UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
For the quarterly period ended September 30, 2010
For the transition period from to
Commission File Number 1-14387
Commission File Number 1-13663
United Rentals, Inc.
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. x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨ (registrant is not yet required to provide financial disclosure in an Interactive Data File format)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
As of October 18, 2010, there were 60,533,375 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 Instruction (H)(1)(a) and (b) of Form 10-Q and is therefore filing this report 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, 2010
INDEX
FINANCIAL INFORMATION
Item 1
Unaudited Condensed Consolidated Financial Statements
United Rentals, Inc. Condensed Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009 (unaudited)
United Rentals, Inc. Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2010 and 2009 (unaudited)
United Rentals, Inc. Condensed Consolidated Statement of Stockholders’ Equity (Deficit) for the Nine Months Ended September 30, 2010 (unaudited)
United Rentals, Inc. Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009 (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
OTHER INFORMATION
Legal Proceedings
Item 1A
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Item 6
Exhibits
Signatures
2
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements can be identified by the use of forward-looking terminology such as “believe,” “expect,” “may,” “will,” “should,” “seek,” “on-track,” “plan,” “project,” “forecast,” “intend” or “anticipate,” or the negative thereof or comparable terminology, or by discussions of strategy or outlook. You are cautioned that our business and operations are subject to a variety of risks and uncertainties, many of which are beyond our control, and, consequently, our actual results may differ materially from those projected. Factors that could cause actual results to differ materially from those projected include, but are not limited to, the following: (1) on-going decreases in North American construction and industrial activities, which have significantly affected revenues and, because many of our costs are fixed, our profitability, and which may further reduce demand and prices for our products and services; (2) inability to benefit from government spending associated with stimulus-related construction projects; (3) our highly leveraged capital structure, which requires us to use a substantial portion of our cash flow for debt service and can constrain our flexibility in responding to unanticipated or adverse business conditions; (4) noncompliance with financial or other covenants in our debt agreements, which could result in our lenders terminating our credit facilities and requiring us to repay outstanding borrowings; (5) inability to access the capital that our business may require; (6) increases in our maintenance and replacement costs as we age our fleet, and decreases in the residual value of our equipment; (7) inability to sell our new or used fleet in the amounts, or at the prices, we expect; (8) rates we can charge and time utilization we can achieve being less than anticipated; and (9) costs we incur being more than anticipated, and the inability to realize expected savings in the amounts or time frames planned. For a fuller description of these and other possible uncertainties, please refer to our Annual Report on Form 10-K for the year ended December 31, 2009. Our forward-looking statements contained herein speak only as of the date hereof, and we make no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances or changes in expectations.
3
PART I. FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In millions, except share data)
ASSETS
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts of $26 and $25 at September 30, 2010 and December 31, 2009, respectively
Inventory
Prepaid expenses and other assets
Deferred taxes
Total current assets
Rental equipment, net
Property and equipment, net
Goodwill and other intangible assets, net
Other long-term assets
Total assets
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current maturities of long-term debt
Accounts payable
Accrued expenses and other liabilities
Total current liabilities
Long-term debt
Subordinated convertible debentures
Other long-term liabilities
Total liabilities
Common stock—$0.01 par value, 500,000,000 shares authorized, 60,533,375 and 60,163,233 shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive income
Total stockholders’ deficit
Total liabilities and stockholders’ deficit
See accompanying notes.
4
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in millions, except per share amounts)
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 revenues
Total cost of revenues
Gross profit
Selling, general and administrative expenses
Restructuring charge
Non-rental depreciation and amortization
Operating income
Interest expense, net
Interest expense—subordinated convertible debentures, net
Other income, net
Income (loss) before provision (benefit) for income taxes
Provision (benefit) for income taxes
Net income (loss)
Basic earnings (loss) per share
Diluted earnings (loss) per share
5
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT) (UNAUDITED)
(In millions)
Balance at December 31, 2009
Comprehensive loss:
Net loss
Other comprehensive income:
Foreign currency translation adjustments
Comprehensive income
Stock compensation expense, net
Excess tax benefits from share-based payment arrangements, net
Other
Balance at September 30, 2010
6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in millions)
Cash Flows From Operating Activities:
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization
Amortization of deferred financing costs and original issue discounts
Gain on sales of rental equipment
(Gain) loss on sales of non-rental equipment
Loss (gain) on repurchase/redemption of debt securities
Gain on retirement of subordinated convertible debentures
Decrease in deferred taxes
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable
(Increase) decrease in inventory
Decrease in prepaid expenses and other assets
Increase (decrease) in accounts payable
Increase (decrease) in accrued expenses and other liabilities
Net cash provided by operating activities
Cash Flows From Investing Activities:
Purchases of rental equipment
Purchases of non-rental 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:
Proceeds from debt
Payments of debt
Payments of financing costs
Shares repurchased and retired
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
Supplemental disclosure of cash flow information:
Cash received for income taxes, net
See accompanying notes
7
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data, unless otherwise indicated)
1. Organization, Description of Business and Basis of Presentation
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 government entities in the United States and Canada. In addition to renting equipment, we sell new and used rental equipment, as well as related contractor supplies, parts and service.
We have prepared the accompanying unaudited condensed consolidated financial statements in accordance with the accounting policies described in our annual report on Form 10-K for the year ended December 31, 2009 (the “2009 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 unaudited condensed consolidated financial statements should be read in conjunction with the 2009 Form 10-K. Certain reclassifications have been made to prior year financial information to conform to the current year presentation.
Generally, accounting for income taxes requires companies to provide for income taxes each quarter based on their estimate of the effective tax rate for the full year (the effective tax rate approach). However, in the present circumstance, because we are unable to reliably estimate the effective tax rate for the full year, we have calculated taxes for the three and nine months ended September 30, 2010 based on actual year-to-date pre-tax income, rather than a full-year forecast.
In our opinion, all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair statement of financial condition, 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.
New Accounting Pronouncements
Fair Value Measurements. In January 2010, the Financial Accounting Standards Board (“FASB”) issued guidance which expanded the required disclosures about fair value measurements. In particular, this guidance requires (i) separate disclosure of the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements along with the reasons for such transfers, (ii) information about purchases, sales, issuances and settlements to be presented separately in the reconciliation for Level 3 fair value measurements, (iii) fair value measurement disclosures for each class of assets and liabilities and (iv) disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3. The adoption of this guidance did not have a material effect on our financial condition or results of operations.
Subsequent Events. In February 2010, the FASB issued guidance related to events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This guidance amended existing standards to address potential conflicts with Securities and Exchange Commission (“SEC”) guidance and refined the scope of the reissuance disclosure requirements to include revised financial statements only. Under this guidance, SEC filers are no longer required to disclose the date through which subsequent events have been evaluated. The adoption of this standard did not have a material effect on our financial condition or results of operations.
2. Segment Information
Our reportable segments are general rentals and trench safety, power and HVAC. In the second quarter of 2010, our reportable segment for specialty operations was renamed trench safety, power and HVAC to better reflect its fleet and service components. The segment was previously referred to as trench safety, pump and power.
The general rentals segment includes the rental of construction, infrastructure, industrial and homeowner equipment and related services and activities. The general rentals segment’s customers include construction and industrial companies, manufacturers, utilities, municipalities, homeowners and government entities. The general rentals segment comprises seven geographic regions—the Southwest, Gulf, Northwest, Southeast, Midwest, East, and the Northeast Canada—as well as the Aerial West region and operates throughout the United States and Canada. The trench safety, power and HVAC segment includes the rental of equipment for underground construction, temporary power, climate control and disaster recovery, and related services such as training. The trench safety, power and HVAC 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. These segments align our external segment reporting with how management evaluates and allocates resources. We evaluate segment performance based on segment operating results.
8
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table sets forth financial information by segment. Information related to our condensed consolidated balance sheets is presented as of September 30, 2010 and December 31, 2009.
Total reportable segment revenues
General rentals
Trench safety, power and HVAC
Total reportable segment depreciation and amortization expense
Total depreciation and amortization expense
Total reportable segment operating income
Total reportable segment capital expenditures
Total capital expenditures
Total reportable segment assets
The following is a reconciliation of segment operating income to total Company operating income:
Unallocated restructuring charge
9
3. Restructuring and Asset Impairment Charges
Over the past several years we have been focused on reducing our operating costs. In connection with this strategy, we reduced our employee headcount from approximately 10,900 at December 31, 2007 to approximately 8,000 at December 31, 2009. Additionally, we reduced our branch network from 697 at December 31, 2007 to 569 at December 31, 2009. In the first nine months of 2010, we further reduced our headcount by approximately 600 employees, or 8 percent, and closed 27 of our less profitable branches. The restructuring charges for the three and nine months ended September 30, 2010 and 2009 include severance costs associated with our headcount reductions, as well as branch closure charges, the latter of which principally relates to continuing lease obligations at vacant facilities.
The table below provides certain information concerning our restructuring charges:
Description
Branch closure charges
Severance costs
Total
We have incurred total restructuring charges between January 1, 2008 and September 30, 2010 of $70, comprised of $53 of branch closure charges and $17 of severance costs. We expect that the restructuring activity will be substantially complete by the end of 2011.
In addition to the restructuring charges discussed above, during the three and nine months ended September 30, 2010, the company recorded asset impairment charges of $1 and $3, respectively. The asset impairment charges for the three and nine months ended September 30, 2010 primarily relate to leasehold improvement write-offs which were recognized in connection with the consolidation of our branch network discussed above, and are reflected in non-rental depreciation and amortization in the accompanying condensed consolidated statements of operations.
During the three and nine months ended September 30, 2009, the company recorded restructuring charges of $1 and $25, respectively, and asset impairment charges of $0 and $9, respectively. The asset impairment charges for the nine months ended September 30, 2009 include (i) a charge of $7 related to certain rental equipment which is reflected in depreciation of rental equipment in the accompanying condensed consolidated statements of operations and (ii) leasehold improvement write-offs of $2 recognized in connection with the consolidation of our branch network discussed above, which are reflected in non-rental depreciation and amortization in the accompanying condensed consolidated statements of operations.
4. Derivatives
We recognize all derivative instruments as either assets or liabilities at fair value, and recognize the changes in fair value of the derivative instruments based on the designation of the derivative. For derivative instruments that are designated and qualify as hedging instruments, we designate the hedging instrument, based upon the exposure being hedged, as either a fair value hedge or a cash flow hedge. As of September 30, 2010, we do not have any outstanding derivative instruments designated as fair value hedges. The effective portion of the changes in fair value of derivatives that are designated as cash flow hedges is recorded as a component of accumulated other comprehensive income. Amounts included in accumulated other comprehensive income for cash flow hedges are reclassified into earnings in the same period that the hedged item is recognized in earnings. The ineffective portion of changes in the fair value of derivatives designated as cash flow hedges is recorded currently in earnings. For derivative instruments that do not qualify for hedge accounting, we recognize gains or losses due to changes in fair value in our condensed consolidated statements of operations during the period in which the changes in fair value occur.
We are exposed to certain risks relating to our ongoing business operations. At September 30, 2010, the primary risks we managed using derivative instruments were diesel price risk and foreign currency exchange rate risk. At September 30, 2010, we had (i) outstanding fixed price swap contracts on diesel purchases which were entered into to mitigate the price risk associated with forecasted purchases of diesel and (ii) an outstanding forward contract to purchase Canadian dollars which was entered into to mitigate the foreign currency exchange rate risk associated with URNA’s Canadian dollar denominated intercompany loan. The outstanding forward contracts on diesel purchases were designated and qualify as cash flow hedges and the forward contract to purchase Canadian dollars represents a derivative instrument not designated as a hedging instrument.
Fixed Price Diesel Swaps
The fixed price swap contracts on diesel purchases that were outstanding at September 30, 2010 were designated and qualify as cash flow hedges and the effective portion of the gain or loss on these contracts is reported as a component of accumulated other comprehensive income and reclassified into earnings in the period during which the hedged transaction affects earnings (i.e., when the hedged gallons of diesel are used). The remaining gain or loss on the fixed price swap contracts in excess of the cumulative change in the present value of future cash flows of the hedged item, if any (i.e., the ineffectiveness portion), is recognized in our condensed consolidated statements of operations during the current period. As of September 30, 2010, we had outstanding fixed price swap contracts covering 2.1 million gallons of diesel, 0.9 million and 1.2 million of which will be purchased throughout 2010 and 2011, respectively.
Foreign Currency Forward Contracts
The forward contract to purchase Canadian dollars represents a derivative instrument not designated as a hedging instrument and gains or losses due to changes in its fair value are recognized in our condensed consolidated statements of operations during the period in which the changes in fair value occur. At September 30, 2010, there was an outstanding forward contract to purchase $11 Canadian dollars, representing the amount due at maturity for an intercompany loan entered into during the third quarter of 2010. This intercompany loan concentrated excess foreign cash into the US. The intercompany loan and the forward contract both mature in the fourth quarter of 2010. Upon maturity, the proceeds from the forward contract will be used to pay down the Canadian dollar denominated intercompany loan.
10
Financial Statement Presentation
There were no derivative instruments outstanding as of December 31, 2009, or during the three and nine months ended September 30, 2009, and these periods are excluded from the tables below.
Our derivative instruments were reflected in our condensed consolidated balance sheets as follows:
Balance sheet location
Fixed price diesel swaps
Foreign currency forward contracts
The effect of our derivative instruments on our condensed consolidated statements of operations was as follows:
Location of income (expense)recognized on derivative
Location of income(expense) recognized
on hedged item
Derivatives designated as hedging instruments:
Derivatives not designated as hedging instruments:
5. Fair Value Measurements
We account for certain assets and liabilities at fair value. In accordance with GAAP, we categorize each of our fair value measurements in one of the following three levels based on the lowest level input that is significant to the fair value measurement in its entirety:
Level 1- Inputs to the valuation methodology are unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2- Observable inputs other than quoted prices in active markets for identical assets and liabilities include:
If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.
Level 3- Inputs to the valuation methodology are unobservable (i.e., supported by little or no market activity) and significant to the fair value measure.
11
Assets and Liabilities Measured at Fair Value
The following table presents the fair values of our assets and liabilities that are measured at fair value:
Held for sale assets measured at fair value on a non-recurring basis (1)
Derivatives measured at fair value on a recurring basis:
Assets:
Fuel fixed price swaps contracts (2)
Foreign exchange contracts (3)
Total derivative assets
Liabilities:
Fair Value of Financial Instruments
The carrying amounts reported in our condensed consolidated balance sheets for accounts receivable, accounts payable and accrued expenses and other liabilities approximate fair value due to the immediate to short-term maturity of these financial instruments. The fair values of our ABL facility, accounts receivable securitization facility and 1 7/8 percent Convertible Senior Subordinated Notes approximate their book values as of September 30, 2010 and December 31, 2009. The estimated fair values of our other financial instruments as of September 30, 2010 and December 31, 2009 have been calculated based upon available market information or an appropriate valuation technique, and are as follows:
Senior and senior subordinated notes
Other debt, including capital leases (1)
12
6. Debt and Subordinated Convertible Debentures
Debt consists of the following:
URNA and subsidiaries debt:
Accounts Receivable Securitization Facility (1)
$1.360 billion ABL Facility (1)
6 1/2 percent Senior Notes
7 3/4 percent Senior Subordinated Notes
7 percent Senior Subordinated Notes
10 7/8 percent Senior Notes
9 1/4 percent Senior Notes
1 7/8 percent Convertible Senior Subordinated Notes (2)
Other debt, including capital leases
Total URNA and subsidiaries debt
Less current portion
Long-term URNA and subsidiaries debt
Holdings:
4 percent Convertible Senior Notes
Total long-term debt (3)
Subject to providing notification to the Company on October 15, 2010, the holders of our 1 7/8 percent Convertible Senior Subordinated Notes had the right to require us to repurchase all of the 1 7/8 percent Convertible Senior Subordinated Notes. On October 15, 2010, $93 of the 1 7/8 percent Convertible Senior Subordinated Notes outstanding at September 30, 2010 were put to the Company and are scheduled to be repurchased on October 20, 2010 at par.
In August 1998, a subsidiary trust of Holdings (the “Trust”) issued and sold $300 of 6 1/2 percent Convertible Quarterly Income Preferred Securities (“QUIPS”) in a private offering. The Trust used the proceeds from the offering to purchase 6 1/2 percent subordinated convertible debentures due 2028 (the “Debentures”), which resulted in Holdings receiving all of the net proceeds of the offering. The QUIPS are non-voting securities, carry a liquidation value of $50 (fifty dollars) per security and are convertible into Holdings’ common stock. Total long-term debt at September 30, 2010 and December 31, 2009 excludes $124 of these Debentures, which are separately classified in our condensed consolidated balance sheets and referred to as “subordinated convertible debentures.” The subordinated convertible debentures reflect the obligation to our subsidiary that has issued the QUIPS. This subsidiary is not consolidated in our financial statements because we are not the primary beneficiary of the Trust.
Retirement/Redemption of Debt. During the nine months ended September 30, 2010, we repurchased or redeemed and subsequently retired certain of our outstanding debt securities. In connection with these repurchases/retirements, we recognized gains (losses) based on the difference between the net carrying amounts of the repurchased or redeemed securities and the repurchase prices. A summary of our debt repurchase/redemption activity for the nine months ended September 30, 2010 is as follows:
13
Loan Covenants and Compliance. As of September 30, 2010, we were in compliance with the covenants and other provisions of the ABL facility, the accounts receivable securitization facility, the senior notes and the QUIPS. Any failure to be in compliance with any material provision or covenant of these agreements could have a material adverse effect on our liquidity and operations. The only material financial covenants which currently exist relate to the fixed charge coverage ratio and the senior secured leverage ratio under the ABL facility. Both of these covenants were suspended on June 9, 2009 because availability, as defined in the agreement governing the ABL facility, had exceeded 20 percent of the maximum revolver amount under the ABL facility. Since the June 9, 2009 suspension date and through September 30, 2010, availability under the ABL facility has exceeded 10 percent of the maximum revolver amount under the ABL facility and, as a result, these maintenance covenants remained inapplicable. Subject to certain limited exceptions specified in the ABL facility, these covenants will only apply in the future if availability under the ABL facility falls below 10 percent of the maximum revolver amount under the ABL facility.
7. Legal and Regulatory Matters
As discussed in note 13 to our consolidated financial statements for the year ended December 31, 2009 filed on Form 10-K on February 3, 2010 (“Note 13”), we are subject to certain ongoing class action and derivative legal proceedings. The following information is limited to recent developments concerning certain legal proceedings in which we are involved, and supplements the discussions of these proceedings included in Note 13.
In the First New York Securities, L.L.C., et al. v. United Rentals, Inc., et al. matter, on August 30, 2010, the United States Court of Appeals for the Second Circuit affirmed the judgment of the United States District Court for the District of Connecticut granting defendants’ motion to dismiss. On September 13, 2010, plaintiffs filed a petition for rehearing en banc or panel rehearing.
We are also subject to a number of claims and proceedings that generally arise in the ordinary conduct of our business. These matters include, but are not limited to, general liability claims (including personal injury, product liability, and property and auto claims), indemnification and guarantee obligations, employee injuries and employment-related claims, self-insurance obligations and contract and real estate matters. Based on advice of counsel and available information, including current status or stage of proceeding, and taking into account accruals for matters where we have established them, we currently believe that any liabilities ultimately resulting from these ordinary course claims and proceedings will not, individually or in the aggregate, have a material adverse effect on our consolidated financial condition, results of operations or cash flows.
8. Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares. Diluted earnings (loss) per share is computed by dividing net income (loss) available to common stockholders by the adjusted weighted-average number of common shares. Diluted earnings per share for the three months ended September 30, 2010 and 2009 excludes the impact of approximately 3.0 million and 8.3 million common stock equivalents, respectively, since the effect of including these securities would be anti-dilutive. Diluted loss per share for the nine months ended September 30, 2010 and 2009 excludes the impact of approximately 9.2 million and 9.6 million common stock equivalents, respectively, since the effect of including these securities would be anti-dilutive. The following table sets forth the computation of basic and diluted earnings (loss) per share (shares in thousands):
Numerator:
Convertible debt interest—1 7/8 percent
Net income (loss) available to common stockholders
Denominator:
Denominator for basic earnings (loss) per share—weighted-average common shares
Effect of dilutive securities:
Employee stock options and warrants
Convertible subordinated notes—1 7/8 percent
Convertible subordinated notes—4 percent
Restricted stock units
Denominator for diluted earnings (loss) per share—adjusted weighted-average common shares
14
9. Condensed Consolidating Financial Information of Guarantor Subsidiaries
URNA is 100 percent owned by Holdings (“Parent”) and has outstanding (i) certain indebtedness that is guaranteed by Parent and (ii) certain indebtedness that is guaranteed by both Parent and, with the exception of its U.S. special purpose entity (the “SPV”) which holds receivable assets relating to the Company’s accounts receivable securitization facility, all of URNA’s U.S. subsidiaries (the “guarantor subsidiaries”). However, this indebtedness is not guaranteed by URNA’s foreign subsidiaries and the SPV (together, the “non-guarantor 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 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 Parent and its subsidiaries is as follows:
CONDENSED CONSOLIDATING BALANCE SHEET
September 30, 2010
Accounts receivable, net
Intercompany receivable (payable)
Investments in subsidiaries
Goodwill and other intangibles, net
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
Total stockholders’ (deficit) equity
Total liabilities and stockholders’ (deficit) equity
15
December 31, 2009
16
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Three Months Ended September 30, 2010
REVENUES
Operating (loss) income
Interest expense-subordinated convertible debentures
Other (income) expense, net
(Loss) income before (benefit) provision for income taxes
(Benefit) provision for income taxes
(Loss) income before equity in net earnings (loss) of subsidiaries
Equity in net earnings (loss) of subsidiaries
17
For the Three Months Ended September 30, 2009
18
For the Nine Months Ended September 30, 2010
(Loss) income before equity in net (loss) earnings of subsidiaries
Equity in net (loss) earnings of subsidiaries
Net (loss) income
19
For the Nine Months Ended September 30, 2009
Interest expense-subordinated convertible debentures, net
Income (loss) before equity in net (loss) earnings of subsidiaries
20
CONDENSED CONSOLIDATING CASH FLOW INFORMATION
Net cash provided by (used in) operating activities
Net cash (used in) provided by financing activities
Net increase (decrease) in cash and cash equivalents
Net cash (used in) provided by investing activities
21
Executive Overview
We are the largest equipment rental company in the world with an integrated network of 549 rental locations in the United States and Canada. Although the equipment rental industry is highly fragmented and diverse, we believe we are well positioned to take advantage of this environment because as a larger company we have more resources and certain 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 better maintained equipment, and greater flexibility to transfer equipment among branches.
We offer for rent approximately 2,900 classes of equipment to customers that include construction and industrial companies, manufacturers, utilities, municipalities, homeowners and government entities. Our revenues are derived from the following sources: equipment rentals, sales of used rental equipment, sales of new equipment, contractor supplies sales and service and other. In 2009, equipment rental revenues represented 78 percent of our total revenues.
The latter part of 2008 through 2009 was challenging for both our company and the U.S. equipment rental industry as a whole. As the financial crisis led into a recession, credit restrictions and the macro economy triggered a severe downturn in non-residential construction activity of unprecedented depth and duration. Late in the first quarter of 2010, we began to see signs of a potential recovery in our end markets; this has continued through the second and third quarters, becoming more pronounced by June. We believe that our performance in the third quarter—which includes record quarterly time utilization of 71.3 percent—reflects both seasonal and cyclical improvements in our operating environment. Although there is no certainty that these trends will continue, we believe that our strategy will strengthen our leadership position in the recovery. Our strategy is to optimize our core rental business through customer segmentation, rate management and fleet management; achieve differentiation and a competitive advantage through customer service excellence; and maintain a disciplined approach to cost control.
Financial Overview
Net income (loss). Net income (loss) and diluted earnings (loss) per share for the three and nine months ended September 30, 2010 and 2009 were as follows:
Net income (loss) and diluted earnings (loss) per share for the three and nine months ended September 30, 2010 and 2009 include the impacts of the following special items (amounts presented on an after-tax basis):
Restructuring charge (1)
(Loss) gain on repurchases/redemptions of debt securities and retirement of subordinated convertible debentures
Asset impairment charge (2)
In addition to the matters discussed above, our 2010 performance reflects increased gross profit from the sale of rental equipment and reductions in selling, general and administrative expenses. Our results for the three months ended September 30, 2010 also include increased gross profit from equipment rentals reflecting a 7.1 percentage point increase in time utilization to a quarterly record of 71.3 percent. Additionally, and as discussed below (see “Income taxes”), our results for the nine months ended September 30, 2010 include a tax benefit of $18.
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EBITDA GAAP Reconciliation. EBITDA represents the sum of net income (loss), provision (benefit) for income taxes, interest expense, net, interest expense-subordinated convertible debentures, net, depreciation of rental equipment and non-rental depreciation and amortization. Adjusted EBITDA represents EBITDA plus the sum of the restructuring charge and stock compensation expense, net. These items are excluded from adjusted EBITDA internally when evaluating our operating performance and allow investors to make a more meaningful comparison between our core business operating results over different periods of time, as well as with those of other similar companies. Management believes that EBITDA and adjusted EBITDA, when viewed with the Company’s results under GAAP and the accompanying reconciliation, provide useful information about operating performance and period-over-period growth, and provide additional information that is useful for evaluating the operating performance of our core business without regard to potential distortions. Additionally, management believes that EBITDA and adjusted EBITDA permit investors to gain an understanding of the factors and trends affecting our ongoing cash earnings, from which capital investments are made and debt is serviced. However, EBITDA and adjusted EBITDA are not measures of financial performance or liquidity under GAAP and, accordingly, should not be considered as alternatives to net loss or cash flow from operating activities as indicators of operating performance or liquidity. The table below provides a reconciliation between net income (loss) and EBITDA and adjusted EBITDA.
Interest expense – subordinated convertible debentures, net
EBITDA
Stock compensation expense, net (2)
Adjusted EBITDA
For the three months ended September 30, 2010, EBITDA increased $26, or 14.4 percent, and adjusted EBITDA increased $32, or 17.4 percent, primarily reflecting increased margins from equipment rentals and sales of rental equipment, and selling, general and administrative expense reductions. For the nine months ended September 30, 2010, EBITDA increased $37, or 8.3 percent, and adjusted EBITDA increased $31, or 6.5 percent, primarily reflecting increased margins from sales of rental equipment, and selling, general and administrative expense reductions, partially offset by reduced margins from equipment rentals.
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Results of Operations
As discussed in note 2 to our condensed consolidated financial statements, our reportable segments are general rentals and trench safety, power and HVAC. In the second quarter of 2010, our reportable segment for specialty operations was renamed trench safety, power and HVAC to better reflect its fleet and service components. The segment was previously referred to as trench safety, pump and power.
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, homeowners and government entities. The general rentals segment operates throughout the United States and Canada. The trench safety, power and HVAC segment includes the rental of equipment for underground construction, temporary power, climate control and disaster recovery, and related services such as training. The trench safety, power and HVAC 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.
As discussed in note 2 to our condensed consolidated financial statements, we aggregate our seven geographic regions—the Southwest, Gulf, Northwest, Southeast, Midwest, East, and the Northeast Canada—as well as the Aerial West region into our general rentals reporting segment. Historically, there have been variances in the levels of equipment rentals gross margins achieved by these regions. For instance, for the five year period ended September 30, 2010, our Midwest region’s equipment rentals gross margin varied by more than 10 percent from the equipment rentals gross margin of the aggregated general rentals’ regions over the same period. Although the margin for the Midwest region exceeded a 10 percent variance level for this five year period, prior to the significant economic downturn in 2009 that negatively impacted all our regions, the Midwest region’s margin was converging with those achieved at the other general rentals’ regions, and, given management’s focus on cost cutting, improved processes and fleet sharing, we expect further convergence going forward. Although we believe aggregating these regions into our general rentals reporting segment for segment reporting purposes is appropriate, to the extent that the margin variances persist and the equipment rentals gross margins do not converge, we may be required to disaggregate the regions into separate reporting segments. Any such disaggregation would have no impact on our consolidated results of operations.
These segments align our external segment reporting with how management evaluates and allocates resources. We evaluate segment performance based on segment operating results. Our revenues, operating results, and financial condition fluctuate from quarter to quarter reflecting the seasonal rental patterns of our customers, with rental activity tending to be lower in the winter.
Revenues by segment were as follows:
Three months ended September 30, 2010
Sales of new equipment
Total revenue
Three months ended September 30, 2009
Nine months ended September 30, 2010
Nine months ended September 30, 2009
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Three months ended September 30, 2010 and 2009. 2010 equipment rentals of $507 increased $29, or 6.1 percent, reflecting a 7.1 percentage point increase in time utilization, partially offset by a 1.4 percent decrease in rental rates. Dollar utilization, which reflects the impact of both rental rates and time utilization, and is calculated based on annualized rental revenue divided by the average original equipment cost of our fleet, increased 2.9 percentage points to 51.6 percent. Same-store rental revenues increased 9.7 percent. Equipment rentals represented 84 percent of total revenues for the three months ended September 30, 2010. On a segment basis, equipment rentals represented 84 percent and 87 percent of total revenues for general rentals and trench safety, power and HVAC, respectively. General rentals equipment rentals increased $26, or 5.9 percent, reflecting a 9.6 percent increase in same-store rental revenues partially offset by the impact of closed locations. Trench safety, power and HVAC equipment rentals increased $3, or 7.9 percent, reflecting an 11.2 percent increase in same-store rental revenues.
Nine months ended September 30, 2010 and 2009. 2010 equipment rentals of $1,337 decreased $43, or 3.1 percent, reflecting a 4.4 percent decrease in average fleet size, on an original equipment cost basis, and a 3.3 percent decline in rental rates, partially offset by a 4.0 percentage point increase in time utilization. Dollar utilization increased 0.5 percentage points to 45.8 percent. Same-store rental revenues increased 0.6 percent. Equipment rentals represented 82 percent of total revenues for the nine months ended September 30, 2010. On a segment basis, equipment rentals represented 81 percent and 84 percent of total revenues for general rentals and trench safety, power and HVAC, respectively. General rentals equipment rentals decreased $48, or 3.7 percent, primarily due to the impact of closed locations. Trench safety, power and HVAC equipment rentals increased $5, or 5.1 percent, reflecting a 5.3 percent increase in same-store rental revenues.
Sales of rental equipment. For the three and nine months ended September 30, 2010, sales of rental equipment represented approximately 6 percent of our total revenues and our general rentals segment accounted for approximately 93 percent of these sales. Sales of rental equipment for trench safety, power and HVAC were insignificant. For the three and nine months ended September 30, 2010, sales of rental equipment decreased 22.0 and 45.8 percent, respectively, primarily reflecting a decline in the volume of equipment sold and the mix of equipment sold.
New equipment sales. For the three and nine months ended September 30, 2010, new equipment sales represented approximately 4 percent of our total revenues and our general rentals segment accounted for approximately 91 percent of these sales. Sales of new equipment for trench safety, power and HVAC were insignificant. For the three and nine months ended September 30, 2010, sales of new equipment decreased 5.0 and 6.3 percent, respectively, primarily reflecting changes in the volume of equipment sold.
Contractor supplies sales. Contractor supplies sales represent our revenues associated with selling a variety of supplies including construction consumables, tools, small equipment and safety supplies. Consistent with sales of rental and new equipment, general rentals accounts for substantially all of our contractor supplies sales. For the three and nine months ended September 30, 2010, contractor supplies sales decreased 20.0 and 23.2 percent, respectively, reflecting a reduction in the volume of supplies sold, partially offset by improved pricing and product mix.
Service and other revenues. Service and other revenues primarily represent our revenues earned from providing repair and maintenance 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 revenues. Service and other revenues were flat for the three months ended September 30, 2010. For the nine months ended September 30, 2010, service and other revenues decreased 5.6 percent, primarily reflecting reduced revenues from service labor and parts sales, partially offset by increased software license and related revenues.
Segment Operating Income
Segment operating income and operating margin were as follows:
Operating Income
Operating Margin
General rentals. For the three months ended September 30, 2010, operating income increased $28 and operating margin increased 4.8 percentage points, primarily reflecting increased gross margins from equipment rentals and sales of rental equipment, and selling, general and administrative expense reductions.
For the nine months ended September 30, 2010, operating income increased $47 and operating margin increased 3.7 percentage points, primarily reflecting increased gross margins from sales of rental equipment and selling, general and administrative expense reductions, partially offset by reduced gross margins from equipment rentals. Additionally, operating income for the nine months ended September 30, 2010 included asset impairment charges of $3, as compared to $9 for the nine months ended September 30, 2009.
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Trench safety, power and HVAC. For the three and nine months ended September 30, 2010, operating income increased by $4 and $7, respectively, and operating margin increased by 7.2 and 5.1 percentage points, respectively, reflecting increased gross margins from equipment rentals and improved selling, general and administrative leverage.
Gross margin. Gross margins by revenue classification were as follows:
Total gross margin
For the three months ended September 30, 2010, total gross margin increased 4.1 percentage points as compared to the same period in 2009, primarily reflecting increased gross margins from equipment rentals, sales of rental equipment and service and other revenues. Equipment rentals gross margin increased 1.9 percentage points, primarily reflecting a 7.1 percentage point increase in time utilization to a record 71.3 percent, reduced depreciation on a smaller fleet and savings realized from ongoing cost saving initiatives, partially offset by a 1.4 percent rental rate decline. The 24.0 percentage point increase in gross margins from sales of rental equipment primarily reflects a higher proportion of retail sales, which yield higher margins, in 2010. For the three months ended September 30, 2010 and 2009, on an original equipment cost-weighted basis, retail sales represented 57 and 43 percent of our sales of rental equipment, respectively, while auction sales represented 20 and 23 percent, respectively. The 13.0 percentage point increase in gross margins from service and other revenues primarily reflects a higher proportion of software license and related revenues, which yield higher margins, in 2010.
For the nine months ended September 30, 2010, total gross margin increased 3.7 percentage points as compared to the same period in 2009, primarily reflecting increased gross margins from equipment rentals and sales of rental equipment. Equipment rentals gross margin increased 0.5 percentage points, primarily reflecting a 4.0 percentage point increase in time utilization, a $27 reduction in depreciation due to a 4.4 percent decrease in average fleet size, on an original equipment cost basis, and the impact of a $7 asset impairment charge related to certain rental equipment recognized during the nine months ended September 30, 2009, and savings realized from ongoing cost saving initiatives, partially offset by a 3.3 percent rental rate decline. The 27.2 percentage point increase in gross margins from sales of rental equipment primarily reflects a higher proportion of retail sales, which yield higher margins, in 2010. For the nine months ended September 30, 2010 and 2009, on an original equipment cost-weighted basis, retail sales represented 63 and 32 percent of our sales of rental equipment, respectively, while auction sales represented 20 and 42 percent, respectively. Gross margins from sales of rental equipment may change in future periods if the mix of the channels that we use to sell rental equipment changes.
Selling, general and administrative expenses (“SG&A”). SG&A expense information for the three and nine months ended September 30, 2010 and 2009 was as follows:
Total SG&A expenses
SG&A as a percentage of revenue
SG&A expense includes sales force compensation, bad debt expense, information technology costs, advertising and marketing expenses, third-party professional fees, management salaries and clerical and administrative overhead. For the three months ended September 30, 2010, SG&A expense of $95 decreased $4 as compared to 2009 and improved by 1.0 percentage points as a percentage of revenue. The decline in SG&A reflects the benefits we are realizing from our cost-saving initiatives, including reduced compensation costs and professional fees, partially offset by a $6 increase in bad debt expense. The increase in bad debt expense reflects an increase in accounts receivable and a slight deterioration in the aging of our portfolio.
For the nine months ended September 30, 2010, SG&A expense of $271 decreased $37 as compared to 2009 and improved by 0.6 percentage points as a percentage of revenue. The decline in SG&A reflects the benefits we are realizing from our cost-saving initiatives, including reduced compensation costs, travel and entertainment expenses and professional fees.
Restructuring charge. For the three months ended September 30, 2010 and 2009, restructuring charges of $7 and $1 relate to the closure of 10 and three branches, respectively. Additionally, the restructuring charges for the three months ended September 30, 2009 include severance costs associated with reductions in headcount of approximately 200. For the nine months ended September 30, 2010 and 2009, restructuring charges of $19 and $25 relate to the closure of 27 and 51 branches, respectively, and severance costs associated with reductions in headcount of approximately 600 and 1,500, respectively. We expect that the restructuring activity will be substantially complete by the end of 2011.
Interest expense, net for the three and nine months ended September 30, 2010 and 2009 was as follows:
Interest expense, net for the three months ended September 30, 2010 decreased by $7, or 11 percent, primarily reflecting lower average outstanding debt.
Interest expense, net for the nine months ended September 30, 2010 increased by $16, or 10 percent. Interest expense, net for the nine months ended September 30, 2010 and 2009 includes a loss of $3 and a gain of $16, respectively, related to repurchases or redemptions of $459 and $490 principal amounts of our outstanding debt, respectively. Excluding the impact of the gains/losses on the debt repurchases/redemptions, interest expense, net decreased slightly as the impact of higher interest rates partially offset the impact of lower average outstanding debt.
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Interest expense- subordinated convertible debentures, net for the three and nine months ended September 30, 2010 and 2009 was as follows:
Interest expense- subordinated convertible debentures, net
As discussed in note 6 to our condensed consolidated financial statements, the subordinated convertible debentures included in our consolidated balance sheets reflect the obligation to our subsidiary trust that has issued Quarterly Income Preferred Securities (“QUIPS”). This subsidiary is not consolidated in our financial statements because we are not the primary beneficiary of the trust. As of September 30, 2010 and December 31, 2009, the aggregate amount of subordinated convertible debentures outstanding was $124. Interest expense-subordinated convertible debentures, net for nine months ended September 30, 2010 increased by $12 due to a $13 gain we recognized during the second quarter of 2009 in connection with the simultaneous purchase of $22 of QUIPS and retirement of $22 principal amount of our subordinated convertible debentures.
Other income, net for the three and nine months ended September 30, 2010 and 2009 was as follows:
As discussed in note 4 to our condensed consolidated financial statements, other income, net for the three months ended September 30, 2010 includes (i) a gain of $5 associated with foreign currency forward contracts and (ii) a loss of $5 associated with the revaluation of certain Canadian dollar denominated intercompany loans. Other income, net for the nine months ended September 30, 2010 includes (i) a gain of $12 associated with foreign currency forward contracts and (ii) a loss of $12 associated with the revaluation of certain Canadian dollar denominated intercompany loans.
Income taxes. The following table summarizes our provision (benefit) for income taxes and the related effective tax rates for the three and nine months ended September 30, 2010 and 2009:
Effective tax rate
The differences between the 2010 and 2009 effective tax rates and the U.S. federal statutory income tax rate of 35 percent primarily relate to the geographical mix of income between foreign and domestic operations, as well as the impact of state and local taxes.
As discussed in note 1 to our condensed consolidated financial statements, accounting for income taxes generally requires companies to provide for income taxes each quarter based on their estimate of the effective tax rate for the full year (the effective tax rate approach). However, in the present circumstance, because we are unable to reliably estimate the effective tax rate for the full year, we have calculated taxes for the three and nine months ended September 30, 2010 based on actual year-to-date pre-tax income, rather than a full-year forecast.
For the nine months ended September 30, 2010, our net loss and diluted loss per share as reported and calculated using the U.S. federal statutory income tax rate of 35 percent were as follows:
Diluted loss per share
The balance of prepaid expenses and other assets at September 30, 2010 decreased by $52, or 58.4 percent, as compared to December 31, 2009, primarily due to a federal tax refund of $55 received in March 2010.
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Liquidity and Capital Resources
Liquidity. We manage our liquidity using internal cash management practices, which are subject to (i) the policies and cooperation of the financial institutions we utilize to maintain and provide cash management services, (ii) the terms and other requirements of the agreements to which we are a party and (iii) the statutes, regulations and practices of each of the local jurisdictions in which we operate.
Our principal existing sources of cash are cash generated from operations and from the sale of rental equipment and borrowings available under the ABL facility and accounts receivable securitization facility. As of September 30, 2010, we had (i) $683 of borrowing capacity available under the ABL facility, (ii) $7 of borrowing capacity available under our accounts receivable securitization facility and (iii) cash and cash equivalents of $170. Cash equivalents at September 30, 2010 consist of direct obligations of A rated financial institutions. We believe that our existing sources of cash will be sufficient to support our existing operations over the next 12 months.
We expect that our principal needs for cash relating to our existing operations over the next 12 months will be to fund (i) operating activities and working capital, (ii) the purchase of rental equipment and inventory items offered for sale, (iii) payments due under operating leases and (iv) debt service. 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 real estate, the use of additional operating leases or other financing sources as market conditions permit.
The amount of our future capital expenditures will depend on a number of factors, including general economic conditions and growth prospects. We expect that we will fund such expenditures from cash generated from operations, proceeds from the sale of rental equipment and, if required, borrowings available under the ABL facility and accounts receivable securitization facility.
Retirement of Senior Notes. As discussed above, in the nine months ended September 30, 2010, we repurchased or redeemed and subsequently retired $459 principal amounts of our outstanding indebtedness.
Subject to providing notification to the Company on October 15, 2010, the holders of our 1 7/8percent Convertible Senior Subordinated Notes had the right to require us to repurchase all of the 1 7/8 percent Convertible Senior Subordinated Notes. On October 15, 2010, $93 of the 1 7/8 percent Convertible Senior Subordinated Notes outstanding at September 30, 2010 were put to the Company and are scheduled to be repurchased on October 20, 2010 at par.
Loan Covenants and Compliance. As of September 30, 2010, we were in compliance with the covenants and other provisions of the ABL facility, the accounts receivable securitization facility, the senior notes and the QUIPS. Any failure to be in compliance with any material provision or covenant of these agreements could have a material adverse effect on our liquidity and operations.
The only material financial covenants which currently exist relate to the fixed charge coverage ratio and the senior secured leverage ratio under the ABL facility. Both of these covenants were suspended on June 9, 2009 because the availability, as defined in the agreement governing the ABL facility, had exceeded 20 percent of the maximum revolver amount under the ABL facility. Since the June 9, 2009 suspension date and through September 30, 2010, availability under the ABL facility has exceeded 10 percent of the maximum revolver amount under the ABL facility and, as a result, these maintenance covenants remained inapplicable. Subject to certain limited exceptions specified in the ABL facility, these covenants will only apply in the future if availability under the ABL facility falls below 10 percent of the maximum revolver amount under the ABL facility.
As of September 30, 2010, primarily due to our 2008 goodwill impairment charge, we no longer had any restricted payment capacity under the most restrictive restricted payment covenants in the indentures governing our outstanding senior subordinated notes. This depletion limits our ability to move operating cash flows to Holdings, although certain intercompany arrangements are exempted.
Sources and Uses of Cash. During the nine months ended September 30, 2010, we (i) generated cash from operating activities of $343, including $55 related to a federal tax refund and (ii) generated cash from the sale of rental and non-rental equipment of $110. We used cash during this period principally to (i) purchase rental and non-rental equipment of $307 and (ii) fund payments on debt, net of proceeds, of $144. During the nine months ended September 30, 2009, we (i) generated cash from operating activities of $353 and (ii) generated cash from the sale of rental and non-rental equipment of $203. We used cash during this period principally to (i) purchase rental and non-rental equipment of $232 and (iii) fund payments, net of proceeds, on debt of $224.
The balance of accounts payable at September 30, 2010 increased by $39, or 30.5 percent, as compared to December 31, 2009, primarily due to increased capital expenditures in 2010 and a seasonal increase in business activity.
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Free Cash Flow GAAP Reconciliation. We define free cash flow as (i) net cash provided by operating activities less (ii) purchases of rental and non-rental equipment plus (iii) proceeds from sales of rental and non-rental equipment and excess tax benefits from share-based payment arrangements, net. Management believes that free cash flow provides useful additional information concerning cash flow available to meet future debt service obligations and working capital requirements. However, free cash flow is not a measure of financial performance or liquidity under GAAP. Accordingly, free cash flow should not be considered an alternative to net loss or cash flow from operating activities as an indicator of operating performance or liquidity. The table below provides a reconciliation between net cash provided by operating activities and free cash flow.
Free cash flow
Free cash flow for the nine months ended September 30, 2010 was $144, a decrease of $178 as compared to free cash flow of $322 for the nine months ended September 30, 2009. As noted above, net cash provided by operating activities for the nine months ended September 30, 2010 includes a $55 federal tax refund. Excluding the impact of this refund, the year-over-year decrease in free cash flow primarily reflects reduced proceeds from sales of rental equipment and increased purchases of rental equipment.
Credit Ratings. Both our ability to obtain financing and the related cost of borrowing are affected by our credit ratings, which are periodically reviewed by the 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 as long as our ratings reflect a below investment grade rating. In addition, our accounts receivable securitization facility includes a termination event if the long-term senior secured debt rating of URNA falls below either B+ from Standard & Poor’s (“S&P’s”) or B2 from Moody’s. As of October 18, 2010, URNA’s long-term senior secured debt was rated BB- by S&P’s and Ba2 by Moody’s.
Our credit ratings as of October 18, 2010 were as follows:
Moody’s (1)
S&P’s (1)
Fitch (1)
Prior to the June 2009 issuance of URNA’s 10 7/8 percent Senior Notes, and in recognition of the deteriorating economic environment, S&P’s and Fitch downgraded the Company to a corporate rating of B and Fitch placed the Company on negative outlook. In November 2009, prior to the issuance of URNA’s 9 1/4 percent Senior Notes and URI’s 4 percent Convertible Senior Notes, and in recognition of the deteriorating economic environment, Moody’s downgraded the Company to a corporate rating of B3 and placed the Company on stable outlook. In the second quarter of 2010, Fitch and S&P’s raised the Company’s outlook from negative to stable.
A security rating is not a recommendation to buy, sell or hold securities. There is no assurance that any rating will remain in effect for a given period of time or that any rating will not be revised or withdrawn by a rating agency in the future.
Certain Information Concerning Off-Balance Sheet Arrangements. We lease real estate and non-rental equipment under operating leases as a regular business activity. As part of some of our non-rental 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 $14. 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 GAAP, this potential liability was not reflected on our balance sheet as of September 30, 2010 or any prior date as we believe that proceeds from the sale of the equipment under these operating leases would approximate the payment obligation.
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 licenses its tradename and other intangibles and 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.
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Our exposure to market risk primarily consists of (i) interest rate risk associated with our variable and fixed rate debt, (ii) foreign currency exchange rate risk primarily associated with our Canadian operations and (iii) equity price risk associated with our convertible debt.
Interest Rate Risk.As of September 30, 2010, we had an aggregate of $857 of indebtedness that bears interest at variable rates, comprised of $617 of borrowings under the ABL facility and $240 of borrowings under our accounts receivable securitization facility. The amount of variable rate indebtedness outstanding under the ABL facility and accounts receivable securitization facility may fluctuate significantly. The interest rates applicable to our variable rate debt on September 30, 2010 were (i) 3.4 percent for the ABL facility and (ii) 1.7 percent for the accounts receivable securitization facility. As of September 30, 2010, based upon the amount of our variable rate debt outstanding, our annual after-tax earnings would decrease by approximately $4 for each one percentage point increase in the interest rates applicable to our variable rate debt.
At September 30, 2010, we had an aggregate of $2.1 billion of indebtedness that bears interest at fixed rates, including our subordinated convertible debentures. A one percentage point decrease in market interest rates as of September 30, 2010 would increase the fair value of our fixed rate indebtedness by approximately four percent. For additional information concerning the fair value of our fixed rate debt, see note 5 (see “Fair Value of Financial Instruments”) to our condensed consolidated financial statements.
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 between the U.S. and Canadian dollars. Based upon the level of our Canadian operations during 2009 relative to the Company as a whole, a 10 percent change in this exchange rate would not have a material impact on our earnings. As discussed in note 4 to our condensed consolidated financial statements, during the three and nine months ended September 30, 2010, we recognized foreign currency losses of $5 and $12, respectively, associated with the revaluation of certain Canadian dollar denominated intercompany loans, however these losses were offset by gains of $5 and $12, respectively, recognized on forward contracts to purchase Canadian dollars, and the aggregate foreign currency impact of the intercompany loans and forward contracts did not have a material impact on our earnings. We do not engage in purchasing forward exchange contracts for speculative purposes.
Equity Price Risk. In connection with the November 2009 issuance of $173 aggregate principal amount of 4 percent Convertible Senior Notes, Holdings entered into convertible note hedge transactions with option counterparties. The convertible note hedge transactions cover, subject to anti-dilution adjustments, 15.5 million shares of our common stock. The convertible note hedge transactions are intended to reduce, subject to a limit, the potential dilution with respect to our common stock upon conversion of the 4 percent Convertible Senior Notes. The effect of the convertible note hedge transactions is to increase the effective conversion price to approximately $15.56 per share, equal to an approximately 75 percent premium over the $8.89 closing price of our common stock on November 10, 2009. However, in the event the market value of our common stock exceeds $15.56 per share, the settlement amount received from such transactions will only partially offset the potential dilution. For example, if, at the time of exercise of the conversion right, the price of our common stock was $17.00 or $20.00 per share, on a net basis, we would issue 1.3 million or 3.4 million shares, respectively.
Disclosure Controls and Procedures
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 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 Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
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 our disclosure controls and procedures, as defined in Rules 13a–15(e) and 15d–15(e) of the Exchange Act, as of September 30, 2010. Based on the evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2010.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended September 30, 2010 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
The information set forth under note 7 to our unaudited condensed consolidated financial statements of this quarterly report on Form 10-Q is incorporated by reference in answer to this item. Such information is limited to certain recent developments and should be read in conjunction with note 13 to our consolidated financial statements for the year ended December 31, 2009 filed on Form 10-K on February 3, 2010.
Our results of operations and financial condition are subject to numerous risks and uncertainties described in our 2009 Form 10-K, which risk factors are 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.
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(c) The following table provides information about purchases of Holdings’ common stock by Holdings during the third quarter of 2010:
Period
July 1, 2010 to July 31, 2010
August 1, 2010 to August 31, 2010
September 1, 2010 to September 30, 2010
Total (1)
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Restated Certificate of Incorporation of United Rentals, Inc., dated March 16, 2009 (incorporated by reference to
Exhibit 3.1 of the United Rentals, Inc. Report on Form 8-K filed on March 17, 2009)
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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 thereunto duly authorized.
/S/ JOHN J. FAHEY
Vice President, Controller
and Principal Accounting Officer
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