UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
For the quarterly period ended March 31, 2006
For the transition period from to
Commission File Number 1-14387
United Rentals, Inc.
Commission File Number 1-13663
United Rentals (North America), Inc.
(Exact Names of Registrants as Specified in Their Charters)
Delaware
06-1522496
06-1493538
Five Greenwich Office Park,
Greenwich, Connecticut
Registrants’ telephone number, including area code: (203) 622-3131
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer þ Accelerated Filer ¨ Non-Accelerated Filer ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes þ No
As of May 4, 2006, there were 79,329,470 shares of United Rentals, Inc. Common Stock, $.01 par value, outstanding. There is no market for the common stock of United Rentals (North America), Inc., all outstanding shares of which are owned by United Rentals, Inc.
This combined Form 10-Q is separately filed by (i) United Rentals, Inc. and (ii) United Rentals (North America), Inc. (which is a wholly owned subsidiary of United Rentals, Inc.). United Rentals (North America), Inc. meets the conditions set forth in General Instructions (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 MARCH 31, 2006
INDEX
PART I
Item 1
Unaudited Condensed Consolidated Financial Statements
United Rentals, Inc. Condensed Consolidated Balance Sheets as of March 31 2006,March 31, 2005 and December 31, 2005 (unaudited)
United Rentals, Inc. Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2006 and 2005 (unaudited)
United Rentals, Inc. Condensed Consolidated Statement of Stockholders’ Equity for the Three Months Ended March 31, 2006 (unaudited)
United Rentals, Inc. Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2006 and 2005 (unaudited)
Notes to Unaudited Condensed Consolidated Financial Statements
Item 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3
Quantitative and Qualitative Disclosures About Market Risk
Item 4
Controls and Procedures
PART II
Legal Proceedings
Item 1A
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Item 6
Exhibits
Signatures
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this report are forward-looking in nature. Such statements can be identified by the use of forward-looking terminology such as “believe,” “expect,” “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 such risks and uncertainties are referred to below under Item 1A—Risk Factors. 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.
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PART I. FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In millions, except per share data and unless otherwise indicated)
ASSETS
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts of $41 on March 31, 2006, $48 on March 31, 2005 and $45 on December 31, 2005
Inventory
Prepaid expenses and other assets
Rental equipment, net
Property and equipment, net
Goodwill
Other intangible assets, net
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Accounts payable
Accrued expenses and other liabilities
Debt
Subordinated convertible debentures
Deferred taxes
Total liabilities
Stockholders’ equity:
Preferred stock—$0.01 par value, 5,000,000 shares authorized:
Series C perpetual convertible preferred stock—$.30 liquidation preference, 300,000 shares issued and outstanding
Series D perpetual convertible preferred stock—$.15 liquidation preference, 150,000 shares issued and outstanding
Common stock—$.01 par value, 500,000,000 shares authorized, 77,294,023 shares issued and outstanding on March 31, 2006, 77,942,884 shares issued and outstanding on March 31, 2005 and 77,302,915 shares issued and outstanding on December 31, 2005
Additional paid-in capital
Deferred compensation
Accumulated deficit
Accumulated other comprehensive income
Total stockholders’ equity
See accompanying notes.
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Revenues:
Equipment rentals
Sales of rental equipment
New equipment sales
Contractor supplies sales
Service and other revenues
Total revenues
Cost of revenues:
Cost of equipment rentals, excluding depreciation
Depreciation of rental equipment
Cost of rental equipment sales
Cost of new equipment sales
Cost of contractor supplies sales
Cost of service and other revenue
Total cost of revenues
Gross profit
Selling, general and administrative expenses
Non-rental depreciation and amortization
Operating income
Interest expense, net
Interest expense—subordinated convertible debentures
Other expense, net
Income before provision for income taxes
Provision for income taxes
Net income
Earnings per share—basic:
Income available to common stockholders
Earnings per share—diluted:
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CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
Series CPerpetualConvertiblePreferredStock
Series DPerpetualConvertiblePreferredStock
AdditionalPaid-inCapital
DeferredCompensation
AccumulatedDeficit
ComprehensiveIncome
AccumulatedOtherComprehensiveIncome
Balance, December 31, 2005
Comprehensive income:
Other comprehensive income:
Foreign currency translation adjustments
Derivatives qualifying as hedges, net of tax of $1
Comprehensive income
Reclassification of unearned stock compensation in connection with adoption of FAS 123R
Restricted stock activity and other
Common stock repurchased and retired
Balance, March 31, 2006
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Cash Flows From Operating Activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Gain on sales of rental equipment
Gain on sales of non-rental equipment
Non-cash adjustments to equipment
Amortization of deferred compensation
Changes in operating assets and liabilities:
Accounts receivable
Net cash provided by operating activities
Cash Flows From Investing Activities:
Purchases of rental equipment
Purchases of property and equipment
Proceeds from sales of rental equipment
Proceeds from sales of non-rental equipment
Purchases of other companies
Net cash used in investing activities
Cash Flows From Financing Activities:
Payments of debt
Proceeds from the exercise of common stock options
Net cash used in financing activities
Effect of foreign exchange rates
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data unless otherwise indicated)
1. Organization and Basis of Presentation
General
United Rentals, Inc., (“Holdings,” “United Rentals” or the “Company”) is principally a holding company and conducts its operations primarily through its wholly owned subsidiary United Rentals (North America), Inc. (URNA) and subsidiaries of URNA. Holdings’ primary asset is its sole ownership of all issued and outstanding shares of common stock of URNA. URNA’s various credit agreements and debt instruments place restrictions on its ability to transfer funds to its shareholder.
We rent equipment to a diverse customer base that includes construction and industrial companies, manufacturers, utilities, municipalities, homeowners and others in the United States, Canada and Mexico. In addition to renting equipment, we sell new and used rental equipment, as well as related contractor supplies, parts and service. The nature of our business is such that short-term obligations are typically met by cash flow generated from long-term assets. Therefore, the accompanying balance sheets are presented on an unclassified basis.
We have prepared the accompanying unaudited condensed consolidated interim financial statements in accordance with the accounting policies described in our 2005 Form 10-K filed on March 31, 2006 (the “2005 Form 10-K”) and the interim reporting requirements of Form 10-Q. Accordingly, certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the 2005 Form 10-K. Certain reclassifications have been made to prior year financial information to conform to the current year presentation.
In our opinion, all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair statement of financial position, operating results and cash flows for the interim periods presented have been made. Interim results of operations are not necessarily indicative of the results of the full year.
In August 2004 we received notice from the SEC that it was conducting a non-public, fact-finding inquiry of the Company. The SEC inquiry appears to relate to a broad range of the Company’s accounting practices and is not confined to a specific period. In March 2005, our board of directors formed a Special Committee of independent directors to review matters related to the SEC inquiry. Our board of directors received and acted upon findings of the Special Committee in January 2006. The actions that we took with respect to the Special Committee’s findings and actions that we took with respect to certain other accounting matters, including the restatement of previously issued consolidated financial statements for 2003 and 2002, are discussed in our 2005 Form 10-K.
Recent Accounting Changes
Effective January 1, 2006, we adopted SFAS No. 123(R), “Share-Based Payment” (“FAS 123(R)”), an amendment of SFAS No. 123, “Accounting for Stock-Based Compensation,” using the modified prospective transition method and therefore we did not restate the results of prior periods.
The effect of adopting FAS 123(R) on 2006 first quarter net income was not material. FAS 123(R) requires that cash flows from tax benefits resulting from tax deductions in excess of the compensation cost recognized for stock-based awards (excess tax benefits) be classified as financing cash flows prospectively from January 1, 2006. Prior to the adoption of FAS 123(R), such excess tax benefits were presented as operating cash flows. Excess tax benefits reflected in our accompanying condensed consolidated statements of cash flows were not material for the three months ended March 31, 2006 and 2005.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Refer to notes 2 and 14 in our 2005 Form 10-K for further information regarding our adoption of FAS 123(R) and our stock-based compensation arrangements, including related disclosures required upon the adoption of FAS 123(R).
Restricted stock awards are issued at the fair value of the stock on the grant date. Prior to the adoption of FAS 123(R), unearned compensation for grants of restricted stock equivalent to the fair value of the shares at the date of grant was recorded as a separate component of shareholders’ equity and subsequently amortized to compensation expense over the awards’ vesting period. In accordance with FAS 123(R), shareholders’ equity is credited commensurate with the recognition of compensation expense. All unamortized unearned compensation at January 1, 2006 was reclassified to additional paid-in capital.
Prior to January 1, 2006, in accordance with APB Opinion No. 25 “Accounting for Stock Issued to Employees,” we did not recognize compensation expense relating to employee stock options because the exercise price was equal to or greater than the market price at the date of grant. If we had elected to recognize compensation expense using a fair value approach as required by FAS 123, our pro forma income and earnings per share for the three months ended March 31, 2005 would have been as follows:
Net income as reported
Plus: Stock-based compensation expense included in reported net income, net of tax
Less: Stock-based compensation expense determined using the fair value method, net of tax
Pro forma net income
Basic earnings per share:
As reported
Pro forma
Diluted earnings per share:
2. Segment Information
Our reportable segments are general rentals, trench safety, pump and power and traffic control. The general rentals segment includes the rental of construction, aerial, industrial and homeowner equipment and related services and activities. The general rentals segment’s customers include construction and industrial companies, manufacturers, utilities, municipalities and homeowners. The general rentals segment operates throughout the United States and Canada and has one location in Mexico. The trench safety, pump and power segment includes the rental of specialty construction products and related services. The trench safety, pump and power segment’s customers include construction companies involved in infrastructure projects, municipalities and industrial companies. This segment operates in the United States and has one location in Canada. The traffic control segment includes the rental of equipment used in the management of traffic-related services and activities. The traffic control segment’s customers include construction companies involved in infrastructure projects and municipalities. The traffic control segment operates in the United States. Our external segment reporting is aligned with the manner in which management evaluates and allocates resources. We evaluate segment performance based on segment operating results.
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Operating segment revenues and profitability for the three months ended March 31, 2006 and 2005 were as follows:
General rentals
Trench safety, pump and power
Traffic control
Total depreciation and amortization expense
Segment operating income (loss)
Segment operating income
Total capital expenditures
Total assets
3. Acquisitions
In March 2006, we acquired the equipment rental and sales assets of Handy Rent-All Center which had annual revenues of approximately $16. The aggregate purchase price for this acquisition was approximately $23. Pro forma results of operations giving effect to this acquisition would not vary materially from our historical results.
4. Goodwill and Other Intangible Assets
The carrying amount of the Company’s goodwill was $1,328 at March 31, 2006 and December 31, 2005. We are required to review our goodwill for impairment annually as of a scheduled review date. However, if events or circumstances suggest that goodwill could be impaired, we may be required to conduct an earlier review. The scheduled review date is October 1 of each year.
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Other intangible assets consist of customer relationships and non-compete agreements and are amortized over periods ranging from three to 12 years. Amortization expense for other intangible assets was $1 for the three months ended March 31, 2006 and 2005. The cost of other intangible assets and the related accumulated amortization as of March 31, 2006 was as follows:
Gross carrying amount
Accumulated amortization
Net amount
5. Legal and Regulatory Matters
SEC Non-Public Fact Finding Inquiry and Special Committee Review
As previously announced, on August 25, 2004, the Company received a letter from the SEC in which the SEC referred to an inquiry of the Company. The letter transmitted a subpoena requesting certain of the Company’s documents. The letter and the subpoena referred to an SEC investigation entitled In the Matter of United Rentals, Inc. The notice from the SEC states that the inquiry does not mean that the SEC has concluded that the Company or anyone else has broken the law or that the SEC has a negative opinion of any person, entity or security. As previously announced, the inquiry appears to relate to a broad range of our accounting practices and is not confined to a specific period or the matters discussed in this report.
The Company has since received additional document subpoenas from the SEC. As previously announced, in March 2005, the Company’s board of directors formed the Special Committee to review matters related to the SEC inquiry. The Special Committee retained independent counsel. The board of directors received and acted upon findings of the Special Committee on January 26, 2006. The conclusions and recommendations of the Special Committee are discussed in the Company’s press release and the related current report on Form 8-K dated January 26, 2006.
The Company has provided documents in response to the SEC subpoenas to the SEC or to the Special Committee, which has, in turn, provided documents to the SEC. The Company is cooperating fully with the SEC in complying with the subpoenas. The Company is also responding to the SEC’s informal requests for information.
Shareholder Class Action Lawsuits and Derivative Litigation
As previously announced, following our public announcement of the SEC inquiry referred to above, three purported class action lawsuits were filed against us in the United States District Court for the District of Connecticut. The plaintiff in each of the lawsuits seeks to sue on behalf of a purported class comprised of purchasers of our securities from October 23, 2003 to August 30, 2004. The lawsuits name as the defendants our company, our chairman, our vice chairman and chief executive officer, our former president and chief financial officer, and our former corporate controller. The complaints allege, among other things, that certain of our SEC filings and other public statements contained false and misleading statements which resulted in damages to the plaintiffs and the members of the purported class when they purchased our securities. On the basis of those allegations, plaintiffs in each action assert claims (a) against all defendants under Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder, and (b) against one or more of the individual defendants under Section 20(a) of such Act. The complaints seek unspecified compensatory damages, costs and expenses. On
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February 1, 2005, the Court entered an order consolidating the three actions. On November 8, 2005, the Court appointed City of Pontiac Policeman’s and Fireman’s Retirement System as lead plaintiff for the purported class. The consolidated action is now entitled In re United Rentals, Inc. Securities Litigation. The parties have agreed upon, and the Court has approved, a schedule for the filing of a consolidated amended complaint in this action, and the briefing of any motions to dismiss directed to the operative complaint in the action. We intend to defend against the action vigorously.
As previously announced, in January 2005 an alleged shareholder filed an action in Connecticut State Superior Court, Judicial District of Norwalk/Stamford at Stamford, purportedly suing derivatively on our behalf. The action, entitled Gregory Riegel v. John N. Milne, et al., names as defendants certain of our current and/or former directors and/or officers, and us as a nominal defendant. The complaint asserts, among other things, that the defendants breached their fiduciary duties to us by causing or allowing us to disseminate misleading and inaccurate information to shareholders and the market and by failing to establish and maintain adequate accounting controls, thus exposing us to damages. The complaint seeks unspecified compensatory damages, costs and expenses against the defendants. The parties to the Riegel action have agreed that the proceedings in this action will be stayed pending the resolution of anticipated motions to dismiss in the purported shareholder class actions.
As previously announced, in November 2004 we received a letter from counsel for an alleged shareholder, raising allegations similar to the ones set forth in the derivative complaint described above and demanding that we take action in response to those allegations against certain of our current and/or former directors and/or officers. Following receipt of the letter, the board of directors formed the Special Committee discussed above to consider the letter. In August 2005, this alleged shareholder commenced an action in Connecticut State Superior Court, Judicial District of Norwalk/Stamford at Stamford, purporting to sue derivatively on our behalf. The action, entitled Nathan Brundridge v. Leon D. Black, et al., names as defendants certain of our current and/or former directors and/or officers, and names us as a nominal defendant. The complaint in this action asserts, among other things, that all of the defendants breached fiduciary obligations to us by causing or allowing us to disseminate misleading and inaccurate information to shareholders and the market, and by failing to establish and maintain adequate accounting controls, thus exposing us to damages. The complaint in this action also asserts a claim for unjust enrichment against our chairman, our vice chairman and chief executive officer, and our former president and chief financial officer. The complaint seeks unspecified compensatory damages, equitable relief, costs and expenses against all of the defendants. The complaint also seeks an order, in connection with plaintiff’s unjust enrichment claim, directing the defendants against whom that claim is asserted to disgorge certain compensation they received from us with respect to fiscal years 2001, 2002 and 2003. The parties have agreed upon a schedule for the filing of an amended complaint in this action, and the briefing of any motions to dismiss directed to the operative complaint in this action.
As previously announced, in August 2005 another alleged shareholder filed an action in the United States District Court for the District of Connecticut, purporting to sue derivatively on our behalf. The action, entitled Natalie Gordon v. Wayland R. Hicks, et al., names as defendants certain of our current and/or former directors and/or officers, and names us as a nominal defendant. The complaint in this action asserts claims against each of the defendants for breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment. Each of these claims is premised on, among other things, the theory that the individual defendants caused or permitted us to disseminate misleading and inaccurate information to shareholders and to the market, and failed to establish and maintain adequate accounting controls, thus exposing us to damages. The complaint also asserts (a) a claim that a former director breached fiduciary obligations by selling shares of our common stock while in possession of material, non-public information, and (b) a claim against our chairman, our vice chairman and chief executive officer, and our former president and chief financial officer for recovery of certain incentive-based compensation under section 304 of the Sarbanes-Oxley Act. The complaint seeks
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unspecified compensatory damages, equitable relief, restitution, costs and expenses against all of the defendants. The complaint also seeks an order declaring that the defendants against whom the section 304 claim is directed are liable under the Sarbanes-Oxley Act and directing them to reimburse us for all bonuses or other incentive-based or equity-based compensation they received for the fiscal years 1999 through 2004. The parties have agreed upon, and the Court has approved, a schedule for the filing of an amended complaint in this action, and the briefing of any motions to dismiss directed to the operative complaint in this action.
We are also a party to various other litigation matters, in most cases involving ordinary and routine claims incidental to our business. We cannot estimate with certainty our ultimate legal and financial liability with respect to such pending litigation matters. However, we believe, based on our examination of such matters, that our ultimate liability will not have a material adverse effect on our financial position, results of operations or cash flows.
6. Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding and, if dilutive, the Series C and Series D preferred shares as if converted to common shares since such shares are participating securities. Diluted earnings per share includes the impact of other dilutive securities. The following table sets forth the computation of basic and diluted earnings per share:
Numerator:
Net Income
Plus:
Convertible debt interest
Denominator:
Weighted-average common shares
Series C preferred
Series D preferred
Denominator for basic earnings per share—weighted-average
Effect of dilutive securities:
Employee stock options and warrants
Convertible shares
Restricted stock units and phantom shares
Denominator for diluted earnings per share—adjusted weighted-average shares
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7. Condensed Consolidating Financial Information of Guarantor Subsidiaries
URI is 100 percent owned by Holdings (the “Parent”) and has outstanding (i) certain indebtedness that is guaranteed by the Parent and (ii) certain indebtedness that is guaranteed by both Parent and substantially all of URI’s United States subsidiaries (the “guarantor subsidiaries”). However, this indebtedness is not guaranteed by URI’s foreign subsidiaries (the “non-guarantor subsidiaries”) and certain of its United States subsidiaries. The guarantor subsidiaries are all 100 percent-owned and the guarantees are made on a joint and several basis and are full and unconditional (subject to subordination provisions and subject to a standard limitation which provides that the maximum amount guaranteed by each guarantor will not exceed the maximum amount that can be guaranteed without making the guarantee void under fraudulent conveyance laws). Separate consolidated financial statements of the guarantor subsidiaries have not been presented because management believes that such information would not be material to investors; however, condensed consolidating financial information is presented. The condensed consolidating financial information of the Company and its subsidiaries is as follows:
CONDENSED CONSOLIDATING BALANCE SHEET
March 31, 2006
Accounts receivable, net
Intercompany receivable (payable)
Investment in subsidiaries
Goodwill and other intangible assets, net
Total liabilities and stockholder’s equity
12
March 31, 2005
Total liabilities and stockholders’ equity
13
December 31, 2005
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CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 2006
Operating income (loss)
Interest expense
Other (income) expense, net
Income (loss) before provision (benefit) for income taxes
Provision (benefit) for income taxes
Income (loss) before equity in net earnings of subsidiaries
Equity in net earnings of subsidiaries
Net income (loss)
15
For the Three Months Ended March 31, 2005
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CONDENSED CONSOLIDATING CASH FLOW INFORMATION
For Three Months Ended March 31, 2006
Net cash provided by (used in) operating activities
Net cash provided by (used in) financing activities
Effect of foreign exchange rate changes on cash and cash equivalents
Increase (decrease) in cash and cash equivalents
For Three Months Ended March 31, 2005
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Executive Overview
We are the largest equipment rental company in the world with an integrated network of more than 750 rental locations in the United States, Canada and Mexico. Although the equipment rental industry is highly fragmented and diverse, we believe we are well positioned to take advantage of this environment because larger companies often have significant competitive advantages over smaller competitors. These advantages include greater purchasing power, the ability to provide customers with a broader range of equipment and services as well as with newer and better maintained equipment, and greater flexibility to transfer equipment among branches.
We offer for rent over 20,000 classes of rental equipment, including construction equipment, industrial and heavy machinery, aerial work platforms, traffic control equipment, trench safety equipment and homeowner items. Our revenues are derived from the following sources: equipment rentals, sales of rental (used) equipment, sales of new equipment, contractor supplies sales and service and other. Rental equipment revenues have historically accounted for more than 70 percent of our total revenues and we expect this trend to continue.
In August 2004, we received notice from the SEC that it was conducting a non-public, fact-finding inquiry of the Company. The SEC inquiry appears to relate to a broad range of the Company’s accounting practices and is not confined to a specific period. In March 2005, our board of directors formed a Special Committee of independent directors to review matters related to the SEC inquiry. The board of directors received and acted upon findings of the Special Committee on January 26, 2006. The conclusions and recommendations of the Special Committee are discussed in the Company’s press release and the related current report on Form 8-K dated January 26, 2006. The SEC inquiry is ongoing and we are continuing to cooperate fully with the SEC.
Results of Operations
As discussed in note 2 to our unaudited condensed consolidated financial statements included in this Report, our reportable segments are general rentals, trench safety, pump and power and traffic control. The general rentals segment includes the rental of construction, aerial, industrial and homeowner equipment and related services and activities. The general rentals segment’s customers include construction and industrial companies, manufacturers, utilities, municipalities and homeowners. The general rentals segment operates throughout the United States and Canada and has one location in Mexico. The trench safety, pump and power segment includes the rental of specialty construction products and related services. The trench safety, pump and power segment’s customers include construction companies involved in infrastructure projects, municipalities and industrial companies. This segment operates in the United States and has one location in Canada. The traffic control segment includes the rental of equipment used in the management of traffic-related services and activities. The traffic control segment’s customers include construction companies involved in infrastructure projects and municipalities. The traffic control segment operates in the United States. The Company’s external segment reporting is aligned with how management evaluates and allocates resources. The Company evaluates segment performance based on segment operating results.
Our revenues and operating results fluctuate from quarter to quarter reflecting the seasonal rental patterns of our customers, with rental activity tending to be lower in the winter.
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Revenues by segment were as follows:
Three months ended March 31, 2006
Sales of new equipment
Service and other
Total revenue
Three months ended March 31, 2005
Three months ended March 31, 2006 and 2005. Equipment rentals represent our revenues from renting equipment. 2006 equipment rentals of $591 increased $77 or 15 percent, reflecting a 6.5 percent increase in rental rates as well as an increase in our dollar equipment utilization rate from 53.6 percent for the three months ended March 31, 2005 to 58.6 percent for the three months ended March 31, 2006. Additionally, the average original equipment cost of our equipment increased 6.7 percent in the first quarter of 2006 versus the corresponding quarter in 2005. Equipment rentals represented approximately 70 percent of total revenues for the three months ended March 31, 2006. On a segment basis, equipment rentals represented approximately 68 percent, 78 percent and 85 percent of total revenues for general rentals, trench safety, pump and power and traffic control, respectively. General rentals equipment rentals increased $62, or 14 percent, reflecting increased rental rates and a 13 percent increase in same-store rental revenues. Trench safety, pump and power equipment rentals increased $13, or 50 percent, reflecting a 19 percent increase in same-store rental revenues. Traffic control equipment rentals increased $2, or 5 percent, reflecting a 12 percent increase in same-store rental revenues.
Sales of rental equipment. Sales of rental equipment represent revenues associated with selling used equipment. For the three months ended March 31, 2006 and 2005, sales of rental equipment represented approximately 9 percent and 11 percent of our total revenues, respectively, and our general rentals segment accounted for approximately 95 percent of these sales. Sales of rental equipment for trench safety, pump and power and traffic control were insignificant. For the three months ended March 31, 2006, sales of rental equipment decreased 3 percent as compared to the same period in 2005, primarily reflecting a decrease in the volume of equipment sold.
Sales of new equipment. For the three months ended March 31, 2006 and 2005, sales of new equipment represented approximately 6 percent of our total revenues. Our general rentals segment accounted for between 90 and 95 percent of these sales. Sales of new equipment for trench safety, pump and power and traffic control were insignificant. For the three months ended March 31, 2006, sales of new equipment increased 27 percent as compared to the same period in 2005. The increase primarily reflects an increase in the volume of equipment sold.
Sales of contractor supplies. Sales of contractor supplies represent our revenues associated with selling a variety of contractor supplies including construction consumables, tools, small equipment and safety supplies. Consistent with sales of rental and used equipment, general rentals accounts for substantially all of our contractor supplies sales. General rentals accounted for approximately 91 percent of total sales of contractor supplies for the
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three months ended March 31, 2006 and 2005. For the three months ended March 31, 2006, sales of contractor supplies increased 38 percent as compared to the same period in 2005. The increase reflects an increase in the volume of supplies sold.
Service and other. Service and other represent our revenues earned from providing services (including parts sales). Consistent with sales of rental and new equipment as well as sales of contractor supplies, general rentals accounts for substantially all of our service and other revenue. For the three months ended March 31, 2006, service and other revenue increased 12 percent as compared to the same period in 2005. The increase is primarily attributable to increased parts sales.
Segment Operating Profit
Segment operating profit and operating margin were as follows:
Operating Profit (Loss)
Operating Margin
General rentals. For the three months ended March 31, 2006, operating profit increased by $11 as compared to the same period in 2005 primarily due to increased rental rates, partially offset by higher costs for labor and benefits from normal inflationary increases, higher selling, general and administrative costs and increased costs associated with opening new stores.
Trench safety, pump and Power. Trench safety, pump and power operating profit increased by $7 for the three months ended March 31, 2006 as compared to the same period in 2005 reflecting increased revenues of 44 percent.
Traffic control. Traffic control operating loss decreased by $4 for the three months ended March 31, 2006 as compared to the same period in 2005 primarily due to the closure and/or divestiture of unprofitable branches as well as reduced operating costs due to cost reductions and improved efficiencies.
Gross Margin. Gross margins by revenue classification were as follows:
Total gross margin
For the three months ended March 31, 2006, total gross profit margin improved by 2.9 percentage points as compared to the same period in 2005. Equipment rentals gross margin improved 4.8 percentage points primarily due to increased rental rates of 6.5 percent and equipment rentals revenue growth in the trench safety, pump and power segment of 50 percent. The reduction in gross margins on contractor supplies sales of 5.6 percentage points resulted primarily from increased costs related to the opening of our distribution centers. The fluctuations in margins on sales of rental equipment and new equipment reflect changes in the mix of equipment sold. Additionally, the reduction in gross margin on sales of new equipment reflects increased shipping costs.
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Selling, general and administrative expenses (SG&A). SG&A expense information for the three months ended March 31, 2006 and 2005 was as follows:
Total SG&A expenses
SG&A as a percentage of revenue
SG&A expense primarily includes sales force compensation, bad debt expense, advertising and marketing expenses, third party professional fees, management salaries and clerical and administrative overhead. For the three months ended March 31, 2006, SG&A expense increased $31 as compared to the same period in 2005. In addition to normal inflationary increases and higher selling and administrative costs related to growth in the business, the year-over-year growth in SG&A expense reflects increased professional costs related to regulatory issues and related matters of $10.
Non-rental depreciation and amortization for the three months ended March 31, 2006 and 2005 was as follows:
Non-rental depreciation and amortization as a percent of revenues
Non-rental depreciation and amortization includes (i) depreciation expense associated with equipment that is not offered for rent (such as vehicles, computers and office equipment) and amortization expense associated with leasehold improvements and (ii) the amortization of other intangible assets. Our other intangible assets consist of customer relationships and non-compete agreements.
Interest expense for the three months ended March 31, 2006 and 2005 was as follows:
Interest expense for the three months ended March 31, 2006 increased $7 primarily due to the increase in the interest rates applicable to our floating rate debt.
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Income taxes. The following table summarizes our consolidated provision for income taxes and the related effective tax rate for the three months ended March 31, 2006 and 2005:
Pre-tax income
Effective tax rate
The difference between the consolidated effective tax rates of 40 and 39 percent and the U.S. federal statutory income tax rate of 35 percent primarily relates to state taxes as well as certain non deductible charges.
Liquidity and Capital Resources
Liquidity. We manage our liquidity using internal cash management practices, which are subject to (1) the statutes, regulations and practices of each of the local jurisdictions in which we operate, (2) the legal requirements of the agreements to which we are a party and (3) the policies and cooperation of the financial institutions we utilize to maintain and provide cash management and investment services.
Our principal existing sources of cash are cash generated from operations and from the sale of rental equipment and borrowings available under our revolving credit facility and receivables securitization facility. As of March 31, 2006, we had (i) $429 of borrowing capacity available under the revolving credit facility portion of our $1.55 billion senior credit facility and (ii) $200 of borrowing capacity available under our receivables securitization facility (reflecting the size of the eligible collateral pool as of such date and no loans outstanding) and (iii) cash and cash equivalents of $331. We believe that our existing sources of cash will be sufficient to support our existing operations over the next twelve months.
We expect that our principal needs for cash relating to our existing operations over the next twelve months will be to fund (i) operating activities and working capital, (ii) the purchase of rental equipment and inventory items offered for sale, (iii) payments due under operating leases, (iv) debt service and (v) acquisitions. We plan to fund such cash requirements from our existing sources of cash. In addition, we may seek additional financing through the securitization of some of our equipment or real estate or through the use of additional operating leases.
While emphasizing internal growth, we intend to continue to expand through a disciplined acquisition program. We will consider potential transactions of varying sizes and may, on a selective basis, pursue acquisition or consolidation opportunities involving other public companies or large privately-held companies. We expect to pay for future acquisitions using cash, capital stock, notes and/or assumption of indebtedness. To the extent that our existing sources of cash described above are not sufficient to fund such future acquisitions, we will require additional debt or equity financing and, consequently, our indebtedness may increase or the ownership of existing stockholders may be diluted as we implement our growth strategy.
Loan Covenants and Compliance
As of March 31, 2006, we had not filed our quarterly reports on Form 10-Q for the periods ended in 2005. Therefore, we were in violation of amendments to our indentures which provided us with an extension through March 31, 2006 to file outstanding SEC reports. On April 12, 2006, we filed each of these quarterly reports on Form 10-Q and therefore regained compliance with the covenants in the indentures. The Company was in compliance with the New Credit Facility, as amended, as of March 31, 2006.
Sources and Uses of Cash. During the three months ended March 31, 2006, we (i) generated cash from operations of $226 and (ii) generated cash from the sale of rental equipment of $78. We used cash during this period principally to (i) purchase rental equipment of $243, (ii) purchase other property and equipment of $21 and (iii) purchase other companies for $23.
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During the three months ended March 31, 2005, we (i) generated cash from operations of $125 and (ii) generated cash from the sale of rental equipment of $80. We used cash during this period principally to (i) purchase rental equipment of $152 and (ii) purchase other property and equipment of $13.
Our credit ratings as of May 8, 2006 were as follows:
Moody’s
S&P
Fitch
Both our ability to obtain financing and the related cost of borrowing are affected by our credit ratings, which are periodically reviewed by these rating agencies. Our current credit ratings are below investment grade and we expect our access to the public debt markets to be limited to the non-investment grade segment until our ratings reflect an investment grade rating.
Certain Information Concerning Off-Balance Sheet Arrangements
We lease real estate, rental equipment and non-rental equipment under operating leases as a regular business activity. As part of some of our equipment operating leases, we guarantee that the value of the equipment at the end of the term will not be less than a specified projected residual value. If the actual residual value for all equipment subject to such guarantees were to be zero, then our maximum potential liability under these guarantees would be approximately $29. Under current circumstances we do not anticipate paying significant amounts under these guarantees; however, we cannot be certain that changes in market conditions or other factors will not cause the actual residual values to be lower than those currently anticipated. In accordance with FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” this potential liability was not reflected on our balance sheet as of March 31, 2006, March 31, 2005 or December 31, 2005 or any prior date because the leases associated with such guarantees were entered into prior to January 1, 2003.
Relationship Between Holdings and URNA
Holdings is principally a holding company and primarily conducts its operations through its wholly owned subsidiary URNA and subsidiaries of URNA. Holdings provides certain services to URNA in connection with its operations. These services principally include: (i) senior management services, (ii) finance and tax related services and support, (iii) information technology systems and support, (iv) acquisition related services, (v) legal services, and (vi) human resource support. In addition, Holdings leases certain equipment and real property that are made available for use by URNA and its subsidiaries.
Our exposure to market risk primarily consists of (1) interest rate risk associated with our variable rate debt and (2) foreign currency exchange rate risk primarily associated with our Canadian operations.
Interest Rate Risk. We periodically utilize interest rate swap agreements and interest rate cap agreements to manage our interest costs and exposure to changes in interest rates. As of March 31, 2006, we had swap agreements with an aggregate notional amount of $1.2 billion and cap agreements with an agreement notional amount of $725. The effect of the swap agreement was, at March 31, 2006, to convert $1.2 billion of our fixed rate notes to floating rate instruments. The fixed rate notes being converted consisted of (i) $445 of our 6 1/2 percent notes through 2012, (ii) $375 of our 7 percent notes, and (iii) $375 of our 7 3/4 percent senior subordinated notes through 2013.
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As of March 31, 2006, after giving effect to our interest rate swap and cap agreements, we had an aggregate of $1.3 billion of indebtedness that bears interest at variable rates. For this purpose, the portion of the term loan subject to the cap is considered fixed. The debt that is subject to fluctuations in interest rates includes $137 of borrowings under our revolving credit facility, $1.2 billion in swaps, and $10 of term loans not subject to an interest rate cap. The weighted-average effective interest rates applicable to our variable rate debt as of March 31, 2006 were (i) 5.9 percent for the revolving credit facility (represents the Canadian rate since the amount outstanding was Canadian borrowings), (ii) 7.1 percent for the term loan and (iii) 7.6 percent for the debt subject to our swap agreements. As of March 31, 2006, based upon the amount of our variable rate debt outstanding, after giving effect to our interest rate swap agreements, our annual earnings would decrease by approximately $13 for each one percentage point increase in the interest rates applicable to our variable rate debt. The amount of our variable rate indebtedness may fluctuate significantly as a result of changes in the amount of indebtedness outstanding under our revolving credit facility and receivables securitization facility from time to time.
Currency Exchange Risk. The functional currency for our Canadian operations is the Canadian dollar. As a result, our future earnings could be affected by fluctuations in the exchange rate changes between the U.S. and Canadian dollars. Based upon the level of our Canadian operations during 2005 relative to the company as a whole, a 10 percent change in this exchange rate would not have a material impact on our earnings. In addition, we periodically enter into foreign exchange contracts to hedge our transaction exposures. We had no outstanding foreign exchange contracts as of March 31, 2006. We do not engage in purchasing forward exchange contracts for speculative purposes.
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Company’s Chief Executive Offer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As of March 31, 2006, the Company’s management carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a–15(e) and 15d–15(e) of the Exchange Act. Based on the continued existence of the material weakness in internal control over financial reporting described below, our Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2006, the Company’s disclosure controls and procedures were not effective.
In light of the material weaknesses in internal control described below, we performed additional procedures to ensure that our unaudited condensed consolidated financial statements included in this report were prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). These steps included, among other actions, expansion of our closing procedures, including performing detailed analyses of accounts and review of subsequent transactions to affirm account balances. As a result of the additional procedures, management has concluded that the unaudited condensed consolidated financial statements included in this quarterly report are fairly stated, in all material respects, in accordance with GAAP.
Under the supervision of our Chief Executive Officer and Chief Financial Officer, our management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005. In making this assessment, management used the criteria set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
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A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of annual or interim financial statements will not be prevented or detected. As previously described in greater detail in Item 9A of the Company’s annual report on Form 10-K for the year ended December 31, 2005, we determined that internal controls over the financial statement close process were not effective and represented a material weakness in internal control over financial reporting as of December 31, 2005. This material weakness in internal control over financial reporting had not been effectively remediated, and therefore continued to exist, as of March 31, 2006.
During 2006, the Company is implementing short-term enhancements to the financial close process to remediate the material weakness in internal control over financial reporting, as well as a long-term finance transformation. The short-term enhancements include:
In addition to these short-term measures, in the first quarter 2006 the Company initiated a long-term enterprise-wide finance transformation project to assess and improve various aspects of the Company’s financial operations and systems. Substantial improvements to the Company’s financial operations are expected to be achieved from this project over a twelve to eighteen month period.
Until the short-term remediation measures discussed above are completed, the material weakness in the financial statement close process will continue to exist. Management presently anticipates that the short-term changes necessary to remediate this material weakness will be in place by the end of the third quarter of 2006. Until such time that the remediation is effectively completed, we will rely on additional analyses and other detailed procedures to assist us with meeting the objectives otherwise of an effective internal control environment.
Changes in Internal Control over Financial Reporting
As previously discussed in Item 9A of our 2005 10-K, during the first quarter of 2006, we hired an Executive Vice President/Chief Financial Officer (previously our Interim Chief Financial Officer), a Senior Vice President/Chief Information Officer and a Vice President—Taxes. Except for such hires and as discussed above, there were no changes in our internal control over financial reporting during the quarter ended March 31, 2006 that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
The information set forth under note 5 to our unaudited condensed consolidated financial statements of this Quarterly Report on Form 10-Q is incorporated by reference in answer to this item.
Our results of operations and financial condition are subject to numerous risks and uncertainties described in our Annual Report on Form 10-K for 2005, filed on March 31, 2006, and incorporated herein by reference. You should carefully consider these risk factors in conjunction with the other information contained in this report. Should any of these risks materialize, our business, financial condition and future prospects could be negatively impacted.
Sales of Unregistered Securities
Options to purchase an aggregate of 210,000 shares of the Company’s common stock were granted to employees and consultants between January and March 2006. The exercise price is equal to the fair market value of the common stock on the date of grant. The grant of these options was not required to be registered under the Securities Act because the issuance did not constitute a sale within the meaning of Section 2(3) thereof.
Purchases of Equity Securities by the Issuer
The following table provides information about purchases of the Company’s common stock by the Company during the first quarter of 2006:
Period
January 1, 2006 to January 31, 2006
February 1, 2006 to February 28, 2006
March 1, 2006 to March 31, 2006
Total
(a) Exhibits:
Description of Exhibit
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
By:
/S/ MARTIN E. WELCH III
Martin E. Welch III
Chief Financial Officer
(Principal Financial and Accounting Officer)
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