- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 September 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) Delaware 06-1522496 Delaware 06-1493538 (State or other (I.R.S. jurisdictionof EmployerIdentification incorporation or Nos.) organization) Five Greenwich Office Park,Greenwich, Connecticut 06830 (Address of principal executive offices) (Zip Code) (203) 622-3131 (Registrants' telephone number, including area code) Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. X Yes No As of November 6, 2001, there were 73,308,256 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 SEPTEMBER 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 September 30, 2001 and December 31, 2000 (unaudited)........................................................................... 4 United Rentals, Inc. Consolidated Statements of Operations for the Nine and Three Months Ended September 30, 2001 and 2000 (unaudited).............................................. 5 United Rentals, Inc. Consolidated Statement of Stockholders' Equity for the Nine Months Ended September 30, 2001 (unaudited)....................................................... 6 United Rentals, Inc. Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2001 and 2000 (unaudited).................................................... 7 United Rentals (North America), Inc. Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000 (unaudited).......................................................... 8 United Rentals (North America), Inc. Consolidated Statements of Operations for the Nine and Three Months Ended September 30, 2001 and 2000 (unaudited)........................ 9 United Rentals (North America), Inc. Consolidated Statement of Stockholder's Equity for the Nine Months Ended September 30, 2001 (unaudited)........................................... 10 United Rentals (North America), Inc. Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2001 and 2000 (unaudited).................................. 11 Notes to Unaudited Consolidated Financial Statements....................................... 12 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations...... 28 Item 3 Quantitative and Qualitative Disclosures about Market Risk................................. 39 PART II OTHER INFORMATION Item 1 Legal Proceedings.......................................................................... 40 Item 2 Changes in Securities and Use of Proceeds.................................................. 40 Item 6 Exhibits and Reports on Form 8-K........................................................... 40 Signatures................................................................................. 42 </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. 1
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 22 credit offices and three service centers. In the third quarter of 2001, approximately 10.5% 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 62 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 37 professionals serving over 1,600 National Account customers. We estimate that our revenues from National Account customers will increase over 40% to approximately $350 million in 2001 from $245 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 50 experienced professionals and is responsible for implementing our safety programs and procedures, developing our employee and customer training programs, and managing any claims against us. 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 2
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> September 30, December 31, 2001 2000 ------------- ------------ (In thousands, except share data) <S> <C> <C> ASSETS Cash and cash equivalents..................................................... $ 30,516 $ 34,384 Accounts receivable, net of allowance for doubtful accounts of $50,850 in 2001 and $55,624 in 2000......................................................... 539,311 469,594 Inventory..................................................................... 105,064 133,380 Prepaid expenses and other assets............................................. 171,858 104,493 Rental equipment, net......................................................... 1,819,801 1,732,835 Property and equipment, net................................................... 425,316 422,239 Goodwill, net of accumulated amortization of $146,532 in 2001 and $103,219 in 2000............................................................ 2,207,797 2,215,532 Other intangible assets, net.................................................. 8,583 11,476 ---------- ---------- $5,308,246 $5,123,933 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Accounts payable........................................................... $ 253,813 $ 260,155 Debt....................................................................... 2,698,443 2,675,367 Deferred taxes............................................................. 267,403 206,243 Accrued expenses and other liabilities..................................... 191,936 136,225 ---------- ---------- Total liabilities...................................................... 3,411,595 3,277,990 Commitments and contingencies Company-obligated mandatorily redeemable convertible preferred securities of a subsidiary trust.......................................................... 300,000 300,000 Series A and B preferred stock................................................ 430,800 Stockholders' equity: Preferred stock--$.01 par value, 5,000,000 shares authorized: Series C perpetual convertible preferred stock--$300,000 liquidation preference, 300,000 shares issued and outstanding........................ 3 Series D perpetual convertible preferred stock--$150,000 liquidation preference, 150,000 shares issued and outstanding........................ 2 Common stock--$.01 par value, 500,000,000 shares authorized, 73,295,189 shares issued and outstanding in 2001 and 71,065,707 in 2000............. 733 711 Additional paid-in capital................................................. 1,241,748 765,529 Deferred compensation...................................................... (56,974) Retained earnings.......................................................... 434,932 355,850 Accumulated other comprehensive loss....................................... (23,793) (6,947) ---------- ---------- Total stockholders' equity............................................. 1,596,651 1,115,143 ---------- ---------- $5,308,246 $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> Nine Months Ended Three Months Ended September 30, September 30, --------------------- ------------------ 2001 2000 2001 2000 ---------- ---------- -------- -------- (In thousands, except per share data) <S> <C> <C> <C> <C> Revenues: Equipment rentals....................................... $1,670,036 $1,522,131 $626,286 $610,499 Sales of rental equipment............................... 107,681 254,977 35,442 99,806 Sales of equipment and merchandise and other revenues... 404,883 390,833 133,755 148,728 ---------- ---------- -------- -------- Total revenues............................................. 2,182,600 2,167,941 795,483 859,033 Cost of revenues: Cost of equipment rentals, excluding depreciation....... 790,234 659,876 290,098 263,262 Depreciation of rental equipment........................ 239,862 246,537 81,508 87,502 Cost of rental equipment sales.......................... 63,744 149,738 21,363 58,570 Cost of equipment and merchandise sales and other operating costs........................................ 294,888 293,304 97,272 108,995 ---------- ---------- -------- -------- Total cost of revenues..................................... 1,388,728 1,349,455 490,241 518,329 ---------- ---------- -------- -------- Gross profit............................................... 793,872 818,486 305,242 340,704 Selling, general and administrative expenses............... 332,671 335,461 110,956 124,492 Restructuring charge....................................... 28,922 Non-rental depreciation and amortization................... 80,289 62,610 27,051 21,889 ---------- ---------- -------- -------- Operating income........................................... 351,990 420,415 167,235 194,323 Interest expense........................................... 171,315 167,268 56,726 61,058 Preferred dividends of a subsidiary trust.................. 14,625 14,625 4,875 4,875 Other (income) expense, net................................ 6,497 (796) (438) (484) ---------- ---------- -------- -------- Income before provision for income taxes and extraordinary item...................................................... 159,553 239,318 106,072 128,874 Provision for income taxes................................. 69,154 99,317 44,020 53,483 ---------- ---------- -------- -------- Income before extraordinary item........................... 90,399 140,001 62,052 75,391 Extraordinary item, net of tax benefit of $6,759........... 11,317 ---------- ---------- -------- -------- Net income................................................. $ 79,082 $ 140,001 $ 62,052 $ 75,391 ========== ========== ======== ======== Earnings per share--basic: Income before extraordinary item........................ $ 1.26 $ 1.96 $ 0.85 $ 1.07 Extraordinary item, net................................. 0.16 ---------- ---------- -------- -------- Net income.............................................. $ 1.10 $ 1.96 $ 0.85 $ 1.07 ========== ========== ======== ======== Earnings per share--diluted: Income before extraordinary item........................ $ 0.96 $ 1.49 $ 0.63 $ 0.79 Extraordinary item, net................................. 0.12 ---------- ---------- -------- -------- Net income.............................................. $ 0.84 $ 1.49 $ 0.63 $ 0.79 ========== ========== ======== ======== </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 5
UNITED RENTALS, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited) <TABLE> <CAPTION> Series C Series D Perpetual Perpetual Convertible Convertible Preferred Stock Preferred Stock Common Stock ----------------- ----------------- ------------------ Number of Number of Number of Shares Amount Shares Amount Shares Amount --------- ------- --------- ------- ---------- ------ <S> <C> <C> <C> <C> <C> <C> Balance, December 31, 2000...................... 71,065,707 $ 711 Comprehensive income: Net income................ 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 $3,759.... Comprehensive income....... Issuance of common stock under deferred compensation plans........ 2,854,264 29 Amortization of deferred compensation.............. Issuance of Series C perpetual convertible preferred stock........... 300,000 $ 3 Issuance of Series D perpetual convertible preferred stock........... 150,000 $ 2 Issuance of common stock... 2,770 Exercise of common stock options............. 723,048 7 Shares repurchased and retired................... (1,350,600) (14) ------- ------- ------- ------- ---------- ------ Balance, September 30, 2001...................... 300,000 $ 3 150,000 $ 2 73,295,189 $ 733 ======= ======= ======= ======= ========== ====== </TABLE> <TABLE> <CAPTION> Accumulated Additional Other Paid-in Deferred Retained Comprehensive Comprehensive Capital Compensation Earnings Income Loss ---------- ------------ -------- ------------- ------------- <S> <C> <C> <C> <C> <C> Balance, December 31, 2000...................... $ 765,529 $355,850 $ (6,947) Comprehensive income: Net income................ 79,082 $79,082 Other comprehensive income: Foreign currency translation adjustments............. (9,031) (9,031) 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 $3,759.... (5,299) (5,299) ------- Comprehensive income....... $62,236 ======= Issuance of common stock under deferred compensation plans........ 60,621 (60,649) Amortization of deferred compensation.............. 3,675 Issuance of Series C perpetual convertible preferred stock........... 286,734 Issuance of Series D perpetual convertible preferred stock........... 143,667 Issuance of common stock... 50 Exercise of common stock options............. 9,891 Shares repurchased and retired................... (24,744) ---------- -------- -------- -------- Balance, September 30, 2001...................... $1,241,748 $(56,974) $434,932 $(23,793) ========== ======== ======== ======== </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> Nine Months Ended September 30, ---------------------- 2001 2000 ----------- --------- (In thousands) <S> <C> <C> Cash Flows From Operating Activities: Net income........................................................................................ $ 79,082 $ 140,001 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.................................................................... 320,151 309,147 Gain on sales of rental equipment................................................................ (43,937) (105,239) Deferred taxes................................................................................... 54,724 84,419 Amortization of deferred compensation............................................................ 3,675 Extraordinary item............................................................................... 18,076 Restructuring charge............................................................................. 10,893 Changes in operating assets and liabilities: Accounts receivable............................................................................ (66,549) (68,607) Inventory...................................................................................... 39,897 12,444 Prepaid expenses and other assets.............................................................. (31,291) (49,515) Accounts payable............................................................................... (9,986) 17,736 Accrued expenses and other liabilities......................................................... 60,139 (47,750) ----------- --------- Net cash provided by operating activities................................................. 434,874 292,636 Cash Flows From Investing Activities: Purchases of rental equipment..................................................................... (395,027) (681,099) Purchases of property and equipment............................................................... (42,237) (112,153) Proceeds from sales of rental equipment........................................................... 107,681 254,977 In-process acquisition costs...................................................................... (2,570) (3,157) Payments of contingent purchase price............................................................. (12,748) Purchases of other companies...................................................................... (45,200) (304,232) ----------- --------- Net cash used in investing activities..................................................... (377,353) (858,412) Cash Flows From Financing Activities: Proceeds from debt................................................................................ 2,008,655 579,080 Payments of debt.................................................................................. (2,017,087) (131,382) Proceeds from sale-leaseback...................................................................... 165,511 Payments of financing costs....................................................................... (27,946) (8,862) Proceeds from the exercise of common stock options................................................ 8,778 179 Shares repurchased and retired.................................................................... (24,758) (30,950) ----------- --------- Net cash (used in) provided by financing activities....................................... (52,358) 573,576 Effect of foreign exchange rates.................................................................. (9,031) 104 ----------- --------- Net (decrease) increase in cash and cash equivalents.............................................. (3,868) 7,904 Cash and cash equivalents at beginning of period.................................................. 34,384 23,811 ----------- --------- Cash and cash equivalents at end of period........................................................ $ 30,516 $ 31,715 =========== ========= Supplemental disclosure of cash flow information: Cash paid for interest............................................................................ $ 168,488 $ 179,625 Cash paid for income taxes, net of refunds........................................................ $ 1,535 $ 67,210 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................................................................... $ 12,692 $ 492,944 Liabilities assumed............................................................................ (4,767) (123,515) Less: Amounts paid through issuance of debt.................................................... (600) (65,197) ----------- --------- 7,325 304,232 Due to seller and other payments............................................................... 37,875 ----------- --------- Net cash paid............................................................................. $ 45,200 $ 304,232 =========== ========= </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> September 30, December 31, 2001 2000 ------------- ------------ (In thousands, except share data) <S> <C> <C> ASSETS Cash and cash equivalents......................................................... $ 30,516 $ 34,384 Accounts receivable, net of allowance for doubtful accounts of $50,850 in 2001 and $55,624 in 2000................................................................. 539,311 469,594 Inventory......................................................................... 105,064 133,380 Prepaid expenses and other assets................................................. 162,955 104,493 Rental equipment, net............................................................. 1,819,801 1,732,835 Property and equipment, net....................................................... 397,939 387,432 Goodwill, net of accumulated amortization of $146,532 in 2001 and $103,219 in 2000................................................................ 2,207,797 2,215,532 Other intangible assets, net...................................................... 8,583 11,476 ---------- ---------- $5,271,966 $5,089,126 ========== ========== LIABILITIES AND STOCKHOLDER'S EQUITY Liabilities: Accounts payable............................................................... $ 253,813 $ 260,155 Debt........................................................................... 2,698,443 2,675,367 Deferred taxes................................................................. 267,403 206,243 Accrued expenses and other liabilities......................................... 181,147 119,172 ---------- ---------- Total liabilities.......................................................... 3,400,806 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..................................................... 1,516,439 1,507,661 Retained earnings.............................................................. 378,514 327,475 Accumulated other comprehensive loss........................................... (23,793) (6,947) ---------- ---------- Total stockholder's equity................................................. 1,871,160 1,828,189 ---------- ---------- $5,271,966 $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> Nine Months Ended Three Months Ended September 30, September 30, --------------------- ------------------ 2001 2000 2001 2000 ---------- ---------- -------- -------- (In thousands) <S> <C> <C> <C> <C> Revenues: Equipment rentals...................................... $1,670,036 $1,522,131 $626,286 $610,499 Sales of rental equipment.............................. 107,681 254,977 35,442 99,806 Sales of equipment and merchandise and other........... Sales of equipment and merchandise and other revenues.. 404,883 390,833 133,755 148,728 ---------- ---------- -------- -------- Total revenues............................................ 2,182,600 2,167,941 795,483 859,033 Cost of revenues: Cost of equipment rentals, excluding depreciation...... 790,234 659,876 290,098 263,262 Depreciation of rental equipment....................... 239,862 246,537 81,508 87,502 Cost of rental equipment sales......................... 63,744 149,738 21,363 58,570 Cost of equipment and merchandise sales and other operating costs...................................... 294,888 293,304 97,272 108,995 ---------- ---------- -------- -------- Total cost of revenues.................................... 1,388,728 1,349,455 490,241 518,329 ---------- ---------- -------- -------- Gross profit.............................................. 793,872 818,486 305,242 340,704 Selling, general and administrative expenses.............. 332,671 335,461 110,956 124,492 Restructuring charge...................................... 28,922 Non-rental depreciation and amortization.................. 74,035 57,100 25,083 19,945 ---------- ---------- -------- -------- Operating income.......................................... 358,244 425,925 169,203 196,267 Interest expense.......................................... 171,315 167,268 56,726 61,058 Other (income) expense, net............................... 6,497 (796) (438) (484) ---------- ---------- -------- -------- Income before provision for income taxes and extraordinary item.................................................... 180,432 259,453 112,915 135,693 Provision for income taxes................................ 78,693 107,722 47,289 56,313 ---------- ---------- -------- -------- Income before extraordinary item.......................... 101,739 151,731 65,626 79,380 Extraordinary item, net of tax benefit of $6,759.......... 11,317 ---------- ---------- -------- -------- Net income................................................ $ 90,422 $ 151,731 $ 65,626 $ 79,380 ========== ========== ======== ======== </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..................................... 90,422 $90,422 Other comprehensive income: Foreign currency translation adjustments...... (9,031) (9,031) 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 $3,759....................................... (5,299) (5,299) ------- Comprehensive income............................. $73,576 ======= Contributed capital from parent.................. 8,778 Dividend distributions to parent................. (39,383) ----- ---------- -------- -------- Balance, September 30, 2001...................... 1,000 $1,516,439 $378,514 $(23,793) ===== ========== ======== ======== </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> Nine Months Ended September 30, ---------------------- 2001 2000 ----------- --------- (In thousands) <S> <C> <C> Cash Flows From Operating Activities: Net income........................................................................................ $ 90,422 $ 151,731 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.................................................................... 313,897 303,637 Gain on sales of rental equipment................................................................ (43,937) (105,239) Deferred taxes................................................................................... 54,724 84,419 Extraordinary item............................................................................... 18,076 Restructuring charge............................................................................. 10,893 Changes in operating assets and liabilities: Accounts receivable............................................................................ (66,549) (68,607) Inventory...................................................................................... 39,897 12,444 Prepaid expenses and other assets.............................................................. (31,023) (76,848) Accounts payable............................................................................... (9,986) 17,884 Accrued expenses and other liabilities......................................................... 65,626 (34,549) ----------- --------- Net cash provided by operating activities.................................................... 442,040 284,872 Cash Flows From Investing Activities: Purchases of rental equipment..................................................................... (395,027) (681,099) Purchases of property and equipment............................................................... (37,348) (94,544) Proceeds from sales of rental equipment........................................................... 107,681 254,977 Payments of contingent purchase price............................................................. (12,748) Purchases of other companies...................................................................... (45,200) (304,232) ----------- --------- Net cash used in investing activities........................................................ (369,894) (837,646) Cash Flows From Financing Activities: Proceeds from debt................................................................................ 2,008,655 579,080 Payments of debt.................................................................................. (2,017,087) (131,382) Proceeds from sale-leaseback...................................................................... 165,511 Payments of financing costs....................................................................... (27,946) (7,239) Capital contributions by parent................................................................... 8,778 179 Dividend distributions to parent.................................................................. (39,383) (45,575) ----------- --------- Net cash (used in) provided by financing activities.......................................... (66,983) 560,574 Effect of foreign exchange rates.................................................................. (9,031) 104 ----------- --------- Net (decrease) increase in cash and cash equivalents.............................................. (3,868) 7,904 Cash and cash equivalents at beginning of period.................................................. 34,384 23,811 ----------- --------- Cash and cash equivalents at end of period........................................................ $ 30,516 $ 31,715 =========== ========= Supplemental disclosure of cash flow information: Cash paid for interest............................................................................ $ 153,863 $ 165,000 Cash paid for income taxes, net of refunds........................................................ $ 1,535 $ 67,210 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................................................................... $ 12,692 $ 492,944 Liabilities assumed............................................................................ (4,767) (123,515) Less: Amounts paid through issuance of debt.................................................... (600) (65,197) ----------- --------- 7,325 304,232 Due to seller and other payments............................................................... 37,875 ----------- --------- Net cash paid............................................................................. $ 45,200 $ 304,232 =========== ========= </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 nine and three month periods ended September 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 Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("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 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. 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. Goodwill amortization for the nine months ended September 30, 2001 was approximately $43.3 million. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This standard addresses financial accounting and reporting for the impairment or disposal of 12
UNITED RENTALS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". This standard is effective for fiscal years beginning after December 15, 2001. The adoption of SFAS No. 144 is not expected to have a material effect on the Company's consolidated financial position or results of operations. Exchange of Preferred Stock The Company issued Series A Perpetual Convertible Preferred Stock ("Series A Preferred") and Series B Perpetual Convertible Preferred Stock ("Series B Preferred") in 1999 and included such preferred in stockholders' equity. In July 2001, the SEC issued guidance to all public companies as to when redeemable preferred stock may be classified as stockholders' equity. This guidance indicates that preferred stock that would be subject to redemption on the occurrence of an event outside the control of the issuer may not be classified as equity and that the probability of the event occurring is not a factor to be considered. Under this guidance, the Series A Preferred and Series B Preferred would not be included in stockholders' equity because this stock would be subject to mandatory redemption on a hostile change of control. On September 28, 2001, the Company entered into an agreement effecting the exchange of new Series C Perpetual Convertible Preferred Stock ("Series C Preferred") for the Series A Preferred and new Series D Perpetual Convertible Preferred Stock ("Series D Preferred") for the Series B Preferred (see note 6). The Series C Preferred and Series D Preferred stock is not subject to mandatory redemption on a hostile change of control, and will be classified as stockholders' equity under the recently issued SEC guidance. The effect of the foregoing is that the Company's perpetual convertible preferred stock is classified as stockholders' equity as of September 28, 2001 and thereafter, and outside of stockholders' equity for earlier dates. Accordingly, the Company's perpetual convertible preferred stock is (i) reflected as "Stockholders" Equity" on the accompanying balance sheet as of September 30, 2001 and (ii) reflected under "Series A and B Preferred Stock", rather than under "Stockholders' Equity", in the accompanying balance sheet as of December 31, 2000. Reclassifications Certain prior year balances have been reclassified to conform to the 2001 presentation. 2. Acquisitions During the nine months ended September 30, 2001 and the year ended December 31, 2000, the Company completed three 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. 13
UNITED RENTALS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table summarizes, on an unaudited pro forma basis, the results of operations of the Company for the nine months ended September 30, 2000 as though each acquisition which was consummated during the period January 1, 2000 to September 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.................. $2,354,485 Net income................ $ 148,495 Basic earnings per share.. $ 2.08 Diluted earnings per share $ 1.58 </TABLE> Since the acquisitions made during the nine months ended September 30, 2001 had an insignificant impact on the Company's pro forma results of operations, the pro forma results of operations for the nine months ended September 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 $7.2 million has been paid as of September 30, 2001. Of the remaining $10.8 million of this charge, approximately $4.6 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> Activity Balance Restructuring in September 30, Charg-e 2001 2001 ------------- -------- ------------- <S> <C> <C> <C> Costs to vacate facilities..... $18,291 $11,605 $ 6,686 Workforce reduction costs...... 5,666 3,092 2,574 Information technology costs... 4,965 3,414 1,551 ------- ------- ------- $28,922 $18,111 $10,811 ======= ======= ======= </TABLE> 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 through the termination of branch and administrative personnel (including 440 terminated as of September 30, 2001), and certain information technology hardware and software will no longer be used. The workforce reduction costs primarily represent severance. The costs to vacate facilities primarily represent the payment of obligations under leases offset by estimated sublease opportunities ($9.9 million), the write-off of capital improvements made to such facilities ($2.8 million) and the write-off of related goodwill ($5.6 million). As of September 30, 2001, 29 of the 31 underperforming branches have been closed or consolidated and the remaining 2 underperforming branches will be closed or consolidated by December 31, 2001. The information technology costs represent the abandonment of certain information technology projects ($2.5 million) and the payment of obligations under equipment leases relating to such projects ($2.5 million). 14
UNITED RENTALS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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. As of September 30, 2001, approximately $259.5 million was outstanding under the revolving credit facility. 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 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. 15
UNITED RENTALS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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 September 30, 2001, the Company had obtained additional 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. A portion of those borrowings generally accrues interest at the commercial paper rate for commercial paper issued by Atlantic Asset Securitization Corp. with a similar maturity as such borrowings plus a margin of 0.75% per annum, and the balance of those borrowings generally accrues 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 receivables securitization may be extended until December 2003 with the same terms. As of September 30, 2001, approximately $241.5 million of borrowings were outstanding under the receivables securitization facility. 6. Preferred Stock New Preferred Stock. On September 28, 2001, the Company entered into an agreement effecting an exchange of the Company's outstanding Series A Preferred for an equal number of shares of Series C Preferred and the exchange of the Company's Series B Preferred for an equal number of shares of Series D Preferred. 16
UNITED RENTALS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Except as described below, the material terms of the new Series C Preferred are the same as the old Series A Preferred and the material terms of the new Series D Preferred are the same as the old Series B Preferred. The certificates of designation for the Series A Preferred and Series B Preferred (the "Prior Preferred") provided that, upon the occurrence of a Change of Control (as defined in these certificates of designation), the Company is required to redeem the Prior Preferred. The term "Change of Control," as defined in these certificates of designation, would have included certain transactions that were disapproved by the Company's board. The certificates of designation for Series C Preferred and Series D Preferred (the "New Preferred") change these provisions by excluding from the definition of "Change of Control" transactions that are defined as "Non-Approved Changes of Control." In general, a Non-Approved Change of Control transaction is a change of control transaction that the board has disapproved and which the board has not facilitated by such actions as weakening or eliminating the Company's Stockholder Rights Plan. If a Non-Approved Change of Control occurs, the holders of the New Preferred obtain the following additional rights, but only if, prior to the transaction, the board does not elect to offer the holders of the New Preferred essentially the same redemption rights that apply to an approved Change of Control transaction: . The holders of the Series C Preferred would elect a majority of the board for a specified period and, during such period, the unanimous vote of the board would be required to approve any optional redemption of the New Preferred or to declare, pay, or change the accrual rate of, any dividends on the New Preferred. . Upon liquidation, the holders of the New Preferred would receive, in addition to the liquidation preference and accrued dividends, an amount equal to 6.25% of the liquidation preference, compounded annually from the date the Series A Preferred was issued, in the case of the Series C Preferred, or the date the Series B was issued, in the case of the Series D Preferred, and ending on the date of the Non Approved Change of Control. In addition, after holders of the Common Stock have received the equivalent amount, the holders of the New Preferred would participate with the holders of the Common Stock in any remaining amounts available for distribution (based upon the number of shares of Common Stock into which such Preferred shares would then be convertible). . Dividends would begin to accrue on the New Preferred. Accrued dividends would not be payable until liquidation or sale of the Company, unless the board by unanimous vote approves earlier payment. The dividend rate would be 10% per annum of the liquidation preference, compounded annually. If these dividends are not paid quarterly, additional dividends would accrue at the rate of 8% per annum of the liquidation preference, compounded annually. Any regular or additional dividends that are not paid quarterly would be added to the liquidation preference. Stockholders Rights Plan. The Company adopted a Stockholders Rights Plan on September 28, 2001 (with a record date of October 19, 2001). This plan and other provisions of the Company's charter and bylaws may have the effect of deterring hostile takeovers or delaying or preventing changes in control or management of the Company, including transactions in which the shareholders of the Company might otherwise receive a premium for their shares over then current market prices. The rights expire on September 27, 2011. 17
UNITED RENTALS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 7. 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> Nine Months Three Months Ended Ended September 30, September 30, ----------------- ---------------- 2001 2000 2001 2000 -------- -------- -------- ------- <S> <C> <C> <C> <C> Numerator: Income before extraordinary item................................ $ 90,399 $140,001 $ 62,052 $75,391 Plus: preferred dividends of a subsidiary trust, net of taxes... 8,544 2,841 2,841 -------- -------- -------- ------- Income available to common stockholders......................... $90,399 $148,545 $ 64,893 $78,232 ======== ======== ======== ======= Denominator: Denominator for basic earnings per share-- weighted-average shares......................................... 71,745 71,319 73,233 70,286 Effect of dilutive securities: Employee stock options...................................... 1,522 1,483 2,379 2,178 Warrants.................................................... 3,723 2,729 4,027 3,193 Series A perpetual convertible preferred stock.............. 12,000 12,000 Series B perpetual convertible preferred stock.............. 5,000 5,000 Series C perpetual convertible preferred stock.............. 12,000 12,000 Series D perpetual convertible preferred stock.............. 5,000 5,000 Company-obligated mandatorily redeemable convertible preferred securities of a subsidiary trust.................. 6,876 6,876 6,876 -------- -------- -------- ------- Denominator for diluted earnings per share-- adjusted weighted-average shares................................ 93,990 99,407 103,515 99,533 ======== ======== ======== ======= Earnings per share-basic: Income before extraordinary item................................ $ 1.26 $ 1.96 $ 0.85 $ 1.07 Extraordinary item, net......................................... 0.16 -------- -------- -------- ------- Net Income...................................................... $ 1.10 $ 1.96 $ 0.85 $ 1.07 ======== ======== ======== ======= Earnings per share-diluted: Income before extraordinary item-............................... $ 0.96 $ 1.49 $ 0.63 $ 0.79 Extraordinary item, net......................................... 0.12 ======== ======== ======== ======= Net income...................................................... $ 0.84 $ 1.49 $ 0.63 $ 0.79 ======== ======== ======== ======= </TABLE> 8. 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 September 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). 18
UNITED RENTALS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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 September 30, 2001, 839,264 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). 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. 9. Comprehensive Income The following table sets forth the Company's comprehensive income (in thousands): <TABLE> <CAPTION> Nine Months Three Months Ended Ended September 30, September 30,- ----------------- ---------------- 2001 2000 2001 2000 ------- -------- ------- ------- <S> <C> <C> <C> <C> Net income.................................................... $79,082 $140,001 $62,052 $75,391 Other comprehensive gain (loss): Foreign currency translation adjustment................... (9,031) 104 (5,583) (238) Cumulative effect on equity of adopting FAS No. 133, net of tax of $1,784..................................... (2,516) Derivatives qualifying as hedges, net of tax of $3,759..... (5,299) (3,486) ------- -------- ------- ------- Comprehensive income.......................................... $62,236 $140,105 $52,983 $75,153 ======= ======== ======= ======= </TABLE> 10. 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 and its risk associated with fluctuations in foreign exchange rates related to its liabilities denominated in foreign currencies. As of September 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. 19
UNITED RENTALS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 11. 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 September 30, 2001 and December 31, 2000 and for the nine and three months ended September 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> September 30, 2001 -------------------------------------------------- Non- Guarantor Guarantor Other and Parent URI Subsidiaries Subsidiaries Eliminations ---------- ---------- ------------ ------------ ------------ (In thousands) <S> <C> <C> <C> <C> <C> ASSETS Cash and cash equivalents............................. $ 28,250 $ 2,266 Accounts receivable, net.............................. $ 23,573 486,040 29,698 Intercompany receivable (payable)..................... 230,187 (54,955) (175,232) Inventory............................................. 39,485 61,180 4,399 Prepaid expenses and other assets..................... 60,656 100,867 1,432 $ 8,903 Rental equipment, net................................. 938,591 759,124 122,086 Property and equipment, net........................... $ 27,377 144,069 237,256 16,614 Investment in subsidiaries............................ 1,876,813 2,388,936 (4,265,749) Intangible assets, net................................ 865,002 1,228,197 123,181 ---------- ---------- ---------- --------- ----------- $1,904,190 $4,690,499 $2,845,959 $ 124,444 $(4,256,846) ========== ========== ========== ========= =========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Accounts payable................................... $ 70,323 $ 168,722 $ 14,768 Debt............................................... $ 300,000 2,435,357 244,075 19,011 $ (300,000) Deferred income taxes.............................. 267,353 50 Accrued expenses and other liabilities............. 7,539 49,751 118,564 12,832 3,250 ---------- ---------- ---------- --------- ----------- Total liabilities................................ 307,539 2,822,784 531,411 46,611 (296,750) Commitments and contingencies Company-obligated mandatorily redeemable convertible preferred securities of a subsidiary trust 300,000 Stockholders' equity: Preferred stock.................................... 5 Common stock....................................... 733 Additional paid-in capital......................... 1,241,748 1,497,015 1,839,014 65,920 (3,401,949) Deferred compensation.............................. (56,974) Retained earnings.................................. 434,932 378,515 475,534 27,891 (881,940) Accumulated other comprehensive income............. (23,793) (7,815) (15,978) 23,793 ---------- ---------- ---------- --------- ----------- Total stockholders' equity....................... 1,596,651 1,867,715 2,314,548 77,833 (4,260,096) ---------- ---------- ---------- --------- ----------- $1,904,190 $4,690,499 $2,845,959 $ 124,444 $(4,256,846) ========== ========== ========== ========= =========== </TABLE> <TABLE> <CAPTION> Consolidated Total ------------ <S> <C> ASSETS Cash and cash equivalents............................. $ 30,516 Accounts receivable, net.............................. 539,311 Intercompany receivable (payable)..................... Inventory............................................. 105,064 Prepaid expenses and other assets..................... 171,858 Rental equipment, net................................. 1,819,801 Property and equipment, net........................... 425,316 Investment in subsidiaries............................ Intangible assets, net................................ 2,216,380 ---------- $5,308,246 ========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Accounts payable................................... $ 253,813 Debt............................................... 2,698,443 Deferred income taxes.............................. 267,403 Accrued expenses and other liabilities............. 191,936 ---------- Total liabilities................................ 3,411,595 Commitments and contingencies Company-obligated mandatorily redeemable convertible preferred securities of a subsidiary trust 300,000 Stockholders' equity: Preferred stock.................................... 5 Common stock....................................... 733 Additional paid-in capital......................... 1,241,748 Deferred compensation.............................. (56,974) Retained earnings.................................. 434,932 Accumulated other comprehensive income............. (23,793) ---------- Total stockholders' equity....................... 1,596,651 ---------- $5,308,246 ========== </TABLE> 20
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 equivalents................... $ 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 subsidiaries.................. 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 Stockholders' 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 taxes.................... 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 contingencies Company-obligated mandatorily redeemable convertible preferred securities of a subsidiary trust............................ 300,000 300,000 Series A and B preferred stock.............. 430,800 430,800 Stockholders' equity: Common stock............................. 711 711 Additional paid-in capital............... 765,529 1,488,238 1,830,500 65,657 (3,384,395) 765,529 Retained earnings........................ 355,850 327,475 358,080 22,878 (708,433) 355,850 Accumulated other comprehensive loss..... (6,947) (6,947) 6,947 (6,947) ---------- ---------- ---------- --------- ----------- ---------- Total stockholders' equity............. 1,115,143 1,815,713 2,188,580 81,588 (4,085,881) 1,115,143 ---------- ---------- ---------- --------- ----------- ---------- $1,874,759 $4,814,131 $2,397,305 $ 135,382 $(4,097,644) $5,123,933 ========== ========== ========== ========= =========== ========== </TABLE> 21
UNITED RENTALS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS <TABLE> <CAPTION> For the Nine Months Ended September 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.......................... $694,531 $ 897,985 $ 77,520 $1,670,036 Sales of rental equipment.................. 56,160 41,263 10,258 107,681 Sales of equipment and merchandise and other revenues............................ 188,287 194,607 21,989 404,883 -------- -------- ---------- -------- --------- ---------- Total revenues................................ 938,978 1,133,855 109,767 2,182,600 Cost of revenues: Cost of equipment rentals, excluding depreciation............................... 293,186 459,141 37,907 790,234 Depreciation of rental equipment........... 116,552 107,965 15,345 239,862 Cost of rental equipment sales............. 35,235 22,286 6,223 63,744 Cost of equipment and merchandise sales and other operating costs.................. 141,240 137,504 16,144 294,888 -------- -------- ---------- -------- --------- ---------- Total cost of revenues........................ 586,213 726,896 75,619 1,388,728 -------- -------- ---------- -------- --------- ---------- Gross profit.................................. 352,765 406,959 34,148 793,872 Selling, general and administrative expenses.. 142,788 171,641 18,242 332,671 Restructuring charge.......................... 28,922 28,922 Non-rental depreciation and amortization...... $ 6,254 31,066 38,567 4,402 80,289 -------- -------- ---------- -------- --------- ---------- Operating income (loss)....................... (6,254) 149,989 196,751 11,504 351,990 Interest expense.............................. 14,625 161,341 8,790 1,184 $ (14,625) 171,315 Preferred dividends of a subsidiary trust..... 14,625 14,625 Other (income) expense, net................... 18,205 (13,414) 1,706 6,497 -------- -------- ---------- -------- --------- ---------- Income (loss) before provision (benefit) for income taxes and extraordinary item........... (20,879) (29,557) 201,375 8,614 159,553 Provision (benefit) for income taxes.......... (9,539) (8,829) 83,921 3,601 69,154 -------- -------- ---------- -------- --------- ---------- Income (loss) before extraordinary item and equity in net earnings of subsidiaries....... (11,340) (20,728) 117,454 5,013 90,399 Extraordinary item............................ 11,317 11,317 -------- -------- ---------- -------- --------- ---------- Income (loss) before equity in net earnings of subsidiaries.................................. (11,340) (32,045) 117,454 5,013 79,082 Equity in net earnings of subsidiaries........ 90,422 122,467 (212,889) -------- -------- ---------- -------- --------- ---------- Net income.................................... $ 79,082 $ 90,422 $ 117,454 $ 5,013 $(212,889) $ 79,082 ======== ======== ========== ======== ========= ========== </TABLE> 22
UNITED RENTALS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS <TABLE> <CAPTION> For the Nine Months Ended September 30, 2000 --------------------------------------------------------------------- Non- Guarantor Guarantor Other and Consolidated Parent URI Subsidiaries Subsidiaries Eliminations Total -------- -------- ------------ ------------ ------------ ------------ (In thousands) <S> <C> <C> <C> <C> <C> <C> Revenues: Equipment rentals............................. $622,474 $ 817,973 $ 81,684 $1,522,131 Sales of rental equipment..................... 114,596 122,502 17,879 254,977 Sales of equipment and merchandise and other revenues................................ 195,195 171,551 24,087 390,833 -------- -------- ---------- -------- --------- ---------- Total revenues................................... 932,265 1,112,026 123,650 2,167,941 Cost of revenues: Cost of equipment rentals, excluding depreciation.................................. 260,097 363,522 36,257 659,876 Depreciation of rental equipment.............. 114,571 117,599 14,367 246,537 Cost of rental equipment sales................ 65,711 72,951 11,076 149,738 Cost of equipment and merchandise sales and other operating costs......................... 154,807 118,908 19,589 293,304 -------- -------- ---------- -------- --------- ---------- Total cost of revenues........................... 595,186 672,980 81,289 1,349,455 -------- -------- ---------- -------- --------- ---------- Gross profit..................................... 337,079 439,046 42,361 818,486 Selling, general and administrative expenses..... 133,951 183,312 18,198 335,461 Non-rental depreciation and amortization......... $ 5,510 25,639 27,390 4,071 62,610 -------- -------- ---------- -------- --------- ---------- Operating income................................. (5,510) 177,489 228,344 20,092 420,415 Interest expense................................. 14,625 165,547 224 1,497 $ (14,625) 167,268 Preferred dividends of a subsidiary trust........ 14,625 14,625 Other (income) expense, net...................... 8,943 (9,987) 248 (796) -------- -------- ---------- -------- --------- ---------- Income (loss) before provision for income taxes.. (20,135) 2,999 238,107 18,347 239,318 Provision (benefit) for income taxes............. (8,405) 1,245 99,092 7,385 99,317 -------- -------- ---------- -------- --------- ---------- Income (loss) before equity in net earnings of subsidiaries..................................... (11,730) 1,754 139,015 10,962 140,001 Equity in net earnings of subsidiaries........... 151,731 149,977 (301,708) -------- -------- ---------- -------- --------- ---------- Net income....................................... $140,001 $151,731 $ 139,015 $ 10,962 $(301,708) $ 140,001 ======== ======== ========== ======== ========= ========== </TABLE> 23
UNITED RENTALS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS <TABLE> <CAPTION> For the Three Months Ended September 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............................. $247,536 $348,035 $30,715 $626,286 Sales of rental equipment..................... 22,438 9,159 3,845 35,442 Sales of equipment and merchandise and other revenues............................... 60,338 66,513 6,904 133,755 ------- -------- -------- ------- --------- -------- Total revenues................................... 330,312 423,707 41,464 795,483 Cost of revenues: Cost of equipment rentals, excluding depreciation.................................. 101,778 174,686 13,634 290,098 Depreciation of rental equipment.............. 38,682 37,628 5,198 81,508 Cost of rental equipment sales................ 14,045 4,899 2,419 21,363 Cost of equipment and merchandise sales and other operating costs......................... 45,535 46,685 5,052 97,272 ------- -------- -------- ------- --------- -------- Total cost of revenues........................... 200,040 263,898 26,303 490,241 ------- -------- -------- ------- --------- -------- Gross profit..................................... 130,272 159,809 15,161 305,242 Selling, general and administrative expenses..... 48,331 56,755 5,870 110,956 Non-rental depreciation and amortization......... $ 1,968 10,775 12,842 1,466 27,051 ------- -------- -------- ------- --------- -------- Operating income................................. (1,968) 71,166 90,212 7,825 167,235 Interest expense................................. 4,875 53,516 2,744 466 $ (4,875) 56,726 Preferred dividends of a subsidiary trust........ 4,875 4,875 Other (income) expense, net...................... 3,480 (4,561) 643 (438) ------- -------- -------- ------- --------- -------- Income (loss) before provision for income........ (6,843) 14,170 92,029 6,716 106,072 Provision (benefit) for income taxes............. (3,269) 5,934 38,542 2,813 44,020 ------- -------- -------- ------- --------- -------- Income (loss) before equity in net earnings of subsidiaries..................................... (3,574) 8,236 53,487 3,903 62,052 Equity in net earnings of subsidiaries........... 65,626 57,390 (123,016) ------- -------- -------- ------- --------- -------- Net income....................................... $62,052 $ 65,626 $ 53,487 $ 3,903 $(123,016) $ 62,052 ======= ======== ======== ======= ========= ======== </TABLE> 24
UNITED RENTALS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS <TABLE> <CAPTION> For the Three Months Ended September 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............................... $243,673 $333,433 $33,393 $610,499 Sales of rental equipment....................... 40,112 54,187 5,507 99,806 Sales of equipment and merchandise and other revenues........................................ 83,154 57,350 8,224 148,728 ------- -------- -------- ------- --------- -------- Total revenues..................................... 366,939 444,970 47,124 859,033 Cost of revenues: Cost of equipment rentals, excluding depreciation.................................... 97,780 152,133 13,349 263,262 Depreciation of rental equipment................ 44,555 37,929 5,018 87,502 Cost of rental equipment sales.................. 21,722 33,480 3,368 58,570 Cost of equipment and merchandise sales and other operating costs........................... 62,967 39,263 6,765 108,995 ------- -------- -------- ------- --------- -------- Total cost of revenues............................. 227,024 262,805 28,500 518,329 ------- -------- -------- ------- --------- -------- Gross profit....................................... 139,915 182,165 18,624 340,704 Selling, general and administrative expenses....... 41,264 76,789 6,439 124,492 Non-rental depreciation and amortization........... $ 1,944 7,727 10,793 1,425 21,889 ------- -------- -------- ------- --------- -------- Operating income................................... (1,944) 90,924 94,583 10,760 194,323 Interest expense................................... 4,875 60,930 29 99 $ (4,875) 61,058 Preferred dividends of a subsidiary trust.......... 4,875 4,875 Other (income) expense, net........................ 5,014 (5,565) 67 (484) ------- -------- -------- ------- --------- -------- Income (loss) before provision (benefit) for income taxes.............................................. (6,819) 24,980 100,119 10,594 128,874 Provision (benefit) for income taxes............... (2,830) 10,367 41,827 4,119 53,483 ------- -------- -------- ------- --------- -------- Income (loss) before equity in net earnings of subsidiaries....................................... (3,989) 14,613 58,292 6,475 75,391 Equity in net earnings of subsidiaries............. 79,380 64,767 (144,147) ------- -------- -------- ------- --------- -------- Net income......................................... $75,391 $ 79,380 $ 58,292 $ 6,475 $(144,147) $ 75,391 ======= ======== ======== ======= ========= ======== </TABLE> 25
UNITED RENTALS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) CONDENSED CONSOLIDATING CASH FLOW INFORMATION <TABLE> <CAPTION> For the Nine Months Ended September 30, 2001 ------------------------------------------------------------------------- Non- Guarantor 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..................................... $ (7,765) $ 289,050 $ 125,996 $ 27,593 $ 434,874 Cash flows from investing activities: Purchases of rental equipment................ (228,579) (144,259) (22,189) (395,027) Purchases of property and equipment.......... (4,290) (12,108) (22,948) (2,891) (42,237) Proceeds from sales of rental equipment...... 56,160 41,263 10,258 107,681 Capital contributed to subsidiary............ (8,778) $ 8,778 Purchases of other companies................. (44,301) (899) (45,200) In-process acquisition costs................. (2,570) (2,570) -------- ----------- --------- -------- -------- ----------- Net cash used in investing activities...... (15,638) (228,828) (125,944) (15,721) 8,778 (377,353) Cash flows from financing activities: Proceeds from debt........................... 2,008,644 11 2,008,655 Payments of debt............................. (2,010,426) (1,546) (5,115) (2,017,087) Payments of financing costs.................. (27,835) (111) (27,946) Capital contributions by parent.............. 8,778 (8,778) Dividend distributions to parent............. (39,383) 39,383 Shares repurchased and retired............... (24,758) (24,758) Proceeds from the exercise of common stock options................................ 8,778 8,778 Proceeds from the dividends from subsidiary................................... 39,383 (39,383) -------- ----------- --------- -------- -------- ----------- Net cash provided by (used in) financing activities....................... 23,403 (60,222) (1,535) (5,226) (8,778) (52,358) Effect of foreign exchange rates............. (9,031) (9,031) -------- ----------- --------- -------- -------- ----------- Net decrease in cash and cash equivalents.... (1,483) (2,385) (3,868) Cash and cash equivalents at beginning of period....................................... 29,733 4,651 34,384 -------- ----------- --------- -------- -------- ----------- Cash and cash equivalents at end of period... $ 28,250 $ 2,266 $ 30,516 ======== =========== ========= ======== ======== =========== Supplemental disclosure of cash flow information: Cash paid for interest..................... $ 14,625 $ 140,837 $ 11,447 $ 1,579 $ 168,488 Cash paid for income taxes, net of refunds.................................... $ 1,828 $ (293) $ 1,535 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................. $ 11,859 $ 833 $ 12,692 Liabilities assumed.......................... (4,573) (194) (4,767) Less: Amounts paid through issuance of debt....................................... (600) (600) -------- ----------- --------- -------- -------- ----------- 6,686 639 7,325 Due to seller and other payments............. 37,615 260 37,875 -------- ----------- --------- -------- -------- ----------- Net cash paid.............................. $ 44,301 $ 899 $ 45,200 ======== =========== ========= ======== ======== =========== </TABLE> 26
UNITED RENTALS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) CONDENSED CONSOLIDATING CASH FLOW INFORMATION <TABLE> <CAPTION> For the Nine Months Ended September 30, 2000 ----------------------------------------------------------- Non- Guarantor guarantor Other and Parent URI Subsidiaries Subsidiaries Eliminations -------- --------- ------------ ------------ ------------ (In thousands) <S> <C> <C> <C> <C> <C> Net cash provided by (used in) operating activities....... $ 6,141 $(150,846) $ 424,504 $ 12,824 $ 13 Cash flows from investing activities: Purchases of rental equipment.......................... (194,651) (467,912) (18,536) Purchases of property and equipment.................... (17,609) (25,455) (66,152) (2,937) Proceeds from sales of rental equipment................ 114,596 122,502 17,879 Payments of contingent purchase price.................. (1,521) (11,227) Purchases of other companies........................... (301,130) (3,102) Capital contributed to subsidiary...................... (179) 179 In-process acquisition costs........................... (3,157) -------- --------- --------- -------- -------- Net cash used in investing activities................ (20,945) (408,161) (422,789) (6,696) 179 Cash flows from financing activities: Proceeds from debt..................................... 554,413 24,667 Payments of debt....................................... (110,361) (14,575) (6,446) Proceeds from sale-leaseback........................... 165,511 Payments of financing costs............................ (8,849) (13) Capital contributions by parent........................ 179 (179) Dividend distributions to parent....................... (45,575) 45,575 Proceeds from the exercise of common stock options..... 179 Proceeds from dividends from subsidiary................ 45,575 (45,575) Shares repurchased and retired......................... (30,950) -------- --------- --------- -------- -------- Net cash provided by (used in) financing activities........................................... 14,804 555,318 10,092 (6,446) (192) Effect of foreign exchange rates....................... 104 -------- --------- --------- -------- -------- Net increase (decrease) in cash and cash equivalents... (3,689) 11,807 (214) Cash and cash equivalents at beginning of period....... 3,689 16,414 3,708 -------- --------- --------- -------- -------- Cash and cash equivalents at end of period............. $ 28,221 $ 3,494 ======== ========= ========= ======== ======== Supplemental disclosure of cash flow information: Cash paid for interest............................... $ 14,625 $ 163,192 $ 271 $ 1,537 Cash paid for income taxes........................... $ 59,862 $ 7,348 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........................... $ 488,060 $ 4,884 Liabilities assumed.................................... (121,733) (1,782) Less: Amounts paid through issuance of debt................ (65,197) -------- --------- --------- -------- -------- Net cash paid..................................... $ 301,130 $ 3,102 ======== ========= ========= ======== ======== </TABLE> <TABLE> <CAPTION> Consolidated ------------ <S> <C> Net cash provided by (used in) operating activities....... $ 292,636 Cash flows from investing activities: Purchases of rental equipment.......................... (681,099) Purchases of property and equipment.................... (112,153) Proceeds from sales of rental equipment................ 254,977 Payments of contingent purchase price.................. (12,748) Purchases of other companies........................... (304,232) Capital contributed to subsidiary...................... In-process acquisition costs........................... (3,157) --------- Net cash used in investing activities................ (858,412) Cash flows from financing activities: Proceeds from debt..................................... 579,080 Payments of debt....................................... (131,382) Proceeds from sale-leaseback........................... 165,511 Payments of financing costs............................ (8,862) Capital contributions by parent........................ Dividend distributions to parent....................... Proceeds from the exercise of common stock options..... 179 Proceeds from dividends from subsidiary................ Shares repurchased and retired......................... (30,950) --------- Net cash provided by (used in) financing activities........................................... 573,576 Effect of foreign exchange rates....................... 104 --------- Net increase (decrease) in cash and cash equivalents... 7,904 Cash and cash equivalents at beginning of period....... 23,811 --------- Cash and cash equivalents at end of period............. $ 31,715 ========= Supplemental disclosure of cash flow information: Cash paid for interest............................... $ 179,625 Cash paid for income taxes........................... $ 67,210 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........................... $ 492,944 Liabilities assumed.................................... (123,515) Less: Amounts paid through issuance of debt................ (65,197) --------- Net cash paid..................................... $ 304,232 ========= </TABLE> 27
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion reviews our operations for the nine and three months ended September 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 and operating lease payments 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 adopted a restructuring plan during the second quarter of 2001 involving the following principal elements: (i) 31 underperforming branches are being closed or consolidated with other locations (comprised of 29 closed or consolidated as of September 30, 2001 and 2 that will be closed or consolidated by December 31, 2001); (ii) five administrative offices are being closed or consolidated with other locations; (iii) our workforce is being reduced by 489 through the termination of branch and administrative personnel (including 440 terminated as of September 30, 2001); 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 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 $7.2 million of these cash expenses as of September 30, 2001. We expect to pay the balance of these cash expenses as follows: approximately $4.6 million during the balance of 2001 and approximately $6.2 million in subsequent periods. 28
The restructuring charge includes: (1) the cost of vacating facilities, primarily the payment of obligations under leases offset by estimated sublease opportunities ($9.9 million), the write-off of capital improvements made to such facilities ($2.8 million), and the write-off of related goodwill ($5.6 million), (2) workforce reduction costs, primarily severance, and (3) information technology costs comprised of the abandonment of certain information technology projects ($2.5 million) and the payment of obligations under equipment leases relating to such projects ($2.5 million). The table below provides certain information concerning the restructuring charge: <TABLE> <CAPTION> Activity Amount through Balance of September 30, September 30, Components of Restructuring Charge Charge 2001(1) 2001(2) ---------------------------------- ------- ------------- ------------- <S> <C> <C> <C> Cost to vacate facilities........... $18,291 $11,605 $ 6,686 Workforce reduction costs........... 5,666 3,092 2,574 Information technology costs......... 4,965 3,414 1,551 ------- ------- ------- Total........................... $28,922 $18,111 $10,811 ======= ======= ======= </TABLE> ----- (1)Represents the non-cash component of the charge plus the cash component that was paid through September 30, 2001. (2)Represents the portion of the cash component of the charge that had not been paid as of September 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 in note 4 to the Unaudited Consolidated Financial Statements included elsewhere herein. 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 Nine Months Ended September 30, 2001 and 2000 Revenues. Total revenues for the nine months ended September 30, 2001 were $2,182.6 million, representing an increase of 0.7% over total revenues of $2,167.9 million for the nine months ended September 30, 2000. Our revenues during these periods were attributable to the following sources. . Revenues from Equipment Rentals. These revenues were $1,670.0 million in the first nine months of 2001, representing an increase of 9.7% from $1,522.1 million in the first nine months of 2000. These revenues accounted for 76.5% of our total revenues in the first nine months of 2001 compared with 70.2% of our total revenues in the first nine months of 2000. The 9.7% increase in these revenues in the first nine months of 2001 reflected (i) increased revenues at locations open more than one year (which accounted for approximately 6.6 percentage points) 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 3.1 percentage points). The 6.6% increase in revenues at locations open more than one year reflected an increase in the volume of transactions and utilization rates that would have caused a 7.0% increase at level prices, partially offset by price decreases that took away 0.4 percentage points. . Revenues from the Sales of Rental Equipment. These revenues were $107.7 million in the first nine months of 2001, representing a decrease of 57.8% from $255.0 million in the first nine months of 2000. These revenues accounted for 4.9% of our total revenues in the first nine months of 2001 compared with 11.8% of our total revenues in the first nine months of 2000. These revenues decreased in 2001 because, 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 "--Additional Information Concerning Equipment Purchases." 29
. Revenues from the Sales of Equipment and Merchandise and Other Revenues. These revenues were $404.9 million in the first nine months of 2001, representing an increase of 3.6% from $390.8 million in the first nine months of 2000. These revenues accounted for 18.6% of our total revenues in the first nine months of 2001 compared with 18.0% of our total revenues in the first nine months of 2000. The 3.6% increase in sales of equipment and merchandise and other revenues was attributable to an increase in the volume of transactions. Gross Profit. Gross profit decreased to $793.9 million in the nine months ended September 30, 2001, from $818.5 million in the nine months ended September 30, 2000. This decrease reflected the decrease in gross profit margin described below from equipment rental and the sales of rental equipment. Our gross profit margin by source of revenues in the nine months ended September 30, 2001 and 2000 was: (i) equipment rental (38.3% in the nine months ended September 30, 2001 and 40.5% in the nine months ended September 30, 2000), (ii) sales of rental equipment (40.8% in the nine months ended September 30, 2001 and 41.3% in the nine months ended September 30, 2000) and (iii) sales of equipment and merchandise and other revenues (27.2% in the nine months ended September 30, 2001 and 25.0% in the nine months ended September 30, 2000). The decrease in the gross profit margin from rental revenues in the nine months ended September 30, 2001, principally reflected an increase in our cost of equipment rental because more of our rental equipment was held by us under operating leases rather than being owned. The decrease in the gross profit margin from the sales of rental equipment in the nine months ended September 30, 2001, was primarily the result of a modest price decline in certain geographic areas. The increase in the gross profit margin from sales of equipment and merchandise and other revenue in the nine months ended September 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. Selling, General and Administrative Expenses. Selling, general and administrative expenses ("SG&A") were $332.7 million, or 15.2% of total revenues, during the nine months ended September 30, 2001 and $335.5 million, or 15.5% of total revenues, during the nine months ended September 30, 2000. The decrease in SG&A in the first nine months of 2001 primarily reflected cost-cutting measures that we have taken, including reducing the number of administrative personnel, reducing discretionary expenditures and consolidating certain credit and collection facilities. We are seeking to continue to cut costs in a number of ways, including further reducing administrative costs, further consolidating credit and collection centers and streamlining advertising. Restructuring Charge. We recorded a restructuring charge of $28.9 million in the nine months ended September 30, 2001. See "--Restructuring Plan" for additional information. Non-rental Depreciation and Amortization. Non-rental depreciation and amortization was $80.3 million, or 3.7% of total revenues, in the nine months ended September 30, 2001 and $62.6 million, or 2.9% of total revenues, in the nine months ended September 30, 2000. The increase in the dollar amount of non-rental depreciation and amortization in the first nine months of 2001 primarily reflected additional non-rental vehicles which have shorter useful lives. Interest Expense. Interest expense increased to $171.3 million in the nine months ended September 30, 2001 from $167.3 million in the nine months ended September 30, 2000. Preferred Dividends of a Subsidiary Trust. During the nine months ended September 30, 2001 and 2000, preferred dividends of a subsidiary trust were $14.6 million. Other (Income) Expense. Other expense was $6.5 million in the nine months ended September 30, 2001 compared with other income of $0.8 million in the nine months ended September 30, 2000. The increase in other expense in the first nine 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." 30
Income Taxes. Income taxes were $69.2 million, or an effective rate of 43.3%, in the nine months ended June 30, 2001 compared to $99.3 million, or an effective rate of 41.5%, in the nine months ended September 30, 2000. The increase in the effective rate in the first nine 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 nine months ended September 30, 2001. See "--Debt Refinancing and Extraordinary Item" for additional information. Three Months Ended September 30, 2001 and 2000 Revenues. Total revenues for the three months ended September 30, 2001 were $795.5 million, representing a decrease of 7.4% over total revenues of $859.0 million for the three months ended September 30, 2000. Our revenues during these periods were attributable to the following sources. . Revenues from Equipment Rentals. These revenues were $626.3 million in the third quarter of 2001, representing an increase of 2.6% from $610.5 million in the third quarter of 2000. These revenues accounted for 78.7% of our total revenues in the third quarter of 2001 compared with 71.1% of our total revenues in the third quarter of 2000. The 2.6% increase in these revenues reflected the net effect of the following: (i) a 4.3% increase in revenues at locations open more than one year and (ii) a loss of revenue from rental locations closed or consolidated, partially offset by revenues from new rental locations opened or acquired, amounting to 1.7% of revenues in the third quarter of 2000. The 4.3% increase in revenues at locations open more than one year reflected an increase in the volume of transactions and utilization rates that would have caused a 5.0% increase at level prices, partially offset by price decreases that took away 0.7 percentage points. . Revenues from the Sales of Rental Equipment. These revenues were $35.4 million in the third quarter of 2001, representing a decrease of 64.5% from $99.8 million in the third quarter of 2000. These revenues accounted for 4.5% of our total revenues in the third quarter of 2001 compared with 11.6% of our total revenues in the third quarter of 2000. These revenues decreased in 2001 because, 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 "--Additional Information Concerning Equipment Purchases." . Revenues from the Sales of Equipment and Merchandise and Other Revenues. These revenues were $133.8 million in the third quarter of 2001, representing a decrease of 10.1% from $148.7 million in the third quarter of 2000. These revenues accounted for 16.8% of our total revenues in the third quarter of 2001 compared with 17.3% of our total revenues in the third quarter of 2000. The decrease in these revenues was primarily attributable to a decrease in sales of equipment and merchandise. Gross Profit. Gross profit decreased to $305.2 million in the three months ended September 30, 2001, from $340.7 million in the three months ended September 30, 2000. This decrease reflected the decrease in gross profit margin described below from equipment rental and the sales of rental equipment. Our gross profit margin by source of revenues in the three months ended September 30, 2001 and 2000 was: (i) equipment rental (40.7% in the three months ended September 30, 2001 and 42.5% in the three months ended September 30, 2000), (ii) sales of rental equipment (39.7% in the three months ended September 30, 2001 and 41.3% in the three months ended September 30, 2000) and (iii) sales of equipment and merchandise and other revenues (27.3% in the three months ended September 30, 2001 and 26.7% in the three months ended September 30, 2000). The principal reason for the decrease in the gross profit margin from rental revenues in the three months ended September 30, 2001, was that during the latter part of the quarter our revenues were lower than anticipated, reflecting the weakening economy, while our cost structure, which anticipated higher revenues, includes elements that will take a somewhat longer time to adjust to the lower revenue base. The decrease in the gross profit margin from the sales of rental equipment was primarily the result of a modest price decline in some geographic areas. The increase in the gross profit margin from sales of equipment and merchandise and 31
other revenue in the three months ended September 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. Selling, General and Administrative Expenses. SG&A was $111.0 million, or 13.9% of total revenues, during the three months ended September 30, 2001 and $124.5 million, or 14.5% of total revenues, during the three months ended September 30, 2000. The decrease in SG&A in the three months ended September 30, 2001, primarily reflected cost-cutting measures that we have taken, including reducing the number of administrative personnel, reducing discretionary expenditures and consolidating certain credit and collection facilities. We are seeking to continue to cut costs in a number of ways, including further reducing administrative costs, further consolidating credit and collection centers and streamlining advertising. Non-rental Depreciation and Amortization. Non-rental depreciation and amortization was $27.1 million, or 3.4% of total revenues, in the three months ended September 30, 2001 and $21.9 million, or 2.5% of total revenues, in the three months ended September 30, 2000. The increase in the dollar amount of non-rental depreciation and amortization in the three months ended September 30, 2001 primarily reflected additional non-rental vehicles which have shorter useful lives. Interest Expense. Interest expense decreased to $56.7 million in the three months ended September 30, 2001 from $61.1 million in the three months ended September 30, 2000. This decrease primarily reflected lower interest rates on our variable rate debt. Preferred Dividends of a Subsidiary Trust. During the three months ended September 30, 2001 and 2000, preferred dividends of a subsidiary trust were $4.9 million. Other (Income) Expense. Other income was $0.4 million in the three months ended September 30, 2001 compared with other income of $0.5 million in the three months ended September 30, 2000. Income Taxes. Income taxes were $44.0 million, or an effective rate of 41.5%, in the three months ended September 30, 2001 compared to $53.5 million, or an effective rate of 41.5%, in the three months ended September 30, 2000. Outlook for Fourth Quarter of 2001 On September 25, 2001, we issued a press release in which we announced a revised forecast for the fourth quarter of 2001. The revised forecast projects that for the fourth quarter of 2001, revenues will range between $700 million and $730 million and earnings per share will range from $0.32 to $0.37. The revised forecast is lower than earlier estimates. The principal reason for this revision is that the slowing economy continues to impact our business, particularly in the western states. Liquidity and Capital Resources Information Concerning Financing Transactions In Third Quarter of 2001 During the third quarter of 2001, we obtained an additional $29.5 million through the securitization of additional accounts receivable under our existing accounts receivable securitization facility. As of September 30, 2001, the total outstanding borrowings under this facility were $241.5 million. See note 5 to our Unaudited Consolidated Financial Statements included elsewhere herein. Certain Information Concerning Our Credit Facility Our 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. 32
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 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. Sources and Uses of Cash During the first nine months of 2001, we (i) generated cash from operations of approximately $434.9 million, and (ii) generated cash from the sale of rental equipment of approximately $107.7 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 $45.2 million), (ii) purchase rental equipment (approximately $395.0 million), (iii) purchase other property and equipment (approximately $42.2 million), (iv) purchase and retire shares of our outstanding common stock (approximately $24.8 million) and (v) pay financing fees related to the refinancing of certain of our debt as described in note 4 to our Unaudited Consolidated Financial Statements included elsewhere herein (approximately $27.9 million). Certain Balance Sheet Changes The increase in accounts receivable at September 30, 2001 compared to December 31, 2000 was attributable to the increase in revenues in the seasonally stronger third quarter. The decrease in inventory at September 30, 2001 compared to December 31, 2000 primarily reflected increased sales during the second and third quarters of 2001. The increase in prepaid expenses and other assets at September 30, 2001 compared to December 31, 2000 was primarily attributable to payment of certain prepaid expenses during the first nine months of 2001. The increase in deferred taxes and accrued expenses and other liabilities at September 30, 2001 compared to December 31, 2000 was primarily attributable to the increase in revenues in the seasonally stronger third quarter of 2001. The increase in rental equipment at September 30, 2001 compared to December 31, 2000 primarily reflected our equipment purchases during the first nine months of 2001. The increase in debt at September 30, 2001 compared to December 31, 2000 primarily reflected borrowings for acquisition related payments and equipment purchases during the first nine months of 2001. The increase in additional paid in capital at September 30, 2001 compared to December 31, 2001, primarily reflects the following: (i) our perpetual convertible preferred stock is reflected as "Stockholders' Equity" on the September 30, 2001 balance sheet and reflected under "Series A and B Preferred Stock," rather than under "Stockholders' Equity," on the December 31, 2000 balance sheet (for the reasons described in note 1 to our Unaudited Consolidated Financial Statements included elsewhere herein) and (ii) restricted stock was issued under our stock plans during 2001 (as described in note 8 to our Unaudited Consolidated Financial Statements included elsewhere herein). Cash Requirements Related to Operations Our principal existing sources of cash are borrowings available under our revolving credit facility ($434.7 million available as of November 7, 2001), cash generated from operations and the sale of rental equipment. We believe that our existing sources of cash will be sufficient to support our existing operations over the next 12 months. 33
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 $465 million for our existing operations. These expenditures are comprised of approximately (i) $215 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. The recent refinancing of $1,695.7 million of our indebtedness (described in note 4 to our Unaudited Consolidated Financial Statements included elsewhere herein) 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 $23.5 million over the next 12 months. We may also, at our option, make additional principal payments. Additional Information Concerning Equipment Purchases In the beginning of 2001, as the economy softened, we determined to purchase less new equipment in 2001 than in 2000 ($465 million budgeted for 2001 compared to $962 million expended in 2000) and to reduce the rate at which we sell used equipment. We expect that revenues in 2001 from the sale of used equipment will be 50-75% lower than the level in 2000. We estimate that the average age of our rental fleet, which currently is approximately 29 months, will increase to approximately 32 months by the end of the year as a result of the planned reduction in the rate at which we purchase new equipment and sell used equipment. The rate at which we purchase new equipment and sell used equipment next year will depend on future developments, including the economic outlook, conditions in the used equipment market, and our equipment utilization rates. If we continue to purchase new equipment at a reduced rate next year, the average age of our rental fleet may further increase to 35 or 40 months. We believe that our business will not be adversely affected by the increases, or potential increases, in average age described above. Relationship Between Holdings and URI United Rentals, Inc. ("Holdings") is principally a holding company and primarily conducts its operations through its wholly owned subsidiary United Rentals (North America), Inc. ("URI") and subsidiaries of URI. Holdings provides certain services to URI in connection with its operations. These services principally include: (i) senior management services, (ii) finance related services and support, (iii) information technology systems 34
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 companies that specialize in renting traffic control equipment. These companies 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. Goodwill amortization for the nine months ended September 30, 2001 was approximately $43.3 million. 35
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This standard addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". This standard is effective for fiscal years beginning after December 15, 2001. The adoption of SFAS No. 144 is not expected to have a material effect on the Company's consolidated financial position or results of operations. 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, decreases in construction or industrial activity may lead to a decrease in the demand for our equipment, or the prices that we can charge. For example, the current slow-down in the economy has caused construction and industrial activity to decrease, particularly in the western states, which required us to lower our revenue and earnings forecast for the fourth quarter of 2001. See "Managements' Discussion and Analysis of Financial Condition and Results of Operations--Outlook for Fourth Quarter of 2001." We have identified below certain of the factors that may cause a further downturn in construction and industrial activity, 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 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 acquisition of companies 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. Substantial Goodwill At September 30, 2001, we had on our balance sheet net goodwill of approximately $2.2 billion, which represents approximately 41.6% of our total assets at such date. This goodwill is an intangible asset and represents the excess of the purchase price that we paid for acquired businesses over the estimated fair market value of the net assets of those businesses. If the fair value of the goodwill, determined in accordance with applicable accounting standards, were to fall below the recorded value shown on the balance sheet, we would be required to write off the excess goodwill. Any write-off could adversely affect our operating results. 36
Substantial Indebtedness Our substantial indebtedness has the potential to affect us adversely in a number of ways. For example, it will or could: . require us to devote a substantial portion of our cash flow to debt service, reducing the funds available for other purposes; . constrain our ability to obtain additional financing, particularly since substantially all of our assets are subject to security interests relating to existing indebtedness; or . make it difficult for us to cope with a downturn in our business or a decrease in our cash flow. Furthermore, if we are unable to service our indebtedness and fund our business, we will be forced to adopt an alternative strategy that may include: . reducing or delaying capital expenditures; . limiting our growth; . seeking additional capital; . selling assets; or . restructuring or refinancing our indebtedness. We cannot assure you that any of these strategies could be effected on favorable terms or at all. Variable Rate Indebtedness A portion of our indebtedness bears interest at variable rates that are linked to changing market interest rates. As a result, an increase in market rates would increase our interest expense and our debt service obligations. On September 30, 2001, we had approximately $1,249.1 million of variable rate indebtedness. Restrictive Covenants We are subject to various restrictive financial and operating covenants under the agreements governing our indebtedness. These covenants limit or prohibit, among other things, our ability to incur indebtedness, make prepayments of certain indebtedness, 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. Dependence on Additional Capital We may require additional capital for, among other purposes, purchasing rental equipment, making acquisitions, opening 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, we may be unable to fund the capital outlays required for the success of our business, including those relating to purchasing equipment, making acquisitions, opening new rental locations and refinancing existing indebtedness. Certain Risks Relating to Acquisitions We have grown in part through acquisitions and may continue to do so. The making of acquisitions entails certain risks, including: . unrecorded liabilities of acquired companies that we fail to discover during our due diligence investigations; 37
. difficulty in assimilating the operations and personnel of the acquired company with our existing operations; . loss of key employees of the acquired company; and . difficulty maintaining uniform standards, controls, procedures and policies. We cannot guarantee that we will realize the expected benefits from our acquisitions or that our existing operations will not be harmed as a result of acquisitions. Dependence on Management Our success is highly dependent on the experience and skills of our senior management team. If we lose the services of any member of senior management and are unable to find a suitable replacement, we may not have the depth of senior management resources required to efficiently manage our business and execute our growth strategy. 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. Competitive pressures could adversely affect our revenues and operating results by decreasing our market share or depressing the prices that we can charge. 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. If we are found liable for any significant claims that are not covered by insurance, our operating results could be adversely affected. We cannot be certain that insurance will continue to be available to us on economically reasonable terms, if at all. Environmental and Safety Regulations Our operations are subject to numerous laws governing environmental protection and occupational health and safety matters. These laws regulate such issues as wastewater, stormwater, solid and hazardous wastes and materials, and air quality. Under these laws, we may be liable for, among other things, (1) the costs of 38
investigating and remediating contamination at our sites as well as sites to which we sent hazardous wastes for disposal or treatment regardless of fault and (2) fines and penalties for non-compliance. Our operations generally do not raise significant environmental risks, but we use hazardous materials to clean and maintain equipment, and dispose of solid and hazardous waste and wastewater from equipment washing, and store and dispense petroleum products from underground and above-ground storage tanks located at certain of our locations. Based on the conditions currently known to us, we do not believe that any pending or likely remediation and compliance costs will have a material adverse effect on our business. We cannot be certain, however, as to the potential financial impact on our business if new adverse environmental conditions are discovered or environmental and safety requirements become more stringent. If we are required to incur environmental compliance or remediation costs that are not currently anticipated by us, our business could be adversely affected depending on the magnitude of the cost. Risks Related to International Operations Our operations outside the United States are subject to the risks normally associated with international operations. These include (1) the need to convert currencies, which could result in a gain or loss depending on fluctuations in exchange rates, (2) the need to comply with foreign laws and (3) the possibility of political or economic instability in foreign countries. Dependence on Information Technology Systems Our information technology systems facilitate our ability to monitor and control our operations and adjust to changing market conditions. Any disruption in these systems or the failure of these systems to operate as expected could, depending on the magnitude of the problem, adversely affect our operating results by limiting our capacity to effectively monitor and control our operations and adjust to changing market conditions. Labor Matters We have approximately 1,200 employees that 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 ability to serve our customers could be adversely affected. Furthermore, our labor costs could increase as a result of the settlement of actual or threatened labor disputes. 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 and our risk associated with fluctuations in foreign exchange rates related to our liabilities denominated in foreign currencies. 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. 39
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 third 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 450,000 shares of perpetual convertible preferred stock as further described in note 1 to the Unaudited Consolidated Financial Statements included elsewhere herein. 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) Form of Certificate of Designation for Series C Perpetual Convertible Preferred Stock.* 3(g) Form of Certificate of Designation for Series D Perpetual Convertible Preferred Stock.* 3(h) Form of Certificate of Designation for Series E Junior Participating Preferred Stock (incorporated by reference to Exhibit A of Exhibit 4 of the United Rentals, Inc. Current report on Form 8-K filed October 5, 2001). 3(i) Rights Agreement dated September 28, 2001 between United Rentals, Inc. and American Stock Transfer & Trust Co., as Rights Agent (incorporated by reference to Exhibit 4 to the United Rentals, Inc. Report on Form 8-K filed on October 5, 2001) 3(j) 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). </TABLE> 40
<TABLE> <CAPTION> Exhibit Number Description of Exhibit - ------- ---------------------- <C> <S> 3(k) 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) Agreement dated September 28, 2001 among United Rentals, Inc., Apollo Investment Fund IV, L.P., Apollo Overseas Partners IV, L.P., and Chase Equity Associates, L.P. relating to the exchange of Series A Perpetual Convertible Preferred Stock for Series C Perpetual Convertible Preferred Stock and Series B Perpetual Convertible Preferred Stock for Series D Perpetual Convertible Preferred Stock (incorporated by reference to Exhibit 10 to the United Rentals, Inc. Report on Form 8-K filed on October 5, 2001) (less than)/TC </TABLE> (b) Reports on Form 8-K: 1. Form 8-K filed on July 27, 2001 (earliest event reported July 25, 2001); Item 9 was reported. 2. Form 8-K filed on October 5, 2001 (earliest event reported September 28, 2001); Item 5 was reported. - -------- * Filed herewith 41
SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this amended report to be signed on its behalf by the undersigned hereunto duly authorized. UNITED RENTALS, INC. Dated: November 14, 2001 BY: /S/ MICHAEL J. NOLAN _________________________ Michael J. Nolan Chief Financial Officer (Principal Financial Officer and Chief Accounting Officer) UNITED RENTALS (NORTH Dated: November 14, 2001 AMERICA), INC. By: /S/ MICHAEL J. NOLAN _________________________ Michael J. Nolan Chief Financial Officer (Principal Financial Officer and Chief Accounting Officer) 42