Net income | $ | 95 | $ | 76 | ||
Nine Months Ended | ||||||
September 30, 2006 | September 30, 2005 | |||||
Net income | $ | 171 | $ | 138 |
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Net income for the three and nine months ended September 30, 2006 includes refinancing charges of $3.6 ($5.8 pre-tax). The refinancing charges, which are discussed further in note 5 to our unaudited condensed consolidated financial statements, relate to the $400 prepayment of our term loan and the retirement of $63 of subordinated convertible debentures. The refinancing charges of $5.8 pre-tax include a net charge of $5 pre-tax recorded in Interest expense, net, as well as a $0.8 charge recorded in Other (income) expense, net. The net charge of $5 pre-tax includes $8.2 of non-cash charges related to the write-offs of unamortized deferred financing costs and a portion of the unamortized premium on our interest rate caps, partially offset by a $3.2 gain recognized in conjunction with the partial termination of these interest rate caps. The $0.8 charge relates to the premium paid in conjunction with the retirement of $63 of subordinated convertible debentures.
Results of Operations
As discussed in note 2 to our unaudited condensed consolidated financial statements included in this Report, our reportable segments are general rentals, trench safety, pump and power and traffic control. 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. All three reporting segments generate revenues from equipment rentals as well as the sales of new and used equipment and related contractor supplies. Our external segment reporting is aligned with how management evaluates and allocates resources. We evaluate segment performance based on segment operating results.
Our revenues and operating results fluctuate from quarter to quarter reflecting the seasonal rental patterns of our customers, with rental activity tending to be lower in the winter.
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Revenues by segment were as follows:
General rentals | Trench safety, pump and power | Traffic control | Total | General rentals | Trench safety, pump and power | Traffic control | Total | |||||||||||||||||
Three months ended June 30, 2006 | ||||||||||||||||||||||||
Three months ended September 30, 2006 | ||||||||||||||||||||||||
Equipment rentals | $ | 589 | $ | 42 | $ | 67 | $ | 698 | $ | 645 | $ | 48 | $ | 80 | $ | 773 | ||||||||
Sales of rental equipment | 81 | 3 | 1 | 85 | 83 | 4 | — | 87 | ||||||||||||||||
New equipment sales | 58 | 3 | 1 | 62 | 54 | 6 | — | 60 | ||||||||||||||||
Contractor supplies sales | 98 | 5 | 6 | 109 | 98 | 4 | 7 | 109 | ||||||||||||||||
Service and other revenues | 39 | 2 | — | 41 | 41 | — | — | 41 | ||||||||||||||||
Total revenues | $ | 865 | �� | $ | 55 | $ | 75 | $ | 995 | $ | 921 | $ | 62 | $ | 87 | $ | 1,070 | |||||||
Three months ended June 30, 2005 | ||||||||||||||||||||||||
Three months ended September 30, 2005 | ||||||||||||||||||||||||
Equipment rentals | $ | 531 | $ | 32 | $ | 64 | $ | 627 | $ | 620 | $ | 42 | $ | 75 | $ | 737 | ||||||||
Sales of rental equipment | 83 | 3 | 1 | 87 | 57 | 3 | 1 | 61 | ||||||||||||||||
New equipment sales | 49 | 5 | 1 | 55 | 51 | 3 | 1 | 55 | ||||||||||||||||
Contractor supplies sales | 75 | 3 | 7 | 85 | 80 | 3 | 6 | 89 | ||||||||||||||||
Service and other revenues | 33 | 1 | — | 34 | 36 | 1 | — | 37 | ||||||||||||||||
Total revenues | $ | 771 | $ | 44 | $ | 73 | $ | 888 | $ | 844 | $ | 52 | $ | 83 | $ | 979 | ||||||||
Six months ended June 30, 2006 | ||||||||||||||||||||||||
Nine months ended September 30, 2006 | ||||||||||||||||||||||||
Equipment rentals | $ | 1,101 | $ | 81 | $ | 107 | $ | 1,289 | $ | 1,745 | $ | 129 | $ | 187 | $ | 2,061 | ||||||||
Sales of rental equipment | 155 | 6 | 2 | 163 | 238 | 10 | 2 | 250 | ||||||||||||||||
New equipment sales | 105 | 7 | 2 | 114 | 159 | 13 | 2 | 174 | ||||||||||||||||
Contractor supplies sales | 178 | 8 | 11 | 197 | 276 | 12 | 18 | 306 | ||||||||||||||||
Service and other revenues | 76 | 2 | — | 78 | 117 | 2 | — | 119 | ||||||||||||||||
Total revenues | $ | 1,615 | $ | 104 | $ | 122 | $ | 1,841 | $ | 2,535 | $ | 166 | $ | 209 | $ | 2,910 | ||||||||
Six months ended June 30, 2005 | ||||||||||||||||||||||||
Nine months ended September 30, 2005 | ||||||||||||||||||||||||
Equipment rentals | $ | 981 | $ | 58 | $ | 102 | $ | 1,141 | $ | 1,599 | $ | 100 | $ | 178 | $ | 1,877 | ||||||||
Sales of rental equipment | 159 | 6 | 2 | 167 | 215 | 9 | 4 | 228 | ||||||||||||||||
New equipment sales | 88 | 7 | 1 | 96 | 139 | 10 | 2 | 151 | ||||||||||||||||
Contractor supplies sales | 133 | 5 | 11 | 149 | 213 | 9 | 16 | 238 | ||||||||||||||||
Service and other revenues | 64 | 2 | 1 | 67 | 102 | 2 | — | 104 | ||||||||||||||||
Total revenues | $ | 1,425 | $ | 78 | $ | 117 | $ | 1,620 | $ | 2,268 | $ | 130 | $ | 200 | $ | 2,598 | ||||||||
Equipment rentalsrentals..
Three months ended JuneSeptember 30, 2006 and 2005. 2006 equipment rentals of $698$773 increased $71,$36, or 115 percent, reflecting a 5.65.1 percent increase in rental rates and an 8.6a 3.5 percent increase in same-store rental revenues. The increase also reflected an increaserevenues, partially offset by a 0.2 percentage point decline in our dollar equipment utilization rate (which is calculated with consideration to our rental equipment revenue and the average original cost of equipment in out rental fleet) from 64.072.4 percent for the three months ended JuneSeptember 30, 2005 to 65.372.2 percent for the three months ended JuneSeptember 30, 2006. The decrease in our dollar equipment utilization rate reflects a change in the mix of our equipment on rent. On a segment basis, equipment rentals represented approximately 6870 percent, 7677 percent and 8992 percent of total revenues for general rentals, trench safety, pump and power and traffic control, respectively. General rentals equipment rentals increased $58,$25, or 114 percent, reflecting increased rental rates and an 8.6a 3.3 percent increase in same-store rental revenues. Trench safety, pump and power equipment rentals increased $10,$6, or 3114 percent, reflecting a 13.5 percent increase in same-store rental revenues.revenue growth from new branches (“cold starts”) as well as acquisitions. Traffic control equipment rentals increased $3,$5, or 5 percent, reflecting a 6.2 percent increase in same-store rental revenues, partially offset by the impact of store closures.7 percent.
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SixNine months ended JuneSeptember 30, 2006 and 2005. 2006 equipment rentals of $1,289$2,061 increased $148,$184, or 1310 percent, reflecting a 6.05.6 percent increase in rental rates and a 10.9an 8.4 percent increase in same-store rental revenues. The increase also reflectedreflects an increase in our dollar equipment utilization rate from 58.963.5 percent for the sixnine months ended JuneSeptember 30, 2005 to 61.966.1 percent for the sixnine months ended JuneSeptember 30, 2006. On a segment basis, equipment rentals represented approximately 6869 percent, 78 percent and 8889 percent of total revenues for general rentals, trench safety, pump and power, and traffic control, respectively.respectively, for the nine months ended September 30, 2006. General rentals equipment rentals increased $120,$146, or 129 percent, reflecting increased rental rates and a 10.7an 8.3 percent increase in same-store rental revenues. Trench safety, pump and power equipment rentals increased $23,$29, or 40 percent, reflecting an 18.7 percent increase in same-store rental revenues.29 percent. Traffic control equipment rentals increased $5,$9, or 5 percent, reflecting a 8.1 percent increase in same-store rental revenues, partially offset by the impact of store closures.percent.
Sales of rental equipment. “Sales of rental equipment” represents revenues associated with selling used equipment. For the three and sixnine months ended JuneSeptember 30, 2006, sales of rental equipment represented approximately 9 percent of our total revenues and our general rentals segment accounted for approximately 95 percent of these sales. For the three and six months ended June 30, 2005, sales of rental equipment represented approximately 108 percent of our total revenues and our general rentals segment accounted for approximately 95 percent of these sales. Sales of rental equipment for trench safety, pump and power and traffic control were insignificant for all periods. The decreaseincrease in sales of rental equipment for the three and nine months ended JuneSeptember 30, 2006 primarily relates to the mix of equipment soldimproved pricing and the decrease in sales for the six months ended June 30, 2006 primarily relates to a decrease in the volumemix of equipment sold.
New equipment sales. For the three and sixnine months ended June 30,September 2006 and 2005, sales of new equipment represented approximately 6 percent of our total revenues. Our general rentals segment accounted for between 8990 and 9493 percent of these sales. Sales of new equipment for trench safety, pump and power and traffic control were insignificant for all periods. The increase in sales of new equipment for the three and nine months ended JuneSeptember 30, 2006 primarily relates to the mix of equipment sold and for the six months ended June 30, 2006 primarily relates to an increase in the volume of equipment sold.
Sales of contractorContractor supplies sales. “Sales of contractor supplies”“Contractor supplies sales” represents our revenues associated with selling a variety of contractor supplies including construction consumables, tools, small equipment and safety supplies. Consistent with sales of rental and used equipment, general rentals accounts for substantially all of our contractor supplies sales. For the three and sixnine months ended JuneSeptember 30, 2006 and 2005, general rentals accounted for between 88 andapproximately 90 percent of total sales of contractor supplies.supplies sales. The increase in sales of contractor supplies sales for the three and sixnine months ended JuneSeptember 30, 2006 primarily relates to an increase in the volume of supplies sold.
Service and other revenues. “Service and other revenues” represents 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. The increase in service and other revenue for the three and nine months ended JuneSeptember 30, 2006 primarily relates to increased service and parts sales and for the six months ended June 30, 2006 primarily relates to increased parts sales.
27
Segment Operating Profit.
Segment operating profit and operating margin were as follows:
General rentals | Trench safety, pump and power | Traffic control | Total | General rentals | Trench safety, pump and power | Traffic control | Total | |||||||||||||||||||||||||
Three months ended June 30, 2006 | ||||||||||||||||||||||||||||||||
Three months ended September 30, 2006 | ||||||||||||||||||||||||||||||||
Operating Profit | $ | 190 | $ | 18 | $ | 8 | $ | 216 | ||||||||||||||||||||||||
Operating Margin | 21 | % | 29 | % | 9 | % | 20 | % | ||||||||||||||||||||||||
Three months ended September 30, 2005 | ||||||||||||||||||||||||||||||||
Operating Profit (Loss) | $ | 142 | $ | 13 | $ | (5 | ) | $ | 150 | $ | 156 | $ | 18 | $ | (1 | ) | $ | 173 | ||||||||||||||
Operating Margin | 16 | % | 24 | % | -7 | % | 15 | % | 18 | % | 35 | % | -1 | % | 18 | % | ||||||||||||||||
Three months ended June 30, 2005 | ||||||||||||||||||||||||||||||||
Nine months ended September 30, 2006 | ||||||||||||||||||||||||||||||||
Operating Profit (Loss) | $ | 123 | $ | 11 | $ | (2 | ) | $ | 132 | $ | 414 | $ | 44 | $ | (4 | ) | $ | 454 | ||||||||||||||
Operating Margin | 16 | % | 25 | % | -3 | % | 15 | % | 16 | % | 27 | % | -2 | % | 16 | % | ||||||||||||||||
Six months ended June 30, 2006 | ||||||||||||||||||||||||||||||||
Nine months ended September 30, 2005 | ||||||||||||||||||||||||||||||||
Operating Profit (Loss) | $ | 224 | $ | 26 | $ | (12 | ) | $ | 238 | $ | 350 | $ | 35 | $ | (14 | ) | $ | 371 | ||||||||||||||
Operating Margin | 14 | % | 25 | % | -10 | % | 13 | % | 15 | % | 27 | % | -7 | % | 14 | % | ||||||||||||||||
Six months ended June 30, 2005 | ||||||||||||||||||||||||||||||||
Operating Profit (Loss) | $ | 194 | $ | 17 | $ | (13 | ) | $ | 198 | |||||||||||||||||||||||
Operating Margin | 14 | % | 22 | % | -11 | % | 12 | % |
General rentals. For the three months ended JuneSeptember 30, 2006, operating margin remained flatincreased by 3 percentage points as compared to the same period in 2005. Higher selling costs related to growth in the business and increased costs for labor and benefits associated with normal inflationary increases were offset by2005 primarily reflecting higher rental rates.rates on a larger fleet.
For the sixnine months ended JuneSeptember 30, 2006, operating margin was flatincreased by 1 percentage point as compared to the same period in 2005. The benefit2005 as the benefits of higher rental rates waswere partially offset by higher selling costs related to growth in the business, increased costs for labor and benefits associated with normal inflationary increases and increased professional costs related to regulatory issues and related matters.
Trench safety, pump and power. Trench safety, pump and power operating profit increased by $2 forFor the three months ended JuneSeptember 30, 2006, operating profit remained flat as compared to the same period in 2005. The increase reflectsOur operating margin declined by 6 percent as the impact of increased revenuescosts associated with the opening of 25 percent due to higher rental ratesnew stores (“cold starts”) and revenue mix offset a 919 percent increase in same store revenues.
For the sixnine months ended JuneSeptember 30, 2006, operating marginprofit increased 3 percentage pointsby $9 as compared to the same period in 2005. Operating profit growth reflects a 33an approximate 28 percent increase in revenue primarily relating to a 17 percent increase in same store revenues.revenue.
Traffic control. Traffic control operating loss increasedprofit improved by $3$9 for the three months ended JuneSeptember 30, 2006 as compared to the same period in 2005 reflecting increased operating costs primarily due tothe benefit of an approximate 5 percent increase in the cost of materials consumed,revenues as well as increased selling costs. The adverse impactcost containment initiatives.
For the nine months ended September 30, 2006, the operating loss decreased by $10 as compared to the same period in 2005 reflecting the benefit of these increased costs was partially offset by increasedan approximate 5 percent increase in revenues of approximately 3 percent.as well as cost containment initiatives.
Gross Margin. Gross margins by revenue classification were as follows:
Three Months Ended | Three Months Ended | |||||||||||
June 30, 2006 | June 30, 2005 | September 30, 2006 | September 30, 2005 | |||||||||
Total gross margin | 34.0 | % | 31.9 | % | 36.4 | % | 35.2 | % | ||||
Equipment rentals | 37.1 | % | 33.8 | % | 39.7 | % | 38.0 | % | ||||
Sales of rental equipment | 30.6 | % | 25.3 | % | 31.0 | % | 29.5 | % | ||||
New equipment sales | 17.7 | % | 18.2 | % | 18.3 | % | 18.2 | % | ||||
Contractor supplies sales | 18.3 | % | 24.7 | % | 21.1 | % | 22.5 | % | ||||
Service and other revenues | 53.7 | % | 52.9 | % | 53.7 | % | 45.9 | % |
Total gross margin Equipment rentals Sales of rental equipment New equipment sales Contractor supplies sales Service and other revenues28 Six Months Ended June 30, 2006 June 30, 2005 32.3 % 29.9 % 34.8 % 30.8 % 30.7 % 26.9 % 17.5 % 17.7 % 18.8 % 24.8 % 51.3 % 52.2 %
Nine Months Ended | ||||||
September 30, 2006 | September 30, 2005 | |||||
Total gross margin | 33.4 | % | 31.5 | % | ||
Equipment rentals | 36.0 | % | 33.0 | % | ||
Sales of rental equipment | 30.8 | % | 27.6 | % | ||
New equipment sales | 17.8 | % | 17.9 | % | ||
Contractor supplies sales | 19.6 | % | 23.9 | % | ||
Service and other revenues | 52.1 | % | 50.0 | % |
For the three months ended JuneSeptember 30, 2006, total gross margin improved 2.11.2 percentage points as compared to the same period in 2005. Equipment rentals gross margin improved 3.31.7 percentage points primarily due to a year-over-year increase in rental rates of 5.1 percent. During the second quarter of 2006, we determined that we had been depreciating certain vehicles on capital lease over a period which exceeded the related contractual lease terms. As a result, our Depreciation of rental equipment for the nine months ended September 30, 2006 includes a pre- and after-tax charge of $1 to correct depreciation expense recorded since the fourth quarter of 2002. Depreciation of rental equipment is a component of Equipment rentals gross margin. This correction does not affect historical or future cash flows and its effect on our current and prior years’ Net income, cash flows from operations, and Stockholders’ equity is not material. The reduction in the gross margin on contractor supplies sales of 1.4 percentage points resulted primarily from increased costs related to our distribution centers that opened during 2005. The fluctuations in gross margin on sales of rental equipment reflect improved pricing and a change in the mix of equipment sold.
For the nine months ended September 30, 2006, total gross margin improved by 1.9 percentage points as compared to the same period in 2005. Equipment rentals gross margin improved 3.0 percentage points primarily due to a year-over-year increase in rental rates of 5.6 percent and strong revenue growth in trench safety, pump and power. The reduction in the gross margin on contractor supplies sales of 6.44.3 percentage points resulted primarily from increased costs related to the opening of newour distribution centers and increased provisions for excess and slow moving inventory. The fluctuations in gross margin on sales of rental equipment and new equipment result primarily from changes in the mix of equipment sold.
For the six months ended June 30, 2006, total gross margin improved 2.4 percentage pointsthat opened during 2005 as compared to the same period in 2005. Equipment rentals gross margin improved 4.0 percentage points primarily due to a year-over-year increase in rental rates of 6.0 percent and strong revenue growth in trench safety, pump and power. The reduction in the gross margin on contractor supplies sales of 6.0 percentage points resulted primarily from increased costs related to the opening of new distribution centers andwell as increased provisions for excess and slow moving inventory. The increase in gross margin on the sales of rental equipment resulted from improved pricing and a change in the mix of equipment sold.
Selling, general and administrative expenses (“SG&A”). SG&A expense information for the three and sixnine months ended JuneSeptember 30, 2006 and 2005 was as follows:
Three Months Ended | Three Months Ended | |||||||||||||||
June 30, 2006 | June 30, 2005 | September 30, 2006 | September 30, 2005 | |||||||||||||
Total SG&A expenses | $ | 164 | $ | 136 | $ | 164 | $ | 162 | ||||||||
SG&A as a percentage of revenue | 16.5 | % | 15.3 | % | 15.3 | % | 16.5 | % | ||||||||
Six Months Ended | Nine Months Ended | |||||||||||||||
June 30, 2006 | June 30, 2005 | September 30, 2006 | September 30, 2005 | |||||||||||||
Total SG&A expenses | $ | 317 | $ | 258 | $ | 480 | $ | 419 | ||||||||
SG&A as a percentage of revenue | 17.2 | % | 15.9 | % | 16.5 | % | 16.1 | % |
SG&A expense primarily includes sales force compensation, bad debt expense, advertising and marketing expenses, third party professional fees, management salaries and clerical and administrative overhead.
For the three months ended JuneSeptember 30, 2006, SG&A expense increased $28.was essentially flat and, as a percentage of revenue, decreased by 1.2 percent points. This increaseyear-over-year performance reflects normal inflationary increases and higher selling and administrative costs related to growth in the business, offset by a year-over-year reduction of $6 in the level of professional fees associated with regulatory issues and related matters as well as increased costs associated with professional fees for business improvement initiatives.a year-over-year reduction of $5 in our bad debt provisions.
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For the sixnine months ended JuneSeptember 30, 2006, SG&A expense increased $59.$61. 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 $11$5 as well as professional fees for business improvement initiatives.
Non-rental depreciation and amortizationfor the three and sixnine months ended JuneSeptember 30, 2006 and 2005 was as follows:
Three Months Ended | Three Months Ended | |||||||||||||||
June 30, 2006 | June 30, 2005 | September 30, 2006 | September 30, 2005 | |||||||||||||
Non-rental depreciation and amortization | $ | 24 | $ | 15 | $ | 10 | $ | 10 | ||||||||
Non-rental depreciation and amortization as a percent of revenue | 2 | % | 2 | % | 1 | % | 1 | % | ||||||||
Six Months Ended | Nine Months Ended | |||||||||||||||
June 30, 2006 | June 30, 2005 | September 30, 2006 | September 30, 2005 | |||||||||||||
Non-rental depreciation and amortization | $ | 40 | $ | 29 | $ | 38 | $ | 28 | ||||||||
Non-rental depreciation and amortization as a percent of revenue | 2 | % | 2 | % | 1 | % | 1 | % |
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 and (ii) the amortization of other intangible assets. Our other intangible assets primarily consist of customer relationships and non-compete agreements. During the second quarter of 2006, we determined that we had been depreciating certain vehicles on capital lease over a period which exceeded the related contractual lease terms. As a result, our non-rentalNon-rental depreciation and amortization expense for the three and sixnine months ended JuneSeptember 30, 2006 includes a pre-tax charge of $5$4 ($32 net of tax) to correct depreciation expense recorded since the fourth quarter of 2002. 2002.This correction does not affect historical or future cash flows and its effect on our current and prior years’ netNet income, cash flows from operations, and shareholders’Stockholders’ equity is not material.
Interest expense, net for the three and sixnine months ended JuneSeptember 30, 2006 and 2005 was as follows:
Three Months Ended | Three Months Ended | |||||||||||
June 30, 2006 | June 30, 2005 | September 30, 2006 | September 30, 2005 | |||||||||
Interest expense, net | $ | 52 | $ | 43 | $ | 58 | $ | 48 | ||||
Six Months Ended | Nine Months Ended | |||||||||||
June 30, 2006 | June 30, 2005 | September 30, 2006 | September 30, 2005 | |||||||||
Interest expense, net | $ | 102 | $ | 86 | $ | 160 | $ | 134 |
Interest expense, net, for the three and sixnine months ended JuneSeptember 30, 2006 increased $9$10 and $16, respectively, reflecting$26, respectively. As discussed more fully in note 5 to our unaudited condensed consolidated financial statements, during the third quarter of 2006 we prepaid $400 of our outstanding term loan and retired $63 of our subordinated convertible debentures. These transactions will reduce our interest expense going forward as well as provide us with greater financial flexibility. As a result of these transactions, Interest expense, net, for the three and nine months ended September 30, 2006 includes charges of $5.6 related to the partial write-off of deferred financing costs and a charge of $2.6 related to a partial write-off of the unamortized premium associated with the interest rate caps on our term loan. These interest rate caps have been designated as cash flow hedges. Additionally, Interest expense, net, for the three and nine months ended September 30, 2006 includes a gain of $3.2 related to the partial termination of the interest rate caps hedging our term loan exposures. The balance of
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the increase for the three and nine months ended September 30, 2006 relates to the increase in interest ratescosts applicable to our floating rate debt. As of JuneSeptember 30, 2006, approximately 4253 percent of our debt was floating rate debt.
Income taxes. The following table summarizes our consolidated provision for income taxes and the related effective tax rate for the three and sixnine months ended JuneSeptember 30, 2006 and 2005:
Three Months Ended | ||||||||
June 30, 2006 | June 30, 2005 | |||||||
Pre-tax income | $ | 96 | $ | 82 | ||||
Provision for income taxes | $ | 40 | $ | 32 | ||||
Effective tax rate | 42 | % | 39 | % | ||||
Six Months Ended | ||||||||
June 30, 2006 | June 30, 2005 | |||||||
Pre-tax income | $ | 129 | $ | 101 | ||||
Provision for income taxes | $ | 53 | $ | 39 | ||||
Effective tax rate | 41 | % | 39 | % |
Pre-tax income Provision for income taxes Effective tax rate Pre-tax income Provision for income taxes Effective tax rate Three Months Ended September 30,
2006 September 30,
2005 $ 154 $ 126 $ 59 $ 50 38.3 % 39.7 % Nine Months Ended September 30,
2006 September 30,
2005 $ 283 $ 227 $ 112 $ 89 39.6 % 39.2 %
The difference between the consolidated effective tax rates and the U.S. federal statutory income tax rate of 35 percent primarily relates to state taxes as well as certain non-deductible charges. Additionally, during the second quarter, we recordedprovision for income taxes for the nine months ended September 30, 2006 includes a net charge of $3 primarily related to an identified tax contingency item.
Our effective tax rate is based on recurring factors including the geographical mix of income before taxes and the related tax rates in those jurisdictions. In addition, our effective tax rate will change based on discrete or other nonrecurring events (such as audit settlements) that may not be predictable. We anticipate that our full year tax rate will approximate 39.9%39.5%.
Liquidity and Capital Resources
Liquidity. We manage our liquidity using internal cash management practices, which are subject to (1)(i) the policies and cooperation of the financial institutions we utilize to maintain and provide cash management services, (2)(ii) the legal requirements of the agreements to which we are a party and (3)(iii) the statutes, regulations and practices of each of the local jurisdictions in which we operate.operate
Our principal existing sources of liquidity are cash generated from operations and from the sale of rental equipment and borrowings available under our revolving credit facility and accounts receivables securitization facility.
As of JuneSeptember 30, 2006, we had (i) $478$414 of borrowing capacity available under the revolving credit facility portion of our $1.55 billion senior secured credit facility, (ii) $200 ofno borrowing capacity available under our accounts receivables securitization facility (reflecting the size of the eligible collateral pool as of such date and no loans outstanding) and (iii) cash and cash equivalents of $208.$140. As discussed in note 9 to our unaudited condensed consolidated financial statements, in October 2006 we amended our existing accounts receivable securitization facility to, among other things, increase the facility size from $200 to $300. We believe that our existing sources of cash will be sufficient to support our existing operations over the next twelve months.
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 and (v) acquisitions. We plan to fund such cash requirements from cash generated from operations as well as our existing sources of liquidity
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discussed 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.
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 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.
Sources and Uses of Cash. During the sixnine months ended JuneSeptember 30, 2006, we (i) generated cash from operations of $369$606, (ii) generated cash from the sale of rental equipment of $250, (iii) borrowed $200 under our accounts receivable securitization facility, (iv) borrowed $65 under our revolver and (v) received $64 of proceeds from the exercise of stock options. We used cash during this period principally to (i) prepay $400 of term loan debt and retire $63 of our subordinated convertible debentures (ii) purchase rental equipment of $770 (including the buy-out of equipment under operating leases of $46), (iii) purchase non-rental equipment of $81 and (iv) purchase other companies, net of cash acquired, of $39.
During the nine months ended September 30, 2005, we (i) generated cash from operations of $414 and (ii) generated cash from the sale of rental equipment of $163.$228. We used cash during this period principally to (i) purchase rental equipment of $612$680 (including the buy-out of equipment under operating leases of $44)$9), (ii) purchase non-rental equipment of $47, (iii) purchase other companies, net of cash acquired, of $39$56 and (iv) make debt repayments and pay financing costs of $15.$66.
During the six months ended June 30, 2005, we (i) generated cash from operations of $318 and (ii) generated cash from the sale of rental equipment of $167. We used cash during this period principally to (i) purchase rental equipment of $484, (ii) purchase non-rental equipment of $32, (iii) purchase other companies, net of cash acquired, of $3 and (iv) make debt repayments of $25.
Our corporate family credit ratings as of August 7,October 20, 2006 were as follows:
Corporate Rating | Outlook (1)(2)(3) | |||
Moody’s | ||||
S&P | BB- | |||
Fitch | BB- | Stable |
(1) | On |
(2) | On |
(3) | On June 6, 2006, Fitch changed its outlook to Stable from Negative. |
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 Off-Balance Sheet Arrangements
We lease real estate, rental equipment and non-rental equipment under operating leases as a 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 $11. 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 Financial Accounting Standards Board Interpretation No. 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 June 30, 2006 or December 31, 2005 or any prior date because the leases associated with such guarantees were entered into prior to January 1, 2003.
Relationship Between Holdings and URNA
Holdings is principally a holding company and primarily conducts its operations through its wholly owned subsidiary, URNA, and subsidiaries of URNA. Holdings providesprovide certain services to URNA 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 URNA and its subsidiaries.
Forward-Looking Statements
Certain statements in this Item 2 or contained elsewhere in this Report, as well as other oral and written statements made by us to the public, contain and incorporate by reference forward-looking statements within the
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meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These statements can generally be identified by words such as “believes,” “expects,” “plans,” “intends,” “projects,” “forecasts,” “may,” “will,” “should,” “on track,” “affirms” or “anticipates,” or the negative thereof or comparable terminology, or by discussions of strategy or outlook. Our businesses and operations are subject to a variety of risks and uncertainties, many of which are beyond our control, and, consequently, actual results may differ materially from those projected by any forward-looking statements. Factors that could cause actual results to differ from those projected include, but are not limited to, the following: (1) weaker or unfavorable economic and industry conditions can reduce demand and prices for our products and services, (2) non-residential construction spending, or governmental funding for highway, infrastructure and other construction projects, may not reach
expected levels, (3) we may not have access to capital that our businesses or growth plans may require, (4) any companies we acquire could have undiscovered liabilities, may stretch our management capabilities andor may be difficult to integrate, (5) rates we can charge may increase less than anticipated, or costs we incur may increase more than anticipated, (6) we are highly-leveraged,have significant leverage, which requires us to use a substantial portion of our cash flow for debt service and can constrain our flexibility in responding to unanticipated or adverse business conditions, (7) we have not yet successfully remediated a previously identified material weakness in our internal controls relating to our financial close process, (8) we are subject to an ongoing inquiry by the SEC, and there can be no assurance that its outcome will not require additional changes in our accounting policies and practices, restatements of financial statements, revisions of results or guidance, or otherwise have adverse consequences for us and (9) we may incur additional significant expenses in connection with the SEC inquiry, our related internal reviews, the class action lawsuits and derivative actions that were filed in light of the SEC inquiry, the U.S. Attorney’s office request for information, or other litigation, regulatory or investigatory matters, related theretoto the SEC inquiry or otherwise. For a fuller description of these and other possible uncertainties, please refer to our 2005 Form 10-K, as well as to our subsequent filings with the SEC.
Our forward-looking statements contained herein speak only as of the date of this Report or, in the case of any document incorporated by reference, the date of that document. We make no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances or changes in expectations.
Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
Our exposure to market risk primarily consists of (i) interest rate risk associated with our variable rate debt and (ii) foreign currency exchange rate risk primarily associated with our Canadian operations.
Interest Rate 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. As of JuneSeptember 30, 2006, we had swap agreements with an aggregate notional amount of $1.2 billion and cap agreements with an aggregate notional amount of $725.$329. The effect of the swap agreements was, at JuneSeptember 30, 2006, to convert $1.2 billion of our fixed rate notes to floating rate instruments. The fixed rate notes being converted consisted of (i) $445 of our 6 1/2 percent notes through 2012, (ii) $375 of our 7 percent notes, and (iii) $375 of our 7 3/4 percent senior subordinated notes through 2013. The caps are designated as cash flow hedges and limit the interest rate on our term loan. During the third quarter of 2006, in connection with the prepayment of $400 of term loan borrowings, the Company terminated a portion of these interest rate caps.
As of JuneSeptember 30, 2006, after giving effect to our interest rate swap and cap agreements, we had an aggregate of $1.3$1.6 billion of indebtedness that bears interest at variable rates. For this purpose, the portion of the term loan subject to the cap is considered fixed. The debt that is subject to fluctuations in interest rates includes $143$208 of borrowings under our Canadian revolving credit facility, $1.2 billion in swaps, and $8$2 of term loans not subject to an interest rate cap.cap and $200 of borrowings under the accounts receivable securitization facility. The weighted-average effective interest rates applicable to our variable rate debt on JuneSeptember 30, 2006 were (i) 6.2%6.4% percent for the revolving credit facility, (represents the Canadian rate since the amount outstanding was in Canadian borrowings), (ii) 7.4%7.3 percent for the term loan, and (iii) 7.9%8.0 percent for the debt subject to our swap agreements.agreements and (iv) 5.3 percent for our accounts receivable securitization facility. As of JuneSeptember 30, 2006, based upon the amount of our variable rate debt outstanding, after giving effect to our interest rate swap
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agreements, our annual earnings would decrease by approximately $8$9 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.
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 the exchange rate between U.S. and Canadian dollars. Based upon the level of our Canadian operations during 2005 relative to the Company as a whole, a 10 percent change in this exchange 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 JuneSeptember 30, 2006.
We do not engage in purchasing forward exchange contracts for speculative purposes.
Item 4. | Controls and Procedures |
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Offer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As of JuneSeptember 30, 2006, our management carried out an evaluation, under the supervision and with the 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 continued existence of the material weakness in internal control over financial reporting described below, our chief executive officer and chief financial officer have concluded that, as of JuneSeptember 30, 2006, our disclosure controls and procedures were not effective.
In light of the material weaknesses in internal control described below, we performed additional procedures to ensure that our unaudited condensed consolidated financial statements included in this Report were prepared in accordance with GAAP. These steps included, among other actions, expansion of our closing procedures, including performing detailed analyses of accounts and review of subsequent transactions to affirm account balances. As a result of the additional procedures, management has concluded that the unaudited condensed consolidated financial statements included in this Report are fairly stated, in all material respects, in accordance with GAAP.
Under the supervision of our chief executive officer and chief financial officer, our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2005. 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. As previously described in greater detail in Item 9A of our 2005 Form 10-K, we determined that internal controls over the financial statement close process were not effective and represented a material weakness in internal control over financial reporting as of December 31, 2005. This material weakness in internal control over financial reporting had not been effectively remediated, and therefore continued to exist, as of JuneSeptember 30, 2006.
During 2006, we arehave been implementing short-term enhancements to the financial close process to remediate the material weakness in internal control over financial reporting, as well as a long-term finance transformation. The short-term enhancements include:including the following:
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In addition to these short-termremediation measures, in the first quarter of 2006 we initiated a long-term enterprise-wide finance transformation project to assess and improve various other aspects of our financial operations and systems. Substantial improvements to our financial operations are expected to be achieved from this project over a twelve- to eighteen-month period.
Until the short-termfinancial close process remediation measures discussed above are completed, the material weakness in the financial statement close process will continue to exist. Management presently anticipates, but cannot guarantee, that the short-term changes necessary to remediate this material weakness will be in place by year-end 2006. Until such time that the remediation is effectively completed, we will rely on additional analyses and other detailed procedures to assist us with meeting the objectives otherwise fulfilled by an effective internal control environment.
Changes in Internal Control over Financial Reporting
As previously reported in our Current Report on Form 8-K filed on September 1, 2006, during the third quarter of 2006, we announced the appointment of a member of financial management as Senior Vice President and Controller and the appointment of another member of financial management as Vice President and Assistant Corporate Controller and Principal Accounting Officer. Except for these appointments and the ongoing progress related to the other remediation measures discussed above, there were no changes in our internal control over financial reporting during the quarter ended JuneSeptember 30, 2006 that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.
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Item 1. | Legal Proceedings |
The information set forth under note 5 to6 of our unaudited condensed consolidated financial statements in this Report is incorporated by reference in answer to this Item.
Item 1A. | Risk Factors |
There have been no material changes with respect to this Item from the disclosure included in our 2005 Form 10-K.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Purchases of Equity Securities by the Issuer
The following table provides information about purchases of the Company’s common stock by the Company during the secondthird quarter of 2006:
Period | Total Number of Shares Purchased (1) | Average Price Paid per Share | |||
April 1, 2006 to April 30, 2006 | 2,910 | $ | 33.76 | ||
May 1, 2006 to May 31, 2006 | 3,776 | $ | 32.56 | ||
June 1, 2006 to June 30, 2006 | — | — | |||
Total | 6,686 |
Period | Total Number of Shares Purchased (1) | Average Price Paid per Share | |||
July 1, 2006 to July 31, 2006 | 9,052 | $ | 27.70 | ||
August 1, 2006 to August 31, 2006 | 5,442 | $ | 21.08 | ||
September 1, 2006 to September 30, 2006 | 16,252 | $ | 22.83 | ||
Total | 30,746 | ||||
(1) | The shares were surrendered to the Company by employees in order to satisfy tax withholding obligations upon the vesting of restricted |
The Company’s Annual Meeting of Stockholders was held on June 13, 2006. The following directors were elected by holders of shares of our common stock and our Class D-1 Perpetual Convertible Preferred Stock, as follows:
Votes | ||||
For | Withheld | |||
Class 1 Directors | ||||
Wayland R. Hicks | 71,150,101 | 3,680,151 | ||
Singleton B. McAllister | 71,159,207 | 3,671,045 | ||
John S. McKinney | 71,150,367 | 3,679,885 | ||
Class 2 Directors | ||||
Brian D. McAuley | 70,524,236 | 4,306,016 | ||
Jason Papastavrou | 71,158,947 | 3,671,305 | ||
Gerald Tsai, Jr. | 71,062,105 | 3,768,147 |
The Class 1 directors were elected for a two-year term expiring in 2008 and the Class 2 directors were elected for a three-year term expiring in 2009.
In addition, the following directors were elected by holders of shares of our Series C Perpetual Convertible Preferred Stock (the “Series C Preferred Stock”) for a one-year term expiring in 2007, as follows:
Votes | ||||
For | Withheld | |||
Series C Preferred Stock Directors | ||||
Leon D. Black | 12,000,000 | 0 | ||
Michael S. Gross | 12,000,000 | 0 |
The following individuals, who were not up for election at the 2006 Annual Meeting of Stockholders, continue to serve as our Class 3 directors for a term expiring in 2007: Bradley S. Jacobs (chairman); Howard L. Clark, Jr.; Mark A. Suwyn; and Lawrence “Keith” Wimbush.
The other matters voted upon at the 2006 Annual Meeting of Stockholders, and the results of those votes, are as follows:
For | Against | Abstain | Broker Non-Votes | |||
50,532,627 | 30,843,497 | 37,092 | 5,417,036 |
For | Against | Abstain | Broker Non-Votes | |||
85,082,855 | 1,709,667 | 37,730 | 0 |
For | Against | Abstain | Broker Non-Votes | |||
51,785,896 | 29,345,754 | 281,566 | 5,417,036 |
There were no additional matters voted upon at the 2006 Annual Meeting of Stockholders. An anticipated stockholder proposal concerning director election by majority vote was not presented at the meeting and, accordingly, votes on the proposal were not tabulated.36
Item 6. | Exhibits |
(a) Exhibits:
Exhibit Number | Description of Exhibit | ||
3 | (a) | Amended and Restated Certificate of Incorporation of United Rentals, Inc., (incorporated by reference to exhibit 3.1 of United Rentals, Inc. Report on Form 10-Q for the quarter ended June 30, 1998) | |
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. (incorporated by reference to exhibit 3.2 of United Rentals, Inc. Report on Form 10-Q for the quarter ended June 30, 1998) | |
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 Report on Form 8-K filed on October 5, 2001) | |
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 of the United Rentals, Inc. Current Report on Form 8-K filed on October 5, 2001) | |
3 | (h) | Amended and Restated Certificate of Incorporation of United Rentals (North America), Inc., (incorporated by reference to Exhibit 3.3 of the United Rentals (North America), Inc. Report on Form 10-Q for the quarter ended June 30, 1998) | |
3 | (i) | By-laws of United Rentals (North America), Inc., (incorporated by reference to Exhibit 3.4 of the United Rentals (North America), Inc. Report on Form 10-Q for the quarter ended June 30, 1998) | |
10 | (a) | Employment Agreement dated | |
10 | (b) | ||
Employment Agreement dated | |||
31 | (a)* | Rule 13a-14(a) Certification by Chief Executive Officer | |
31 | (b)* | Rule 13a-14(a) Certification by Chief Financial Officer | |
32 | (a)* | Section 1350 Certification by Chief Executive Officer | |
32 | (b)* | Section 1350 Certification by Chief Financial Officer |
* | Filed herewith. |
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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 thereunto duly authorized.
UNITED RENTALS, INC. | ||||||||||||
Dated: | October 31, 2006 | By: | /s/ | |||||||||
John J. Fahey Vice President-Assistant Corporate Controller and Principal Accounting Officer | ||||||||||||
/s/ TODD G. HELVIE | ||||||||||||
| ||||||||||||
UNITED RENTALS (NORTH AMERICA), INC. | ||||||||||||
Dated: | October 31, 2006 | By: | /s/ | |||||||||
John J. Fahey Vice President-Assistant Corporate Controller and Principal Accounting Officer | ||||||||||||
/s/ TODD G. HELVIE | ||||||||||||
| ||||||||||||
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