- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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 June 30, 2001 [_] 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) <TABLE> <S> <C> Delaware 06-1522496 Delaware 06-1493538 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Nos.) Five Greenwich Office Park, Greenwich, Connecticut 06830 (Address of principal executive offices) (Zip Code) </TABLE> (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 August 6, 2001, there were 73,194,724 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. - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
UNITED RENTALS, INC. UNITED RENTALS (NORTH AMERICA), INC. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001 INDEX <TABLE> <CAPTION> Page ---- <C> <S> <C> PART I FINANCIAL INFORMATION Item 1 Unaudited Consolidated Financial Statements United Rentals, Inc. Consolidated Balance Sheets as of June 30, 2001 and December 31, 2000 (unaudited).................................. 4 United Rentals, Inc. Consolidated Statements of Operations for the Six and Three Months Ended June 30, 2001 and 2000 (unaudited).................................................... 5 United Rentals, Inc. Consolidated Statement of Stockholders' Equity for the Six Months Ended June 30, 2001 (unaudited)...... 6 United Rentals, Inc. Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2001 and 2000 (unaudited)........ 7 United Rentals (North America), Inc. Consolidated Balance Sheets as of June 30, 2001 and December 31, 2000 (unaudited).............................. 8 United Rentals (North America), Inc. Consolidated Statements of Operations for the Six and Three Months Ended June 30, 2001 and 2000 (unaudited).. 9 United Rentals (North America), Inc. Consolidated Statement of Stockholder's Equity for the Six Months Ended June 30, 2001 (unaudited).................................................... 10 United Rentals (North America), Inc. Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2001 and 2000 (unaudited)............ 11 Notes to Unaudited Consolidated Financial Statements............ 12 Management's Discussion and Analysis of Financial Condition and Item 2 Results of Operations.......................................... 26 Item 3 Quantitative and Qualitative Disclosures about Market Risk...... 38 PART II OTHER INFORMATION Item 1 Legal Proceedings............................................... 39 Item 2 Changes in Securities and Use of Proceeds....................... 39 Item 4 Submission of Matters to a Vote of Security Holders............. 40 Item 6 Exhibits and Reports on Form 8-K................................ 41 Signatures...................................................... 43 </TABLE>
Certain of the 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," "may," "will," "should," "seek," "on- track," "plan," "intend," or "anticipate" or the negative thereof or comparable terminology, or by discussions of strategy. You are cautioned that our business and operations are subject to a variety of risks and uncertainties and, consequently, our actual results may materially differ from those projected by any forward-looking statements. Certain of these factors are discussed in Item 2 of Part I of this Report under the caption "--Factors that May Influence Future Results and Accuracy of 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 North America with more than 740 locations in 47 states, seven Canadian provinces and Mexico. We offer for rent over 600 different types of equipment to customers that include construction and industrial companies, manufacturers, utilities, municipalities, homeowners and others. In 2000, we served more than 1.2 million customers and completed over 8.4 million rental transactions. We have the largest fleet of rental equipment in the world, with over 500,000 units having an original purchase price of approximately $3.6 billion. Our 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; . General 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; . 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; and . Special event equipment, such as large tents, light towers and power units used for sporting, corporate and other events. In addition to renting equipment, we sell used rental equipment, act as a dealer for new equipment and sell related merchandise, parts and service. 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 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. Our purchasing power is further increased by our ongoing efforts to consolidate our vendor base. For example, we reduced the 1
number of our primary equipment suppliers from 111 to 28 in 2000. This reduction allowed us to lower our equipment purchase costs by approximately $150 million in 2000 and should enable us to save additional amounts in 2001. We expect to realize additional savings by consolidating our merchandise suppliers and negotiating more favorable warranty terms with key vendors. Operating Efficiencies. We generally group our branches into clusters of 10 to 30 locations that are in the same geographic area. Our information technology systems allow each branch to access all available equipment within a cluster. We believe that our cluster strategy produces significant operating efficiencies by enabling us to: (1) market equipment through all branches within a cluster, (2) cross-market equipment specialties of different branches within each cluster, and (3) reduce costs by consolidating functions that are common to our more than 740 branches, such as payroll, accounts payable and credit and collection, into 24 credit offices and three service centers. In the second quarter of 2001, approximately 10.7% of our rental revenue was attributable to equipment sharing among branches. Geographic and Customer Diversity. We have more than 740 branches in 47 states, seven Canadian provinces and Mexico and served more than 1.2 million customers in 2000. Our customers are diverse, ranging from Fortune 500 companies to small companies and homeowners, and in 2000 our top ten customers accounted for approximately 2% of our revenues. We believe that our geographic and customer diversity provide us with many advantages including: (1) enabling us to better serve National Account customers with multiple locations, (2) helping us achieve favorable resale prices by allowing us to access used equipment resale markets across the country, (3) reducing our dependence on any particular customer and (4) reducing the impact that fluctuations in regional economic conditions have on our overall financial performance. Strong and Motivated Branch Management. Each of our branches has a full-time branch manager who is supervised by one of our 63 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 staffing, pricing, equipment purchasing and other branch matters. Management closely tracks branch, district and regional performance with extensive systems and controls, including performance benchmarks and detailed monthly operating reviews. We promote equipment sharing among branches by linking the compensation of branch managers and other personnel to their branch's financial performance and return on assets. Information Technology Systems. Our information technology systems facilitate our ability to make rapid and informed decisions, respond quickly to changing market conditions, and share equipment among branches. These systems allow: (1) management to obtain a wide range of operating and financial data, (2) branch personnel to access and manage branch level data, such as customer requirements, equipment availability and maintenance histories, and (3) customers to access their accounts online. These systems promote equipment sharing among branches by enabling branch personnel to locate needed equipment within a geographic region, determine its closest location and arrange for its delivery to a customer's work site. We have an in-house team of approximately 100 information technology specialists that supports our systems and extends them to new locations. National Account Program. Our National Account sales force is dedicated to establishing and expanding relationships with larger 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 and a single point of contact for all their equipment needs. Our National Account team currently includes 39 professionals serving over 1,500 National Account customers, including more than 130 new accounts added in the second quarter of 2001. We estimate that our revenues from National Account customers will increase to approximately $400.0 million in 2001 from $245.0 million in 2000. Risk Management and Safety Programs. We place great emphasis on risk reduction and safety and 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 2
safety programs and procedures, developing our employee and customer training programs, and managing any claims against us. Industry Background We estimate the U.S. equipment rental industry has grown from approximately $6.5 billion in annual rental revenues in 1990 to over $25 billion in 2000, representing a compound annual growth rate of approximately 14.5%. We believe that the principal driver of growth in the equipment rental industry, in addition to general economic expansion, has been 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. 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, such as funding under the U.S. Transportation Equity Act for the 21st Century ("TEA-21") and the Aviation Investment and Reform Act for the 21st Century ("AIR-21"). TEA-21 earmarks $175 billion for highway construction and $42 billion for transit spending over the 1998-2003 fiscal period, a 40% increase over the prior six-year period. AIR-21 provides for $40 billion in construction spending over three years to support the FAA's airport improvement programs. 3
UNITED RENTALS, INC. CONSOLIDATED BALANCE SHEETS (Unaudited) <TABLE> <CAPTION> June 30, December 31, 2001 2000 ---------------- ------------------ (In thousands, except share data) <S> <C> <C> ASSETS Cash and cash equivalents................. $ 36,135 $ 34,384 Accounts receivable, net of allowance for doubtful accounts of $49,693 in 2001 and $55,624 in 2000.......................... 490,555 469,594 Inventory................................. 114,570 133,380 Prepaid expenses and other assets......... 183,885 104,493 Rental equipment, net..................... 1,851,404 1,732,835 Property and equipment, net............... 428,576 422,239 Goodwill, net of accumulated amortization of $131,975 in 2001 and $103,219 in 2000......................... 2,199,876 2,215,532 Other intangible assets, net.............. 9,645 11,476 ---------------- ---------------- $ 5,314,646 $ 5,123,933 ================ ================ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Accounts payable........................ $ 312,014 $ 260,155 Debt.................................... 2,759,748 2,675,367 Deferred taxes.......................... 230,106 206,243 Accrued expenses and other liabilities.. 172,013 136,225 ---------------- ---------------- Total liabilities..................... 3,473,881 3,277,990 Commitments and contingencies Company-obligated mandatorily redeemable convertible preferred securities of a subsidiary trust....................... 300,000 300,000 Stockholders' equity: Preferred stock--$.01 par value, 5,000,000 shares authorized: Series A perpetual convertible preferred stock--$300,000 liquidation preference, 300,000 shares issued and outstanding........................... 3 3 Series B 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, 73,150,359 shares issued and outstanding in 2001 and 71,065,707 in 2000................................... 732 711 Additional paid-in capital.............. 1,241,127 1,196,324 Deferred compensation................... (59,255) Retained earnings....................... 372,880 355,850 Accumulated other comprehensive loss.... (14,724) (6,947) ---------------- ---------------- Total stockholders' equity............ 1,540,765 1,545,943 ---------------- ---------------- $ 5,314,646 $ 5,123,933 ================ ================ </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 4
UNITED RENTALS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) <TABLE> <CAPTION> Six Months Ended Three Months Ended June 30, June 30, --------------------- ------------------- 2001 2000 2001 2000 ---------- ---------- --------- --------- (In thousands, except per share data) <S> <C> <C> <C> <C> <C> Revenues: Equipment rentals............. $1,043,750 $ 911,632 $ 582,368 $ 511,534 Sales of rental equipment..... 72,239 155,171 33,117 84,839 Sales of equipment and merchandise and other revenues..................... 271,128 242,105 152,528 133,573 ---------- ---------- --------- --------- Total revenues................. 1,387,117 1,308,908 768,013 729,946 Cost of revenues: Cost of equipment rentals, excluding depreciation....... 500,136 396,614 270,103 222,314 Depreciation of rental equipment.................... 158,354 159,035 81,553 85,532 Cost of rental equipment sales........................ 42,381 91,168 19,305 50,082 Cost of equipment and merchandise sales and other operating costs.............. 197,616 184,309 110,989 100,220 ---------- ---------- --------- --------- Total cost of revenues......... 898,487 831,126 481,950 458,148 ---------- ---------- --------- --------- Gross profit................... 488,630 477,782 286,063 271,798 Selling, general and administrative expenses....... 221,715 210,969 112,822 109,119 Restructuring charge........... 28,922 28,922 Non-rental depreciation and amortization.................. 53,238 40,721 27,131 20,703 ---------- ---------- --------- --------- Operating income............... 184,755 226,092 117,188 141,976 Interest expense............... 114,589 106,210 57,059 56,527 Preferred dividends of a subsidiary trust.............. 9,750 9,750 4,875 4,875 Other (income) expense, net.... 6,935 (312) 7,605 (108) ---------- ---------- --------- --------- Income before provision for income taxes and extraordinary item.......................... 53,481 110,444 47,649 80,682 Provision for income taxes..... 25,134 45,834 22,714 33,483 ---------- ---------- --------- --------- Income before extraordinary item.......................... 28,347 64,610 24,935 47,199 Extraordinary item, net of tax benefit of $6,759............. 11,317 11,317 ---------- ---------- --------- --------- Net income..................... $ 17,030 $ 64,610 $ 13,618 $ 47,199 ========== ========== ========= ========= Earnings per share--basic: Income before extraordinary item........................ $ 0.40 $ 0.90 $ 0.35 $ 0.66 Extraordinary item, net...... 0.16 0.16 ---------- ---------- --------- --------- Net income................... $ 0.24 $ 0.90 $ 0.19 $ 0.66 ========== ========== ========= ========= Earnings per share--diluted: Income before extraordinary item........................ $ 0.31 $ 0.70 $ 0.26 $ 0.51 Extraordinary item, net...... 0.13 0.12 ---------- ---------- --------- --------- Net income................... $ 0.18 $ 0.70 $ 0.14 $ 0.51 ========== ========== ========= ========= </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 5
UNITED RENTALS, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY <TABLE> <CAPTION> Series A Series B Perpetual Convertible Perpetual Convertible Preferred Stock Preferred Stock Common Stock ----------------------- --------------------- ------------------ Additional Number of Number of Number of Paid-in Deferred Retained Shares Amount Shares Amount Shares Amount Capital Compensation Earnings ------------ --------- ------------ --------- ---------- ------ ---------- ------------ -------- (In thousands, except share data) Accumulated Other Comprehensive Comprehensive Income Loss ------------- ------------- (Unaudited) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Balance, December 31, 2000........ 300,000 $3 150,000 $ 2 71,065,707 $711 $1,196,324 $355,850 Comprehensive income: Net income...... 17,030 Other comprehensive income: Foreign currency translation adjustments.... Cumulative effect on equity of adopting FAS 133, net of tax of $1,784......... Derivatives qualifying as hedges, net of tax of $1,287......... Comprehensive income.......... Issuance of common stock under deferred compensation plans........... 2,767,041 28 60,621 $(60,649) Amortization of deferred compensation.... 1,394 Issuance of common stock.... 2,770 50 Exercise of common stock options... 665,441 7 8,876 Shares repurchased and retired......... (1,350,600) (14) (24,744) ------------ -------- ------------ -------- ---------- ---- ---------- -------- -------- Balance, June 30, 2001............ 300,000 $ 3 150,000 $ 2 73,150,359 $732 $1,241,127 $(59,255) $372,880 ============ ======== ============ ======== ========== ==== ========== ======== ======== Balance, December 31, 2000........ $ (6,947) Comprehensive income: Net income...... $17,030 Other comprehensive income: Foreign currency translation adjustments.... (3,448) (3,448) Cumulative effect on equity of adopting FAS 133, net of tax of $1,784......... (2,516) (2,516) Derivatives qualifying as hedges, net of tax of $1,287......... (1,813) (1,813) ------------- Comprehensive income.......... $ 9,253 ============= Issuance of common stock under deferred compensation plans........... Amortization of deferred compensation.... Issuance of common stock.... Exercise of common stock options... Shares repurchased and retired......... ------------- Balance, June 30, 2001............ $(14,724) ============= </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 6
UNITED RENTALS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) <TABLE> <CAPTION> Six Months Ended June 30, ---------------------- 2001 2000 ----------- --------- (In thousands) <S> <C> <C> Cash Flows From Operating Activities: Net income............................................ $ 17,030 $ 64,610 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........................ 211,592 199,756 Gain on sales of rental equipment.................... (29,858) (64,003) Deferred taxes....................................... 17,427 14,571 Amortization of deferred compensation................ 1,394 Extraordinary item................................... 18,076 Restructuring charge................................. 10,893 Changes in operating assets and liabilities: Accounts receivable.................................. (20,853) (31,981) Inventory............................................ 19,355 (13,616) Prepaid expenses and other assets.................... (50,663) (1,430) Accounts payable..................................... 51,567 137,285 Accrued expenses and other liabilities............... 52,495 (42,367) ----------- --------- Net cash provided by operating activities........ 298,455 262,825 Cash Flows From Investing Activities: Purchases of rental equipment......................... (303,281) (513,817) Purchases of property and equipment................... (31,426) (69,241) Proceeds from sales of rental equipment............... 72,239 155,171 In-process acquisition costs.......................... (2,140) (2,445) Payments of contingent purchase price................. (6,553) Purchases of other companies.......................... (37,801) (265,084) ----------- --------- Net cash used in investing activities............ (302,409) (701,969) Cash Flows From Financing Activities: Proceeds from debt.................................... 1,979,155 376,903 Payments of debt...................................... (1,926,282) (38,217) Proceeds from sale-leaseback.......................... 147,515 Payments of financing costs........................... (27,118) (7,164) Proceeds from the exercise of common stock options.... 8,156 96 Shares repurchased and retired........................ (24,758) (30,950) ----------- --------- Net cash provided by financing activities........ 9,153 448,183 Effect of foreign exchange rates...................... (3,448) 342 ----------- --------- Net increase in cash and cash equivalents............. 1,751 9,381 Cash and cash equivalents at beginning of period...... 34,384 23,811 ----------- --------- Cash and cash equivalents at end of period............ $ 36,135 $ 33,192 =========== ========= Supplemental disclosure of cash flow information: Cash paid for interest................................ $ 110,023 $ 101,046 Cash paid for income taxes, net of refunds............ $ 719 $ 62,720 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......................... $ 5,457 $ 392,873 Liabilities assumed.................................. (1,036) (102,592) Less: Amounts paid through issuance of debt.............. (600) (25,197) ----------- --------- 3,821 265,084 Due to seller and other payments..................... 33,980 ----------- --------- Net cash paid.................................... $ 37,801 $ 265,084 =========== ========= </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 7
UNITED RENTALS (NORTH AMERICA), INC. CONSOLIDATED BALANCE SHEETS (Unaudited) <TABLE> <CAPTION> June 30, 2001 December 31, 2000 ---------------- ------------------ (In thousands, except share data) <S> <C> <C> ASSETS Cash and cash equivalents................. $ 36,135 $ 34,384 Accounts receivable, net of allowance for doubtful accounts of $49,693 in 2001 and $55,624 in 2000.......................... 490,555 469,594 Inventory................................. 114,570 133,380 Prepaid expenses and other assets......... 174,899 104,493 Rental equipment, net..................... 1,851,404 1,732,835 Property and equipment, net............... 393,465 387,432 Goodwill, net of accumulated amortization of $131,975 in 2001 and $103,219 in 2000......................... 2,199,876 2,215,532 Other intangible assets, net.............. 9,645 11,476 ---------------- ---------------- $ 5,270,549 $ 5,089,126 ================ ================ LIABILITIES AND STOCKHOLDER'S EQUITY Liabilities: Accounts payable........................ $ 312,014 $ 260,155 Debt.................................... 2,759,748 2,675,367 Deferred taxes.......................... 230,106 206,243 Accrued expenses and other liabilities.. 149,825 119,172 ---------------- ---------------- Total liabilities..................... 3,451,693 3,260,937 Commitments and contingencies Stockholder's equity: Common stock--$0.01 par value, 3,000 shares authorized, 1,000 shares issued and outstanding........................ Additional paid-in capital.............. 1,515,817 1,507,661 Retained earnings....................... 317,763 327,475 Accumulated other comprehensive loss.... (14,724) (6,947) ---------------- ---------------- Total stockholder's equity............ 1,818,856 1,828,189 ---------------- ---------------- $ 5,270,549 $ 5,089,126 ================ ================ </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 8
UNITED RENTALS (NORTH AMERICA), INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) <TABLE> <CAPTION> Six Months Ended Three Months Ended June 30, June 30, --------------------- ------------------- 2001 2000 2001 2000 ---------- ---------- --------- --------- (In thousands) <S> <C> <C> <C> <C> Revenues: Equipment rentals................ $1,043,750 $ 911,632 $582,368 $ 511,534 Sales of rental equipment........ 72,239 155,171 33,117 84,839 Sales of equipment and merchandise and other revenues.. 271,128 242,105 152,528 133,573 ---------- ---------- --------- --------- Total revenues.................... 1,387,117 1,308,908 768,013 729,946 Cost of revenues: Cost of equipment rentals, excluding depreciation.......... 500,136 396,614 270,103 222,314 Depreciation of rental equipment....................... 158,354 159,035 81,553 85,532 Cost of rental equipment sales... 42,381 91,168 19,305 50,082 Cost of equipment and merchandise sales and other operating costs........................... 197,616 184,309 110,989 100,220 ---------- ---------- --------- --------- Total cost of revenues............ 898,487 831,126 481,950 458,148 ---------- ---------- --------- --------- Gross profit...................... 488,630 477,782 286,063 271,798 Selling, general and administrative expenses.......... 221,715 210,969 112,822 109,119 Restructuring charge.............. 28,922 28,922 Non-rental depreciation and amortization..................... 48,952 37,155 24,909 18,838 ---------- ---------- --------- --------- Operating income.................. 189,041 229,658 119,410 143,841 Interest expense.................. 114,589 106,210 57,059 56,527 Other (income) expense, net....... 6,935 (312) 7,605 (108) ---------- ---------- --------- --------- Income before provision for income taxes and extraordinary item..... 67,517 123,760 54,746 87,422 Provision for income taxes........ 31,404 51,409 26,104 36,280 ---------- ---------- --------- --------- Income before extraordinary item.. 36,113 72,351 28,642 51,142 Extraordinary item, net of tax benefit of $6,759................ 11,317 11,317 ---------- ---------- --------- --------- Net income ....................... $ 24,796 $ 72,351 $ 17,325 $ 51,142 ========== ========== ========= ========= </TABLE> 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) <TABLE> <CAPTION> Common Stock Accumulated ---------------- Additional Other Number Paid-In Retained Comprehensive Comprehensive of Shares Amount Capital Earnings Income Loss --------- ------ ---------- -------- ------------- ------------- (In thousands, except share data) <S> <C> <C> <C> <C> <C> <C> Balance, December 31, 2000.................... 1,000 $1,507,661 $327,475 $(6,947) Comprehensive income: Net income.............. 24.796 $24.796 Other comprehensive income: Foreign currency translation adjustments........... (3,448) (3,448) Cumulative effect on equity of adopting FAS 133, net of tax of $1,784................ (2,516) (2,516) Derivatives qualifying as hedges, net of tax $1,287................ (1,813) (1,813) --- ------- Comprehensive income..... $17,019 ======= Contributed capital from parent.................. 8,156 Dividend distributions to parent.................. (34,508) ----- ---------- -------- -------- Balance, June 30, 2001... 1,000 $1,515,817 $317,763 $(14,724) ===== ========== ======== ======== </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 10
UNITED RENTALS (NORTH AMERICA), INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) <TABLE> <CAPTION> Six Months Ended June 30, ---------------------- 2001 2000 ----------- --------- (In thousands) <S> <C> <C> Cash Flows From Operating Activities: Net income............................................ $ 24,796 $ 72,351 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........................ 207,306 196,190 Gain on sales of rental equipment.................... (29,858) (64,003) Deferred taxes....................................... 17,427 14,571 Extraordinary item................................... 18,076 Restructuring charge................................. 10,893 Changes in operating assets and liabilities: Accounts receivable.................................. (20,853) (31,981) Inventory............................................ 19,355 (13,616) Prepaid expenses and other assets.................... (43,429) (14,124) Accounts payable..................................... 51,567 127,822 Accrued expenses and other liabilities............... 46,583 (56,461) ----------- --------- Net cash provided by operating activities.......... 301,863 230,749 Cash Flows From Investing Activities: Purchases of rental equipment......................... (303,281) (513,817) Purchases of property and equipment................... (27,224) (55,656) Proceeds from sales of rental equipment............... 72,239 155,171 Payments of contingent purchase price................. (6,553) Purchases of other companies.......................... (37,801) (265,084) ----------- --------- Net cash used in investing activities.............. (296,067) (685,939) Cash Flows From Financing Activities: Proceeds from debt.................................... 1,979,155 376,903 Payments of debt...................................... (1,926,282) (38,217) Proceeds from sale-leaseback.......................... 147,515 Payments of financing costs........................... (27,118) (7,155) Due to parent......................................... 30,950 Capital contributions by parent....................... 8,156 96 Dividend distributions to parent...................... (34,508) (45,863) ----------- --------- Net cash provided by (used in) financing activities........................................ (597) 464,229 Effect of foreign exchange rates...................... (3,448) 342 ----------- --------- Net increase in cash and cash equivalents............. 1,751 9,381 Cash and cash equivalents at beginning of period...... 34,384 23,811 ----------- --------- Cash and cash equivalents at end of period............ $ 36,135 $ 33,192 =========== ========= Supplemental disclosure of cash flow information: Cash paid for interest................................ $ 100,273 $ 91,296 Cash paid for income taxes, net of refunds............ $ 719 $ 62,720 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......................... $ 5,457 $ 392,873 Liabilities assumed.................................. (1,036) (102,592) Less: Amounts paid through issuance of debt.............. (600) (25,197) ----------- --------- 3,821 265,084 Due to seller and other payments..................... 33,980 ----------- --------- Net cash paid.................................... $ 37,801 $ 265,084 =========== ========= </TABLE> 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 six and three month periods ended June 30, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. 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, 2000. Impact of Recently Issued Accounting Standards In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities--a replacement of FASB Statement No. 125". This standard revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures. This standard is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001 and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. The adoption of SFAS No. 140 did not have a material effect on the Company's consolidated financial position or results of operations. 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. This standard is effective for all business combinations inititated after June 30, 2001. In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets". This standard addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, "Intangible Assets". This standard is effective for fiscal years beginning after December 15, 2001. However, this standard is immediately effective in cases where goodwill and intangible assets are acquired after June 30, 2001. 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. The Company is currently evaluating the impact SFAS No. 142 will have on its financial statements and will perform a fair value analysis of its goodwill in connection with the adoption of this standard on January 1, 2002. Reclassifications Certain prior year balances have been reclassified to conform to the 2001 presentation. 12
UNITED RENTALS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 2. Acquisitions During the six months ended June 30, 2001 and the year ended December 31, 2000, the Company completed two acquisitions and 53 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 consists 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. The following table summarizes, on an unaudited pro forma basis, the results of operations of the Company for the six months ended June 30, 2000 as though each acquisition which was consummated during the period January 1, 2000 to June 30, 2001 as mentioned above and in Note 3 to the Notes to Consolidated Financial Statements included in the Company's 2000 Annual Report on Form 10-K was made on January 1, 2000 (in thousands, except per share data): <TABLE> <S> <C> Revenues....................................................... $1,455,247 Net income..................................................... $ 71,418 Basic earnings per share....................................... $ 0.98 Diluted earnings per share..................................... $ 0.77 </TABLE> Since the acquisitions made during the six months ended June 30, 2001 had an insignificant impact on the Company's pro forma results of operations, the pro forma results of operations for the six months ended June 30, 2001 are not shown. The unaudited pro forma results are based upon certain assumptions and estimates, which are subject to change. These results are not necessarily indicative of the actual results of operations that might have occurred, nor are they necessarily indicative of expected results in the future. 3. 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 underperforming branches and administrative offices, a reduction in the Company's workforce, and certain information technology project costs. Approximately $10.9 million of the charge is non- cash. Approximately $3.2 million has been paid during the second quarter of 2001. Of the remaining $14.8 million of this charge, approximately $8.6 million will be paid by December 31, 2001 and approximately $6.2 million will be paid in future periods. Components of the restructuring charge are as follows: <TABLE> <CAPTION> Balance Restructuring Activity in June 30, Charge 2001 2001 ------------- ------------ -------- <S> <C> <C> <C> Costs to vacate facilities............... $18,291 $ 9,779 $ 8,512 Workforce reduction costs................ 5,666 1,296 4,370 Information technology costs............. 4,965 3,042 1,923 ------- ------- ------- $28,922 $14,117 $14,805 ======= ======= ======= </TABLE> 13
UNITED RENTALS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Under the restructuring plan, 31 underperforming branches and five administrative offices will be closed or consolidated, the Company's workforce will be reduced by 489 employees, and certain information technology hardware and software will no longer be used. The employee termination costs primarily represent severance. The costs to vacate facilities primarily represent the payment of obligations under leases, offset by estimated sublease opportunities, the write-off of capital improvements made to such facilities and the write-off of related goodwill. As of June 30, 2001, 18 of the 31 underperforming branches have been closed or consolidated and the remaining 13 underperforming branches will be closed or consolidated by December 31, 2001. 4. Refinancing of Debt In April 2001, URI issued $450.0 million aggregate principal amount of 10 3/4% senior notes. Concurrent with the issuance of the senior notes, URI entered into a new senior secured credit facility. The new credit facility is comprised of a $750.0 million term loan and a $750.0 million revolving credit facility. The proceeds from the new senior notes and new senior secured credit facility were used to refinance outstanding secured indebtedness of approximately $1,664.5 million and obligations under a synthetic lease of $31.2 million. As a result of the refinancing, the Company recorded an extraordinary charge of approximately $18.1 million ($11.3 million, net of tax), primarily related to the write-off of financing fees, and a charge of approximately $7.8 million recorded in other (income) expense, net related to refinancing costs of the synthetic lease. 10 3/4% Senior Notes. On April 20, 2001, URI sold $450 million aggregate principal amount of 10 3/4% Senior Notes Due 2008. The net proceeds from the sale of the notes were approximately $439.9 million (after deducting the initial purchasers' discount and offering expenses). The notes mature on April 15, 2008. The notes are unsecured and are guaranteed by Holdings and by URI's domestic subsidiaries. URI may, at its option, redeem the notes on or after April 15, 2005, at specified redemption prices which range from 105.375% in 2005 to 100.0% in 2007 and thereafter. In addition, on or prior to April 15, 2004, URI may, at its option, use the proceeds of a public equity offering to redeem up to 35% of the outstanding notes, at a redemption price of 110.75%. The indenture governing the notes contains certain restrictive covenants, including limitations on (i) additional indebtedness, (ii) restricted payments, (iii) liens, (iv) dividends and other payments, (v) preferred stock of certain subsidiaries, (vi) transactions with affiliates, (vii) the disposition of proceeds of asset sales and (viii) the Company's ability to consolidate, merge or sell all or substantially all of its assets. New Revolving Credit Facility. The revolving credit facility enables URI to borrow up to $750 million on a revolving basis and enables one of its Canadian subsidiaries to borrow up to $40 million (provided that the aggregate borrowings of URI and the Canadian subsidiary may not exceed $750 million). Up to $100 million of the revolving credit facility is available in the form of letters of credit. The revolving credit facility will mature and terminate on October 20, 2006. Borrowings under the revolving credit facility will until October 20, 2001, accrue interest, at our option, at either (A) the ABR Rate (which is equal to the greater of (i) the Federal Funds Rate plus 0.5% or (ii) the Chase Manhattan Bank's prime rate) plus a margin of 1.00% or (B) an adjusted LIBOR rate plus a margin of 2.0%. From and after October 20, 2001, the above interest rate margins will be adjusted quarterly based on our financial leverage ratio, up to maximum margins of 1.75% and 2.75%, for revolving loans based on the ABR rate and the adjusted LIBOR rate, respectively, and down to minimum margins of 0.75% and 1.75%, for revolving loans based on the ABR rate and the adjusted LIBOR rate, respectively. Borrowings by the Canadian subsidiary under the revolving credit facility will until October 20, 2001, accrue interest, at such subsidiary's option, at either (X) the Prime rate (which is equal to the Chase Manhattan Bank of Canada's prime rate) plus a margin of 1.00% or (Y) the B/A rate (which is equal to the Chase Manhattan Bank of Canada's B/A rate) plus a margin of 2.0%. From and after October 20, 2001, the above interest rate 14
UNITED RENTALS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) margins will be adjusted quarterly based on our financial leverage ratio, up to maximum margins of 1.75% and 2.75%, for revolving loans based on the Prime rate and the B/A rate, respectively, and down to minimum margins of 0.75% and 1.75%, for revolving loans based on the Prime rate and the B/A rate, respectively. If at any time an event of default exists, the interest rate applicable to each loan will increase by 2% per annum. The Company is also required to pay the lenders a commitment fee equal to 0.5% per annum in respect of undrawn commitments under the revolving credit facility. New Term Loan. On April 20, 2001, URI obtained a $750 million term loan. Amounts repaid in respect of the term loan may not be reborrowed. URI must repay the principal of the term loan in installments, over six and one-half years, as follows: (i) on June 30, 2001 and on the last day of each calendar quarter thereafter up to and including September 30, 2006, URI must repay $1.9 million and (ii) on the last day of each calendar quarter thereafter up to and including September 30, 2007, URI must repay $177.2 million. Borrowings under the term loan accrue interest, at our option, at either (a) the ABR rate (which is equal to the greater of (i) the Federal Funds Rate plus 0.5% or (ii) the Chase Manhattan Bank's prime rate) plus a margin of 2.0%, or (b) an adjusted LIBOR rate plus a margin of 3.0%. Covenants. The agreements governing the new senior secured credit facility contain certain covenants that requires the Company to, among other things, satisfy certain financial tests relating to: (a) the ratio of senior debt to cash flow, (b) minimum interest coverage ratio, (c) the ratio of funded debt to cash flow, and (d) the ratio of senior debt to tangible assets. These agreements also contain various other covenants that restrict the Company's ability to, among other things, (i) incur additional indebtedness, (ii) permit liens to attach to its assets, (iii) pay dividends or make other restricted payments on its common stock and certain other securities and (iv) make acquisitions unless certain financial conditions are satisfied. Security and Guarantees. URI's obligations under the new senior secured facility are, subject to limited exceptions, (i) guaranteed by Holdings and URI's United States subsidiaries and (ii) secured by substantially all of URI's assets, the stock of URI and the stock of Holding's other United States subsidiaries and a portion of the stock of Holding's Canadian subsidiaries. The obligations of the Canadian subsidiary that may borrow under the revolving credit facility are guaranteed by our other Canadian subsidiaries and secured by substantially all of the assets of this Canadian subsidiary and the stock of its subsidiaries. 5. Receivables Securitization During the quarter ended June 30, 2001, the Company obtained an additional $112.0 million in cash through the securitization of certain of its accounts receivable through its existing $250.0 million receivable securitization facility. In the securitization transactions, the Company transferred accounts receivable to a special purpose vehicle (the "SPV"), which in turn pledged those receivables to secure borrowings that the SPV incurred to finance its acquisition of those receivables. The borrowings generally accrue interest at the blended commercial paper rate for commercial paper issued by Gramercy Capital Corporation to fund such borrowings plus a margin of 0.75% per annum. The SPV's borrowings are an obligation of the SPV and not of the Company or URI, and the lenders' recourse in respect of the borrowings is generally limited to collections that the SPV receives on the receivables. Collections on the receivables are used to service the borrowings. From time to time prior to June 2002, subject to certain conditions, collections from the receivables may be reinvested by the SPV in additional accounts receivable originated by the Company. Subject to certain conditions, the term of the receivables securitization may be extended until December 2003. As of June 30, 2001, approximately $212.0 million of borrowings was outstanding under the receivables securitization facility. 15
UNITED RENTALS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 6. Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data): <TABLE> <CAPTION> Six Months Three Months Ended Ended June 30, June 30, --------------- --------------- 2001 2000 2001 2000 ------- ------- ------- ------- <S> <C> <C> <C> <C> Numerator: Income before extraordinary item............. $28,347 $64,610 $24,935 $47,199 Denominator: Denominator for basic earnings per share-- weighted-average shares..................... 71,026 71,844 71,318 71,631 Effect of dilutive securities: Employee stock options..................... 1,850 1,144 2,404 1,024 Warrants................................... 3,056 2,435 3,433 2,303 Series A perpetual convertible preferred stock..................................... 12,000 12,000 12,000 12,000 Series B perpetual convertible preferred stock..................................... 5,000 5,000 5,000 5,000 ------- ------- ------- ------- Denominator for diluted earnings per share-- adjusted weighted-average shares............ 92,932 92,423 94,155 91,958 ======= ======= ======= ======= Earnings per share-basic: Income before extraordinary item............. $ 0.40 $ 0.90 $ 0.35 $ 0.66 Extraordinary item, net...................... 0.16 0.16 ------- ------- ------- ------- Net Income................................... $ 0.24 $ 0.90 $ 0.19 $ 0.66 ======= ======= ======= ======= Earnings per share-diluted: Income before extraordinary item............. $ 0.31 $ 0.70 $ 0.27 $ 0.51 Extraordinary item, net...................... $ 0.13 $ 0.13 ======= ======= ======= ======= Net income................................... $ 0.18 $ 0.70 $ 0.14 $ 0.51 ======= ======= ======= ======= </TABLE> 7. Stock Plans 2001 Senior Stock Plan. In June 2001, the Company's shareholders approved the adoption of the 2001 Senior Stock Plan. This plan provides for the awarding of common stock and other equity-linked awards to our officers and directors. The maximum number of shares of common stock that can be issued under the plan is 4,000,000. The Company records each share that is awarded under this plan at an amount no less than 100% of the fair market value per share at the date of the award. No shares may be awarded under this plan after June 5, 2011. As of June 30, 2001, 2,015,000 shares had been awarded under this plan. Determinations concerning the persons to receive awards, the form, amount and timing of such awards and terms and provisions of such awards are made by the Board of Directors (or a committee appointed by the Board of Directors). 2001 Stock Plan. In March 2001, the Company adopted the 2001 Stock Plan. This plan provides for the awarding of common stock and other equity-linked awards to certain employees (other than officers and directors) and others who render services to the Company. The maximum number of shares of common stock that can be issued under the plan is 2,000,000. The Company records each share that is awarded under this plan at an amount no less than 100% of the fair market value per share at the date of the award. No shares may be awarded under this plan after March 23, 2011. As of June 30, 2001, 752,041 shares had been awarded under this plan. Determinations concerning the persons to receive awards, the form, amount and timing of such awards and terms and provisions of such awards are made by the Board of Directors (or a committee appointed by the Board of Directors). 16
UNITED RENTALS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company records the issuance of restricted shares at the quoted market price on the date of the grants. Amortization of deferred compensation is then recognized on a straight-line basis over the related vesting period. 8. Comprehensive Income The following table sets forth the Company's comprehensive income (in thousands): <TABLE> <CAPTION> Six Months Three Months Ended Ended June 30, June 30, ---------------- --------------- 2001 2000 2001 2000 ------- ------- ------- ------- <S> <C> <C> <C> <C> Net income................................ $17,030 $64,610 $13,618 $47,199 Other comprehensive gain (loss): Foreign currency translation adjustment............................. (3,448) 342 8,565 1,112 Cumulative effect on equity of adopting FAS 133................................ (2,516) Derivatives qualifying as hedges........ (1,813) 627 ------- ------- ------- ------- Comprehensive income...................... $ 9,253 $64,952 $22,810 $48,311 ======= ======= ======= ======= </TABLE> 9. Derivative Financial Instruments The FASB issued, and subsequently amended, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which became effective for the Company on January 1, 2001. Under SFAS No. 133, all derivatives are required to be recorded as assets or liabilities and measured at fair value. Gains or losses resulting from changes in the values of derivatives are recognized immediately or deferred, depending on the use of the derivative and whether or not it qualifies as a hedge. The Company occasionally uses derivative financial instruments to manage its risk associated with fluctuations in interest rates on its debt. As of June 30, 2001, the Company had outstanding interest rate swap agreements that converts a portion, or $200.0 million, of its variable rate term loan to a fixed rate instrument through 2003. These swap agreements are designated as cash flow hedges and changes in fair value of the hedges are recorded in other comprehensive income and reclassified into earnings in the same periods during which the hedged transaction affects earnings. There is no ineffectiveness related to these hedges. 17
UNITED RENTALS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 10. 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 such information would not be material to investors. However, condensed consolidating financial information as of June 30, 2001 and December 31, 2000 and for the six and three months ended June 30, 2001 and 2000, are presented. The condensed consolidating financial information of URI and its subsidiaries are as follows: CONDENSED CONSOLIDATING BALANCE SHEET <TABLE> <CAPTION> June 30, 2001 ---------------------------------------------------------------- Non- Guarantor Guarantor Other and Consolidated Parent URI Subsidiaries Subsidiaries Eliminations Total ------ ---------- ------------ ------------ ------------ ------------ (In thousands) <S> <C> <C> <C> <C> <C> <C> ASSETS Cash and cash equiva- lents.................. $ 30,586 $ 5,549 $ 36,135 Accounts receivable, net.................... $ 59,479 324,470 106,606 490,555 Intercompany receivable (payable).............. 211,682 49,370 (261,052) Inventory............... 52,232 56,973 5,365 114,570 Prepaid expenses and other assets........... 54,508 119,215 1,176 $ 8,986 183,885 Rental equipment, net... 956,034 768,444 126,926 1,851,404 Property and equipment, net.................... $ 35,111 143,055 233,614 16,796 428,576 Investment in subsidiar- ies.................... 1,814,909 2,330,924 (4,145,833) Intangible assets, net.. 869,416 1,209,403 130,702 2,209,521 ---------- ---------- ---------- --------- ----------- ---------- $1,850,020 $4,677,330 $2,792,075 $ 132,068 $(4,136,847) $5,314,646 ========== ========== ========== ========= =========== ========== LIABILITIES AND STOCK- HOLDER'S EQUITY Liabilities: Accounts payable....... $ 71,448 $ 222,935 $ 17,631 $ 312,014 Debt................... $ 300,000 2,523,718 214,768 21,262 $ (300,000) 2,759,748 Deferred income tax- es.................... 230,056 50 230,106 Accrued expenses and other liabilities..... 9,255 42,280 93,864 13,681 12,933 172,013 ---------- ---------- ---------- --------- ----------- ---------- Total liabilities.... 309,255 2,867,502 531,617 52,574 (287,067) 3,473,881 Commitments and contin- gencies Company-obligated mandatorily redeemable convertible preferred securities of a subsidiary trust....... 300,000 300,000 Stockholders' equity: Preferred Stock........ 5 5 Common stock........... 732 732 Additional paid-in capital............... 1,241,127 1,496,393 1,838,411 65,901 (3,400,705) 1,241,127 Deferred compensa- tion.................. (59,255) (59,255) Retained earnings...... 372,880 317,764 422,047 23,988 (763,799) 372,880 Accumulated other com- prehensive income..... (14,724) (4,329) (10,395) 14,724 (14,724) ---------- ---------- ---------- --------- ----------- ---------- Total stockholders' equity.............. 1,540,765 1,809,828 2,260,458 79,494 (4,149,780) 1,540,765 ---------- ---------- ---------- --------- ----------- ---------- $1,850,020 $4,677,330 $2,792,075 $132,068 $(4,136,847) $5,314,646 ========== ========== ========== ========= =========== ========== </TABLE> 18
UNITED RENTALS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) CONDENSED CONSOLIDATING BALANCE SHEET <TABLE> <CAPTION> December 31, 2000 --------------------------------------------------------------------------- Non- Guarantor Guarantor Other and Consolidated Parent URI Subsidiaries Subsidiaries Eliminations Total ---------- ---------- ------------ ------------ ------------ ------------ (In thousands) <S> <C> <C> <C> <C> <C> <C> Assets Cash and cash equiva- lents.................. $ 29,733 $ 4,651 $ 34,384 Accounts receivable, net.................... $ 216,444 143,295 109,855 469,594 Intercompany receivable (payable).............. 319,423 (55,187) (264,236) Inventory............... 54,022 73,979 5,379 133,380 Prepaid expenses and other assets........... 28,263 75,633 597 104,493 Rental equipment, net... 837,972 766,219 128,644 1,732,835 Property and equipment, net.................... $ 34,807 139,871 231,195 16,366 422,239 Investment in subsidiar- ies.................... 1,839,952 2,257,692 $(4,097,644) Intangible assets, net.. 960,444 1,132,438 134,126 2,227,008 ---------- ---------- ---------- --------- ----------- ---------- $1,874,759 $4,814,131 $2,397,305 $ 135,382 $(4,097,644) $5,123,933 ========== ========== ========== ========= =========== ========== Liabilities and Stock- holder's Equity Liabilities: Accounts payable....... $ 78,623 $ 165,677 $ 15,855 $ 260,155 Debt................... $ 300,000 2,647,144 3,484 24,739 $ (300,000) 2,675,367 Deferred income tax- es.................... 186,091 20,702 (550) 206,243 Accrued expenses and other liabilities..... 28,816 86,560 18,862 13,750 (11,763) 136,225 ---------- ---------- ---------- --------- ----------- ---------- Total liabilities.... 328,816 2,998,418 208,725 53,794 (311,763) 3,277,990 Commitments and contin- gencies Company-obligated mandatorily redeemable convertible preferred securities of a subsidiary trust....... 300,000 300,000 Stockholders' equity: Preferred stock........ 5 5 Common stock........... 711 711 Additional paid-in capital................ 1,196,324 1,488,238 1,830,500 65,657 (3,384,395) 1,196,324 Retained earnings...... 355,850 327,475 358,080 22,878 (708,433) 355,850 Accumulated other com- prehensive loss........ (6,947) (6,947) 6,947 (6,947) ---------- ---------- ---------- --------- ----------- ---------- Total stockholders' equity.............. 1,545,943 1,815,713 2,188,580 81,588 (4,085,881) 1,545,943 ---------- ---------- ---------- --------- ----------- ---------- $1,874,759 $4,814,131 $2,397,305 $ 135,382 $(4,097,644) $5,123,933 ========== ========== ========== ========= =========== ========== </TABLE> 19
UNITED RENTALS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS <TABLE> <CAPTION> For the Six Months Ended June 30, 2001 ----------------------------------------------------------------------- Non- Guarantor Guarantor Other and Consolidated Parent URI Subsidiaries Subsidiaries Eliminations Total -------- -------- ------------ ------------ ------------ ------------ (In thousands) <S> <C> <C> <C> <C> <C> <C> Revenues: Equipment rentals...... $446,995 $549,950 $46,805 $1,043,750 Sales of rental equip- ment.................. 33,722 32,104 6,413 72,239 Sales of equipment and merchandise and other revenues............. 127,949 128,094 15,085 271,128 -------- -------- -------- ------- -------- ---------- Total revenues.......... 608,666 710,148 68,303 1,387,117 Cost of revenues: Cost of equipment rent- als, excluding depreciation.......... 191,408 284,455 24,273 500,136 Depreciation of rental equipment............. 77,870 70,337 10,147 158,354 Cost of rental equip- ment sales............ 21,190 17,387 3,804 42,381 Cost of equipment and merchandise sales and other operating costs................. 95,705 90,819 11,092 197,616 -------- -------- -------- ------- -------- ---------- Total cost of revenues.. 386,173 462,998 49,316 898,487 -------- -------- -------- ------- -------- ---------- Gross profit............ 222,493 247,150 18,987 488,630 Selling, general and administrative expenses............... 94,457 114,886 12,372 221,715 Restructuring charge.... 28,922 28,922 Non-rental depreciation and amortization....... $ 4,286 20,291 25,725 2,936 53,238 -------- -------- -------- ------- -------- ---------- Operating income (loss)................. (4,286) 78,823 106,539 3,679 184,755 Interest expense........ 9,750 107,825 6,046 718 $ (9,750) 114,589 Preferred dividends of a subsidiary trust....... 9,750 9,750 Other (income) expense, net.................... 14,725 (8,853) 1,063 6,935 -------- -------- -------- ------- -------- ---------- Income (loss) before provision (benefit) for income taxes and extraordinary item..... (14,036) (43,727) 109,346 1,898 53,481 Provision (benefit) for income taxes........... (6,270) (14,763) 45,379 788 25,134 -------- -------- -------- ------- -------- ---------- Income before extraordi- nary item and equity in net earnings of subsid- iaries................. (7,766) (28,964) 63,967 1,110 28,347 Extraordinary item...... 11,317 11,317 -------- -------- -------- ------- -------- ---------- Income (loss) before equity in net earnings of subsidiaries........ (7,766) (40,281) 63,967 1,110 17,030 Equity in net earnings of subsidiaries........ 24,796 65,077 $(89,873) -------- -------- -------- ------- -------- ---------- Net income ............. $ 17,030 $ 24,796 $ 63,967 $ 1,110 $(89,873) $ 17,030 ======== ======== ======== ======= ======== ========== </TABLE> 20
UNITED RENTALS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS <TABLE> <CAPTION> For the Six Months Ended June 30, 2000 ------------------------------------------------------------------------ Guarantor Non-Guarantor Other and Consolidated Parent URI Subsidiaries Subsidiaries Eliminations Total ------ --- ------------ ------------- ------------ ------------ (In thousands) <S> <C> <C> <C> <C> <C> <C> Revenues: Equipment rentals...... $378,801 $484,540 $48,291 $ 911,632 Sales of rental equipment............. 74,484 68,315 12,372 155,171 Sales of equipment and merchandise and other revenues.............. 112,041 114,201 15,863 242,105 -------- -------- -------- ------- --------- ---------- Total revenues.......... 565,326 667,056 76,526 1,308,908 Cost of revenues: Cost of equipment rentals, excluding depreciation.......... 162,317 211,389 22,908 396,614 Depreciation of rental equipment............. 70,016 79,670 9,349 159,035 Cost of rental equipment sales....... 43,989 39,471 7,708 91,168 Cost of equipment and merchandise sales and other operating costs................. 91,840 79,645 12,824 184,309 -------- -------- -------- ------- --------- ---------- Total cost of revenues.. 368,162 410,175 52,789 831,126 -------- -------- -------- ------- --------- ---------- Gross profit............ 197,164 256,881 23,737 477,782 Selling, general and administrative expenses............... 92,687 106,523 11,759 210,969 Non-rental depreciation and amortization....... $ 3,566 17,912 16,597 2,646 40,721 -------- -------- -------- ------- --------- ---------- Operating income........ (3,566) 86,565 133,761 9,332 226,092 Interest expense........ 9,750 104,617 195 1,398 $ (9,750) 106,210 Preferred dividends of a subsidiary trust....... 9,750 9,750 Other (income) expense, net.................... 3,929 (4,422) 181 (312) -------- -------- -------- ------- --------- ---------- Income (loss) before provision for income taxes.................. (13,316) (21,981) 137,988 7,753 110,444 Provision (benefit) for income taxes........... (5,575) (9,122) 57,265 3,266 45,834 -------- -------- -------- ------- --------- ---------- Income (loss) before equity in net earnings of subsidiaries........ (7,741) (12,859) 80,723 4,487 64,610 Equity in net earnings of subsidiaries........ 72,351 85,210 $(157,561) -------- -------- -------- ------- --------- ---------- Net income.............. $ 64,610 $ 72,351 $ 80,723 $ 4,487 $(157,561) $ 64,610 ======== ======== ======== ======= ========= ========== </TABLE> 21
UNITED RENTALS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS <TABLE> <CAPTION> For the Three Months Ended June 30, 2001 ---------------------------------------------------------------------- Non- Guarantor Guarantor Other and Consolidated Parent URI Subsidiaries Subsidiaries Eliminations Total ------- -------- ------------ ------------ ------------ ------------ (In thousands) <S> <C> <C> <C> <C> <C> <C> Revenues: Equipment rentals...... $239,522 $316,596 $26,250 $582,368 Sales of rental equip- ment.................. 5,527 24,045 3,545 33,117 Sales of equipment and merchandise and other revenues............. 71,408 73,444 7,676 152,528 ------- -------- -------- ------- -------- -------- Total revenues.......... 316,457 414,085 37,471 768,013 Cost of revenues: Cost of equipment rentals, excluding depreciation.......... 92,597 164,780 12,726 270,103 Depreciation of rental equipment............. 40,459 36,041 5,053 81,553 Cost of rental equip- ment sales............ 4,606 12,485 2,214 19,305 Cost of equipment and merchandise sales and other operating costs................. 53,033 52,311 5,645 110,989 ------- -------- -------- ------- -------- -------- Total cost of revenues.. 190,695 265,617 25,638 481,950 ------- -------- -------- ------- -------- -------- Gross profit............ 125,762 148,468 11,833 286,063 Selling, general and administrative expenses............... 46,208 60,278 6,336 112,822 Restructuring charge.... 28,922 28,922 Non-rental depreciation and amortization....... $ 2,222 9,454 13,969 1,486 27,131 ------- -------- -------- ------- -------- -------- Operating income........ (2,222) 41,178 74,221 4,011 117,188 Interest expense........ 4,875 50,978 5,610 471 $ (4,875) 57,059 Preferred dividends of a subsidiary trust....... 4,875 4,875 Other (income) expense, net.................... 8,525 (1,468) 548 7,605 ------- -------- -------- ------- -------- -------- Income (loss) before provision for income taxes and extraordinary item................... (7,097) (18,325) 70,079 2,992 47,649 Provision (benefit) for income taxes........... (3,390) (4,221) 29,083 1,242 22,714 ------- -------- -------- ------- -------- -------- Income before extraordi- nary item and equity in net earnings of subsid- iaries................. (3,707) (14,104) 40,996 1,750 24,935 Extraordinary item...... 11,317 11,317 ------- -------- -------- ------- -------- -------- Income (loss) before equity in net earnings of subsidiaries........ (3,707) (25,421) 40,996 1,750 13,618 Equity in net earnings of subsidiaries........ 17,325 42,746 $(60,071) ------- -------- -------- ------- -------- -------- Net income ............. $13,618 $ 17,325 $ 40,996 $ 1,750 $(60,071) $ 13,618 ======= ======== ======== ======= ======== ======== </TABLE> 22
UNITED RENTALS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS <TABLE> <CAPTION> For the Three Months Ended June 30, 2000 --------------------------------------------------------------------- Non- Gurantor Guarantor Other and Consolidated Parent URI Subsidiaries Subsidiaries Eliminations Total ------- -------- ------------ ------------ ------------ ------------ (In thousands) <S> <C> <C> <C> <C> <C> <C> Revenues: Equipment rentals...... $212,902 $271,802 $26,830 $511,534 Sales of rental equipment............. 31,500 47,444 5,895 84,839 Sales of equipment and merchandise and other revenues.............. 65,415 59,722 8,436 133,573 ------- -------- -------- ------- --------- -------- Total revenues.......... 309,817 378,968 41,161 729,946 Cost of revenues: Cost of equipment rentals, excluding depreciation.......... 84,062 126,661 11,591 222,314 Depreciation of rental equipment............. 36,928 43,798 4,806 85,532 Cost of rental equipment sales....... 17,848 28,830 3,404 50,082 Cost of equipment and merchandise sales and other operating costs................. 52,782 40,833 6,605 100,220 ------- -------- -------- ------- --------- -------- Total cost of revenues.. 191,620 240,122 26,406 458,148 ------- -------- -------- ------- --------- -------- Gross profit............ 118,197 138,846 14,755 271,798 Selling, general and administrative expenses............... 48,535 54,065 6,519 109,119 Non-rental depreciation and amortization....... $ 1,865 8,653 8,813 1,372 20,703 ------- -------- -------- ------- --------- -------- Operating income........ (1,865) 61,009 75,968 6,864 141,976 Interest expense........ 4,875 55,949 35 543 $ (4,875) 56,527 Preferred dividends of a subsidiary trust....... 4,875 4,875 Other (income) expense, net.................... 2,156 (2,698) 434 (108) ------- -------- -------- ------- --------- -------- Income (loss) before provision (benefit) for income taxes........... (6,740) 2,904 78,631 5,887 80,682 Provision (benefit) for income taxes........... (2,797) 1,205 32,661 2,414 33,483 ------- -------- -------- ------- --------- -------- Income (loss) before equity in net earnings of subsidiaries........ (3,943) 1,699 45,970 3,473 47,199 Equity in net earnings of subsidiaries........ 51,142 49,443 (100,585) ------- -------- -------- ------- --------- -------- Net income.............. $47,199 $ 51,142 $ 45,970 $ 3,473 $(100,585) $ 47,199 ======= ======== ======== ======= ========= ======== </TABLE> 23
UNITED RENTALS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) CONDENSED CONSOLIDATING CASH FLOW INFORMATION <TABLE> <CAPTION> For the Six Months Ended June 30, 2001 -------------------------------------------------------------------------- Guarantor Non-guarantor Other and Parent URI Subsidiaries Subsidiaries Eliminations Consolidated ------- ---------- ------------- ------------- ------------ ------------ (In thousands) <S> <C> <C> <C> <C> <C> <C> Net cash provided by (used in) operating activities............. $(4,007) $ 205,885 $78,440 $18,137 $ 298,455 Cash flows from investing activities: Purchases of rental equipment............. (199,566) (89,546) (14,169) (303,281) Purchases of property and equipment......... (3,603) (6,627) (18,907) (2,289) (31,426) Proceeds from sales of rental equipment...... 33,722 32,104 6,413 72,239 Capital contributed to subsidiary............ (8,155) $ 8,155 Purchases of other companies............. (36,983) (818) (37,801) In-process acquisition costs................. (2,140) (2,140) ------- ---------- ------- ------- ------- ---------- Net cash used in investing activities.......... (13,898) (209,454) (76,349) (10,863) 8,155 (302,409) Cash flows from financing activities: Proceeds from debt..... 1,979,144 11 1,979,155 Payments of debt....... (1,922,168) (1,249) (2,865) (1,926,282) Payments of financing costs................. (27,055) (63) (27,118) Capital contributions by parent............. 8,155 (8,155) Dividend distributions to parent............. (34,507) 34,507 Shares repurchased and retired............... (24,758) (24,758) Proceeds from the exercise of common stock options......... 8,156 8,156 Proceeds from the dividends from subsidiary............ 34,507 (34,507) ------- ---------- ------- ------- ------- ---------- Net cash provided by (used in) financing activities.......... 17,905 3,569 (1,238) (2,928) (8,155) 9,153 Effect of foreign exchange rates........ (3,448) (3,448) ------- ---------- ------- ------- ------- ---------- Net decrease in cash and cash equivalents........... 853 898 1,751 Cash and cash equivalents at beginning of period... 29,733 4,651 34,384 ------- ---------- ------- ------- ------- ---------- Cash and cash equivalents at end of period................ $30,586 $ 5,549 $ 36,135 ======= ========== ======= ======= ======= ========== Supplemental disclosure of cash flow information: Cash paid for interest............ $ 9,750 $ 94,892 $ 4,562 $ 819 $ 110,023 Cash paid for income taxes, net of refunds............. $ 1,584 $ (865) $ 719 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........ 33,801 179 33,980 ------- ---------- ------- ------- ------- ---------- Net cash paid........ $ 36,983 $ 818 $ 37,801 ======= ========== ======= ======= ======= ========== </TABLE> 24
UNITED RENTALS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) CONDENSED CONSOLIDATING CASH FLOW INFORMATION <TABLE> <CAPTION> For the Six Months Ended June 30, 2000 -------------------------------------------------------------- Guarantor Non-guarantor Other and Parent URI Subsidiaries Subsidiaries Eliminations Consolidated -------- ---------- ------------- ------------- ------------ ------------ (In thousands) <S> <C> <C> <C> <C> <C> <C> Net cash provided by (used in) operating activities............. $ 1,117 $ (106,798) $ 356,725 $ 11,772 $ 9 $ 262,825 Cash flows from investing activities: Purchases of rental equipment............. (127,778) (368,805) (17,234) (513,817) Purchases of property and equipment......... (13,585) (12,678) (41,512) (1,466) (69,241) Proceeds from sales of rental equipment...... 74,484 68,315 12,372 155,171 Payments of contingent purchase price........ (851) (5,702) (6,553) Purchases of other companies............. (261,982) (3,102) (265,084) Capital contributed to subsidiary............ (96) 96 In-process acquisition costs................. (2,445) (2,445) -------- ---------- --------- -------- ------- --------- Net cash used in investing activities.......... (16,126) (328,805) (347,704) (9,430) 96 (701,969) Cash flows from financing activities: Proceeds from debt..... 357,250 19,653 376,903 Payments of debt....... (19,929) (14,037) (4,251) (38,217) Proceeds from sale- leaseback............. 147,515 147,515 Payments of financing costs................. (7,155) (9) (7,164) Capital contributions by parent............. 96 (96) Dividend distributions to parent............. (45,863) 45,863 Proceeds from the exercise of common stock options......... 96 96 Proceeds from dividends from subsidiary............ 45,863 (45,863) Shares repurchased and retired............... (30,950) (30,950) -------- ---------- --------- -------- ------- --------- Net cash provided by (used in) financing activities.......... 15,009 431,914 5,616 (4,251) (105) 448,183 Effect of foreign exchange rates........ 342 342 -------- ---------- --------- -------- ------- --------- Net increase (decrease) in cash and cash equivalents........... (3,689) 14,637 (1,567) 9,381 Cash and cash equivalents at beginning of period... 3,689 16,414 3,708 23,811 -------- ---------- --------- -------- ------- --------- Cash and cash equivalents at end of period................ $ 31,051 $ 2,141 $ 33,192 ======== ========== ========= ======== ======= ========= Supplemental disclosure of cash flow information: Cash paid for interest............ $ 9,750 $ 89,682 $ 243 $ 1,371 $ 101,046 Cash paid for income taxes............... $ 55,791 $ 6,929 $ 62,720 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.............. $ 387,989 $ 4,884 $ 392,873 Liabilities assumed.... (100,810) (1,782) (102,592) Less: Amounts paid through issuance of debt.... (25,197) (25,197) -------- ---------- --------- -------- ------- --------- Net cash paid...... $ 261,982 $ 3,102 $ 265,084 ======== ========== ========= ======== ======= ========= </TABLE> 25
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion reviews our operations for the six and three months ended June 30, 2001 and 2000 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 2000 Annual Report on Form 10-K. General We primarily derive revenues from the following sources: (i) equipment rental (including additional fees that may be charged for equipment delivery, fuel, repair of rental equipment, and damage waivers), (ii) the sale of used rental equipment, (iii) the sale of new equipment, and (iv) the sale of related merchandise and parts and other revenue. Cost of operations consists primarily of depreciation costs associated with rental equipment, the cost of repairing and maintaining rental equipment, the cost of rental equipment and equipment and other merchandise sold, personnel costs, occupancy costs and supplies. We record rental equipment expenditures at cost and depreciate equipment using the straight-line method over the estimated useful life (which ranges from 2 to 10 years), after giving effect to an estimated salvage value of 0% to 10% 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 intangible assets. Our intangible assets include non-compete agreements and goodwill, which represents the excess of the purchase price of acquired companies over the estimated fair market value of the net assets acquired. Accounting For Acquisitions We completed several acquisitions in 2000 and 2001. See note 2 to the Unaudited Consolidated Financial Statements included herein. We accounted for these acquisitions as "purchases," which means that the results of operations of the businesses acquired are included in our financial statements only from their respective dates of acquisition. In view of the fact that our operating results for 2000 and 2001 were impacted by these acquisitions, we believe that our results of operations for these periods are not directly comparable. Restructuring Plan We have adopted a restructuring plan involving the following principal elements: (i) 31 underperforming branches are being closed or consolidated with other locations (comprised of 18 closed or consolidated as of June 30, 2001 and 13 that will be closed or consolidated by December 31, 2001); (ii) five administrative offices are being closed or consolidated with other locations; (iii) our employee headcount is being reduced by 489; and (iv) certain information technology software will no longer be used. The aggregate annual revenues from the 31 branches that are being eliminated amounted to approximately $82.0 million. We expect that we will retain approximately $56 million of this revenue by shifting the business of some of the closed branches to other locations. We estimate that we will realize annual cost savings from the branch closures of approximately $33 million. We recorded, in the second quarter of 2001, a restructuring charge of approximately $28.9 million relating to the restructuring plan described above. This charge is comprised of a non-cash charge in the amount of $10.9 million and cash expenses in the amount of $18.0 million. We paid $3.2 million of these cash expenses in the second quarter of 2001. We expect to pay the balance of these cash expenses as follows: approximately $8.6 million during the balance of 2001 and approximately $6.2 million in subsequent periods. 26
The restructuring charge includes: (1) the cost of vacating facilities, primarily the payment of obligations under leases, offset by estimated sublease opportunities, the write-off of capital improvements made to such facilities, and the write-off of related goodwill, (2) workforce reduction costs, primarily severance, and (3) information technology costs. The table below provides certain information concerning the restructuring charge: <TABLE> <CAPTION> Activity through Balance Amount of June 30, June 30, Components of Restructuring Charge Charge 2001(1) 2001(2) ---------------------------------- --------- -------- -------- <S> <C> <C> <C> Cost to vacate facilities........................ $18,291 $ 9,779 $ 8,512 Workforce reduction costs........................ 5,666 1,296 4,370 Information technology costs..................... 4,965 3,042 1,923 ------- ------- ------- Total.......................................... $28,922 $14,117 $14,805 ======= ======= ======= </TABLE> -------- (1) Represents the non-cash component of the charge plus the cash component that was paid through June 30, 2001. (2) Represents the portion of the cash component of the charge that had not been paid as of June 30, 2001. Debt Refinancing and Extraordinary Item We refinanced an aggregate of $1,695.7 million of indebtedness and other obligations in April 2001, as described under "--Information Concerning Recent Financing Transactions." We recorded the following charges relating to this refinancing in the second quarter of 2001: (i) a pre-tax extraordinary charge of $18.1 million ($11.3 million, net of tax) and (ii) a pre-tax charge of $7.8 million ($5.2 million, net of tax) that is recorded in other (income) expense, net, and relates to the refinancing of a synthetic lease. Results of Operations Six Months Ended June 30, 2001 and 2000 Revenues. Total revenues for the six months ended June 30, 2001 were $1,387.1 million, representing an increase of 6.0% over total revenues of $1,308.9 million for the six months ended June 30, 2000. Our revenues during these periods were attributable to the following sources. . Revenues from Equipment Rentals. These revenues were $1,043.8 million in the first six months of 2001, representing an increase of 14.5% from $911.6 million in the first six months of 2000. These revenues accounted for 75.3% of our total revenues in the first six months of 2001 compared with 69.6% of our total revenues in first six months of 2000. The 14.5% increase in these revenues in the first six months of 2001 reflected (i) increased revenues at locations open more than one year (which accounted for approximately 8.0 percentage points, 7.9 percentage points of which related to increases in the volume of transactions and utilization rates, offset by 0.1 percentage points from price decreases) and (ii) new rental locations acquired through acquisitions and the opening of start-up locations, partially offset by locations sold or closed (which accounted for approximately 6.5 percentage points). . Revenues from the Sales of Rental Equipment. These revenues were $72.2 million in the first six months of 2001, representing a decrease of 53.4% from $155.2 million in the first six months of 2000. These revenues accounted for 5.2% of our total revenues in the first six months of 2001 compared with 11.9% of our total revenues in the first six months of 2000. The reduction in these revenues in 2001 reflects the fact that, as the economy softened, we reduced our budget for new equipment purchases in 2001 and slowed the rate at which we sell our used rental equipment. See "Certain Measures to Reduce Cash Requirements." 27
. Revenues from the Sales of Equipment and Merchandise and Other Revenues. These revenues were $271.1 million in the first six months of 2001, representing an increase of 12.0% from $242.1 million in the first six months of 2000. These revenues accounted for 19.6% of our total revenues in the first six months of 2001 compared with 18.5% of our total revenues in the first six months of 2000. The 12.0% increase in sales of equipment and merchandise and other revenues was attributable to the increase in the volume of transactions. Gross Profit. Gross profit increased to $488.6 million in the six months ended June 30, 2001, from $477.8 million in the six months ended June 30, 2000. This increase primarily reflected the increase in revenues described above. Our gross profit margin by source of revenues in the six months ended June 30, 2001 and 2000 was: (i) equipment rental (36.9% in the six months ended June 30, 2001 and 39.0% in the six months ended June 30, 2000), (ii) sales of rental equipment (41.3% in the six months ended June 30, 2001 and 41.2% in the six months ended June 30, 2000) and (iii) sales of equipment and merchandise and other revenues (27.1% in the six months ended June 30, 2001 and 23.9% in the six months ended June 30, 2000). The decrease in the gross profit margin from rental revenues in the six months ended June 30, 2001, principally reflected the following factors. First, we had more traffic control equipment in 2001 than in 2000. This lowered our overall gross profit margin because (i) this equipment category generally produces losses during the first quarter due to seasonal factors and (ii) this equipment category generally produces lower gross profit margins than our other categories. Second, our cost of equipment rental increased in 2001 because more of our rental equipment was held by us under operating leases rather than being owned. The increase in the gross profit margin from sales of equipment and merchandise and other revenue in the six months ended June 30, 2001, primarily reflected the following: (i) lower costs resulting from our ongoing efforts to consolidate our suppliers and further capitalize on our purchasing power and (ii) a shift in mix which resulted in more of our sales being attributable to higher margin areas such as providing services and selling parts. Selling, General and Administrative Expenses. Selling, general and administrative expenses ("SG&A") were $221.7 million, or 16.0% of total revenues, during the six months ended June 30, 2001 and $211.0 million, or 16.1% of total revenues, during the six months ended June 30, 2000. Although we have been implementing a number of measures to reduce SG&A, including reducing the number of administrative personnel, reducing discretionary expenditures and consolidating certain credit and collection facilities, SG&A as a percentage of total revenues only decreased very slightly in 2001. This principally reflects the fact that our revenues from the sales of rental equipment were down significantly in 2001 for the reasons described above. SG&A as a percentage of revenues, excluding revenues from the sale of rental equipment, decreased to 16.9% in the six months ended June 30, 2001 from 18.3% in the six months ended June 30, 2000. Restructuring Charge. We recorded a restructuring charge of $28.9 million in the six months ended June 30, 2001. See "--Restructuring Plan" for additional information. Non-rental Depreciation and Amortization. Non-rental depreciation and amortization was $53.2 million, or 3.8% of total revenues, in the six months ended June 30, 2001 and $40.7 million, or 3.1% of total revenues, in the six months ended June 30, 2000. The increase in the dollar amount of non-rental depreciation and amortization in the first six months of 2001 primarily reflected (i) the amortization of goodwill attributable to acquisitions completed subsequent to the second quarter of 2000 and (ii) additional non- rental vehicles which have shorter useful lives. Interest Expense. Interest expense increased to $114.6 million in the six months ended June 30, 2001 from $106.2 million in the six months ended June 30, 2000. This increase primarily reflected an increase in the Company's indebtedness, principally to fund acquisitions. 28
Preferred Dividends of a Subsidiary Trust. During the six months ended June 30, 2001 and 2000, preferred dividends of a subsidiary trust were $9.8 million. Other (Income) Expense. Other expense was $6.9 million in the six months ended June 30, 2001 compared with other income of $0.3 million in the six months ended June 30, 2000. The increase in other expense in the first six months of 2001 was primarily attributable to the $7.8 million charge we incurred relating to the refinancing costs of a synthetic lease as described under "--Debt Refinancing and Extraordinary Item." Income Taxes. Income taxes were $25.1 million, or an effective rate of 47.0%, in the six months ended June 30, 2001 compared to $45.8 million, or an effective rate of 41.5%, in the six months ended June 30, 2000. The increase in the effective rate in the first six months of 2001 was primarily attributable to the non-deductibility for income tax purposes of certain costs in the restructuring charge. Extraordinary Item. We recorded an extraordinary charge of $18.1 million ($11.3 million, net of tax) in the six months ended June 30, 2001. See "--Debt Refinancing and Extraordinary Item" for additional information. Three Months Ended June 30, 2001 and 2000 Revenues. Total revenues for the three months ended June 30, 2001 were $768.0 million, representing an increase of 5.2% over total revenues of $729.9 million for the three months ended June 30, 2000. Our revenues during these periods were attributable to the following sources. . Revenues from Equipment Rentals. These revenues were $582.4 million in the second quarter of 2001, representing an increase of 13.8% from $511.5 million in the second quarter of 2000. These revenues accounted for 75.8% of our total revenues in the second quarter of 2001 compared with 70.1% of our total revenues in the second quarter of 2000. The 13.8% increase in these revenues in the second quarter of 2001 reflected (i) increased revenues at locations open more than one year (which accounted for approximately 7.9 percentage points, 8.8 percentage points of which related to increases in the volume of transactions and utilization rates, offset by 0.9 percentage points from price decreases) and (ii) new rental locations acquired through acquisitions and the opening of start-up locations, partially offset by locations sold or closed (which accounted for approximately 5.9 percentage points). . Revenues from the Sales of Rental Equipment. These revenues were $33.1 million in the second quarter of 2001, representing a decrease of 61.0% from $84.8 million in the second quarter of 2000. These revenues accounted for 4.3% of our total revenues in the second quarter of 2001 compared with 11.6% of our total revenues in the second quarter of 2000. The reduction in these revenues in 2001 reflects the fact that, as the economy softened, we reduced our budget for new equipment purchases in 2001 and slowed the rate at which we sell our used rental equipment. See "--Certain Measures to Reduce Cash Requirements." . Revenues from the Sales of Equipment and Merchandise and Other Revenues. These revenues were $152.5 million in the second quarter of 2001, representing an increase of 14.2% from $133.6 million in the second quarter of 2000. These revenues accounted for 19.9% of our total revenues in the second quarter of 2001 compared with 18.3% of our total revenues in the second quarter of 2000. The 14.2% increase in sales of equipment and merchandise and other revenues was attributable to the increase in the volume of transactions. Gross Profit. Gross profit increased to $286.1 million in the three months ended June 30, 2001, from $271.8 million in the three months ended June 30, 2000. This increase primarily reflected the increase in revenues described above. 29
Our gross profit margin by source of revenues in the three months ended June 30, 2001 and 2000 was: (i) equipment rental (39.6% in the three months ended June 30, 2001 and 39.8% in the three months ended June 30, 2000), (ii) sales of rental equipment (41.7% in the three months ended June 30, 2001 and 41.0% in the three months ended June 30, 2000) and (iii) sales of equipment and merchandise and other revenues (27.2% in the three months ended June 30, 2001 and 25.0% in the three months ended June 30, 2000). The increase in the gross profit margin from sales of equipment and merchandise and other revenue in the three months ended June 30, 2001, primarily reflected the following: (i) lower costs resulting from our ongoing efforts to consolidate our suppliers and further capitalize on our purchasing power and (ii) a shift in mix which resulted in more of our sales being attributable to higher margin areas such as providing services and selling parts. Selling, General and Administrative Expenses. SG&A was $112.8 million, or 14.7% of total revenues, during the three months ended June 30, 2001 and $109.1 million, or 14.9% of total revenues, during the three months ended June 30, 2000. Although we have been implementing a number of measures to reduce SG&A, including reducing the number of administrative personnel, reducing discretionary expenditures and consolidating certain credit and collection facilities, SG&A as a percentage of total revenues only decreased very slightly in 2001. This principally reflects the fact that our revenues from the sales of rental equipment were down significantly in 2001 for the reasons described above. SG&A as a percentage of revenues, excluding revenues from the sale of rental equipment, decreased to 15.4% in the three months ended June 30, 2001 from 16.9% in the six months ended June 30, 2000. Restructuring Charge. We recorded a restructuring charge of $28.9 million in the three months ended June 30, 2001. See "--Restructuring Plan" for additional information. Non-rental Depreciation and Amortization. Non-rental depreciation and amortization was $27.1 million, or 3.5% of total revenues, in the three months ended June 30, 2001 and $20.7 million, or 2.8% of total revenues, in the three months ended June 30, 2000. The increase in the dollar amount of non-rental depreciation and amortization in the first three months of 2001 primarily reflected (i) the amortization of goodwill attributable to acquisitions completed subsequent to the second quarter of 2000 and (ii) additional non- rental vehicles which have shorter useful lives. Interest Expense. Interest expense increased to $57.1 million in the three months ended June 30, 2001 from $56.5 million in the three months ended June 30, 2000. This increase primarily reflected an increase in the Company's indebtedness, principally to fund acquisitions, offset by lower interest rates on our variable rate debt due to the refinancing. Preferred Dividends of a Subsidiary Trust. During the three months ended June 30, 2001 and 2000, preferred dividends of a subsidiary trust were $4.9 million. Other (Income) Expense. Other expense was $7.6 million in the three months ended June 30, 2001 compared with other income of $0.1 million in the three months ended June 30, 2000. The increase in other expense in the three months ended June 30, 2001 was primarily attributable to the $7.8 million charge we incurred related to the refinancing costs of a synthetic lease as described under "--Debt Refinancing and Extraordinary Item." Income Taxes. Income taxes were $22.7 million, or an effective rate of 47.7%, in the three months ended June 30, 2001 compared to $33.5 million, or an effective rate of 41.5%, in the three months ended June 30, 2000. The increase in the effective rate in the second quarter of 2001 was primarily attributable to the non-deductibility for income tax purposes of certain costs in the restructuring charge. Extraordinary Item. We recorded an extraordinary charge of $18.1 million ($11.3 million, net of tax) in the three months ended June 30, 2001. See "-- Debt Refinancing and Extraordinary Item" for additional information. 30
Liquidity and Capital Resources Information Concerning Recent Financing Transactions General In April 2001, we refinanced $1,695.7 million of our indebtedness and other obligations. In order to effect this refinancing, we: . issued $450.0 million of 10 3/4% Senior Notes Due 2008; . obtained a new senior secured credit facility comprised of a $750 million term loan and a $750 million revolving credit facility; . made an initial draw under the new revolving credit facility in the amount of $525.0 million; and . used the proceeds from the notes, the new term loan and the initial draw under the new revolving credit facility to (i) permanently repay the outstanding balance under our old revolving credit facility ($476.0 million); (ii) repay outstanding term loans ($1,188.5 million) and (iii) repay an outstanding synthetic lease ($31.2 million). In June 2001, we obtained an additional $112.0 million facility through the securitization of additional accounts receivable. For additional information, see "--Additional Information Concerning the Receivables Securitization." Additional Information Concerning the 10 3/4% Senior Notes On April 20, 2001, United Rentals (North America), Inc. ("URI"), a wholly owned subsidiary of United Rentals, Inc. ("Holdings"), sold $450 million aggregate principal amount of 10 3/4% Senior Notes Due 2008. The net proceeds from the sale of the notes were approximately $439.9 million (after deducting the initial purchasers' discount and offering expenses). The notes mature on April 15, 2008. The notes are unsecured and are guaranteed by Holdings and by URI's domestic subsidiaries. URI may, at its option, redeem the notes on or after April 15, 2005, at specified redemption prices which range from 105.375% in 2005 to 100.0% in 2007 and thereafter. In addition, on or prior to April 15, 2004, URI may, at its option, use the proceeds of a public equity offering to redeem up to 35% of the outstanding notes, at a redemption price of 110.75%. The indenture governing the notes contains certain restrictive covenants, including limitations on (i) additional indebtedness, (ii) restricted payments, (iii) liens, (iv) dividends and other payments, (v) preferred stock of certain subsidiaries, (vi) transactions with affiliates, (vii) the disposition of proceeds of asset sales and (viii) our ability to consolidate, merge or sell all or substantially all of our assets. Additional Information Concerning the New Credit Facility On April 20, 2001, we entered into a new senior secured credit facility. The new facility is comprised of a term loan and a revolving credit facility and replaces the term loans and revolving credit facility that we previously had. Set forth below is additional information concerning the new credit facility. General Terms of the New Revolving Credit Facility. The revolving credit facility enables URI to borrow up to $750 million on a revolving basis and enables one of our Canadian subsidiaries to borrow up to $40 million (provided that the aggregate borrowings of URI and the Canadian subsidiary may not exceed $750 million). Up to $100 million of the revolving credit facility is available in the form of letters of credit. The revolving credit facility will mature and terminate on October 20, 2006. Borrowings under the revolving credit facility will until October 20, 2001, accrue interest, at our option, at either (A) the ABR Rate (which is equal to the greater of (i) the Federal Funds Rate plus 0.5% or (ii) the Chase Manhattan Bank's prime rate) plus a margin of 1.00% or (B) an adjusted LIBOR rate plus a margin of 2.0%. From and after October 20, 2001, the above interest rate margins will be adjusted quarterly based on our funded 31
debt to cash flow ratio, up to maximum margins of 1.75% and 2.75%, for revolving loans based on the ABR rate and the adjusted LIBOR rate, respectively, and down to minimum margins of 0.75% and 1.75%, for revolving loans based on the ABR rate and the adjusted LIBOR rate, respectively. If at any time an event of default exists, the interest rate applicable to each loan will increase by 2% per annum. We are also required to pay the lenders a commitment fee equal to 0.5% per annum in respect of undrawn commitments under the revolving credit facility. General Terms of the New Term Loan. On April 20, 2001, URI obtained a $750 million term loan. Amounts repaid in respect of the term loan may not be reborrowed. URI must repay the principal of the term loan in installments, over six and one-half years, as follows: (i) on June 30, 2001 and on the last day of each calendar quarter thereafter up to and including September 30, 2006, URI must repay $1.9 million and (ii) on the last day of each calendar quarter through June 30, 2007 and on August 31, 2007, URI must repay $177.2 million. Borrowings under the term loan accrue interest, at our option, at either (a) the ABR rate (which is equal to the greater of (i) the Federal Funds Rate plus 0.5% or (ii) the Chase Manhattan Bank's prime rate) plus a margin of 2.0%, or (b) an adjusted LIBOR rate plus a margin of 3.0%. Covenants. The agreements governing our new senior secured credit facility contains certain covenants that require us to, among other things, satisfy certain financial tests relating to: (a) the ratio of senior debt to cash flow, (b) minimum interest coverage ratio, (c) the ratio of funded debt to cash flow, and (d) the ratio of senior debt to tangible assets. These agreements also contain various other covenants that restrict our ability to, among other things, (i) incur additional indebtedness, (ii) permit liens to attach to our assets, (iii) pay dividends or make other restricted payments on our common stock and certain other securities and (iv) make acquisitions unless certain financial conditions are satisfied. Security and Guarantees. URI's obligations under the new senior secured facility are, subject to limited exceptions, (i) guaranteed by Holdings and URI's United States subsidiaries and (ii) secured by substantially all of URI's assets, the stock of URI and the stock of Holding's other United States subsidiaries and a portion of the stock of Holding's Canadian subsidiaries. The obligations of the Canadian subsidiary that may borrow under the revolving credit facility are guaranteed by our other Canadian subsidiaries and secured by substantially all of the assets of this Canadian subsidiary and the stock of its subsidiaries. Additional Information Concerning the Receivables Securitization During the quarter ended June 30, 2001, the Company obtained an additional $112.0 million in cash through the securitization of certain of its accounts receivable through its existing $250.0 million receivable securitization facility. In the securitization transactions, the Company transferred accounts receivable to a special purpose vehicle (the "SPV"), which in turn pledged those receivables to secure borrowings that the SPV incurred to finance its acquisition of those receivables. The borrowings generally accrue interest at the blended commercial paper rate for commercial paper issued by Gramercy Capital Corporation to fund such borrowings plus a margin of 0.75% per annum. The SPV's borrowings are an obligation of the SPV and not of the Company or URI, and the lenders' recourse in respect of the borrowings is generally limited to collections that the SPV receives on the receivables. Collections on the receivables are used to service the borrowings. From time to time prior to June 2002, subject to certain conditions, collections from the receivables may be reinvested by the SPV in additional accounts receivable originated by the Company. Subject to certain conditions, the term of the receivables securitization may be extended until December 2003. As of June 30, 2001, approximately $212.0 million of borrowings was outstanding under the receivables securitization facility. Sources and Uses of Cash During the first six months of 2001, we (i) generated cash from operations of approximately $298.5 million, (ii) generated cash from the sale of rental equipment of approximately $72.2 million and (iii) obtained net 32
proceeds from financing activities of approximately $9.2 million. We used cash during this period principally to (i) pay consideration for acquisitions and settle certain outstanding liabilities due to former owners of businesses that we acquired (approximately $37.8 million), (ii) purchase rental equipment (approximately $303.3 million), (iii) purchase other property and equipment (approximately $31.4 million) and (iv) purchase and retire shares of our outstanding common stock (approximately $24.8 million). Certain Balance Sheet Changes The increase in accounts receivable at June 30, 2001 compared to December 31, 2000 was attributable to the increase in revenues due to the seasonally stronger second quarter. The decrease in inventory at June 30, 2001 compared to December 31, 2000 primarily reflected increased sales during the second quarter of 2001. The increase in prepaid expenses and other assets at June 30, 2001 compared to December 31, 2000 was primarily attributable to payment of certain prepaid expenses during the first six months of 2001. The increase in accounts payable, deferred taxes and accrued expenses and other liabilities at June 30, 2001 compared to December 31, 2000 was primarily attributable to the increase in revenues in the second quarter of 2001. The increase in rental equipment at June 30, 2001 compared to December 31, 2000 primarily reflected our equipment purchases during the first six months of 2001. The increase in debt at June 30, 2001 compared to December 31, 2000 primarily reflected borrowings for acquisition related payments and equipment purchases during the first six months of 2001. The increase in additional paid-in capital at June 30, 2001 compared to December 31, 2000 was primarily attributable to the accounting for restricted shares that were issued during the second quarter of 2001. Cash Requirements Related to Operations Our principal existing sources of cash are borrowings available under our revolving credit facility ($289.7 million available as of August 7, 2001) and cash generated from operations. Our cash generated from operations was approximately $298.5 million and $262.8 million in the first six months of 2001 and the first six months of 2000, respectively. The increase in 2001 primarily reflected the changes in our operating assets and liabilities discussed above. 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) debt service and (iv) costs relating to the restructuring charge. We plan to fund such cash requirements relating to our existing operations from our existing sources of cash described above. In addition, we plan to seek additional financing through the securitization of certain of our accounts receivable and equipment. We estimate that equipment expenditures for the year 2001 will be approximately $400 million for our existing operations. These expenditures are comprised of approximately (i) $150 million of expenditures in order to replace rental equipment sold, (ii) $200 million of discretionary expenditures to increase the size of our rental fleet and (iii) $50 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. While emphasizing internal growth, we may also continue to expand through a disciplined acquisition program. 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 financing and, consequently, our indebtedness may increase as we implement our growth strategy. There can be no assurance, however, that any additional financing will be available or, if available, will be on terms that are satisfactory to us. 33
The recent refinancing of $1,695.7 million of our indebtedness (described under "--Information Concerning Recent Financing Transactions") extended the maturities of a significant amount of our indebtedness. Based on the scheduled maturities of our current indebtedness, we are required to make principal payments of approximately $15.7 million over the next 12 months. We may also, at our option, make additional principal payments. Certain Measures to Reduce Cash Requirements As the economy softened, we adopted a number of measures to further control costs and increase free cash flow. These include the restructuring plan described under "--Restructuring Plan" and the measures described below. Reduce Equipment Purchases. We will purchase less new equipment in 2001 than in 2000 ($400 million budgeted for 2001 compared to $962 million expended in 2000) and will reduce the rate at which we sell used equipment. The amount of the reduction will depend on future developments, including the economic outlook, conditions in the used equipment market, and our equipment utilization rate. Based on current conditions, we estimate that our revenues from the sale of used equipment will be 50-75% lower in 2001 than in 2000. We estimate that the weighted average age of our rental fleet, which currently is approximately 29 months, will increase to approximately 32 months as a result of the planned reduction in the rate at which we purchase new equipment and sell used equipment. We believe that, because of the young age of our fleet, our business will not be adversely affected by this increase in average age. Continue to Consolidate Suppliers. We reduced the number of our primary equipment suppliers from 111 to 28 in 2000. This allowed us to lower our purchase costs by approximately $150 million in 2000 and should enable us to save additional amounts in 2001. We are currently in the process of similarly consolidating our merchandise suppliers. Other Cost-Cutting Measures. We are seeking to reduce costs in a number of other ways, including reducing administrative expenses, consolidating credit and collection centers, and streamlining advertising. Certain Information Concerning Stock Plans 2001 Senior Stock Plan. In June 2001, our shareholders approved the adoption of the 2001 Senior Stock Plan. This plan allows us to grant to our officers and directors shares of common stock and other equity-linked awards. The maximum number of shares of common stock that may be issued under this plan is 4,000,000. Our board of directors, or a committee of the board, determines to whom awards will be made, the timing of each award, and the terms and provisions of each award. No shares may be awarded under this plan after June 5, 2011. As of June 30, 2001, an aggregate of 2,015,000 shares had been awarded under this plan. 2001 Stock Plan. In March 2001, we adopted the 2001 Stock Plan. This plan allows us to grant to certain employees (other than officers and directors) shares of common stock and other equity-linked awards. The maximum number of shares of common stock that may be issued under this plan is 2,000,000. Our board of directors, or a committee of the board, determines to whom awards will be made, the timing of each award, and the terms and provisions of each award. No shares may be awarded under this plan after March 23, 2011. As of June 30, 2001, an aggregate of 752,041 shares had been awarded under this plan. We record the issuance of restricted shares at the quoted market price on the date of the grants. Amortization of deferred compensation is then recognized on a straight-line basis over the related vesting period. 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. 34
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 preferred securities (the "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. Recently Issued Accounting Standards In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities--a replacement of FASB Statement No. 125". This standard revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures. This standard is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001 and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. The adoption of SFAS No. 140 did not have a material effect on our consolidated financial position or results of operations. 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. This standard is effective for all business combinations initiated after June 30, 2001. In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets". This standard addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, "Intangible Assets". This standard is effective for fiscal years beginning after December 15, 2001. However, this standard is immediately effective in cases where goodwill and intangible assets are acquired after June 30, 2001. 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. We are currently evaluating the impact that SFAS No. 142 will have our financial statements and will perform a fair value analysis of goodwill in connection with the adoption of this standard on January 1, 2002. 35
Factors that May Influence Future Results and Accuracy of Forward-Looking Statements Sensitivity to Changes in Construction and Industrial Activities Our equipment is principally used in connection with construction and industrial activities. Consequently, a downturn in construction or industrial activity may lead to a decrease in the demand for our equipment, or depress rental rates and the sales prices for the equipment we sell. We have identified below certain of the factors which may cause such a downturn, either temporarily or long-term: . a continuation or worsening of the recent slow-down of the economy; . an increase in interest rates; or . adverse weather conditions which may temporarily affect a particular region. In addition, demand for our traffic control 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") or the Aviation Investment and Reform Act for the 21st Century ("AIR-21"), does not reach expected levels. 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, including: . seasonal rental patterns of our customers, with rental activity tending to be lower in the winter; . our recent acquisition of businesses that specialize in renting traffic control equipment, which tend to operate at a loss during the first quarter; . the timing of expenditures for new equipment and the disposition of used equipment; . changes in demand for our equipment or the prices therefor 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 store consolidations or closings or the refinancing of existing indebtedness. Dependence on Additional Capital We may require additional capital for, among other purposes, purchasing rental equipment, completing acquisitions, establishing new rental locations, and refinancing existing indebtedness. 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, our business could be adversely affected. Certain Risks Relating to Acquisitions We have grown in part through acquisitions. The making of acquisitions entails certain risks, including: . unrecorded liabilities of acquired companies that we fail to discover during our due diligence investigations; . difficulty in assimilating the operations and personnel of the acquired company with our existing operations; 36
. loss of key employees of the acquired company; and . difficulty maintaining uniform standards, controls, procedures and policies. Dependence on Management We are highly dependent upon our senior management team. Consequently, our business could be adversely affected in the event that we lose the services of any member of senior management. We do not maintain "key man" life insurance with respect to 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, certain equipment manufacturers may commence or increase their existing efforts relating to renting and selling equipment directly to our customers or potential customers. 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 million and limited to a maximum of $98 million per occurrence; . we do not maintain coverage for environmental liability (other than legally required fuel storage tank coverage), since we believe that the cost for such coverage is high relative to the benefit that it provides; 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. 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 37
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. Risks Related to International Operations Our operations outside the United States are subject to the risks normally associated with international operations. These include the need to convert currencies, which could result in a gain or loss depending on fluctuations in exchange rates, and the need to comply with foreign laws. Dependence on Information Technology Systems Our ability to monitor and control our operations depends to a large extent on the proper functioning of our information technology systems. Any disruption in these systems or the failure of these systems to operate as expected could, depending on the magnitude and duration of the problem, adversely affect our business. Labor Matters Certain of our employees are represented by unions and covered by collective bargaining agreements. If we should experience a prolonged labor dispute involving a significant number of our employees, our business could be adversely affected. 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, 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. 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, 2000. There has been no material change in these market risks since the end of the fiscal year 2000. The FASB issued, and subsequently amended, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which became effective for us on January 1, 2001. Under SFAS No. 133, all derivatives are required to be recorded as assets or liabilities and measured at fair value. Gains or losses resulting from changes in the values of derivatives are recognized immediately or deferred, depending on the use of the derivative and whether or not it qualifies as a hedge. We occasionally use derivative financial instruments to manage our risk associated with fluctuations in interest rates on our debt. We currently have interest rate swap agreements that convert a portion, or $200.0 million, of our variable rate term loan to a fixed rate instrument through 2003. These swap agreements are designated as cash flow hedges and changes in the fair value of the hedges are recorded in other comprehensive income and reclassified into earnings in the same periods during which the hedged transaction affects earnings. There is no ineffectiveness related to these hedges. 38
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 effect on our business or financial condition. Item 2. Changes in Securities and Use of Proceeds Sale of Unregistered Securities Set forth below is certain information concerning sales of unregistered securities by us during the second quarter of 2001. The issuances by us of the securities sold in the transactions referenced below were not registered under the Securities Act of 1933, pursuant to the exemption contemplated by Section 4(2) thereof for transactions not involving a public offering. 1. We issued 2,370,588 restricted shares of common stock pursuant to the 2001 Senior Stock Plan and the 2001 Stock Plan that were not registered. 39
Item 4. Submission of Matters to a Vote of Security Holders The Company's Annual Meeting of Stockholders was held on June 5, 2001. The holders of 59,686,185 common shares, 300,000 Series A Perpetual Convertible Preferred Shares ("Series A Preferred") and 105,252 Series B-1 Perpetual Convertible Preferred Shares ("Series B-1 Preferred") were present either in person or by proxy. The following four matters were voted on and approved at such meeting. 1. The election of five members to the Board of Directors by the holders of the Company's common stock and Series B-1 Preferred (where each share of Series B-1 Preferred is entitled to 33 1/3 votes). <TABLE> <CAPTION> For Withheld ---------- --------- <S> <C> <C> Richard D. Colburn................................... 62,793,617 400,968 Bradley S. Jacobs.................................... 59,737,522 3,457,063 John N. Milne........................................ 59,712,022 3,482,563 Timothy J. Tully..................................... 61,435,260 1,759,325 Christian M. Weyer................................... 63,006,422 188,163 2. The election of two members to the Board of Directors by the holders of the Series A Preferred. <CAPTION> For Withheld ---------- --------- <S> <C> <C> Leon D. Black........................................ 300,000 0 Michael S. Gross..................................... 300,000 0 </TABLE> 3. The approval of the 2001 Senior Stock Plan by the holders of the Company's common stock, Series B-1 Preferred (where each share of Series B-1 Preferred is entitled to 33 1/3 votes) and Series A Preferred (where each share of Series A Preferred is entitled to 40 votes). <TABLE> <CAPTION> Broker For Abstain Against Non-Votes ---------- ------- ---------- --------- <S> <C> <C> <C> <C> 56,124,376 37,020 11,082,188 7,951,001 </TABLE> 4. The ratification of the appointment of Ernst & Young LLP as the company's independent auditors for the fiscal year ending December 31, 2001 by the holders of the Company's common stock, Series B-1 Preferred (where each share of Series B-1 Preferred is entitled to 33 1/3 votes) and Series A Preferred (where each share of Series A Preferred is entitled to 40 votes). <TABLE> <CAPTION> For Abstain Against ---------- ------- ---------- <S> <C> <C> <C> <C> 74,619,853 26,757 547,975 </TABLE> 40
Item 6. Exhibits and Reports on Form 8-K <TABLE> <C> <S> (a) Exhibits: <CAPTION> Exhibit Number Description of Exhibit ------- ---------------------- <C> <S> 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 A Perpetual Convertible Preferred Stock (incorporated by reference to Exhibit 4(k) to the United Rentals, Inc. Registration Statement on Form S-3, No. 333-64463) together with a certificate of amendment thereto (incorporated by reference to exhibit A of United Rentals, Inc. Proxy Statement on Schedule 14A dated July 22, 1999). 3(e) Form of Certificate of Designation for Series B Perpetual Convertible Preferred Stock (incorporated by reference to exhibit B of United Rentals, Inc. Proxy Statement on Schedule 14A dated July 22, 1999). 3(f) 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(g) 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) Amended and Restated Credit Agreement dated as of April 20, 2001 between United Rentals, Inc., United Rentals (North America), Inc., various financial institutions, and The Chase Manhattan Bank, as U.S. Administrative Agent (incorporated by reference to Exhibit 10(a) of United Rentals, Inc. Report on Form 10-Q for the quarter ended March 31, 2001). 10(b) Indenture dated as of April 20, 2001 among United Rentals (North America), Inc., the Guarantors named therein and The Bank of New York, as Trustee (incorporated by reference to Exhibit 10(b) of United Rentals, Inc. Report on Form 10-Q for the quarter ended March 31, 2001). 10(c) Purchase Agreement dated April 12, 2001 relating to the initial sale by United Rentals (North America), Inc. of $450 million aggregate principal amount of 10 3/4% Senior Notes due 2008 (incorporated by reference to Exhibit 10(c) of United Rentals, Inc. Report on Form 10-Q for the quarter ended March 31, 2001). 10(d) Registration Rights Agreement dated as of April 20, 2001 among United Rentals (North America), Inc., the Guarantors named therein and the Initial Purchasers named therein, relating to $450 million aggregate principal amount of 10 3/4 Senior Notes due 2008 (incorporated by reference to Exhibit 10(d) of United Rentals, Inc. Report on Form 10-Q for the quarter ended March 31, 2001). 10(e) 2001 Senior Stock Plan of United Rentals, Inc. (incorporated by reference to Appendix B to United Rentals, Inc. Definitive Proxy Statement dated April 30, 2001)++ 10(f) 2001 Stock Plan of United Rentals, Inc. (incorporated by reference to Exhibit 4.6 to United Rentals, Inc. Registration Statement on Form S- 8, No. 333-60458)++ 10(g) Senior Restricted Stock Agreement with Bradley S. Jacobs, dated June 5, 2001 (incorporated by reference to Exhibit 10.1 to United Rentals, Inc. Registration Statement on Form S-3, No. 333-64662)++ 10(h) Senior Restricted Stock Agreement with Wayland R. Hicks, dated June 5, 2001 (incorporated by reference to Exhibit 10.2 to United Rentals, Inc. Registration Statement on Form S-3, No. 333-64662)++ </TABLE> 41
<TABLE> <CAPTION> Exhibit Number Description of Exhibit ------- ---------------------- <C> <S> 10(i) Senior Restricted Stock Agreement with John N. Milne, dated June 5, 2001 (incorporated by reference to Exhibit 10.3 to United Rentals, Inc. Registration Statement on Form S-3, No. 333-64662)++ 10(j) Senior Restricted Stock Agreement with Michael J. Nolan, dated June 5, 2001 (incorporated by reference to Exhibit 10.4 to United Rentals, Inc. Registration Statement on Form S-3, No. 333-64662)++ </TABLE> - -------- ++This document is a management contract or compensatory plan or arrangement. (b)Reports on Form 8-K: 1. Form 8-K filed on April 16, 2001 (earliest event reported March 29, 2001); Item 5 was reported. 2. Form 8-K filed on May 1, 2001 (earliest event reported April 27, 2001); Item 5 was reported. 42
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: August 14, 2001 /s/ Michael J. Nolan By: _________________________________ Michael J. Nolan Chief Financial Officer (Principal Financial Officer and Chief Accounting Officer) United Rentals (North America), Inc. Dated: August 14, 2001 /s/ Michael J. Nolan By: _________________________________ Michael J. Nolan Chief Financial Officer (Principal Financial Officer and Chief Accounting Officer) 43