UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
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or
[ ] 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 1-12623
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U.S. RENTALS, INC.
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(Exact Name of Registrant as Specified in its Charter)
DELAWARE 94-3061974
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(State of Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1581 Cummins Drive, Ste. 155, Modesto, California 95358
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(Address of Principal Executive Offices) (Zip Code)
(209) 544-9000
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(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 month (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days.
Yes [x] No [ ]
There were 30,759,975 shares of common stock, $.01 per value, outstanding
at April 27, 1998.
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U.S. RENTALS, INC.
TABLE OF CONTENTS
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PART I: Financial Information
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ITEM 1. Financial Statements
Balance Sheets -
March 31, 1998 and December 31, 1997............... 3
Statements of Operations -
Three months ended March 31, 1998 and 1997......... 4
Statements of Cash Flows -
Three months ended March 31, 1998 and 1997......... 5
Statement of Changes in Stockholders' Equity -
Three months ended March 31, 1998.................. 6
Notes to Financial Statements -
March 31, 1998..................................... 7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 9
PART II: Other Information
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ITEM 1. Legal Proceedings................................... 13
ITEM 2. Changes in Securities............................... 13
ITEM 3. Defaults Upon Senior Securities..................... 13
ITEM 4. Submission of Matters to a Vote of Security Holders. 13
ITEM 5. Other Information................................... 13
ITEM 6. Exhibits and Reports on Form 8-K.................... 13
Signatures.......................................................... 14
U.S. RENTALS, INC.
BALANCE SHEETS
(In thousands, except share data)
March 31, December 31,
1998 1997
------------ ------------
ASSETS (Unaudited)
Cash and cash equivalents $ 6,344 $ 3,104
Accounts receivable, net 61,533 60,906
Inventories 17,234 17,379
Rental equipment, net 441,202 390,598
Property and equipment, net 83,575 78,014
Goodwill, net 25,378 23,114
Prepaid expenses and other assets 14,656 12,696
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Total assets $649,922 $585,811
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LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and other liabilities $ 74,744 $ 75,048
Note payable to related party 21,000 17,000
Notes payable, other 259,200 203,300
Deferred taxes 24,769 25,077
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Total liabilities 379,713 320,425
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Stockholders' equity:
Common stock, $.01 par value-
authorized 100,000,000 shares; issued
and outstanding 30,759,975 shares as of
March 31, 1998 and 30,748,975 as of
December 31, 1997 308 307
Paid-in capital 244,461 244,211
Retained earnings 25,440 20,868
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Total stockholders' equity 270,209 265,386
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Total liabilities and stockholders' equity $649,922 $585,811
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Page 1
U.S. RENTALS, INC.
STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
Three Months Ended
March 31,
1998 1997
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Revenues:
Rental revenue $ 92,641 $ 65,330
Rental equipment sales 13,066 7,201
Merchandise and new equipment sales 14,811 8,450
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Total revenues 120,518 80,981
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Cost of revenues:
Rental equipment expense 22,000 17,498
Rental equipment depreciation 21,445 14,313
Cost of rental equipment sales 6,288 3,385
Cost of merchandise and new equipment sales 10,851 6,494
Direct operating expense 33,377 21,183
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Total cost of revenues 93,961 62,873
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Gross profit 26,557 18,108
Selling, general and administrative expense 11,426 7,550
Non-rental depreciation 3,725 1,929
Amortization of goodwill 75 3
Termination cost of deferred compensation agreements - 20,290
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Operating income 11,331 (11,664)
Other expense, net - (473)
Interest expense, net (3,402) (1,553)
Related party interest (expense) income, net (284) 52
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Income before income taxes and extraordinary item 7,645 (13,638)
Income tax expense 3,073 9,112
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Income (loss) before extraordinary item 4,572 (22,750)
Extraordinary item, net of tax benefit of $995 - 1,511
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Net income (loss) $ 4,572 $ (24,261)
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Basic and diluted net income (loss) before extraordinary item per share $ 0.15 $ (0.90)
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Basic and diluted extraordinary item per share $ - $ (0.06)
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Basic and diluted net income (loss) per share $ 0.15 $ (0.96)
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Basic weighted average shares outstanding 30,751,868 25,144,579
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Diluted weighted average shares outstanding 31,526,109 25,144,579
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Page 2
U.S. RENTALS, INC.
STATEMENTS OF CASH FLOW
(In thousands)
(Unaudited)
Three Months Ended
March 31,
1998 1997
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Operating activities:
Net income (loss) $ 4,572 $ (24,261)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 25,245 16,465
Gain on sale of equipment (7,032) (3,902)
Principal adjustment on notes receivable - (146)
Provision for doubtful accounts 2,127 1,472
Deferred taxes (308) 7,638
Interest income not collected - (294)
Interest expense not paid - 495
Loss on early extinguishment of debt - 2,506
Changes in operating assets and liabilities
Accounts receivable (2,409) (5,695)
Inventories 585 147
Prepaid expenses and other assets 75 (516)
Accounts payable and other liabilities (304) (160)
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Net cash provided by (used in) operating activities 22,551 (6,251)
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Investing activities:
Acquisition of rental operations (8,070) (1,757)
Purchases of rental equipment (75,426) (28,253)
Proceeds from sale of rental equipment 13,066 7,201
Purchases of property and equipment, net (9,032) (6,046)
Funding of notes receivable, net - 221
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Net cash used in investing activities (79,462) (28,634)
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Financing activities:
Proceeds from (payments on) line of credit, net 56,000 (58,267)
Payments on senior notes - (92,506)
Payments on other obligations, net (100) (100)
Proceeds from related party note payable 4,000 -
Proceeds from issuance of common stock, net of
issuance costs 251 185,950
Cash retained by the Predecessor in connection with
Recapitalization - (998)
Dividends paid - (1,905)
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Net cash provided by financing activities 60,151 32,174
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Net increase (decrease) in cash 3,240 (2,711)
Cash at beginning of period 3,104 2,906
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Cash at end of period $ 6,344 $ 195
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Supplemental non-cash flow information:
Distribution of net assets to stockholder $ 3,221
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Page 3
U.S. RENTALS, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except share data)
(Unaudited)
Additional Total
Common Paid-in Retained Stockholders'
Shares Stock Capital Earnings Equity
-------------- ----------- ------------- ------------- --------------
Balance at December 31, 1997 30,748,975 $ 307 $ 244,211 $ 20,868 $ 265,386
Net income -- -- 4,572 4,572
Stock options exercised 11,000 1 219 -- 220
Income tax benefit from stock
options exercised -- 31 -- 31
-------------- ------------ -------------- ------------- --------------
Balance at March 31, 1998 30,759,975 $ 308 $ 244,461 $ 25,440 $ 270,209
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U.S. RENTALS, INC.
NOTES TO FINANCIAL STATEMENTS
(Tables in thousands, except share data)
(Unaudited)
1. INTRODUCTION
The Registrant's initial public offering ("IPO") was declared effective on
February 20, 1997. Prior to the IPO, the equipment rental business was operated
by Ayr, Inc., a California corporation (the "Predecessor") that was treated as
an S corporation under the Internal Revenue Code. The Registrant did not have
any operations prior to its IPO. Prior to the closing of the IPO, the
Predecessor transferred substantially all of its operating assets and associated
liabilities to the Registrant in exchange for 20,748,975 shares of Common Stock
of the Registrant, representing all of the Registrant's outstanding capital
stock prior to the IPO. The Predecessor retained only non-operating assets and
liabilities, including approximately $25.7 million of notes receivable from
related parties and approximately $24.4 million of notes payable to related
parties. These transactions are referred to as the "Recapitalization" in this
report.
Unless otherwise indicated, the "Company" means the Predecessor prior to the IPO
and the Registrant on or after the IPO.
2. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Results of operations for the interim periods are not necessarily indicative of
the results that may be expected for a full year.
3. BANK DEBT AND LONG-TERM OBLIGATIONS
Bank debt and long-term obligations consist of the following:
March 31, December 31,
1998 1997
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Notes payable:
Revolving line of credit, interest payable monthly
at money market rates (6.09% at March 31,
1998 and 6.03% to 6.34% at December 31, 1997) $259,000 $203,000
U.S. RENTALS, INC.
NOTES TO FINANCIAL STATEMENTS
(Tables in thousands, except share data)
(Unaudited)
Notes payable related to the purchase of certain
businesses, imputed interest averaging 7%,
due through 1999 200 300
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259,200 203,300
Note payable to related party:
Demand note payable to the majority stockholder
of Predecessor interest at a variable rate,
payable monthly. 5.90% at March 31, 1998
and December 31, 1997 21,000 17,000
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$280,200 $220,300
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On February 26, 1997, the Company repaid the bank notes, revolving line of
credit and senior notes utilizing proceeds from its IPO. The early
extinguishment of debt generated an extraordinary loss of $1,511,000 (net of
income tax benefit of $995,000).
On February 26, 1997, the Company entered into a $300,000,000 unsecured line of
credit with a bank maturing no later than February 25, 2002. The Company
believes it is in compliance with all covenants in the credit agreement.
4. INCOME TAXES
Income tax expense consists of the following:
Three Months Ended
March 31,
---------
1998 1997
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One-time charge for cumulative deferred taxes as
of the date of the IPO as if the Company had
always been subject to taxes as a C corporation $ - $7,520
Income tax provision for the period subsequent to
the IPO 3,073 1,592
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$3,073 $9,112
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5. SUBSEQUENT EVENT
On April 28, 1998, the Company completed a $252 million private placement of
senior unsecured notes. The notes accrue interest at rates ranging from 6.71% to
6.93%. Interest is payable semi-annually on October 28th and April 28th.
U.S. RENTALS, INC.
MARCH 31, 1997
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
FIRST QUARTER 1998 VS. FIRST QUARTER 1997
RESULTS OF OPERATIONS
Revenues. Total revenues for the three months ended March 31, 1998 increased
48.8% to $120.5 million from $81.0 million for the same period in 1997. Rental
revenue increased 41.8% to $92.6 million or 76.9% of total revenues for the
three months ended March 31, 1998, as compared to $65.3 million or 80.7% of
total revenues for the same period in 1997. Of the $27.3 million increase in
rental revenue, $18.2 million was due primarily to 44 new locations which were
added subsequent to December 31, 1996. The remaining increase of approximately
$9.1 million was due to increased equipment rental fleet at existing locations.
Rental revenue as a percentage of total revenue decreased due to the Company's
efforts to take advantage of opportunities in the used equipment sales and
merchandise and new equipment sales markets. In addition to the above, severe
weather conditions along the West Coast related to El Nino have slowed
construction activity which caused a less than expected rental volume. Used
rental equipment sales increased 81.4% to $13.1 million or 10.8% of total
revenues for the three months ended March 31, 1998 from $7.2 million or 8.9% of
total revenues for the same period in 1997 due to increased customer demand,
increased sales efforts across the nation and alternative financing sources for
customers such as various leasing programs. Merchandise and new equipment sales
increased 75.3% for the first three months ended March 31, 1998 to $14.8 million
or 12.3% of total revenues as compared to $8.5 million or 10.4% of total
revenues for the same period in 1997. This increase was primarily due to the
increase in the related rental revenue, expansion of product line within resale
showrooms, as well as a 55% increase in the number of operating locations since
December 31, 1996.
Gross Profit. Gross profit for the three months ended March 31, 1998
increased 46.7% to $26.6 million from $18.1 million for the same period in 1997
primarily due to increased rental revenue and certain economies achieved through
the Company's continued investment in new equipment. Gross profit from rentals
increased 46.8% to $49.2 million for the three month ended March 31, 1998 from
$33.5 million for the same period in 1997 as a result of higher rental volume.
Rental gross profit as a percent of rental revenue increased to 53.1% for the
three months ended March 31, 1998 from 51.3% for the same period in 1997. This
increase was due primarily to a 41.8% increase in rental revenue partially
offset by an increase in rental equipment expense of 25.7% due to the impact of
increased rental volume. Gross profit from sales of used rental equipment
increased 77.6% to $6.8 million from $3.8 million for the same period in 1997
due to increased demand for used equipment, but decreased as a percent of such
sales due to the mix of sales toward later model equipment. Gross profit from
sales of merchandise and new equipment increased 102.5% for the three months
ended March 31, 1998 as compared to the same period in 1997 due to the impact of
increased rental volume on the sale of merchandise, a concerted effort to expand
the product line and resale showrooms, and an increase in new equipment sales
and customer volume. Gross profit on the sale of merchandise and new equipment
also increased as a percentage of total revenue. Gross profit was negatively
impacted by an increase in direct operating expenses for the three months ended
March 31, 1998 which increased 57.6% to $33.4 million as compared to $21.2
million for the same period in 1997. The increase reflects staffing and
facilities costs resulting from an increased number of rental yards and higher
maintenance costs necessary to support the increased size of the rental fleet.
U.S. RENTALS, INC.
MARCH 31, 1997
Selling, General and Administrative Expense. Selling, general and
administrative expense for the three months ended March 31, 1998 increased 51.3%
to $11.4 million compared to $7.6 million for the same period in 1997. The
increase was primarily due to higher advertising, bad debt and profit sharing
expense for the three months ended March 31, 1998 as compared to the same period
in 1997. As a percentage of total revenue, selling, general and administrative
expense increased slightly to 9.4% for the three months ended March 31, 1998
from 9.3% for the same period in 1997. The small increase relates to
efficiencies in operations and realizing certain economies of scale related to
the increase in the number of locations as described above.
Termination cost of deferred compensation agreements. Other operating
expense for the three months ended March 31, 1997 consists of a one-time
compensation expense related to the termination of the Predecessor's deferred
incentive compensation agreements just prior to the Initial Public Offering
(IPO) in February 1997.
Other Expense, net. Substantially all other income and expense items for the
three months ended March 31, 1997 are related to investments and charitable
contributions made at the direction of the majority stockholder of the
Predecessor prior to the IPO. No such expense was incurred by the Company in
the current quarter.
Interest Expense, net. Interest expense increased 119.1% to $3.4 million for
the three months ended March 31, 1998 from $1.6 million for the same period in
1997. The increase was primarily the result of higher average debt outstanding
under the credit facility during the three months ended March 31, 1998 as
compared to same period of 1997. The increase in average debt outstanding was
the result of the Company's significant investment in capital expenditures.
Income Taxes. Prior to its IPO, the Company was taxed as an S corporation for
federal and state purposes. In February 1997, the Company incurred a one-time
$7.5 million deferred tax charge to reflect the recognition of a deferred tax
liability relating to federal and state income taxes as if the Company had been
taxed as a C corporation rather than as an S corporation since inception.
Subsequent to February 26, 1997, the Company's income was taxed as a C
corporation at an effective rate from 40.0 TO 40.2%.
LIQUIDITY AND CAPITAL RESOURCES
The Company received net proceeds of $186.0 million from the sale of
10,000,000 shares of its common stock on February 26, 1997. A portion of the
net proceeds from the IPO was used to repay all of the senior notes and
borrowings under the Company's prior credit facility. In conjunction with the
IPO, the Company entered into a new credit facility which provides availability
of up to $300.0 million with its existing lenders (the "Credit Facility").
The Company has primarily used cash to purchase rental equipment and acquire
and start-up rental yards. The Company historically has financed its cash
requirements primarily through net cash provided by operating activities and
borrowings under its Credit Facility. In addition to the Company's Credit
Facility, the Company completed a $252.0 million private placement of senior
unsecured notes on April 28, 1998. The Company believes that cash flow from
operations, availability under its Credit Facility and the debt offering will be
sufficient to support its operations, expansion and liquidity requirements for
at least the next 12 months.
U.S. RENTALS, INC.
MARCH 31, 1998
For the first quarter of 1998, the Company's operating activities before
changes in operating assets and liabilities provided net cash flow of $24.6
million for the three months ended March 31, 1998 as compared to $.1 million for
the same period in 1997. The $24.5 million increase was primarily due to the
absence of the termination cost of deferred compensation agreements which were
paid during the first quarter of 1997.
Net cash used in investing activities was $79.5 million for the three months
ended March 31, 1998 as compared to $29.4 million for the same period in 1997
due to increased purchases of rental equipment, acquisition of one rental
operation, and investment in property and equipment, partially offset by
increased sales of used rental equipment. The increase in rental fleet relates
to newly opened or acquired yards and the continued expansion of rental fleet at
existing locations. Rental equipment purchases for the three months ended March
31, 1998 were $75.4 million as compared to $28.3 million for the same period in
1997.
Net cash provided by financing activities was $60.1 million for the three
months ended March 31, 1998 as compared to $32.2 million for the same period in
1997. The principal causes for the variation between periods was the receipt of
the net proceeds on borrowings under the Company's Credit Facility and proceeds
from a note payable to a related party.
Certain Risk Factors That May Impact Future Operating Results
Statements in this report may contain forward-looking statements that
represent the Company's expectations or beliefs concerning future events,
including but not limited to the sufficiency of the Company's cash to meet
expected capital expenditures and interest expense.
The Company cautions that these statements are qualified by important factors
that could cause actual results to differ from those in the forward-looking
statements: The Company's ability to acquire or start more rental yards and the
timing, pricing and related costs of the acquisitions and openings, the
effective integration of the acquired business and new yards, variations in
seasonal rental patterns principally due to the effect of weather on
construction activity, increased competition due to larger companies expanding
into previously less competitive markets, the cyclical nature of the equipment
rental industry, the timing and financing of capital expenditures for fleet
expansions, and general economic conditions in the Company's markets including
the possible impact of interest rate fluctuations. In addition, the market
price of the Company's common stock could be subject to significant variation
due to fluctuations in the Company's operating results, changes in earnings
estimates by securities analysts and other factors.
Fluctuations in Quarterly Operating Results. The Company has experienced
fluctuations in operating results in interim periods in certain geographic
regions due to seasonality. Weather conditions, such as El Nino, sometimes
affect quarterly revenues. As a result, the Company may not learn of revenue
shortfalls until late in the quarter. The Company's operating expenses are based
in part on its expectations for future revenues and
U.S. RENTALS, INC.
MARCH 31, 1998
are relatively fixed in the short term. Any revenue shortfall below expectations
could have an immediate and significant adverse effect on results of operations.
U.S. RENTALS, INC.
MARCH 31, 1998
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter
ended March 31, 1998.
10.1 Amended revolving note payable to Richard D. Colburn.
10.2 Private placement of senior unsecured notes.
27.1 Financial data schedule.
U.S. RENTALS, INC.
MARCH 31, 1998
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
U.S. RENTALS, INC.
(Registrant)
Date: April 30 , 1998 By: /s/ JOHN S. MCKINNEY
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John S. McKinney
Vice President
Chief Financial Officer