================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2002
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ____________________
Commission File No. 1-14387
United Rentals, Inc.
Commission File No. 1-13663
United Rentals (North America), Inc.
(Exact names of registrants as specified in their charters)
Delaware 06-1522496
Delaware 06-1493538
(State or other (I.R.S. Employer Identification Nos.)
jurisdiction of
incorporation or
organization)
Five Greenwich Office
Park, Greenwich,
Connecticut 06830
(Address of principal
executive offices) (Zip Code)
(203) 622-3131
(Registrants' telephone number, including area code)
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days.
[X] Yes [_] No
As of May 3, 2002, there were 76,586,965 shares of the 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.
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UNITED RENTALS, INC.
UNITED RENTALS (NORTH AMERICA), INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
INDEX
Page
----
PART I FINANCIAL INFORMATION
Item 1 Unaudited Consolidated Financial Statements
United Rentals, Inc. Consolidated Balance Sheets as of March 31, 2002 and December 31, 2001
(unaudited)................................................................................ 4
United Rentals, Inc. Consolidated Statements of Operations for the Three Months Ended
March 31, 2002 and 2001 (unaudited)........................................................ 5
United Rentals, Inc. Consolidated Statement of Stockholders' Equity for the Three Months
Ended March 31, 2002 (unaudited)........................................................... 6
United Rentals, Inc. Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2002 and 2001 (unaudited)........................................................ 7
United Rentals (North America), Inc. Consolidated Balance Sheets as of March 31, 2002 and
December 31, 2001 (unaudited).............................................................. 8
United Rentals (North America), Inc. Consolidated Statements of Operations for the
Three Months Ended March 31, 2002 and 2001 (unaudited)..................................... 9
United Rentals (North America), Inc. Consolidated Statement of Stockholder's Equity for the
Three Months Ended March 31, 2002 (unaudited).............................................. 10
United Rentals (North America), Inc. Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2002 and 2001 (unaudited)..................................... 11
Notes to Unaudited Consolidated Financial Statements....................................... 12
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations...... 23
Item 3 Quantitative and Qualitative Disclosures about Market Risk................................. 32
PART II OTHER INFORMATION
Item 1 Legal Proceedings.......................................................................... 33
Item 6 Exhibits and Reports on Form 8-K........................................................... 33
Signatures................................................................................. 34
Certain statements contained in this Report are forward-looking in nature.
Such statements can be identified by the use of forward-looking terminology
such as "believe," "expect," "forecast," "may," "will," "should," "seek,"
"on-track," "plan," "intend," "project" or "anticipate," or the negative
thereof or comparable terminology, or by discussions of strategy. You are
cautioned that our business and operations are subject to a variety of risks
and uncertainties and, consequently, our actual results may materially differ
from those projected by any forward-looking statements. Certain of these
factors are discussed in Item 2 of Part I of this Report under the caption
"--Factors that May Influence Future Results and Results Anticipated by
Forward-Looking Statements." We make no commitment to revise or update any
forward-looking statements in order to reflect events or circumstances after
the date any such statement is made.
UNITED RENTALS
United Rentals is the largest equipment rental company in the world. We
offer for rent over 600 types of equipment--everything from heavy machines to
hand tools--through our network of more than 740 rental locations in the United
States, Canada and Mexico. Our customers include construction and industrial
companies, manufacturers, utilities, municipalities, homeowners and others. In
2001, we served more than 1.4 million customers, completed over 8.4 million
rental transactions and generated revenues of $2.9 billion.
Our fleet of rental equipment, the largest in the world, includes over
500,000 units having an original purchase price of approximately $3.5 billion.
The fleet includes:
. General construction and industrial equipment, such as backhoes,
skid-steer loaders, forklifts, earth moving equipment, material handling
equipment, compressors, pumps and generators;
. Aerial work platforms, such as scissor lifts and boom lifts;
. Tools and light equipment, such as power washers, water pumps, heaters and
hand tools;
. Traffic control equipment, such as barricades, cones, warning lights,
message boards and pavement marking systems; and
. Trench safety equipment for below ground work, such as trench shields,
aluminum hydraulic shoring systems, slide rails, crossing plates,
construction lasers and line testing equipment.
In addition to renting equipment, we sell used rental equipment, act as a
dealer for new equipment and sell related merchandise, parts and service.
Industry Background
We estimate that the U.S. equipment rental industry has grown from
approximately $6.5 billion in annual rental revenues in 1990 to about $25
billion in 2001, representing a compound annual growth rate of approximately
12.9%. We believe that long-term industry growth, in addition to reflecting
general economic expansion, is being driven by the increasing recognition by
equipment users of the many advantages that equipment rental may offer compared
with ownership. They recognize that by renting they can:
. avoid the large capital investment required for equipment purchases;
. access a broad selection of equipment and select the equipment best suited
for each particular job;
. reduce storage and maintenance costs; and
. access the latest technology without investing in new equipment.
1
While the construction industry has to date been the principal user of
rental equipment, industrial companies, utilities and others are increasingly
using rental equipment for plant maintenance, plant turnarounds and other
functions requiring the periodic use of equipment. The market for rental
equipment is also benefiting from increased government funding for
infrastructure projects.
Competitive Advantages
We believe that we benefit from the following competitive advantages:
Large and Diverse Rental Fleet. Our rental fleet is the largest and most
comprehensive in the industry, which allows us to:
. attract customers by providing "one-stop" shopping;
. serve a diverse customer base and reduce our dependence on any particular
customer or group of customers; and
. serve customers that require substantial quantities and/or wide varieties
of equipment.
Significant Purchasing Power. We purchase large amounts of equipment,
merchandise and other items, which enables us to negotiate favorable pricing,
warranty and other terms with our vendors.
Operating Efficiencies. We benefit from the following operating
efficiencies:
Equipment Sharing Among Branches. We generally group our branches into
clusters of 10 to 30 locations that are in the same geographic area. Each
branch within a cluster can access all available equipment in the cluster area.
This increases equipment utilization because equipment that is idle at one
branch can be marketed and rented through other branches. In the first quarter
of 2002, the sharing of equipment among branches accounted for approximately
10.2%, or $46 million, of our total rental revenue.
Ability to Transfer Equipment to Other Branches. The size of our branch
network gives us the ability to take advantage of strength at a particular
branch or in a particular region by permanently transferring underutilized
equipment from weaker to stronger areas. For example, in the first quarter of
2002, we permanently transferred $359 million of equipment among our branches.
Consolidation of Common Functions. We reduce costs through the
consolidation of functions that are common to our more than 740 branches, such
as payroll, accounts payable and credit and collection, into 17 credit offices
and three service centers.
State-of-the-Art Information Technology Systems. We have state-of-the-art
information technology systems that facilitate our ability to make rapid and
informed decisions, respond quickly to changing market conditions, and share
equipment among branches. We have an in-house team of approximately 100
information technology specialists that supports our systems.
National Account Program. Our National Account sales force is dedicated to
establishing and expanding relationships with large companies, particularly
those with a national or multi-regional presence. We offer our National Account
customers the benefits of a consistent level of service across North America, a
wide selection of equipment and a single point of contact for all their
equipment needs. Our National Account team serves approximately 1,700 National
Account customers.
Geographic and Customer Diversity. We have more than 740 branches in 47
states, seven Canadian provinces and Mexico and serve customers that range from
Fortune 500 companies to small companies and homeowners. In 2001, we served
more than 1.4 million customers and our top ten customers accounted for less
2
than 3% of our revenues. We believe that our geographic and customer diversity
provide us with many advantages including: (1) enabling us to better serve
National Account customers with multiple locations, (2) helping us achieve
favorable resale prices for used equipment by giving us access to resale
markets across North America and by allowing us to market used equipment
directly to end-user customers, (3) reducing our dependence on any particular
customer and (4) reducing the impact that fluctuations in regional economic
conditions have on our overall financial performance.
Risk Management and Safety Programs. We believe that we have one of the
most comprehensive risk management and safety programs in the industry. Our
risk management department is staffed by 41 experienced professionals and is
responsible for implementing our safety programs and procedures, developing our
employee and customer training programs and managing any claims against us.
Strong and Motivated Branch Management. Each of our branches has a
full-time branch manager who is supervised by one of our 59 district managers
and nine regional vice presidents. We believe that our managers are among the
most knowledgeable and experienced in the industry, and we empower them--within
budgetary guidelines--to make day-to-day decisions concerning branch matters.
Senior management closely tracks branch, district and regional performance with
extensive systems and controls, including performance benchmarks and detailed
monthly operating reviews. The compensation of branch managers and other branch
personnel is linked to their branch's financial performance and return on
assets. This incentivizes branch personnel to control costs, optimize pricing,
share equipment with other branches and manage their fleet efficiently.
3
UNITED RENTALS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31 December 31
2002 2001
---------- -----------
(In thousands, except share data)
ASSETS
Cash and cash equivalents..................................................... $ 31,250 $ 27,326
Accounts receivable, net of allowance for doubtful accounts of $51,531 in 2002
and $47,744 in 2001......................................................... 422,181 450,273
Inventory..................................................................... 103,891 85,764
Prepaid expenses and other assets............................................. 171,874 133,217
Rental equipment, net......................................................... 1,732,580 1,747,182
Property and equipment, net................................................... 408,134 410,053
Goodwill...................................................................... 1,882,156 2,199,774
Other intangible assets, net.................................................. 7,614 7,927
---------- ----------
$4,759,680 $5,061,516
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable........................................................... $ 190,454 $ 204,773
Debt....................................................................... 2,518,308 2,459,522
Deferred taxes............................................................. 228,792 297,024
Accrued expenses and other liabilities..................................... 137,320 174,687
---------- ----------
Total liabilities...................................................... 3,074,874 3,136,006
Commitments and contingencies
Company-obligated mandatorily redeemable convertible preferred securities of
a subsidiary trust.......................................................... 283,250 300,000
Stockholders' equity:
Preferred stock--$.01 par value, 5,000,000 shares authorized:
Series C perpetual convertible preferred stock--$300,000 liquidation
preference, 300,000 shares issued and outstanding........................ 3 3
Series D perpetual convertible preferred stock--$150,000 liquidation
preference, 150,000 shares issued and outstanding........................ 2 2
Common stock--$.01 par value, 500,000,000 shares authorized, 75,937,100
shares issued and outstanding in 2002 and 73,361,407 in 2001............. 759 734
Additional paid-in capital................................................. 1,305,545 1,243,586
Deferred compensation...................................................... (61,717) (55,794)
Retained earnings.......................................................... 186,351 467,106
Accumulated other comprehensive loss....................................... (29,387) (30,127)
---------- ----------
Total stockholders' equity............................................. 1,401,556 1,625,510
---------- ----------
$4,759,680 $5,061,516
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
4
UNITED RENTALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31
------------------------
2002 2001
--------- --------
(In thousands, except pe
share data)
Revenues:
Equipment rentals.............................................................. $ 446,288 $461,382
Sales of rental equipment...................................................... 39,130 39,122
Sales of equipment and merchandise and other revenues.......................... 113,547 118,600
--------- --------
Total revenues.................................................................... 598,965 619,104
Cost of revenues:
Cost of equipment rentals, excluding depreciation.............................. 235,562 230,033
Depreciation of rental equipment............................................... 78,050 76,801
Cost of rental equipment sales................................................. 25,132 23,076
Cost of equipment and merchandise sales and other operating costs.............. 81,013 86,627
--------- --------
Total cost of revenues............................................................ 419,757 416,537
--------- --------
Gross profit...................................................................... 179,208 202,567
Selling, general and administrative expenses...................................... 98,495 108,893
Non-rental depreciation and amortization.......................................... 13,884 26,107
--------- --------
Operating income.................................................................. 66,829 67,567
Interest expense.................................................................. 49,983 57,530
Preferred dividends of a subsidiary trust......................................... 4,694 4,875
Other (income) expense, net....................................................... (280) (670)
--------- --------
Income before provision for income taxes and cumulative effect of change
in accounting principle......................................................... 12,432 5,832
Provision for income taxes........................................................ 4,848 2,420
--------- --------
Income before cumulative effect of change in accounting principle................. 7,584 3,412
Cumulative effect of change in accounting principle, net of tax benefit of $60,529 (288,339)
--------- --------
Net income (loss)................................................................. $(280,755) $ 3,412
========= ========
Earnings per share--basic:
Income before cumulative effect of change in accounting principle.............. $ 0.10 $ 0.05
Cumulative effect of change in accounting principle, net....................... (3.92)
--------- --------
Net income (loss).............................................................. $ (3.82) $ 0.05
========= ========
Earnings per share--diluted:
Income before cumulative effect of change in accounting principle.............. $ 0.08 $ 0.04
Cumulative effect of change in accounting principle, net....................... (2.96)
--------- --------
Net income (loss).............................................................. $ (2.88) $ 0.04
========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
5
UNITED RENTALS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
Series C Series D Common Stock
Perpetual Perpetual ---------------- Additional
Convertible Convertible Number of Paid-in Deferred Retained
Preferred Stock Preferred Stock Shares Amount Capital Compensation Earnings
--------------- --------------- --------- ------ ---------- ------------ ---------
(In thousands)
Balance, December 31, 2001.......... $ 3 $ 2 73,361 $ 734 $1,243,586 $(55,794) $ 467,106
Comprehensive income:
Net loss........................... (280,755)
Other comprehensive income:
Foreign currency translation
adjustments......................
Derivatives qualifying as
hedges, net of tax...............
Comprehensive loss..................
Issuance of common stock under
deferred compensation plans........ 339 3 8,713 (8,716)
Amortization of deferred
compensation....................... 2,793
Exercise of common stock options.... 3,149 31 70,341
Common stock repurchased
and retired........................ (912) (9) (22,365)
Liquidation preference in excess of
amounts paid for Company-
obligated mandatorily redeemable
convertible preferred securities of
a subsidiary trust................. 5,270
------ ------ ------ ------ ---------- -------- ---------
Balance, March 31, 2002............. $ 3 $ 2 75,937 $ 759 $1,305,545 $(61,717) $ 186,351
====== ====== ====== ====== ========== ======== =========
Accumulated
Other
Comprehensive Comprehensive
Loss Loss
------------- -------------
Balance, December 31, 2001.......... $(30,127)
Comprehensive income:
Net loss........................... $(280,755)
Other comprehensive income:
Foreign currency translation
adjustments...................... (426) (426)
Derivatives qualifying as
hedges, net of tax............... 1,166 1,166
---------
Comprehensive loss.................. $(280,015)
=========
Issuance of common stock under
deferred compensation plans........
Amortization of deferred
compensation.......................
Exercise of common stock options....
Common stock repurchased
and retired........................
Liquidation preference in excess of
amounts paid for Company-
obligated mandatorily redeemable
convertible preferred securities of
a subsidiary trust.................
--------
Balance, March 31, 2002............. $(29,387)
========
The accompanying notes are an integral part of these consolidated financial
statements.
6
UNITED RENTALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31
--------------------
2002 2001
--------- ---------
(In thousands)
Cash Flows From Operating Activities:
Net income (loss)....................................................................... $(280,755) $ 3,412
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization.......................................................... 91,934 102,908
Gain on sales of rental equipment...................................................... (13,998) (16,046)
Deferred taxes......................................................................... 4,121 2,105
Amortization of deferred compensation................................................. 2,793
Cumulative effect of change in accounting principle................................... 288,339
Changes in operating assets and liabilities:
Accounts receivable.................................................................. 29,417 49,467
Inventory............................................................................ (7,220) 6,096
Prepaid expenses and other assets.................................................... (8,255) (38,752)
Accounts payable..................................................................... (14,332) (54,583)
Accrued expenses and other liabilities............................................... (51,443) 1,460
--------- ---------
Net cash provided by operating activities....................................... 40,601 56,067
Cash Flows From Investing Activities:
Purchases of rental equipment........................................................... (84,133) (98,347)
Purchases of property and equipment..................................................... (7,222) (16,722)
Proceeds from sales of rental equipment................................................. 39,130 39,122
Deposits on rental equipment purchases.................................................. (28,000)
In-process acquisition costs............................................................ (554) (719)
Purchases of other companies............................................................ (48,667) (27,695)
--------- ---------
Net cash used in investing activities........................................... (129,446) (104,361)
Cash Flows From Financing Activities:
Proceeds from debt...................................................................... 96,500 95,155
Payments of debt........................................................................ (27,612) (19,645)
Payments of financing costs............................................................. (387) (381)
Proceeds from the exercise of common stock options...................................... 58,548 172
Common shares repurchased and retired................................................... (22,374) (23,176)
Company-obligated mandatorily redeemable convertible preferred securities
of a subsidiary trust repurchased and retired.......................................... (11,480)
--------- ---------
Net cash provided by financing activities....................................... 93,195 52,125
Effect of foreign exchange rates........................................................ (426) (12,013)
--------- ---------
Net increase (decrease) in cash and cash equivalents.................................... 3,924 (8,182)
Cash and cash equivalents at beginning of period........................................ 27,326 34,384
--------- ---------
Cash and cash equivalents at end of period.............................................. $ 31,250 $ 26,202
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest.................................................................. $ 43,816 $ 62,604
Cash paid for income taxes, net of refunds.............................................. $ 593 $ 765
Supplemental disclosure of non-cash investing and financing activities:
The Company acquired the net assets and assumed certain liabilities
of other companies as follows:
Assets, net of cash acquired......................................................... $ 52,805 $ 5,457
Liabilities assumed.................................................................. (5,154) (1,036)
Less:
Amounts paid through issuance of debt.............................................. (600)
--------- ---------
47,651 3,821
Due to seller payments............................................................... 1,016 23,874
--------- ---------
Net cash paid................................................................... $ 48,667 $ 27,695
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
7
UNITED RENTALS (NORTH AMERICA), INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31 December 31
2002 2001
---------- -----------
(In thousands,
except share data)
ASSETS
Cash and cash equivalents......................................................... $31,250 $ 27,326
Accounts receivable, net of allowance for doubtful accounts of $51,531 in 2002 and
$47,744 in 2001................................................................. 422,181 450,273
Inventory......................................................................... 103,891 85,764
Prepaid expenses and other assets................................................. 163,138 124,398
Rental equipment, net............................................................. 1,732,580 1,747,182
Property and equipment, net....................................................... 382,852 383,260
Goodwill.......................................................................... 1,882,156 2,199,774
Other intangible assets, net...................................................... 7,614 7,927
---------- ----------
$4,725,662 $5,025,904
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Accounts payable............................................................... $190,454 $ 204,773
Debt........................................................................... 2,518,308 2,459,522
Deferred taxes................................................................. 228,792 297,024
Accrued expenses and other liabilities......................................... 145,530 166,154
---------- ----------
Total liabilities.......................................................... 3,083,084 3,127,473
Commitments and contingencies
Stockholder's equity:
Common stock--$.01 par value, 3,000 shares authorized, 1,000 shares issued
and outstanding..............................................................
Additional paid-in capital..................................................... 1,576,626 1,518,078
Retained earnings.............................................................. 95,339 410,480
Accumulated other comprehensive loss........................................... (29,387) (30,127)
---------- ----------
Total stockholder's equity................................................. 1,642,578 1,898,431
---------- ----------
$4,725,662 $5,025,904
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
8
UNITED RENTALS (NORTH AMERICA), INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31
2002 2001
--------- --------
(In thousands)
Revenues:
Equipment rentals.............................................................. $ 446,288 $461,382
Sales of rental equipment...................................................... 39,130 39,122
Sales of equipment and merchandise and other revenues.......................... 113,547 118,600
--------- --------
Total revenues.................................................................... 598,965 619,104
Cost of revenues:
Cost of equipment rentals, excluding depreciation.............................. 235,562 230,033
Depreciation of rental equipment............................................... 78,050 76,801
Cost of rental equipment sales................................................. 25,132 23,076
Cost of equipment and merchandise sales and other operating costs.............. 81,013 86,627
--------- --------
Total cost of revenues............................................................ 419,757 416,537
--------- --------
Gross profit...................................................................... 179,208 202,567
Selling, general and administrative expenses...................................... 98,495 108,893
Non-rental depreciation and amortization.......................................... 11,755 24,043
--------- --------
Operating income.................................................................. 68,958 69,631
Interest expense.................................................................. 49,983 57,530
Other (income) expense, net....................................................... (280) (670)
--------- --------
Income before provision for income taxes and cumulative effect of change in
accounting principle............................................................ 19,255 12,771
Provision for income taxes........................................................ 7,509 5,300
--------- --------
Income before cumulative effect of change in accounting principle................. 11,746 7,471
Cumulative effect of change in accounting principle, net of tax benefit of $60,529 (288,339)
--------- --------
Net income (loss)................................................................. $(276,593) $ 7,471
========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
9
UNITED RENTALS (NORTH AMERICA), INC.
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
(Unaudited)
Common Stock Accumulated
---------------- Additional Other
Number Paid-In Retained Comprehensive Comprehensive
of Shares Amount Capital Earnings Loss Loss
--------- ------ ---------- --------- ------------- -------------
(In thousands, except share data)
Balance, December 31, 2001..................... 1,000 $1,518,078 $ 410,480 $(30,127)
Comprehensive income:
Net loss..................................... (276,593) $(276,593)
Other comprehensive loss:
Foreign currency translation adjustments.... (426) (426)
Derivatives qualifying as hedges, net of tax. 1,166 1,166
---------
Comprehensive loss............................. $(275,853)
=========
Contributed capital from parent................ 58,548
Dividend distributions to parent............... (38,548)
----- ---------- --------- --------
Balance, March 31, 2002........................ 1,000 $1,576,626 $ 95,339 $(29,387)
===== ========== ========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
10
UNITED RENTALS (NORTH AMERICA), INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31
--------------------
2002 2001
--------- ---------
(In thousands)
Cash Flows From Operating Activities:
Net income (loss)................................................................................. $(276,593) $ 7,471
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization.................................................................... 89,805 100,844
Gain on sales of rental equipment................................................................ (13,998) (16,046)
Deferred taxes................................................................................... 4,121 2,105
Cumulative effect of change in accounting principle.............................................. 288,339
Changes in operating assets and liabilities:
Accounts receivable............................................................................ 29,417 49,467
Inventory...................................................................................... (7,220) 6,096
Prepaid expenses and other assets.............................................................. (8,809) (39,323)
Accounts payable............................................................................... (14,332) (54,583)
Accrued expenses and other liabilities......................................................... (46,524) 2,471
--------- ---------
Net cash provided by operating activities.................................................... 44,206 58,502
--------- ---------
Cash Flows From Investing Activities:
Purchases of rental equipment..................................................................... (84,133) (98,347)
Purchases of property and equipment............................................................... (6,687) (15,001)
Proceeds from sales of rental equipment........................................................... 39,130 39,122
Deposits on rental equipment purchases............................................................ (28,000)
Purchases of other companies...................................................................... (48,667) (27,695)
--------- ---------
Net cash used in investing activities........................................................ (128,357) (101,921)
--------- ---------
Cash Flows From Financing Activities:
Proceeds from debt................................................................................ 96,500 95,155
Payments of debt.................................................................................. (27,612) (19,645)
Payments of financing costs....................................................................... (387) (381)
Capital contributions by parent................................................................... 58,548 172
Dividend distributions to parent.................................................................. (38,548) (28,051)
--------- ---------
Net cash provided by financing activities.................................................... 88,501 47,250
Effect of foreign exchange rates.................................................................. (426) (12,013)
--------- ---------
Net increase (decrease) in cash and cash equivalents.............................................. 3,924 (8,182)
Cash and cash equivalents at beginning of period.................................................. 27,326 34,384
--------- ---------
Cash and cash equivalents at end of period........................................................ $ 31,250 $ 26,202
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest............................................................................ $ 39,122 $ 57,729
Cash paid for income taxes, net of refunds........................................................ $ 593 $ 765
Supplemental disclosure of non-cash investing and financing activities:
The Company acquired the net assets and assumed certain liabilities of other companies as follows:
Assets, net of cash acquired................................................................... $ 52,805 $ 5,457
Liabilities assumed............................................................................ (5,154) (1,036)
Less:
Amounts paid through issuance of debt........................................................ (600)
--------- ---------
47,651 3,821
Due to seller payments......................................................................... 1,016 23,874
--------- ---------
Net cash paid............................................................................. $ 48,667 $ 27,695
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
11
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
General
United Rentals, Inc., is principally a holding company ("Holdings" or the
"Company") and conducts its operations primarily through its wholly owned
subsidiary United Rentals (North America), Inc. ("URI") and subsidiaries of
URI. Separate footnote information is not presented for the financial
statements of URI and subsidiaries as that information is substantially
equivalent to that presented below. Earnings per share data is not provided for
the operating results of URI and its subsidiaries as they are wholly owned
subsidiaries of Holdings.
The Consolidated Financial Statements of the Company included herein are
unaudited and, in the opinion of management, such financial statements reflect
all adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the results of the interim periods presented. Interim financial
statements do not require all disclosures normally presented in year-end
financial statements, and, accordingly, certain disclosures have been omitted.
Results of operations for the three month period ended March 31, 2002 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2002. The Consolidated Financial Statements included herein should
be read in conjunction with the Company's Consolidated Financial Statements and
related Notes thereto included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2001.
Impact of Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 141, "Business
Combinations". This standard addresses financial accounting and reporting for
business combinations and supersedes APB Opinion No. 16, "Business
Combinations" and SFAS No. 38, "Accounting for Preacquisition Contingencies of
Purchased Enterprises". All business combinations in the scope of this
Statement are to be accounted for using one method, the purchase method. The
Company adopted SFAS No. 141 effective July 1, 2001.
The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets"
effective January 1, 2002. This standard addresses financial accounting and
reporting for acquired goodwill and other intangible assets and supersedes APB
Opinion No. 17, "Intangible Assets". Under this standard, goodwill and
intangible assets deemed to have indefinite lives will no longer be amortized
but will be subject to annual impairment tests on a reporting unit level. Other
intangible assets are being amortized over their estimated useful lives. The
reporting units for the Company are its reporting branches. Upon adoption, the
Company performed a transitional impairment test on its reporting units. As a
result of this transitional impairment test, the Company recorded an impairment
charge of approximately $288.3 million, net of tax benefit, as a cumulative
effect of change in accounting principle in the first quarter of 2002. See Note
3 for further detail on the Company's goodwill and other intangible assets.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets". This standard addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of". The Company adopted SFAS No. 144
on January 1, 2002. The adoption of SFAS No. 144 did not have an impact on the
Company's consolidated financial position or results of operations.
Reclassifications
Certain prior year balances have been reclassified to conform to the 2002
presentation.
12
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Acquisitions
During the three months ended March 31, 2002 and the year ended December 31,
2001, the Company completed one acquisition and three acquisitions,
respectively, that were accounted for as purchases. The results of operations
of the businesses acquired in these acquisitions have been included in the
Company's results of operations from their respective acquisition dates.
The purchase prices for such acquisitions have been allocated to the assets
acquired and liabilities assumed based on their respective fair values at their
respective acquisition dates. However, the Company has not completed its
valuation of all of its purchases and, accordingly, the purchase price
allocations are subject to change when additional information concerning asset
and liability valuations are 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 12
months of the acquisition date and are not expected to result in significant
differences between the preliminary and final allocations.
Since the acquisitions made during the three months ended March 31, 2002 and
the year ended December 31, 2001 had an insignificant impact on the Company's
pro forma results of operations, pro forma results of operations are not shown.
3. Goodwill and Other Intangible Assets
Changes in the Company's carrying amount of goodwill for the first quarter
of 2002 are as follows (in thousands):
Balance at December 31, 2001.......................... $2,199,774
Transitional impairment loss.......................... (348,868)
Foreign currency translation and other adjustments.... 1,001
Goodwill related to acquisitions...................... 30,249
----------
Balance at March 31, 2002............................. $1,882,156
==========
The Company's reporting units are its reporting branches. The transitional
impairment loss recorded during the first quarter of 2002 upon the adoption of
SFAS No. 142 related to certain branches that decreased in value. The factors
that negatively affected the values of these branches included some or all of
the following: an increase in competition; being situated in markets where
general economic activity or construction activity softened; and operational
weakness. The fair values of the Company's reporting units were based upon
valuation techniques using multiples of earnings and revenues.
13
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The reconciliation of previously reported net income and earnings per share
to adjusted net income and earnings per share excluding goodwill amortization
is as follows (in thousands, except per share data):
Three Months
Ended March 31
--------------
2002 2001
------ -------
Income before cumulative effect of change in
accounting principle................................ $7,584 $ 3,412
Goodwill amortization expense, net of tax............. 9,323
------ -------
Adjusted income before cumulative effect of change in
accounting principle................................ $7,584 $12,735
====== =======
Earnings per share--basic:
Income before cumulative effect of change in
accounting principle................................ $ 0.10 $ 0.05
Goodwill amortization expense, net of tax............. 0.13
------ -------
Adjusted income before cumulative effect of change in
accounting principle................................ $ 0.10 $ 0.18
====== =======
Earnings per share--diluted:
Income before cumulative effect of change in
accounting principle................................ $ 0.08 $ 0.04
Goodwill amortization expense, net of tax............. 0.10
------ -------
Adjusted income before cumulative effect of change in
accounting principle................................ $ 0.08 $ 0.14
====== =======
Other intangible assets consist of non-compete agreements and are amortized
over periods ranging from three to eight years. The cost of other intangible
assets and the related accumulated amortization as of March 31, 2002 were $16.3
million and $8.7 million, respectively. Amortization expense of other
intangible assets was $0.8 million for the first quarter of 2002.
As of March 31, 2002, estimated amortization expense of other intangible
assets for the remainder of 2002 and for each of the next five years is as
follows (in thousands):
Remainder of 2002 $2,374
2003............. 2,939
2004............. 1,485
2005............. 433
2006............. 183
2007............. 93
Thereafter....... 107
------
$7,614
======
4. Restructuring Charge
During the second quarter of 2001, the Company recorded a restructuring
charge of approximately $28.9 million. The charge primarily relates to the
closure or consolidation of 31 underperforming branches and five administrative
offices, a reduction in the Company's workforce by 489 (including approximately
450 terminated as of March 31, 2002), and the abandonment of certain
information technology projects. Of the remaining $7.0 million of this charge
as of December 31, 2001, activity in the first quarter of 2002 was
approximately $1.6
14
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
million. Of the remaining $5.4 million of this charge as of March 31, 2002, the
Company estimates approximately $2.0 million will be paid by December 31, 2002
and approximately $3.4 million will be paid in future periods.
Components of the restructuring charge are as follows:
Balance Balance
December 31, Activity in March 31,
2001 2002 2002
- ------------ ----------- ---------
(In thousands)
Costs to vacate facilities.. $3,538 $ 773 $2,765
Workforce reduction costs... 2,055 608 1,447
Information technology costs 1,417 247 1,170
------ ------ ------
$7,010 $1,628 $5,382
====== ====== ======
5. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
per share (in thousands, except per share data):
Three Months
Ended
March 31
----------------
2002 2001
------- -------
Numerator:
Income before cumulative effect of change in accounting principle......... $ 7,584 $ 3,412
Denominator:
Denominator for basic earnings per share--
weighted-average shares................................................. 73,521 70,731
Effect of dilutive securities:
Employee stock options................................................ 2,793 1,315
Warrants.............................................................. 4,027 2,563
Series A perpetual convertible preferred stock........................ 12,000
Series B perpetual convertible preferred stock........................ 5,000
Series C perpetual convertible preferred stock........................ 12,000
Series D perpetual convertible preferred stock........................ 5,000
------- -------
Denominator for diluted earnings per share--
adjusted weighted-average shares........................................ 97,341 91,609
======= =======
Earnings per share--basic:
Income before cumulative effect of change in accounting principle..... $ 0.10 $ 0.05
Cumulative effect of change in accounting principle................... (3.92)
------- -------
Net income (loss)..................................................... $ (3.82) $ 0.05
======= =======
Earnings per share--diluted:
Income before cumulative effect of change in accounting principle..... $ 0.08 $ 0.04
Cumulative effect of change in accounting principle................... (2.96)
------- -------
Net income (loss)..................................................... $ (2.88) $ 0.04
======= =======
15
6. Comprehensive Income
The following table sets forth the Company's comprehensive income (loss) (in
thousands):
Three Months Ended
March 31
- - -------------------
2002 2001
--------- --------
Net income (loss)................................................... $(280,755) $ 3,412
Other comprehensive gain (loss):
Foreign currency translation adjustment.......................... (426) (12,013)
Cumulative effect on equity of adopting SFAS No. 133, net of tax. (2,516)
Derivatives qualifying as hedges, net of tax..................... 1,166 (2,440)
--------- --------
Comprehensive loss.................................................. $(280,015) $(13,557)
========= ========
16
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Condensed Consolidating Financial Information of Guarantor Subsidiaries
Certain indebtedness of URI, a wholly owned subsidiary of Holdings (the
"Parent"), is guaranteed by URI's United States subsidiaries (the "guarantor
subsidiaries") and, in certain cases, also by Parent. However, this
indebtedness is not guaranteed by URI's foreign subsidiaries (the
"non-guarantor subsidiaries"). The guarantor subsidiaries are all wholly-owned
and the guarantees are made on a joint and several basis and are full and
unconditional (subject to subordination provisions and subject to a standard
limitation which provides that the maximum amount guaranteed by each guarantor
will not exceed the maximum amount that can be guaranteed without making the
guarantee void under fraudulent conveyance laws). Separate consolidated
financial statements of the guarantor subsidiaries have not been presented
because management believes that such information would not be material to
investors. However, condensed consolidating financial information as of March
31, 2002 and December 31, 2001, and for the three months ended March 31, 2002
and 2001, are presented. The condensed consolidating financial information of
the Company and its subsidiaries are as follows:
CONDENSED CONSOLIDATING BALANCE SHEET
March 31, 2002
Guarantor Non-Guarantor Other and Consolidated
Parent URI Subsidiaries Subsidiaries Eliminations Total
---------- ---------- ------------ ------------- ------------ ------------
(In thousands)
ASSETS
Cash and cash equivalents.................. $ 29,266 $ 1,984 $ 31,250
Accounts receivable, net................... $ 34,025 365,407 22,749 422,181
Intercompany receivable (payable).......... 274,035 (110,119) (163,916)
Inventory.................................. 43,892 56,074 3,925 103,891
Prepaid expenses and other assets.......... 56,447 105,036 1,655 $ 8,736 171,874
Rental equipment, net...................... 901,790 715,696 115,094 1,732,580
Property and equipment, net................ $ 25,282 137,838 228,716 16,298 408,134
Investment in subsidiaries................. 1,659,524 2,287,286 (3,946,810)
Intangible assets, net..................... 537,723 1,230,860 121,187 1,889,770
---------- ---------- ---------- ---------- ----------- ----------
$1,684,806 $4,273,036 $2,620,936 $ 118,976 $(3,938,074) $4,759,680
========== ========== ========== ========== =========== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Liabilities:
Accounts payable........................ $ 53,418 $ 128,986 $ 8,050 $ 190,454
Debt.................................... $ 283,250 2,288,218 169,193 60,897 $ (283,250) 2,518,308
Deferred taxes.......................... 208,799 19,993 228,792
Accrued expenses and other liabilities.. 75,936 57,464 12,130 (8,210) 137,320
---------- ---------- ---------- ---------- ----------- ----------
Total liabilities.................... 283,250 2,626,371 375,636 81,077 (291,460) 3,074,874
Commitments and contingencies
Company-obligated mandatorily redeemable
convertible preferred securities of a
subsidiary trust.......................... 283,250 283,250
Stockholders' equity:
Preferred stock......................... 5 5
Common stock............................ 759 759
Additional paid-in capital.............. 1,305,545 1,557,203 1,896,927 68,195 (3,522,325) 1,305,545
Deferred compensation................... (61,717) (61,717)
Retained earnings....................... 186,351 95,339 348,373 (6,786) (436,926) 186,351
Accumulated other comprehensive loss.... (29,387) (5,877) (23,510) 29,387 (29,387)
---------- ---------- ---------- ---------- ----------- ----------
Total stockholders' equity........... 1,401,556 1,646,665 2,245,300 37,899 $(3,929,864) 1,401,556
---------- ---------- ---------- ---------- ----------- ----------
$1,684,806 $4,273,036 $2,620,936 $ 118,976 $(3,938,074) $4,759,680
========== ========== ========== ========== =========== ==========
17
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2001
Non-
Guarantor Guarantor Other and Consolidated
Parent URI Subsidiaries Subsidiaries Eliminations Total
---------- ---------- ------------ ------------ ------------ ------------
(In thousands)
ASSETS
Cash and cash equivalents.................. $ 6,385 $ 19,798 $ 1,143 $ 27,326
Accounts receivable, net................... 7,142 418,260 24,871 450,273
Intercompany receivable (payable).......... 89,612 39,548 (129,160)
Inventory.................................. 36,335 46,410 3,019 85,764
Prepaid expenses and other assets.......... 57,764 64,699 1,935 $ 8,819 133,217
Rental equipment, net...................... 885,442 744,969 116,771 1,747,182
Property and equipment, net................ $ 26,793 135,240 231,508 16,512 410,053
Investment in subsidiaries................. 1,904,000 2,414,710 (4,318,710)
Intangible assets, net..................... 855,360 1,231,121 121,220 2,207,701
---------- ---------- ---------- --------- ----------- ----------
$1,930,793 $4,487,990 $2,796,313 $ 156,311 $(4,309,891) $5,061,516
========== ========== ========== ========= =========== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Liabilities:
Accounts payable........................ $ 38,436 $ 155,029 $ 11,308 $ 204,773
Debt.................................... $ 300,000 2,193,380 203,896 62,246 $ (300,000) 2,459,522
Deferred income taxes................... 296,974 50 297,024
Accrued expenses and other liabilities.. 5,283 57,108 96,793 12,253 3,250 174,687
---------- ---------- ---------- --------- ----------- ----------
Total liabilities..................... 305,283 2,585,898 455,768 85,807 (296,750) 3,136,006
Commitments and contingencies
Company-obligated mandatorily redeemable
convertible preferred securities
of a subsidiary trust.................... 300,000 300,000
Stockholders' equity:
Preferred stock......................... 5 5
Common stock............................ 734 734
Additional paid-in capital.............. 1,243,586 1,498,655 1,840,604 65,970 (3,405,229) 1,243,586
Deferred compensation................... (55,794) (55,794)
Retained earnings....................... 467,106 410,480 499,941 27,618 (938,039) 467,106
Accumulated other comprehensive loss.... (30,127) (7,043) (23,084) 30,127 (30,127)
---------- ---------- ---------- --------- ----------- ----------
Total stockholders' equity........... 1,625,510 1,902,092 2,340,545 70,504 (4,313,141) 1,625,510
---------- ---------- ---------- --------- ----------- ----------
$1,930,793 $4,487,990 $2,796,313 $ 156,311 $(4,309,891) $5,061,516
========== ========== ========== ========= =========== ==========
18
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Three Months Ended March 31, 2002
------------------------------------------------------------------------
Non-
Guarantor Guarantor Other and Consolidated
Parent URI Subsidiaries Subsidiaries Eliminations Total
--------- --------- ------------ ------------ ------------ ------------
(In thousands)
Revenues:
Equipment rentals............................ $ 195,853 $ 230,488 $ 19,947 $ 446,288
Sales of rental equipment.................... 29,281 5,359 4,490 39,130
Sales of equipment and merchandise and
other revenues.............................. 57,148 50,666 5,733 113,547
--------- --------- --------- -------- -------- ---------
Total revenues.................................. 282,282 286,513 30,170 598,965
Cost of revenues:
Cost of equipment rentals,
excluding depreciation...................... 95,843 128,215 11,504 235,562
Depreciation of rental equipment............. 35,444 37,678 4,928 78,050
Cost of rental equipment sales............... 18,524 3,810 2,798 25,132
Cost of equipment and merchandise sales
and other operating costs................... 41,838 35,046 4,129 81,013
--------- --------- --------- -------- -------- ---------
Total cost of revenues.......................... 191,649 204,749 23,359 419,757
--------- --------- --------- -------- -------- ---------
Gross profit.................................... 90,633 81,764 6,811 179,208
Selling, general and administrative expenses.... 43,865 48,738 5,892 98,495
Non-rental depreciation and amortization........ $ 2,129 5,893 5,202 660 13,884
--------- --------- --------- -------- -------- ---------
Operating income (loss)......................... (2,129) 40,875 27,824 259 66,829
Interest expense................................ 4,694 45,021 3,731 1,231 $ (4,694) 49,983
Preferred dividends of a subsidiary trust....... 4,694 4,694
Other (income) expense, net..................... 2,448 (3,110) 382 (280)
--------- --------- --------- -------- -------- ---------
Income (loss) before provision (benefit) for
income taxes and cumulative effect of change
in accounting principle........................ (6,823) (6,594) 27,203 (1,354) 12,432
Provision (benefit) for income taxes............ (2,661) (2,571) 10,693 (613) 4,848
--------- --------- --------- -------- -------- ---------
Income (loss) before cumulative effect of change
in accounting principle and equity in net
earnings of subsidiaries....................... (4,162) (4,023) 16,510 (741) 7,584
Cumulative effect of change in
accounting principle........................... (86,598) (168,078) (33,663) (288,339)
--------- --------- --------- -------- -------- ---------
Income (loss) before equity in net earnings
of subsidiaries................................ (4,162) (90,621) (151,568) (34,404) (280,755)
Equity in net earnings of subsidiaries.......... (276,593) (185,972) 462,565
--------- --------- --------- -------- -------- ---------
Net income (loss)............................... $(280,755) $(276,593) $(151,568) $(34,404) $462,565 $(280,755)
========= ========= ========= ======== ======== =========
19
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Three Months Ended March 31, 2001
---------------------------------------------------------------------
Non-
Guarantor Guarantor Consolidated
Parent URI Subsidiaries Subsidiaries Eliminations Total
------- -------- ------------ ------------ ------------ ------------
(In thousands)
Revenues:
Equipment rentals........................ $207,473 $233,354 $20,555 $461,382
Sales of rental equipment................ 28,195 8,059 2,868 39,122
Sales of equipment and merchandise
and other revenues..................... 56,541 54,650 7,409 118,600
------- -------- -------- ------- -------- --------
Total revenues.............................. 292,209 296,063 30,832 619,104
Cost of revenues:
Cost of equipment rentals,
excluding depreciation................. 98,811 119,675 11,547 230,033
Depreciation of rental equipment......... 37,411 34,296 5,094 76,801
Cost of rental equipment sales........... 16,584 4,902 1,590 23,076
Cost of equipment and merchandise
sales and other operating costs........ 42,672 38,508 5,447 86,627
------- -------- -------- ------- -------- --------
Total cost of revenues...................... 195,478 197,381 23,678 416,537
------- -------- -------- ------- -------- --------
Gross profit................................ 96,731 98,682 7,154 202,567
Selling, general and administrative expenses 48,249 54,608 6,036 108,893
Non-rental depreciation and amortization.... $ 2,064 10,837 11,756 1,450 26,107
------- -------- -------- ------- -------- --------
Operating income............................ (2,064) 37,645 32,318 (332) 67,567
Interest expense............................ 4,875 56,847 436 247 $ (4,875) 57,530
Preferred dividends of a subsidiary trust... 4,875 4,875
Other (income) expense, net................. 6,200 (7,385) 515 (670)
------- -------- -------- ------- -------- --------
Income (loss) before provision (benefit) for
income taxes.............................. (6,939) (25,402) 39,267 (1,094) 5,832
Provision (benefit) for income taxes........ (2,880) (10,542) 16,296 (454) 2,420
------- -------- -------- ------- -------- --------
Income (loss) before equity in net
earnings of subsidiaries.................. (4,059) (14,860) 22,971 (640) 3,412
Equity in net earnings of
subsidiaries.............................. 7,471 22,331 (29,802)
------- -------- -------- ------- -------- --------
Net income (loss)........................... $ 3,412 $ 7,471 $ 22,971 $ (640) $(29,802) $ 3,412
======= ======== ======== ======= ======== ========
20
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING CASH FLOW INFORMATION
For the Three Months Ended March 31, 2002
-----------------------------------------------------------------------
Non-
Guarantor Guarantor Other and
Parent URI Subsidiaries Subsidiaries Eliminations Consolidated
-------- --------- ------------ ------------ ------------ ------------
(In thousands)
Net cash provided by (used in) operating
activities........................................... $(15,639) $ 13,832 $ 27,348 $ 3,026 $ 12,034 $ 40,601
Cash flows from investing activities:
Purchases of rental equipment...................... (60,278) (19,340) (4,515) (84,133)
Purchases of property and equipment................ (535) (2,880) (3,422) (385) (7,222)
Proceeds from sales of rental equipment............ 29,281 5,359 4,490 39,130
Capital contributed to subsidiary.................. (58,548) 58,548
Purchases of other companies....................... (48,667) (48,667)
Deposits on rental equipment purchases............. (28,000) (28,000)
In-process acquisition costs....................... (554) (554)
-------- --------- -------- ------- -------- ---------
Net cash used in investing activities........... (59,083) (110,544) (17,403) (410) 57,994 (129,446)
Cash flows from financing activities:
Proceeds from debt................................. 96,500 96,500
Payments of debt................................... (25,786) (477) (1,349) (27,612)
Payments of financing costs........................ (387) (387)
Capital contributions by parent.................... 58,548 (58,548)
Dividend distributions to parent................... (38,548) 38,548
Common shares repurchased and retired.............. (22,374) (22,374)
Company-obligated mandatorily redeemable
convertible preferred securities of a subsidiary
trust repurchased and retired..................... (11,480) (11,480)
Proceeds from the exercise of common
stock options..................................... 58,548 58,548
Proceeds from dividends from subsidiary............ 38,548 (38,548)
-------- --------- -------- ------- -------- ---------
Net cash provided by (used in)
financing activities........................... 74,722 90,327 (477) (1,349) (70,028) 93,195
Effect of foreign exchange rates................... (426) (426)
-------- --------- -------- ------- -------- ---------
Net increase (decrease) in cash and
cash equivalents.................................. (6,385) 9,468 841 3,924
Cash and cash equivalents at beginning of period... 6,385 19,798 1,143 27,326
-------- --------- -------- ------- -------- ---------
Cash and cash equivalents at end of period......... $ 29,266 $ 1,984 $ 31,250
======== ========= ======== ======= ======== =========
Supplemental disclosure of cash flow information:
Cash paid for interest.......................... $ 4,875 $ 33,781 $ 3,904 $ 1,256 $ 43,816
Cash paid for income taxes, net of refunds...... (127) $ 720 $ 593
Supplemental disclosure of non-cash investing and
financing activities:
The Company acquired the net assets and assumed
certain liabilities of other companies as follows:
Assets, net of cash acquired....................... $ 52,805 $ 52,805
Liabilities assumed................................ (5,154) (5,154)
-------- --------- -------- ------- -------- ---------
47,651 47,651
Due to seller and other payments................... 1,016 1,016
-------- --------- -------- ------- -------- ---------
Net cash paid................................... $ 48,667 $ 48,667
======== ========= ======== ======= ======== =========
21
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING CASH FLOW INFORMATION
For the Three Months Ended March 31, 2001
----------------------------------------------------------------------
Non-
Guarantor Guarantor Other and
Parent URI Subsidiaries Subsidiaries Eliminations Consolidated
-------- -------- ------------ ------------ ------------ ------------
(In thousands)
Net cash provided by (used in) operating activities $ (3,154) $ 21,233 $ 20,403 $ 16,866 $ 719 $ 56,067
Cash flows from investing activities:
Purchases of rental equipment................... (66,761) (26,650) (4,936) (98,347)
Purchases of property and equipment............. (1,721) (6,188) (7,482) (1,331) (16,722)
Proceeds from sales of rental equipment......... 28,195 8,059 2,868 39,122
Capital contributed to subsidiary............... (172) 172
Purchases of other companies.................... (27,056) (639) (27,695)
In-process acquisition costs.................... (719) (719)
-------- -------- -------- -------- -------- ---------
Net cash used in investing activities......... (1,893) (71,810) (26,073) (4,038) (547) (104,361)
Cash flows from financing activities:
Proceeds from debt.............................. 95,144 11 95,155
Payments of debt................................ (16,307) (555) (2,783) (19,645)
Payments of financing costs..................... (381) (381)
Capital contributions by parent................. 172 (172)
Dividend distributions to parent................ (28,051) 28,051
Common shares repurchased and retired........... (23,176) (23,176)
Proceeds from the exercise of common
stock options.................................. 172 172
Proceeds from dividends from subsidiary......... 28,051 (28,051)
-------- -------- -------- -------- -------- ---------
Net cash provided by (used in)
financing activities........................ 5,047 50,577 (544) (2,783) (172) 52,125
Effect of foreign exchange rates................ (12,013) (12,013)
-------- -------- -------- -------- -------- ---------
Net decrease in cash and cash equivalents....... (6,214) (1,968) (8,182)
Cash and cash equivalents at beginning
of period...................................... 29,733 4,651 34,384
-------- -------- -------- -------- -------- ---------
Cash and cash equivalents at end of period...... $ 23,519 $ 2,683 $ 26,202
======== ======== ======== ======== ======== =========
Supplemental disclosure of cash flow information:
Cash paid for interest........................ $ 4,875 $ 53,026 $ 4,133 $ 570 $ 62,604
Cash paid for income taxes, net
of refunds.................................. $ 538 $ 227 $ 765
Supplemental disclosure of non-cash investing and
financing activities:
The Company acquired the net assets and assumed
certain liabilities of other companies as follows:
Assets, net of cash acquired.................... $ 4,624 $ 833 $ 5,457
Liabilities assumed............................. (842) (194) (1,036)
Less:
Amounts paid through issuance of debt......... (600) (600)
-------- -------- -------- -------- -------- ---------
3,182 639 3,821
Due to seller and other payments................ 23,874 23,874
-------- -------- -------- -------- -------- ---------
Net cash paid................................. $ 27,056 $ 639 $ 27,695
======== ======== ======== ======== ======== =========
22
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion reviews our operations for the three months ended
March 31, 2002 and 2001 and should be read in conjunction with the Unaudited
Consolidated Financial Statements and related Notes included herein and the
Consolidated Financial Statements and related Notes included in our 2001 Annual
Report on Form 10-K.
General
We are the largest equipment rental company in the world. Our revenues are
divided into three categories:
. Equipment rentals--This category includes our revenues from renting
equipment. This category also includes related revenues such as the fees
we charge for equipment delivery, fuel, repair of rental equipment and
damage waivers.
. Sales of rental equipment--This category includes our revenues from the
sale of used rental equipment.
. Sales of equipment and merchandise and other revenues--This category
principally includes our revenues from the following sources: (i) the sale
of new equipment, (ii) the sale of supplies and merchandise, (iii) repair
services and the sale of parts for equipment owned by customers and (iv)
the operations of our subsidiary that develops and markets software for
use by equipment rental companies in managing and operating multiple
branch locations.
Our cost of operations consists primarily of: (i) depreciation costs
relating to the rental equipment that we own and lease payments for the rental
equipment that we hold under operating leases, (ii) the cost of repairing and
maintaining rental equipment, (iii) the cost of the items that we sell
including new and used equipment and related parts, merchandise and supplies
and (iv) personnel costs, occupancy costs and supply costs.
We record rental equipment expenditures at cost and depreciate equipment
using the straight-line method over the estimated useful life (which ranges
from two to ten years), after giving effect to an estimated salvage value of
zero to ten percent of cost.
Selling, general and administrative expenses primarily include sales
commissions, advertising and marketing expenses, management salaries, and
clerical and administrative overhead.
Non-rental depreciation and amortization includes (i) depreciation expense
associated with equipment that is not offered for rent (such as vehicles,
computers and office equipment) and amortization expense associated with
leasehold improvements, (ii) the amortization of deferred financing costs and
(iii) the amortization of goodwill and other intangible assets. Goodwill
represents the excess of the purchase price of acquired companies over the
estimated fair value of the net assets acquired. As described below, effective
January 1, 2002 we no longer amortize goodwill. Our other intangible assets are
non-compete agreements.
Change in Accounting Treatment for Goodwill and Other Intangible Assets
Effective January 1, 2002, we adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" issued by
the Financial Accountants Standards Board ("FASB"). Under this standard, our
goodwill, which we previously amortized over 40 years, will no longer be
amortized. Our approximately $16.3 million of other intangible assets, which
consist of non-compete agreements, will continue to be amortized over their
contractual lives. Under the new accounting standard, we are required to
periodically review our goodwill for impairment. In general, this means that we
must determine whether the fair value of the goodwill, determined in accordance
with applicable accounting standards, is at least equal to the recorded value
shown on our balance sheet. If the fair value of the goodwill is less than the
recorded value, we are required to write-off the excess goodwill and to treat
this write-off as an expense. We completed our initial impairment analysis in
the first quarter of 2002 and recorded a non-cash impairment charge, net of tax
benefit, of
23
$288.3 million. This charge is reflected on our consolidated statements of
operations as "cumulative effect of change in accounting principle." We will be
required to continue to review our goodwill for impairment at least annually.
For additional information, see Notes 1 and 3 to our Unaudited Consolidated
Financial Statements included elsewhere in this Report.
Results of Operations
General Overview
Our revenues were $599.0 million in the first quarter of 2002 compared to
$619.1 million in the first quarter of 2001. The 3.3% decrease in 2002 was
principally attributable to two factors. The first was that continued weakness
in the construction industry put downward pressure on rental rates. As a
result, our rental rates were down 3.5% in the first quarter of 2002 compared
to the first quarter of 2001. Although this price decrease was partially offset
by an increase in the volume of rental transactions, the price decrease
negatively affected our revenues. The second factor was that we closed or
consolidated 31 underperforming branches in 2001 and, as a result, we had fewer
branches, net of additional branches through acquisitions and start-ups, at the
start of 2002 than at the start of 2001.
Our operating income was $66.8 million in the first quarter of 2002 compared
to $67.6 million in the first quarter of 2001. As discussed above, a change in
accounting principle that was effective at the beginning of 2002 eliminated the
amortization of goodwill. Without this change, our operating income in the
first quarter of 2002 would have been approximately $54.1 million. Our
operating income in 2002 was negatively affected by (1) the decrease in
revenues discussed above and (2) lower gross profit margins from equipment
rental and the sale of rental equipment primarily due to price weakness. The
negative impact of the foregoing was partially offset by our continued success
in reducing selling, general and administrative expenses. These expenses were
down $10.4 million in the first quarter of 2002 compared to the first quarter
of 2001.
Our interest expense decreased $7.5 million in the first quarter of 2002
compared to the first quarter of 2001. This reduction in interest expense more
than offset the decrease in operating income described above. Consequently,
although our operating income was down slightly, our "income before cumulative
effect of change in accounting principle" increased to $7.6 million in the
first quarter of 2002 from $3.4 million in the first quarter of 2001.
Additional Information
Three Months Ended March 31, 2002 and 2001
Revenues. We had total revenues of $599.0 million in the first quarter of
2002, representing a decrease of 3.3% from total revenues of $619.1 million in
the first quarter of 2001. The different components of our revenues are
discussed below:
1. Equipment Rentals. Our revenues from equipment rentals was $446.3
million in the first quarter of 2002, representing a decrease of 3.3% from
$461.4 million in the first quarter of 2001. These revenues accounted for 74.5%
of our total revenues in both periods. The decrease in rental revenues
principally reflected the following:
. Our rental revenues from locations open more than one year, or same store
rental revenues, decreased by approximately 2.4%. This decrease reflected
a 3.5% decrease in rental rates, which was partially offset by a 1.1%
increase in the volume of rental transactions.
. We also lost revenues because we had fewer branches at the beginning of
2002 than at the beginning of 2001. The decrease in the number of branches
reflected the closure or consolidation of underperforming branches in
2001, partially offset by the addition of new locations through start-ups
and acquisitions.
24
2. Sales of Rental Equipment. Our revenues from the sale of rental
equipment were $39.1 million in both the first quarter of 2002 and the first
quarter of 2001. These revenues accounted for 6.5% of our total revenues in the
first quarter of 2002 compared with 6.3% in the first quarter of 2001.
3. Sales of Equipment and Merchandise and Other Revenues. Our revenues from
"sale of equipment and merchandise and other revenues" were $113.5 million in
the first quarter of 2002, representing a decrease of 4.3% from $118.6 million
in the first quarter of 2001. These revenues accounted for 19.0% of our total
revenues in the first quarter of 2002 compared with 19.2% of our total revenues
in the first quarter of 2001. The decrease in these revenues in the first
quarter of 2002 principally reflected a decrease in the volume of transactions.
Gross Profit. Our gross profit decreased to $179.2 million in the first
quarter of 2002 from $202.6 million in the first quarter of 2001. This decrease
reflected the decrease in total revenues discussed above, as well as the
decrease in gross profit margin described below from equipment rental and the
sales of rental equipment. Information concerning our gross profit margin by
source of revenue is set forth below:
1. Equipment Rentals. Our gross profit margin from equipment rental
revenues was 29.7% in the first quarter of 2002 and 33.5% in the first quarter
of 2001. The decrease in 2002 principally reflected the decrease in rental
rates described above.
2. Sales of Rental Equipment. Our gross profit margin from the sales of
rental equipment was 35.8% in the first quarter of 2002 and 41.0% in the first
quarter of 2001. The decrease in 2002 primarily reflected price weakness in the
used equipment market.
3. Sales of Equipment and Merchandise and Other Revenues. Our gross profit
margin from "sales of equipment and merchandise and other revenues" was 28.7%
in the first quarter of 2002 and 27.0% in the first quarter of 2001. The
increase in the gross profit margin in 2002 primarily reflected lower costs
resulting from our ongoing efforts to consolidate our suppliers.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") were $98.5 million, or 16.4% of total
revenues, during the first quarter of 2002 and $108.9 million, or 17.6% of
total revenues, during the first quarter of 2001. The decrease in SG&A in 2002
primarily reflected our ongoing efforts at cutting costs, including reducing
the number of administrative personnel, reducing discretionary expenditures and
consolidating certain credit and collection facilities.
Non-rental Depreciation and Amortization. Non-rental depreciation and
amortization decreased to $13.9 million, or 2.3% of total revenues, in the
first quarter of 2002 from $26.1 million, or 4.2% of total revenues, in the
first quarter of 2001. This decrease was attributable to a new accounting
standard (discussed above under "--Change in Accounting Treatment For Goodwill
and Other Intangible Assets") which eliminated the amortization of goodwill
effective January 1, 2002.
Interest Expense. Interest expense decreased to $50.0 million in the first
quarter of 2002 from $57.5 million in the first quarter of 2001. This decrease
primarily reflected lower interest rates on our variable rate debt and lower
debt outstanding due to our repayments of debt during 2001.
Preferred Dividends of a Subsidiary Trust. Preferred dividends of a
subsidiary trust were $4.7 million in the first quarter of 2002, compared to
$4.9 million during the first quarter of 2001. The decrease is due to the
decrease in the amount of our outstanding trust preferred securities.
Other (Income) Expense. Other income was $0.3 million in the first quarter
of 2002 compared with other income of $0.7 million in the first quarter of 2001.
Income Taxes. Income taxes were $4.8 million, or an effective rate of
39.0%, in the first quarter of 2002 compared to $2.4 million, or an effective
rate of 41.5%, in the first quarter of 2001. The decrease in the effective
25
rate in the first quarter of 2002 primarily reflected the elimination for book
purposes of non-tax deductible goodwill amortization upon the adoption of SFAS
No. 142 as described under "--Change in Accounting Treatment for Goodwill and
Other Intangible Assets."
Cumulative Effect of Change in Accounting Principle. As described under
"--Change in Accounting Treatment for Goodwill and Other Intangible Assets," we
recorded an amount of $288.3 million, net of tax, for impairment of goodwill as
part of our transitional impairment test upon the adoption of SFAS No. 142.
Liquidity and Capital Resources
Certain Balance Sheet Changes
The decreases in goodwill and retained earnings at March 31, 2002 as
compared to December 31, 2001 were attributable to the write-off of goodwill as
a result of the transitional impairment test required upon the adoption of SFAS
No. 142 as described under "--Change in Accounting Treatment for Goodwill and
Other Intangible Assets." The decrease in deferred income taxes at March 31,
2002 as compared to December 31, 2001 was attributable primarily to the tax
effects of the goodwill write-off and exercise of stock options during the
first quarter of 2002. The increase in additional paid-in capital at March 31,
2002 as compared to December 31, 2001 was attributable primarily to the
exercise of stock options, the issuance of restricted stock and the excess of
the liquidation preference amount over the amount at which we purchased 335,000
shares of our trust preferred securities, offset by common stock repurchased
and retired.
Sources and Uses of Cash
During the first quarter of 2002, we (i) generated cash from operations of
approximately $40.6 million, (ii) generated cash from the sale of rental
equipment of approximately $39.1 million, (iii) obtained cash from the exercise
of stock options, net of common stock repurchased and retired, of approximately
$36.2 million and (iv) obtained cash from borrowings, net of repayments, of
approximately $68.9 million. We used cash during this period principally to (i)
pay consideration for acquisitions (approximately $48.7 million), (ii) purchase
and pay deposits on rental equipment (approximately $112.1 million),
(iii) purchase other property and equipment (approximately $7.2 million), and
(iv) repurchase and retire trust preferred securities (approximately
$11.5 million).
Cash Requirements Related to Operations
Our principal existing sources of cash are cash generated from operations
and from the sale of used equipment and borrowings available under our
revolving credit facility. As of May 10, 2002, we had $463.3 million of
borrowing capacity available under our $750 million revolving credit facility
(reflecting outstanding loans of approximately $208.4 million and outstanding
letters of credit in the amount of approximately $78.3 million). We believe
that our existing sources of cash will be sufficient to support our existing
operations over the next 12 months.
We expect that our principal needs for cash relating to our existing
operations over the next 12 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) costs relating to the restructuring charge incurred in the second
quarter of 2001. We plan to fund such cash requirements relating to our
existing operations from our existing sources of cash described above.
The amount of our capital expenditures during 2002 will depend on a number
of factors, including general economic conditions and growth prospects. Based
on current conditions, we estimate that capital expenditures for the year 2002
will be approximately $435 million for our existing operations. These
expenditures are comprised of approximately (i) $280 million of expenditures to
replace rental equipment sold, (ii) $115 million of discretionary expenditures
to increase the size of our rental fleet and (iii) $40 million of expenditures
for the purchase of non-rental equipment. We expect that we will fund such
expenditures from proceeds from the sale of used equipment, cash generated from
operations and, if required, borrowings available under our revolving credit
facility.
26
While emphasizing internal growth, we may also continue to expand through a
disciplined acquisition program. We will consider potential transactions of
varying size 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.
Information Concerning Operating Leases
From time to time we have entered into operating leases pursuant to which
we lease, as lessee, equipment or real estate. Certain of these leases were
entered into as part of sale and lease-back transactions. In the first quarter
of 2002, we were the seller-lessee in sale-leaseback transactions with
unrelated third parties in which we sold equipment for aggregate proceeds of
$3.4 million and agreed to lease back the equipment for a minor period of up to
eight months. The related gains recognized from these transactions were
approximately $1.5 million.
Information Concerning Receivables Securitization
We have an accounts receivable securitization facility under which one of
our subsidiaries can borrow up to $250 million against a collateral pool of
accounts receivable. The borrowings under the facility and the receivables in
the collateral pool are included in the liabilities and assets, respectively,
reflected on our consolidated balance sheets. Key terms of this facility
include:
. Borrowings may be made only to the extent that the face amount of the
receivables in the collateral pool exceeds the outstanding loans by a
specified amount.
. The facility is structured so that the receivables in the collateral pool
are the lender's only source of repayment.
. Prior to expiration or early termination of the facility, amounts
collected on the receivables may, subject to certain conditions, be
retained by the borrower, provided that the remaining receivables in the
collateral pool are sufficient to secure the then outstanding borrowings.
. After expiration or early termination of the facility, we will repay the
borrowings.
As of March 31, 2002, (i) the outstanding borrowings under the facility were
approximately $178.9 million and (ii) the aggregate face amount of the
receivables in the collateral pool was approximately $304.1 million. The
agreement governing this facility, which was amended in June 2001, contemplates
that the term of the facility may extend for up to three years from the date of
the amended facility. However, on each anniversary of such date, the consent of
the lender is required for the facility to renew for the next year. The next
anniversary date is in June 2002. We plan to seek the lender's approval for
renewal.
Information Concerning Trust Preferred Securities
In August 1998, a subsidiary trust of United Rentals, Inc. sold six million
shares of 6% Convertible Quarterly Income Preferred Securities for aggregate
consideration of $300 million. During 2002, we repurchased 335,000 of these
shares (having an aggregate liquidation preference of approximately $16.8
million) for aggregate consideration of approximately $11.5 million. The
liquidation preference amounts in excess of the amounts paid for the repurchase
of these shares were recognized as increases in additional paid-in capital. Our
results of operations do not reflect any gain or loss from these transactions.
Information Concerning Certain Restricted Stock Awards
We have granted to employees other than executive officers and directors
815,090 shares of restricted stock that contain the following provisions. The
shares vest in 2004 or 2005 or earlier upon a change in control of the Company,
death, disability, retirement or certain terminations of employment, and are
subject to forfeiture prior
27
to vesting on certain other terminations of employment, the violation of
non-compete provisions and certain other events. The grants provide that we
will pay to employees who vest in their restricted stock, and who sell their
restricted stock within five trading days after vesting, a maximum aggregate
amount for all these employees of $309,799 for each dollar by which the per
share proceeds of these sales are less than $27.26 but more than $15.17, and a
maximum aggregate amount for all these employees of $815,090 for each dollar by
which the per share proceeds of these sales are less than $15.17.
Relationship Between Holdings and URI
United Rentals, Inc. ("Holdings") is principally a holding company and
primarily conducts its operations through its wholly owned subsidiary United
Rentals (North America), Inc. ("URI") and subsidiaries of URI. Holdings
provides certain services to URI in connection with its operations. These
services principally include: (i) senior management services, (ii) finance
related services and support, (iii) information technology systems and support
and (iv) acquisition related services. In addition, Holdings leases certain
equipment and real property that are made available for use by URI and its
subsidiaries. URI has made, and expects to continue to make, certain payments
to Holdings in respect of the services provided by Holdings to URI. The
expenses relating to URI's payments to Holdings are reflected on URI's
financial statements as selling, general and administrative expenses. In
addition, although not legally obligated to do so, URI has in the past, and
expects that it will in the future, make distributions to Holdings to, among
other things, enable Holdings to pay dividends on certain trust preferred
securities that were issued by a subsidiary trust of Holdings in August 1998.
The trust preferred securities are the obligation of a subsidiary trust of
Holdings and are not the obligation of URI. As a result, the dividends payable
on these securities are reflected as an expense on the consolidated financial
statements of Holdings, but are not reflected as an expense on the consolidated
financial statements of URI. This is the principal reason why the net income
reported on the consolidated financial statements of URI is higher than the net
income reported on the consolidated financial statements of Holdings.
Seasonality
Our business is seasonal with demand for our rental equipment tending to be
lower in the winter months. The seasonality of our business has been heightened
by our acquisition of businesses that specialize in renting traffic control
equipment. These businesses tend to generate most of their revenues and profits
in the second and third quarters of the year, slow down during the fourth
quarter and operate at a loss during the first quarter.
Inflation
Although we cannot accurately anticipate the effect of inflation on our
operations, we believe that inflation has not had, and is not likely in the
foreseeable future to have, a material impact on our results of operations.
Impact of Recently Issued Accounting Standards
In June 2001, the FASB issued SFAS No. 141, "Business Combinations." This
standard addresses financial accounting and reporting for business combinations
and supersedes APB Opinion No. 16, "Business Combinations" and SFAS No. 38,
"Accounting for Preacquisition Contingencies of Purchased Enterprises." All
business combinations in the scope of this Statement are to be accounted for
using one method, the purchase method. Effective July 1, 2001, we adopted SFAS
No. 141.
We adopted SFAS No. 142, "Goodwill and Other Intangible Assets" effective
January 1, 2002. This standard addresses financial accounting and reporting for
acquired goodwill and other intangible assets and supersedes APB Opinion No.
17, "Intangible Assets." Under this standard, goodwill and other intangible
assets deemed to have indefinite lives will no longer be amortized but will be
subject to annual impairment tests on a reporting unit level. Other intangible
assets are being amortized over their estimated useful lives. For additional
information, see "--Change in Accounting Treatment For Goodwill and Other
Intangible Assets."
28
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets". This standard addresses financial accounting
and reporting for the impairment or disposal of Long-lived assets and
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of". We adopted SFAS No. 144 on
January 1, 2002. The adoption of SFAS No. 144 did not have an impact on our
consolidated financial position or results of operations.
Factors that May Influence Future Results and Results Anticipated by
Forward-Looking Statements
Sensitivity to Changes in Construction and Industrial Activities
Our equipment is principally used in connection with construction and
industrial activities. Consequently, decreases in construction or industrial
activity due to a recession or other reasons may lead to a decrease in the
demand for our equipment or the prices that we can charge. Any such decrease
could adversely affect our revenues and operating results. For example, the
current slow-down in the economy has caused construction and industrial
activity to decrease and, as a result, our revenues and pricing were both down
in the first quarter of 2002 compared to the same period in 2001.
We have identified below certain factors that may cause a further downturn
in construction and industrial activity, either temporarily or long-term:
. a continuation or a worsening of the current recessionary environment;
. an increase in interest rates; or
. adverse weather conditions which may temporarily affect a particular
region.
In addition, demand for our equipment may not reach projected levels in the
event that funding for highway and other construction projects under government
programs, such as the Transportation Equity Act for the 21st Century
("TEA-21"), does not reach expected levels. A recent proposal by the President
would, if enacted by Congress, reduce TEA-21 spending by up to approximately
$8.6 billion beginning in late 2002.
Fluctuations of Operating Results
We expect that our revenues and operating results may fluctuate from quarter
to quarter or over the longer term due to a number of factors. These factors
include:
. seasonal rental patterns of our customers, with rental activity tending to
be lower in the winter;
. completion of acquisitions;
. changes in the amount of revenue relating to renting traffic control
equipment, since revenues from this equipment category tend to be more
seasonal than the rest of our business;
. changes in the size of our rental fleet or in the rate at which we sell
our used equipment;
. changes in demand for our equipment or the prices thereof due to changes
in economic conditions, competition or other factors;
. changes in the interest rates applicable to our floating rate debt;
. if we determine that a potential acquisition will not be consummated, the
need to charge against earnings any expenditures relating to such
transaction (such as financing commitment fees, merger and acquisition
advisory fees and professional fees) previously capitalized; and
. the possible need, from time to time, to take other write-offs or special
charges due to a variety of occurrences, such as the adoption of new
accounting standards, impairment of goodwill, store consolidations or
closings or the refinancing of existing indebtedness.
29
Substantial Indebtedness
At March 31, 2002, our total indebtedness was approximately $2,518.3
million. Our substantial indebtedness has the potential to affect us adversely
in a number of ways. For example, it will or could:
. require us to devote a substantial portion of our cash flow to debt
service, reducing the funds available for other purposes;
. constrain our ability to obtain additional financing, particularly since
substantially all of our assets are subject to security interests relating
to existing indebtedness; or
. make it difficult for us to cope with a downturn in our business or a
decrease in our cash flow.
Furthermore, if we are unable to service our indebtedness and fund our
business, we will be forced to adopt an alternative strategy that may include:
. reducing or delaying capital expenditures;
. limiting our growth;
. seeking additional capital;
. selling assets; or
. restructuring or refinancing our indebtedness.
We cannot be sure that any of these strategies could be effected on
favorable terms or at all.
A portion of our indebtedness bears interest at variable rates that are
linked to changing market interest rates. As a result, an increase in market
interest rates would increase our interest expense and our debt service
obligations. At March 31, 2002, we had $1,091.0 million of variable rate
indebtedness.
Dependence on Additional Capital
If the cash that we generate from our business, together with cash that we
may borrow under our credit facility, is not sufficient to fund our capital
requirements, we will require additional debt and/or equity financing. We
cannot, however, be certain that any additional financing will be available or,
if available, will be available on terms that are satisfactory to us. If we are
unable to obtain sufficient additional capital in the future, we may be unable
to fund the capital outlays required for the success of our business, including
those relating to purchasing equipment, making acquisitions, opening new rental
locations and repaying or refinancing existing indebtedness.
Restrictive Covenants
We are subject to various restrictive financial and operating covenants
under the agreements governing our indebtedness. These covenants limit or
prohibit, among other things, our ability to incur indebtedness, make
prepayments of certain indebtedness, pay dividends, make investments, create
liens, make acquisitions, sell assets and engage in mergers and acquisitions.
These covenants could adversely affect our business by significantly limiting
our operating and financial flexibility.
Certain Risks Relating to Acquisitions
We have grown in part through acquisitions and may continue to do so. The
making of acquisitions entails certain risks, including:
. unrecorded liabilities of acquired companies that we fail to discover
during our due diligence investigations;
30
. difficulty in assimilating the operations and personnel of the acquired
company with our existing operations;
. loss of key employees of the acquired company; and
. difficulty in maintaining uniform standards, controls, procedures and
policies.
We cannot guarantee that we will realize the expected benefits from our
acquisitions or that our existing operations will not be harmed as a result of
acquisitions.
Substantial Goodwill
At March 31, 2002, we had on our balance sheet net goodwill in the amount of
$1,882.2 million, which represented approximately 39.5% of our total assets at
such date. This goodwill is an intangible asset and represents the excess of
the purchase price that we paid for acquired businesses over the estimated fair
market value of the net assets of those businesses. If the fair value of the
goodwill, determined in accordance with applicable accounting standards, were
to fall below the recorded value shown on the balance sheet, we would be
required to write off the excess goodwill. Any write-off would adversely affect
our results. For example, in the first quarter of 2002, we recorded impairment
of $288.3 million, net of tax, as a cumulative effect of change in accounting
principle upon adoption of SFAS No. 142. See "--Change in Accounting Treatment
for Goodwill and Other Intangible Assets."
Dependence on Management
Our success is highly dependent on the experience and skills of our senior
management team. If we lose the services of any member of this team and are
unable to find a suitable replacement, we may not have the depth of senior
management resources required to efficiently manage our business and execute
our strategy. We do not maintain "key man" life insurance on the lives of
members of senior management.
Competition
The equipment rental industry is highly fragmented and competitive. Our
competitors primarily include small, independent businesses with one or two
rental locations, regional competitors which operate in one or more states,
public companies or divisions of public companies, and equipment vendors and
dealers who both sell and rent equipment directly to customers. We may in the
future encounter increased competition from our existing competitors or from
new companies. In addition, equipment manufacturers may commence or increase
their existing efforts relating to renting and selling equipment directly to
our customers or potential customers. Competitive pressures could adversely
affect our revenues and operating results by decreasing our market share or
depressing the prices that we can charge.
Dependence on Information Technology Systems
Our information technology systems facilitate our ability to monitor and
control our operations and adjust to changing market conditions. Any
disruptions in these systems or the failure of these systems to operate as
expected could, depending on the magnitude of the problem, adversely affect our
operating results by limiting our capacity to effectively monitor and control
our operations and adjust to changing market conditions.
Liability and Insurance
We are exposed to various possible claims relating to our business. These
possible claims include those relating to (1) personal injury or death caused
by equipment rented or sold by us, (2) motor vehicle accidents involving our
delivery and service personnel and (3) employment related claims. We carry a
broad range of insurance for the protection of our assets and operations.
However, such insurance may not fully protect us for a number of reasons,
including:
. our coverage is subject to a deductible of $1.0 million and limited to a
maximum of $98.0 million per occurrence;
31
. we do not maintain coverage for environmental liability (other than
legally required fuel storage tank coverage); and
. certain types of claims, such as claims for punitive damages or for
damages arising from intentional misconduct, which are often alleged in
third party lawsuits, might not be covered by our insurance.
If we are found liable for any significant claims that are not covered by
insurance, our operating results could be adversely affected. We cannot be
certain that insurance will continue to be available to us on economically
reasonable terms, if at all.
Environmental and Safety Regulations
Our operations are subject to numerous laws governing environmental
protection and occupational health and safety matters. These laws regulate such
issues as wastewater, stormwater, solid and hazardous wastes and materials, and
air quality. Under these laws, we may be liable for, among other things, (1)
the costs of investigating and remediating contamination at our sites as well
as sites to which we sent hazardous wastes for disposal or treatment regardless
of fault and (2) fines and penalties for non-compliance. Our operations
generally do not raise significant environmental risks, but we use hazardous
materials to clean and maintain equipment, and dispose of solid and hazardous
waste and wastewater from equipment washing, and store and dispense petroleum
products from underground and above-ground storage tanks located at certain of
our locations.
Based on the conditions currently known to us, we do not believe that any
pending or likely remediation and compliance costs will have a material adverse
effect on our business. We cannot be certain, however, as to the potential
financial impact on our business if new adverse environmental conditions are
discovered or environmental and safety requirements become more stringent. If
we are required to incur environmental compliance or remediation costs that are
not currently anticipated by us, our business could be adversely affected
depending on the magnitude of the cost.
Labor Matters
We have approximately 1,000 employees that are represented by unions and are
covered by collective bargaining agreements. If we should experience a
prolonged labor dispute involving a significant number of our employees, our
ability to serve our customers could be adversely affected. Furthermore, our
labor costs could increase as a result of the settlement of actual or
threatened labor disputes.
Operations Outside the United States
Our operations outside the United States are subject to the risks normally
associated with international operations. These include (1) the need to convert
currencies, which could result in a gain or loss depending on fluctuations in
exchange rates, (2) the need to comply with foreign laws and (3) the
possibility of political or economic instability in foreign countries.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risks relating to changes in interest rates and foreign currency
exchanges rates were reported in Item 7A of our Annual Report on Form 10-K for
the year ended December 31, 2001. There has been no material change in these
market risks since the end of the fiscal year 2001.
32
PART II OTHER INFORMATION
Item 1. Legal Proceedings
We and our subsidiaries are parties to various litigation matters involving
ordinary and routine claims incidental to our business. Our ultimate legal and
financial liability with respect to such pending litigation cannot be estimated
with certainty but we believe, based on our examination of such matters, that
such ultimate liability will not have a material adverse effect on our
consolidated financial position or results of operations.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit
Number Description of Exhibit
- ------- ----------------------
3(a) Amended and Restated Certificate of Incorporation of United Rentals, Inc., in effect as of the date
hereof (incorporated by reference to exhibit 3.1 of United Rentals, Inc. Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998).
3(b) Certificate of Amendment to the United Rentals, Inc. 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., in effect as of the date hereof (incorporated by reference to exhibit 3.2
of United Rentals, Inc. Quarterly 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
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 to the United Rentals,
Inc. Report on Form 8-K filed on October 5, 2001)
3(h) Amended and Restated Certificate of Incorporation of United Rentals (North America), Inc., in effect
as of the date hereof (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., in effect as of the date hereof (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) Deferred Compensation Plan for Directors of United Rentals, Inc.*
(b) Reports on Form 8-K:
1. Form 8-K filed on January 30, 2002 (earliest event reported January
30, 2002); Item 9 was reported.
2. Form 8-K filed on February 1, 2002 (earliest event reported January
30, 2002); Item 9 was reported.
3. Form 8-K filed on March 1, 2002 (earliest event reported February 26,
2002); Item 9 was reported.
4. Form 8-K filed on March 14, 2002 (earliest event reported March 12,
2002); Item 9 was reported.
5. Form 8-K filed on March 18, 2002 (earliest event reported March 17,
2002); Item 5 was reported.
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* Filed herewith
33
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
UNITED RENTALS, INC.
Dated: May 15, 2002
BY: /S/ MICHAEL J. NOLAN
____________________
Michael J. Nolan
Chief Financial
Officer
(Principal Financial
Officer)
UNITED RENTALS, INC.
Dated: May 15, 2002
By: /S/ JOSEPH B. SHERK
____________________
Joseph B. Sherk
Vice President,
Corporate Controller
(Principal Accounting
Officer)
UNITED RENTALS (NORTH
Dated: May 15, 2002 AMERICA), INC.
By: /S/ MICHAEL J. NOLAN
____________________
Michael J. Nolan
Chief Financial
Officer
(Principal Financial
Officer)
UNITED RENTALS (NORTH
Dated: May 15, 2002 AMERICA), INC.
By: /S/ JOSEPH B. SHERK
____________________
Joseph B. Sherk
Vice President,
Corporate Controller
(Principal Accounting
Officer)
34