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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2000.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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
Delaware 06-1493538
State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization Identification Nos.)
Five Greenwich Office Park,
Greenwich, Connecticut 06830
(Address of Principal Executive Offices) (Zip code)
Registrants' telephone number, including area code: (203) 622-3131
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on
Which Registered
Common Stock, $.01 par value, of United Rentals, Inc. New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 12, 2001, there were 69,799,819 shares of United Rentals, Inc.
common stock outstanding. The aggregate market value of such common stock held
by non-affiliates of the registrant at March 12, 2001 was approximately $800.0
million. Such aggregate market value was calculated by using the closing price
of such common stock as of such date on the New York Stock Exchange of $18.67.
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.
Documents incorporated by reference: Certain sections of the Proxy
Statement of United Rentals, Inc. to be filed pursuant to Regulation 14A under
the Securities Exchange Act of 1934 within 120 days of the registrant's fiscal
year are incorporated by reference into Part III of this Form 10-K.
This combined Form 10-K 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 (I)(1) (a) and (b) of Form 10-K and
is therefore filing this form with the reduced disclosure format permitted by
such instruction.
FORM 10-K REPORT INDEX
10-K Part
and Item No. Page No.
- ------------ --------
PART I
Item 1 Business.................................................................. 1
Item 2 Properties................................................................ 7
Item 3 Legal Proceedings......................................................... 8
Item 4 Submission of Matters to a Vote of Security Holders....................... 8
PART II
Item 5 Market for the Registrant's Common Equity and Related Stockholder Matters. 8
Item 6 Selected Financial Data................................................... 10
Item 7 Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................ 11
Item 7A Quantitative and Qualitative Disclosures About Market Risk................ 25
Item 8 Financial Statements and Supplementary Data............................... 27
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure................................................................ 75
PART III
Item 10 Directors and Executive Officers of the Registrant........................ 75
Item 11 Executive and Director Compensation....................................... 75
Item 12 Security Ownership of Certain Beneficial Owners and Management............ 75
Item 13 Certain Relationships and Related Transactions............................ 75
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......... 75
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 "believes," "expects," "may," "will," "should," "on-track" or
"anticipates" 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 discussed below under
Item 7--"Management's Discussion and Analysis of Financial Condition and Result
of Operations--Factors that May Influence Future Results and Accuracy of
Forward-Looking Statements." We make no commitment to revise or update any
forward-looking statements in order to reflect events or circumstances after
the date any such statement is made.
PART I
Unless otherwise indicated, the information under Items 1 and 2 is as of
March 1, 2001.
Item 1. Business
General
United Rentals is the largest equipment rental company in North America
with 755 locations in 47 states, seven Canadian provinces and Mexico. We offer
for rent over 600 different types of equipment to more than 1.2 million
customers, including construction and industrial companies, manufacturers,
utilities, municipalities, homeowners and others. During 2000, we completed
more than 8.4 million rental transactions.
We have the largest fleet of rental equipment in the world, with over
500,000 units having an original purchase price of approximately $3.4 billion.
Our fleet includes:
. light to heavy construction and industrial equipment, such as aerial
lifts, backhoes, skid-steer loaders, forklifts, earth moving equipment,
material handling equipment, compressors, pumps and generators;
. traffic control equipment, such as barricades, cones, warning lights,
message boards and pavement marking systems;
. trench safety equipment for below ground work, such as trench shields,
aluminum hydraulic shoring systems, slide rails, crossing plates,
construction lasers, and line testing equipment;
. special event equipment used for sporting, corporate and other large
events, such as light towers, air conditioning units, portable power
units, electrical cable, temporary kitchens and tents; and
. general tools and equipment, such as power washers, water pumps,
heaters and hand tools.
In addition to renting equipment, we sell used rental equipment, act as a
dealer for new equipment, and sell related merchandise, parts and service.
Competitive Advantages
We believe that we benefit from the following competitive advantages:
Large and Diverse Rental Fleet. We have the largest and most comprehensive
equipment rental fleet in the industry, which helps us to:
. attract customers by providing "one-stop" shopping;
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. serve a diverse customer base and reduce our dependence on any
particular customer or group of customers; and
. serve customers that require assurance that substantial quantities of
different types of equipment will be available on a continuing basis.
Operating Efficiencies. We generally group our branches into clusters of 10
to 30 locations that are in the same geographic area. Our information
technology systems allow each branch to access all available equipment within a
cluster. We believe that our cluster strategy produces significant operating
efficiencies by enabling us to: (1) market equipment within a cluster through
multiple branches, (2) cross-market equipment specialties of different branches
within each cluster, and (3) reduce costs by centralizing common functions such
as payroll, accounts payable and credit and collection into 26 credit offices
and three service centers. In 2000, approximately 10.7% of our rental revenue
was attributable to equipment sharing among branches.
Geographic Diversity. We have branches in 47 states, seven Canadian
provinces and Mexico. We believe that our geographic diversity reduces the
impact that fluctuations in regional economic conditions have on our overall
financial performance. Our geographic diversity and large network of branch
locations also give us the ability to better serve National Account customers,
better serve customers that operate at multiple locations, and access used
equipment re-sale markets across the country.
Customer Diversity. Our customer base is highly diversified and ranges from
Fortune 500 companies to small companies and homeowners. We estimate that our
top ten customers accounted for approximately 2% of our revenues during 2000.
Strong and Motivated Branch Management. Each of our branches has a full-time
branch manager who is supervised by one of our 66 district managers and nine
regional vice presidents. We believe that our managers are among the most
knowledgeable and experienced in the industry, and we empower them--within
budgetary guidelines--to make day-to-day decisions concerning staffing,
pricing, equipment purchasing and other branch matters. Management closely
tracks branch, district and region performance with extensive systems and
controls, including performance benchmarks and detailed monthly operating
reviews. We promote equipment sharing among branches through our incentive
compensation program, which links the compensation of branch personnel to their
branch's financial performance and return on assets.
Significant Purchasing Power. We purchase large amounts of equipment and
other items, which enables us to negotiate favorable terms with our vendors.
Our purchasing power is further increased by our ongoing efforts to narrow our
vendor base. For example, we reduced the number of our primary equipment
suppliers from 111 to 28 in 2000. This allowed us to lower our equipment
purchase costs by approximately $150 million in 2000 and should enable us to
save additional amounts in 2001. We expect to realize additional savings by
similarly consolidating our merchandise suppliers and negotiating more
favorable warranty terms with key vendors.
National Account Program. Our National Account sales force is dedicated to
establishing and expanding relationships with larger companies, particularly
those with a national or multi-regional presence. We offer our National Account
customers the benefits of a consistent level of service across North America
and a single point of contact for all their equipment needs. Our National
Account team currently includes 39 professionals. We currently have over 1,300
National Account customers, including more than 700 new accounts added in 2000.
Our revenues from National Account customers increased to approximately $244.8
million in 2000 from $89.1 million in the prior year.
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Information Technology Systems. Our information technology systems
facilitate rapid and informed decision making and permit us to respond quickly
to changing market conditions. Our systems provide management with a wide range
of operating and financial data, enable our branches to manage a wealth of
information, such as customer requirements, equipment availability, and
maintenance histories, and give our customers online access to their accounts.
Our systems also enable branch personnel to search for needed equipment
throughout a geographic region, determine its closest location and arrange for
delivery to a customer's work site. We have an in-house team of approximately
100 information technology specialists that supports our systems and extends
them to new locations. We also have a subsidiary that is the leading provider
of proprietary software to the equipment rental industry for use in managing
and operating multiple branch locations. Our software includes the
Rentalman(TM) system developed by this subsidiary.
Risk Management and Safety Programs. We place great emphasis on risk
reduction and safety and believe that we have one of the most comprehensive
risk management and safety programs in the industry. Our risk management
department is staffed by 43 experienced professionals and is responsible for
implementing our safety programs and procedures, developing our employee and
customer training programs, and managing any claims against us. Our insurance
and claims costs were approximately 48% below the national average for
comparable industries in 2000, resulting in significant cost savings.
Industry Background
Industry Size and Growth. The U.S. equipment rental industry has grown from
about $6 billion in annual rental revenues in 1990 to over $25 billion in 2000,
representing a compound annual growth rate of approximately 14.5%. This
information is based on data reported by Manfredi & Associates, Inc. In
addition to reflecting general economic growth, we believe that the growth in
the equipment rental industry is being driven by the following trends:
Recognition of Advantages of Renting. Equipment users are increasingly
recognizing the many advantages that equipment rental may offer compared
with ownership. They recognize that by renting they can:
. avoid the large capital investment required for equipment
purchases;
. access a broad selection of equipment and select the equipment
best suited for each particular job;
. reduce storage and maintenance costs; and
. access the latest technology without investing in new equipment.
Outsourcing. Although growth in the equipment rental industry has to
date been largely driven by an increase in rentals by the construction
industry, we believe that the cost and other advantages of renting,
together with the general trend toward the corporate outsourcing of
non-core competencies, are increasingly leading industrial companies,
municipalities, government agencies, utilities and others to rent
equipment.
Corporate Background
We began operations in October 1997 and have grown through a combination of
internal growth, acquisitions and the opening of new rental locations. In
September 1998, we merged with U.S. Rentals, Inc. At the time of the merger,
U.S. Rentals was the second largest equipment rental company in the United
States based on 1997 rental revenues.
3
Products and Services
We offer for rent a wide variety of equipment to customers that include
construction and industrial companies, manufacturers, utilities,
municipalities, homeowners and others. We also sell used equipment, act as a
dealer for many types of new equipment, and sell related merchandise, parts and
service. In addition, we have a subsidiary that develops and markets software
for use by equipment rental companies in managing and operating multiple branch
locations.
For financial information concerning our foreign and domestic operations,
see Note 14 of the Notes to Consolidated Financial Statements included
elsewhere in this report.
Equipment Rental
We offer for rent over 600 different types of equipment on a daily, weekly
or monthly basis. The types of equipment that we offer include light to heavy
construction and industrial equipment; traffic control equipment; trench safety
equipment; equipment for sporting, corporate and other special events; and
general tools and equipment.
We believe that our equipment rental fleet is the largest in the world and
one of the newest and best maintained. As of March 1, 2001, our fleet included
over 500,000 units and had an original purchase price of approximately $3.4
billion and a weighted average age of approximately 26 months. We estimate that
each of the following categories accounted for 10% or more of our equipment
rental revenues in 2000: (i) aerial lift equipment (approximately 24%), (ii)
earth moving equipment (approximately 13%) and (iii) forklifts (approximately
10%).
We vary our equipment mix from branch to branch in response to local market
conditions and customer requirements. Most of our branches offer a general mix
of equipment, while some specialize in specific equipment categories such as
aerial work platforms and traffic control equipment.
Used Equipment Sales
In order to maintain a modern fleet and optimize our equipment mix, we
routinely sell used rental equipment and invest in new equipment. We have
generally been able to achieve favorable prices due to our comprehensive
maintenance program and our national sales force that can access many resale
markets across North America.
We principally sell used equipment through our sales force and our web site
(www.unitedrentals.com) which includes an online database of used equipment
available for sale. We also sell our used equipment to used equipment dealers
and through public auctions. In addition, we sometimes trade in used equipment
to our vendors when we buy new equipment.
New Equipment Sales
We are a dealer for many leading equipment manufacturers. These include
Genie Industries, Inc., JLG Industries, Inc., and SkyJack, Inc. (aerial lifts);
Multiquip, Inc. (compaction equipment, generators, pumps and concrete
equipment); Bomag and Wacker (compaction equipment); Sullair Corporation
(compressors); Omniquip International (forklifts, skid-steer loaders and
mini-excavators); Terex Corporation (off-road dump trucks and telehandlers);
and Honda USA (pumps and generators). Typically, dealership agreements do not
have a specific term and may be terminated at any time. The type of new
equipment that we sell varies by location.
4
Related Merchandise, Parts and Other Services
At most of our locations, we sell equipment parts and a variety of supplies
and merchandise that may be used with our rental equipment, such as saw blades,
fasteners, drill bits, hard hats, gloves and other safety equipment. At some of
our branches, we also offer repair and maintenance services for equipment that
is owned by our customers.
Our Rentalman(TM) Software
We have a subsidiary that develops and markets software for use by
equipment rental companies in managing and operating multiple branch locations.
Seven of the ten largest equipment rental companies, including United Rentals,
use the Rentalman(TM) software package developed by our subsidiary.
Customers
Our customer base is highly diversified and ranges from Fortune 500
companies to small businesses and homeowners. We estimate that no single
customer accounted for more than 0.5% of our revenues during 2000 and that our
top 10 customers accounted for approximately 2% of our revenues in 2000.
Our customer base varies by branch and is determined by several factors,
including the equipment mix and marketing focus of the particular branch and
the business composition of the local economy. Our customers include:
. construction companies that use equipment for building and renovating
commercial buildings, warehouses, industrial and manufacturing plants,
office parks, airports, residential developments and other facilities;
. industrial companies--such as manufacturers, chemical companies, paper
mills, railroads, ship builders, and utilities--that use equipment for
plant maintenance, upgrades, expansion and construction;
. municipalities that require equipment for a variety of purposes such as
traffic control and highway construction and maintenance;
. sponsors of sporting, corporate, entertainment and other large special
events--including events such as the Super Bowl, the U. S. Open Golf
Championship, the NASCAR Brickyard 400, the PGA Championship, the Ryder
Cup, concerts and charity events; and
. homeowners and other individuals that use equipment for projects that
range from simple repairs to major renovations.
Sales and Marketing
We market our products and services through multiple channels as described
below.
Sales Force. As of March 1, 2001, we had a total of 2,495 salespeople,
including 1,314 store-based customer service representatives and 1,181
field-based salespeople. Our sales force calls on existing and potential
customers and assists our customers in planning for their equipment needs.
National Account Program. Our National Account sales force is dedicated to
establishing and expanding relationships with large customers, particularly
those with a national or multi-regional presence. The National Account team
closely coordinates its efforts with the local sales force in each area. Our
National Account team currently includes 39 sales professionals.
5
E-Rental Store(TM). Our customers can rent or buy equipment online 24 hours
a day seven days a week at our E-Rental Store(TM), which is part of our web
site. Our customers can also use our URdata(TM) application to access
up-to-the-minute reports on their business activity with us.
Advertising. We promote our business through local and national advertising
in various media, including trade publications, yellow pages, the Internet, and
direct mail. We also regularly participate in industry trade shows and
conferences and sponsor a variety of local promotional events.
Suppliers
We have been making ongoing efforts to narrow our vendor base in order to
further increase our purchasing power. We estimate that our largest supplier
accounted for approximately 24% of our equipment purchases in 2000, and that
our top 10 largest suppliers accounted for approximately 73% of our equipment
purchases during that period.
Information Technology Systems
We have advanced information technology systems which facilitate rapid and
informed decision making and enable us to respond quickly to changing market
conditions. Each branch is equipped with one or more workstations that are
electronically linked to our other locations and to our AS/400 system located
at our data center. All rental transactions are entered at these workstations
and processed on a real-time basis. Personnel at each location are able to
access the system 24 hours a day in order to determine equipment availability,
monitor business activity on a real-time basis, and obtain a wide range of
operating and financial data.
Our information technology systems and our web site are supported by our
in-house group of approximately 100 information technology specialists. This
group trains our personnel at the branch location; upgrades and customizes our
systems; provides hardware and technology support; operates a support desk to
assist branch personnel in the day-to-day use of the systems; extends the
systems to newly acquired locations; and manages our web site.
Competition
The equipment rental industry is highly fragmented and competitive. Our
competitors primarily include small, independent businesses with one or two
rental locations; regional competitors which operate in one or more states;
public companies or divisions of public companies; and equipment vendors and
dealers who both sell and rent equipment directly to customers. We believe
that, in general, large companies enjoy significant competitive advantages
compared to smaller operators, including greater purchasing power, a lower cost
of capital, the ability to provide customers with a broader range of equipment
and services and with newer and better maintained equipment, and greater
flexibility to transfer equipment among locations in response to customer
demand. For additional information, see "Competitive Advantages".
Environmental and Safety Regulations
There are numerous federal, state and local laws and regulations governing
environmental protection and occupational health and safety. Under these laws,
an owner or lessee of real estate may be liable on a no-fault basis for, among
other things, (1) the costs of removal or remediation of hazardous or toxic
substances located on, in, or emanating from, the real estate, as well as
related costs of investigation and property damage and substantial penalties,
and (2) environmental contamination at facilities where its waste is or has
been disposed. Activities that are or may be affected by these laws include our
use of hazardous materials to clean and maintain equipment and
6
our disposal of solid and hazardous waste and wastewater from equipment
washing. We also dispense petroleum products from underground and above-ground
storage tanks located at certain locations, and at times we must remove or
upgrade tanks to comply with applicable laws. We have acquired or lease certain
locations which have or may have been contaminated by leakage from underground
tanks or other sources, and we are in the process of assessing the nature of
the required remediation. Based on the conditions currently known to us, we
believe that any unreserved environmental remediation and compliance costs
required with respect to those conditions will not have a material adverse
effect on our business. However, we cannot be certain that we will not identify
adverse environmental conditions that are not currently known to us, that all
potential releases from underground storage tanks removed in the past have been
identified, or that environmental and safety requirements will not become more
stringent or be interpreted and applied more stringently in the future. If we
are required to incur environmental compliance or remediation costs that are
not currently anticipated by us, our business could be adversely affected
depending on the magnitude of the cost.
Employees
As of March 1, 2001, we had 14,795 employees. Of these employees, 4,163 are
salaried personnel and 10,632 are hourly personnel. Collective bargaining
agreements relating to 65 separate locations cover approximately 827 of our
employees.
Item 2. Properties
We currently operate 755 branch locations. Of these locations, 676 are in
the United States, 78 are in Canada and one is in Mexico. The number of
locations in each state or province is shown below.
United States
.Alabama (12) .Louisiana (8) .Oklahoma (7)
.Alaska (4) .Maine (2) .Oregon (26)
.Arizona (22) .Maryland (19) .Pennsylvania (18)
.Arkansas (3) .Massachusetts (11) .Rhode Island (2)
.California (102) .Michigan (6) .South Carolina (11)
.Colorado (17) .Minnesota (15) .South Dakota (9)
.Connecticut (11) .Mississippi (1) .Tennessee (9)
.Delaware (5) .Missouri (11) .Texas (58)
.Florida (38) .Montana (1) .Utah (11)
.Georgia (20) .Nebraska (8) .Virginia (12)
.Idaho (2) .Nevada (16) .Washington (33)
.Illinois (17) .New Hampshire (2) .Wisconsin (9)
.Indiana (12) .New Jersey (9) .Wyoming (2)
.Iowa (12) .New Mexico (5)
.Kansas (5) .New York (19)
.Kentucky (7) .North Carolina (24)
.North Dakota (10)
.Ohio (13)
Canada Mexico
.Alberta (2) .Nuevo Leon (1)
.British Columbia (16)
.Manitoba (2)
.Newfoundland (9)
.Ontario (35)
.Quebec (12)
.Saskatchewan (2)
7
Our branch locations generally include facilities for displaying equipment
and, depending on the location, may include separate equipment service areas
and storage areas.
We own 98 of our rental locations and lease the other locations. Our leases
provide for varying terms and include 24 leases that are on a month-to-month
basis and 42 leases that provide for a remaining term of less than one year and
do not provide a renewal option. We are currently negotiating renewals for most
of the leases that provide for a remaining term of less than one year.
We maintain a fleet of approximately 13,440 vehicles that is used for
delivery, maintenance and sales functions. We own a portion of this fleet and
lease a portion.
Our corporate headquarters are located in Greenwich, Connecticut, where we
occupy approximately 28,000 square feet under (1) a lease for approximately
12,000 square feet that extends until 2003 and (2) a lease for approximately
16,000 square feet that extends until 2004 (subject to extension rights).
Item 3. Legal Proceedings
The Company is party to various litigation matters, in most cases involving
ordinary and routine claims incidental to our business. The Company cannot
estimate with certainty its ultimate legal and financial liability with respect
to such pending litigation matters. However, the Company believes, based on its
examination of such matters, that the Company's ultimate liability will not
have a material adverse effect on its financial position, results of operations
or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of 2000, no matter was submitted to a vote of the
security holders of the Company.
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters
Price Range of Common Stock
The Company's Common Stock trades on the New York Stock Exchange under the
symbol "URI." The following table sets forth, for the periods indicated, the
high and low sales prices for the Common Stock, as reported by the New York
Stock Exchange.
High Low
------ ------
1999:
First Quarter.. $35.69 $26.13
Second Quarter. 33.25 25.13
Third Quarter.. 31.00 21.75
Fourth Quarter. 21.94 14.31
2000:
First Quarter.. $21.25 $13.75
Second Quarter. 19.69 13.25
Third Quarter.. 24.13 17.38
Fourth Quarter. 24.31 12.00
As of March 12, 2001, there were approximately 246 holders of record of the
Common Stock. The Company believes that the number of beneficial owners is
substantially greater than the number of record holders, because a large
portion of the Common Stock is held of record in broker "street names."
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Dividend Policy
The Company intends to retain all earnings for the foreseeable future for
use in the operation and expansion of its business and, accordingly, the
Company currently has no plans to pay dividends on its Common Stock. The
payment of any future dividends will be determined by the Board of Directors in
light of conditions then existing, including the Company's earnings, financial
condition and capital requirements, restrictions in financing agreements,
business conditions and other factors. Under the terms of certain agreements
governing the Company's outstanding indebtedness, the Company is prohibited or
restricted from paying dividends on its Common Stock. In addition, under
Delaware law, the Company is prohibited from paying any dividends unless it has
capital surplus or net profits available for this purpose. See Item
7--"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Certain Information Concerning the Credit Facility and Other
Indebtedness."
Sales of Unregistered Securities During the Fourth Quarter of 2000
Set forth below is a listing of all sales by the Company of unregistered
equity securities during the fourth quarter of 2000. Unless otherwise
indicated, (i) such sales were exempt from registration under the Securities
Act of 1933, as amended (the "Act"), pursuant to Section 4(2) of the Act, as
they were transactions not involving a public offering and (ii) the sales were
made by the Company without the assistance of any underwriters.
1. In November 2000, the Company issued 2,459 shares of Common Stock to an
executive officer pursuant to an employment agreement.
2. In December 2000, the Company issued 761,905 shares of Common Stock as
partial consideration for an acquisition.
9
Item 6. Selected Financial Data
The data presented below with respect to the Company should be read in
conjunction with the Consolidated Financial Statements and related Notes
thereto of the Company included elsewhere in this Report and Item
7--"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
During the periods presented below, the Company completed certain
acquisitions that were accounted for as poolings-of-interests (including a
merger in September 1998 with U.S. Rentals) and others that were accounted for
as purchases. The selected financial data presented below has been restated for
all periods presented to include the accounts of the businesses acquired in
transactions accounted for as poolings-of-interests (excluding one such
transaction which was not material) as if the Company and these businesses
acquired were combined for all periods presented. The accounts of businesses
acquired in transactions accounted for as purchases are included from their
respective acquisition dates. In view of the fact that the Company's operating
results for the periods presented below were impacted by acquisitions that were
accounted for as purchases, the Company believes that its results of operations
for the years presented are not directly comparable. See Note 3 of the Notes to
the Consolidated Financial Statements of the Company included elsewhere in this
Report.
Year Ended December 31,
------------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- ---------- ---------- ----------
(dollars in thousands, except per share data)
Income statement data:
Total revenues........................................................... $354,478 $489,838 $1,220,282 $2,233,628 $2,918,861
Total cost of revenues................................................... 241,445 340,546 796,834 1,408,710 1,830,291
-------- -------- ---------- ---------- ----------
Gross profit............................................................. 113,033 149,292 423,448 824,918 1,088,570
Selling, general and administrative expenses............................. 54,721 70,835 195,620 352,595 454,330
Merger-related expenses.................................................. 47,178
Non-rental depreciation and amortization................................. 9,387 13,424 35,248 62,867 86,301
Termination cost of deferred compensation agreements..................... 20,290
-------- -------- ---------- ---------- ----------
Operating income......................................................... 48,925 44,743 145,402 409,456 547,939
Interest expense......................................................... 11,278 11,847 64,157 139,828 228,779
Preferred dividends of a subsidiary trust................................ 7,854 19,500 19,500
Other (income) expense, net.............................................. (499) (2,021) (4,906) 8,321 (1,836)
-------- -------- ---------- ---------- ----------
Income before provision for income taxes and extraordinary items......... 38,146 34,917 78,297 241,807 301,496
Provision for income taxes............................................... 420 29,508 43,499 99,141 125,121
-------- -------- ---------- ---------- ----------
Income before extraordinary items........................................ 37,726 5,409 34,798 142,666 176,375
Extraordinary items, net (1)............................................. 1,511 21,337
-------- -------- ---------- ---------- ----------
Net income............................................................... $ 37,726 $ 3,898 $ 13,461 $ 142,666 $ 176,375
======== ======== ========== ========== ==========
Pro forma provision for income taxes before extraordinary items (2)...... $ 15,487 $ 14,176 $ 44,386
Pro forma income before extraordinary items (2).......................... 22,659 20,741 33,911
Basic earnings before extraordinary items per share...................... $ 1.67 $ 0.12 $ 0.53 $ 2.00 $ 2.48
Diluted earnings before extraordinary items per share.................... $ 1.67 $ 0.11 $ 0.48 $ 1.53 $ 1.89
Basic earnings per share (3)............................................. $ 1.67 $ 0.08 $ 0.20 $ 2.00 $ 2.48
Diluted earnings per share (3)........................................... $ 1.67 $ 0.08 $ 0.18 $ 1.53 $ 1.89
Other financial data:
EBITDA (4)............................................................... $123,606 $160,554 $ 403,738 $ 761,230 $ 962,371
Depreciation and amortization............................................ 74,681 95,521 211,158 343,508 414,432
Dividends on common stock................................................
December 31,
------------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- ---------- ---------- ----------
(dollars in thousands)
Balance sheet data:
Cash and cash equivalents................................................ $ 2,906 $ 72,411 $ 20,410 $ 23,811 $ 34,384
Rental equipment, net.................................................... 235,055 461,026 1,143,006 1,659,733 1,732,835
Total assets............................................................. 381,228 826,010 2,634,663 4,497,738 5,123,933
Total debt............................................................... 214,337 264,573 1,314,574 2,266,148 2,675,367
Company-obligated mandatorily redeemable convertible preferred securities
of a subsidiary trust................................................... 300,000 300,000 300,000
Stockholders' equity..................................................... 105,420 446,388 726,230 1,397,486 1,545,943
10
- --------
(1) The Company recorded an extraordinary item (net of income taxes) of $1.5
million in 1997 and an extraordinary item (net of income taxes) of $21.3
million in 1998. Such charge in 1997 resulted from the prepayment of
certain debt by U.S. Rentals. Such charge in 1998 resulted from the early
extinguishment of certain debt and primarily reflected prepayment penalties
on certain debt of U.S. Rentals.
(2) U.S. Rentals was taxed as a Subchapter S Corporation until its initial
public offering in February 1997, and another company acquired in a
pooling-of-interests transaction was taxed as a Subchapter S Corporation
until being acquired by the Company in 1998. In general, the income or loss
of a Subchapter S Corporation is passed through to its owners rather than
being subjected to taxes at the entity level. Pro forma provision for
income taxes before extraordinary items and pro forma income before
extraordinary items reflect a provision for income taxes as if all such
companies were liable for federal and state income taxes as taxable
corporate entities for all periods presented.
(3) The Company's earnings during 1997 were impacted by $20.3 million of
expenses relating to the termination of certain deferred compensation
expenses in connection with U.S. Rentals' initial public offering, a $7.5
million charge to recognize deferred tax liabilities of U.S. Rentals and an
extraordinary item (net of income taxes) of $1.5 million. The Company's
earnings during 1998 were impacted by merger-related expenses of $47.2
million ($33.2 million net of taxes), a $4.8 million charge to recognize
deferred tax liabilities of a company acquired in a pooling-of-interests
transaction and an extraordinary item (net of income taxes) of $21.3
million. The Company's earnings during 1999 were impacted by $18.2 million
($10.8 million net of taxes) of expenses incurred related to a terminated
tender offer. Excluding such amounts, (i) basic earnings per share for the
years ended 1997, 1998 and 1999 would have been $0.70, $1.10 and $2.15,
respectively, and (ii) diluted earnings per share for the years ended 1997,
1998 and 1999 would have been $0.66, $1.00 and $1.65, respectively.
(4) EBITDA is defined as net income (excluding (i) non-operating income and
expense, (ii) a $20.3 million non-recurring charge incurred by U.S. Rentals
in 1997 arising from the termination of deferred compensation agreements
with certain executives, (iii) $47.2 million in merger-related expenses in
1998 related to the three acquisitions accounted for as
poolings-of-interests, including the merger with U.S. Rentals, and (iv)
$8.3 million of expenses that are included in selling, general and
administrative expenses for 1999 and which related to a terminated tender
offer), plus interest expense, income taxes and depreciation and
amortization. EBITDA data is presented to provide additional information
concerning the Company's ability to meet its future debt service
obligations and capital expenditure and working capital requirements.
However, EBITDA is not a measure of financial performance under generally
accepted accounting principles. Accordingly, EBITDA should not be
considered an alternative to net income or cash flows as indicators of the
Company's operating performance or liquidity.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the
Consolidated Financial Statements and related Notes thereto included elsewhere
in this Report. Certain of the statements contained in such discussion are
forward looking in nature. Such statements can be identified by the use of
forward-looking terminology such as "believes," "expects," "may," "will,"
"should," "on-track" or "anticipates" or the negative thereof or comparable
terminology, or by discussions of strategy. You are cautioned that our business
and operations are subject to a variety of risks and uncertainties and,
consequently, our actual results may materially differ from those projected by
any forward-looking statements. Certain of these factors are discussed below
under "--Factors that May Influence Future Results and Accuracy of
Forward-Looking Statements." We make no commitment to revise or update any
forward-looking statements in order to reflect events or circumstances after
the date any such statement is made.
11
Introduction
The Company commenced equipment rental operations in October 1997 and has
completed 245 acquisitions (through March 1, 2001), including the merger with
U.S. Rentals (the "U.S. Rentals Merger") which was completed in September 1998.
Three of the acquisitions completed by the Company (including the U.S.
Rentals Merger) were accounted for as "poolings-of-interests," and the
Company's financial statements have been restated to include the accounts of
two of the companies acquired in such transactions (but were not restated for
one that was not material, which has been combined with the Company effective
July 1, 1998). See Note 3 to the Notes to the Consolidated Financial Statements
of the Company included elsewhere in this Report.
The other 242 acquisitions completed by the Company were accounted for as
"purchases". The results of operations of the businesses acquired in these
acquisitions are included in the Company's financial statements only from their
respective dates of acquisition. In view of the fact that the Company's
operating results for 2000, 1999 and 1998 were impacted by acquisitions that
were accounted for as purchases, the Company believes that the results of its
operations for such periods are not directly comparable.
United Rentals, Inc. ("Holdings") is principally a holding company and
primarily conducts its operations through its wholly owned subsidiary, United
Rentals (North America), Inc. ("URI"), and subsidiaries of URI.
General
The Company primarily derives revenues from the following sources: (i)
equipment rental (including additional fees that may be charged for equipment
delivery, fuel, repair of rental equipment, and damage waivers), (ii) the sale
of rental equipment, (iii) the sale of equipment, and (iv) the sale of related
merchandise and parts and other revenue.
Cost of operations consists primarily of depreciation costs associated with
rental equipment, the cost of repairing and maintaining rental equipment, the
cost of rental equipment and equipment and other merchandise sold, personnel
costs, occupancy costs and supplies.
The Company records rental equipment expenditures at cost and depreciates
equipment using the straight-line method over the estimated useful life (which
ranges from 2 to 10 years), after giving effect to an estimated salvage value
of 0% to 10% of cost.
Selling, general and administrative expenses primarily include sales
commissions, advertising and marketing expenses, management salaries, and
clerical and administrative overhead.
Non-rental depreciation and amortization includes (i) depreciation expense
associated with equipment that is not offered for rent (such as vehicles,
computers and office equipment) and amortization expense associated with
leasehold improvements, (ii) the amortization of deferred financing costs and
(iii) the amortization of intangible assets. The Company's intangible assets
include non-compete agreements and goodwill, which represents the excess of the
purchase price of acquired companies over the estimated fair market value of
the net assets acquired.
12
Results of Operations
Years Ended December 31, 2000 and 1999
Revenues. Total revenues for 2000 were $2,918.9 million, representing an
increase of 30.7% over total revenues of $2,233.6 million in 1999. The
Company's revenues in 2000 and 1999 were attributable to: (i) equipment rental
($2,056.7 million, or 70.5% of revenues, in 2000 compared to $1,581.0 million,
or 70.8% of revenues, in 1999), (ii) sales of rental equipment ($347.7 million,
or 11.9% of revenues, in 2000 compared to $235.7 million, or 10.6% of revenues,
in 1999) and (iii) sales of equipment and merchandise and other revenues
($514.5 million, or 17.6% of revenues, in 2000 compared to $416.9 million, or
18.7% of revenues, in 1999).
The 30.7% increase in total revenues in 2000 reflected (i) increased
revenues at locations open more than one year (which accounted for
approximately 12.9 percentage points) and (ii) the net effect of new rental
locations acquired through acquisitions and the opening of start-up locations
partially offset by locations sold or closed (which accounted for approximately
17.8 percentage points). The increase in revenues at locations open more than
one year primarily reflected (a) an increase in the volume of rental
transactions, (b) an increase in the sale of related merchandise and parts
which was driven by the increase in equipment rental and sales transactions and
(c) an increase in the sale of used equipment.
Gross Profit. Gross profit increased to $1,088.6 million in 2000 from
$824.9 million in 1999. This increase in gross profit was primarily
attributable to the increase in revenues described above. The Company's gross
profit margin by source of revenue in 2000 and 1999 was: (i) equipment rental
(39.9% in 2000 and 39.4% in 1999), (ii) sales of rental equipment (40.1% in
2000 and 42.0% in 1999) and (iii) sales of equipment and merchandise and other
revenues (24.9% in 2000 and 24.6% in 1999). The increase in the gross profit
margin from rental revenues in 2000 was primarily attributable to greater
equipment utilization rates and to economies of scale. The decrease in the
gross profit margin from the sales of rental equipment in 2000 reflected the
sale of more late-model used equipment which generally generates lower gross
profit margins than older equipment.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") were $454.3 million, or 15.6% of total
revenues, during 2000 and $352.6 million, or 15.8% of total revenues, during
1999. SG&A in 1999 included an $8.3 million charge primarily due to
professional fees incurred in connection with a terminated tender offer.
Excluding this charge, SG&A as a percentage of revenues was 15.4% in 1999.
Non-rental Depreciation and Amortization. Non-rental depreciation and
amortization was $86.3 million, or 3.0% of total revenues, in 2000 and $62.9
million, or 2.8% of total revenues, in 1999.
Interest Expense. Interest expense increased to $228.8 million in 2000 from
$139.8 million in 1999. This increase primarily reflected (i) an increase in
the Company's indebtedness, principally to fund acquisitions, and (ii) an
increase in the interest rates applicable to the Company's variable rate debt.
Preferred Dividends of a Subsidiary Trust. During 2000 and 1999, preferred
dividends of a subsidiary trust of Holdings were $19.5 million.
Other (Income) Expense. Other income was $1.8 million in 2000 compared to
$8.3 million of other expense in 1999. The other expense in 1999 was
attributable to a $9.9 million charge that principally related to fees paid by
the Company for a $2.0 billion financing commitment that was subsequently
cancelled upon termination of a tender offer made by the Company in 1999.
13
Income Taxes. Income taxes increased to $125.1 million, or an effective
rate of 41.5%, in 2000 from $99.1 million, or an effective rate of 41.0%, in
1999.
Years ended December 31, 1999 and 1998
Revenues. Total revenues for 1999 were $2,233.6 million, representing an
increase of 83.0% over total revenues in 1998 of $1,220.3 million. The
Company's revenues in 1999 and 1998 were attributable to: (i) equipment rental
($1,581.0 million, or 70.8% of revenues, in 1999 compared to $895.5 million, or
73.4% of revenues, in 1998), (ii) sales of rental equipment ($235.7 million, or
10.6% of revenues, in 1999 compared to $119.6 million, or 9.8% of revenues, in
1998) and (iii) sales of equipment and merchandise and other revenues ($416.9
million, or 18.6% of revenues, in 1999 compared to $205.2 million, or 16.8% of
revenues, in 1998).
The 83.0% increase in total revenues in 1999 reflected (i) increased
revenues at locations open more than one year (which accounted for
approximately 21.2 percentage points) and (ii) new rental locations acquired
through acquisitions and the opening of start-up locations (which accounted for
approximately 61.8 percentage points). The increase in revenues at locations
open more than one year primarily reflected (a) an increase in the volume of
rental transactions, (b) expansion of the product lines offered by the Company
for sale, (c) an increase in the sale of related merchandise and parts which
was driven by the increase in equipment rental and sales transactions and (d)
an increase in the sale of used equipment.
Gross Profit. Gross profit increased to $824.9 million in 1999 from $423.4
million in 1998. This increase in gross profit was primarily attributable to
the increase in revenues described above. The Company's gross profit margin by
source of revenue in 1999 and 1998 was: (i) equipment rental (39.4% in 1999 and
36.3% in 1998), (ii) sales of rental equipment (42.0% in 1999 and 44.7% in
1998) and (iii) sales of equipment and merchandise and other revenues (24.6% in
1999 and 22.0% in 1998). The increase in the gross profit margin from rental
revenues in 1999 was primarily attributable to greater equipment utilization
rates and to economies of scale. The decrease in the gross profit margin from
the sales of rental equipment in 1999 primarily reflected a shift in mix
towards the sale of more late-model used equipment which generally generates
lower gross profit margins than older equipment. The increase in the gross
profit margin from sales of equipment and merchandise and other revenue in 1999
primarily reflected the benefits of greater purchasing power.
Selling, General and Administrative Expenses. SG&A was $352.6 million, or
15.8% of total revenues, during 1999 and $195.6 million, or 16.0% of total
revenues, during 1998. SG&A in 1999 includes an $8.3 million charge primarily
due to professional fees incurred in connection with a terminated tender offer.
Excluding this charge, SG&A as a percentage of revenues decreased to 15.4% in
1999, primarily due to certain economies of scale relating to the increase in
revenues described above.
Merger-related Expenses. The Company incurred merger-related expenses in
1998 of $47.2 million ($33.2 million after-tax) in connection with three
acquisitions completed by the Company in 1998 that were accounted for as
poolings-of-interests. These expenses consisted of: (i) $18.5 million for
investment banking, legal and accounting services and other merger costs, (ii)
$14.5 million of expenses relating to the closing of duplicate facilities,
(iii) $8.2 million for employee severance and related matters, (iv) $2.1
million for the write down of the computer systems acquired through the U.S.
Rentals Merger and one of the other acquisitions accounted for as a
pooling-of-interests and (v) $3.9 million in other expenses.
Non-rental Depreciation and Amortization. Non-rental depreciation and
amortization was $62.9 million, or 2.8% of total revenues, in 1999 and $35.2
million, or 2.9% of total revenues, in 1998.
14
Interest Expense. Interest expense increased to $139.8 million in 1999 from
$64.2 million in 1998. This increase primarily reflected the fact that the
Company's indebtedness significantly increased in 1999, primarily to fund
acquisitions.
Preferred Dividends of a Subsidiary Trust. Preferred dividends of a
subsidiary trust of Holdings were $19.5 million in 1999 compared with $7.9
million in 1998.
Other (Income) Expense. Other expense was $8.3 million in 1999 compared
with other income of $4.9 million in 1998. The increase in other expense in
1999 primarily reflected a $9.9 million charge that principally related to fees
paid by the Company for a $2.0 billion financing commitment that was
subsequently cancelled upon termination of a tender offer.
Income Taxes. Income taxes increased to $99.1 million, or an effective rate
of 41.0%, in 1999 from $43.5 million, or an effective rate of 55.6%, in 1998.
During 1998, the Company's high effective tax rate reflected (i) the
non-deductibility of $7.4 million for income tax purposes of certain
merger-related expenses and (ii) a $4.8 million charge to recognize deferred
tax liabilities of an acquired business, which was a Subchapter S Corporation
prior to being acquired by the Company.
Extraordinary Item. The Company recorded an extraordinary charge of $35.6
million ($21.3 million net of taxes) in 1998. This charge was incurred in
connection with the early extinguishment of certain debt and primarily
reflected prepayment penalties on certain debt of U.S. Rentals.
Liquidity and Capital Resources
Financing Transactions in 2000
Set forth below is certain information concerning certain financing
transactions entered into by the Company during 2000.
Term Loan D. URI obtained a $200.0 million term loan from a group of
financial institutions. For additional information concerning this loan, see
"--Certain Information Concerning the Credit Facility and Other
Indebtedness--Term Loan D."
Receivables Securitization. In December 2000, the Company obtained $100.0
million through the securitization of certain of its accounts receivable. For
additional information concerning this transaction, see "--Certain Information
Concerning the Credit Facility and Other Indebtedness--Certain Other Secured
Debt."
Sale and Lease-Back Transactions. In 2000, the Company received an
aggregate of $218.8 million of proceeds from equipment sale and lease-back
transactions. For additional information concerning these transactions, see
"--Certain Information Concerning Operating Leases."
Sources and Uses of Cash
During 2000, the Company (i) generated cash from operations of
approximately $512.7 million, (ii) generated cash from the sale of rental
equipment of approximately $347.7 million and (iii) generated cash from
financing activities of approximately $468.1 million. The Company used cash
during this period principally to (i) pay consideration for acquisitions
(approximately $347.3 million), (ii) purchase rental equipment (approximately
$808.2 million), (iii) purchase other property and equipment (approximately
$153.8 million) and (iv) purchase and retire the Company's Common Stock
(approximately $31.0 million).
15
Certain Balance Sheet Changes
The Company's asset and liability accounts were all higher at December 31,
2000 than at December 31, 1999, other than accrued expenses and other
liabilities which was lower. The general increase in the Company's asset and
liability accounts primarily reflected the acquisitions and the equipment
purchases made by the Company in 2000. The decrease in accrued expenses and
other liabilities primarily reflected the refund of certain income tax
payments.
The decrease in additional paid-in capital at December 31, 2000 compared
with December 31, 1999, primarily reflected the purchase and retirement of
Common Stock offset in part by the issuance of Common Stock in connection with
an acquisition.
Cash Requirements Related to Operations
The Company's principal existing sources of cash are borrowings available
under its revolving credit facility ($407.1 million available as of March 6,
2001), cash generated from operations and cash generated from the sale of used
equipment. For additional information concerning the Company's credit facility
(the "Credit Facility"), see "--Certain Information Concerning the Credit
Facility and Other Indebtedness--Credit Facility."
The Company expects that its principal needs for cash relating to its
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 and (iii) debt service. The Company plans to
fund such cash requirements relating to its existing operations from its
existing sources of cash described above.
The Company estimates that equipment expenditures over the next 12 months
will be approximately $400 million for the existing operations of the Company.
These expenditures are comprised of approximately (i) $150 million of
expenditures in order to replace rental equipment sold, (ii) $200 million of
discretionary expenditures to increase the size of the Company's rental fleet
and (iii) $50 million of expenditures for the purchase of non-rental equipment.
The Company expects that it will fund such expenditures from a combination of
approximately $100 million of proceeds expected to be generated from the sale
of used equipment, cash generated from operations and, if required, borrowings
available under the Credit Facility.
While emphasizing internal growth, the Company may also continue to expand
through a disciplined acquisition program. The Company expects to pay for
future acquisitions using cash, capital stock, notes and/or assumption of
indebtedness. To the extent that the Company's existing sources of cash
described above are not sufficient to fund such future acquisitions, the
Company will require additional financing and, consequently, the Company's
indebtedness may increase as the Company implements its growth strategy. There
can be no assurance, however, that any additional financing will be available
or, if available, will be on terms satisfactory to the Company.
Based upon the terms of the Company's currently outstanding indebtedness,
the Company is scheduled to repay debt principal of approximately $33.8 million
during 2001.
Certain Measures to Reduce Cash Requirements
The Company, in response to softening economic conditions, has been
focusing on measures to cut costs and reduce cash outlays. Some of the
principal initiatives are discussed below.
Reduce equipment purchases and supplement new equipment with used
equipment. The Company, as described above, has budgeted $400 million for
rental and other equipment expenditures over the next 12 months. This reflects
a significant reduction from the $962 million that was expended in 2000.
16
The Company believes that it may have the opportunity to purchase
late-model used equipment at attractive prices. Accordingly, while continuing
to purchase new equipment, the Company will also selectively purchase
late-model used equipment. The Company estimates that over the next 12 months
used equipment will account for 15-20% of its total equipment purchases.
The Company plans to reduce the rate at which it invests in new equipment
in 2001, which will cause the weighted average age of its fleet to increase
from approximately 26 months to approximately 32 months. The Company believes
that, because of the young age of its fleet, the Company's operations will not
be adversely affected by this six month increase in average age. The Company
also plans to reduce the rate at which it sells its used rental equipment in
2001 and, as a result, revenues from the sale of rental equipment are expected
to be 70-75% lower in 2001 than in 2000.
Close or Consolidate Under-Performing Branches. The Company is in the
process of reviewing under-performing branches and expects that, over the next
several months, a number of locations will be closed or consolidated with
existing locations.
Continue to Consolidate Suppliers. The Company reduced the number of its
primary equipment suppliers from 111 to 28 in 2000. This allowed the Company to
lower its purchase costs by approximately $150 million in 2000 and should
enable the Company to save additional amounts in 2001. The Company is currently
in the process of similarly consolidating its merchandise suppliers.
Other Cost-Cutting Measures. The Company is seeking to reduce costs in a
number of other ways, including reducing administrative expenses, consolidating
credit and collection centers, and streamlining advertising.
Certain Projected Charges
Branch Consolidation
The Company, as described above, expects that over the next several months
a number of underperforming locations will be closed or consolidated with other
locations. The Company estimates that, as a result, it will incur a pre-tax
charge in 2001 in the range of $20 million to $40 million, primarily relating
to employee severance and vacating facilities.
Debt Refinancing
The Company is currently negotiating with various lenders to replace its
existing credit facility and term loans. If this refinancing is completed, the
Company estimates that it would record a pretax extraordinary charge in 2001 in
the range of $16 million to $27 million, primarily relating to the write-off of
financing fees.
Relationship Between Holdings and URI
Holdings is principally a holding company and primarily conducts its
operations through its wholly owned subsidiary URI and subsidiaries of URI.
Holdings provides certain services to URI in connection with its operations.
These services principally include: (i) senior management services, (ii)
finance related services and support, (iii) information technology systems and
support and (iv) acquisition related services. In addition, Holdings leases
certain equipment and real property that are made available for use by URI and
its subsidiaries. URI has made, and expects to continue to make, certain
payments to Holdings in respect of the services provided by Holdings to the
Company. The expenses relating to URI's payments to Holdings are reflected on
URI's financial statements as selling, general and administrative expenses. In
addition, although not legally obligated to do so, URI has in the past,
17
and expects that it will in the future, make distributions to Holdings to,
among other things, enable Holdings to pay dividends on the Trust Preferred
Securities (as described under "--Certain Information Concerning Preferred
Securities").
The Trust Preferred Securities are the obligation of a subsidiary trust of
Holdings and are not the obligation of URI. As a result, the dividends payable
on these securities are reflected as an expense on the consolidated financial
statements of Holdings, but are not reflected as an expense on the consolidated
financial statements of URI.
Certain Information Concerning the Credit Facility and Other Indebtedness
Credit Facility. URI has a credit facility (the "Credit Facility") which
enables URI to borrow up to $827.5 million on a revolving basis and permits a
Canadian subsidiary of URI (the "Canadian Subsidiary") to directly borrow up to
$40.0 million under the Credit Facility (provided that the aggregate borrowings
of URI and the Canadian Subsidiary do not exceed $827.5 million). Up to $50.0
million of the Credit Facility is available in the form of letters of credit.
The agreement governing the Credit Facility requires that the aggregate
commitment shall be reduced on the last day of each calendar quarter, beginning
September 30, 2001 and continuing through June 30, 2003, by an amount equal to
$20.7 million. The Credit Facility terminates on September 26, 2003, at which
time all outstanding indebtedness is due. As of March 6, 2001, there was $414.0
million of indebtedness outstanding under the Credit Facility (not including
undrawn outstanding letters of credit in the amount of $6.4 million).
Borrowings by URI under the Credit Facility accrue interest at URI's
option, at either (a) the Base Rate (which is equal to the greater of (i) the
Federal Funds Rate plus 0.5% or (ii) Bank of America's reference rate) or (b)
the Eurodollar Rate (which for borrowings by URI is equal to Bank of America's
reserve adjusted Eurodollar Rate) plus a margin ranging from 1.200% to 1.875%
per annum. Borrowings by the Canadian Subsidiary under the Credit Facility
accrue interest, at such subsidiary's option, at either (x) the Prime Rate
(which is equal to Bank of America Canada's prime rate), (y) the BA Rate (which
is equal to Bank of America Canada's BA Rate) plus a margin ranging from 1.200%
to 1.875% per annum or (z) the Eurodollar Rate (which for borrowing by the
Canadian Subsidiary is equal to Bank of America Canada's reserve adjusted
Eurodollar Rate) plus a margin ranging from 1.200% to 1.875% per annum. If at
any time an event of default (as defined in the agreement governing the Credit
Facility) exists, the interest rate applicable to each loan will increase by 2%
per annum. The Company is also required to pay the banks an annual facility fee
equal to 0.375% of the banks' $827.5 million aggregate lending commitment under
the Credit Facility (which fee may be reduced to 0.300% for periods during
which the Company maintains a specified funded debt to cash flow ratio).
The obligations of URI under the Credit Facility are (i) secured by
substantially all of its assets, the stock of its United States subsidiaries
and a portion of the stock of URI's Canadian subsidiaries and (ii) guaranteed
by Holdings and secured by the stock of URI. The obligations of the Canadian
Subsidiary under the Credit Facility are guaranteed by URI and secured by
substantially all of the assets of the Canadian Subsidiary and the stock of the
subsidiaries of the Canadian Subsidiary.
The Credit Facility contains certain covenants that require the Company to,
among other things, satisfy certain financial tests relating to: (a) maximum
leverage, (b) the ratio of senior debt to cash flow, (c) minimum interest
coverage ratio, (d) the ratio of funded debt to cash flow, and (e) the ratio of
senior debt to tangible assets. The agreements governing the Credit Facility
also contain various other covenants that restrict the Company's ability to,
among other things, (i) incur additional indebtedness, (ii) permit liens to
attach to its assets, (iii) pay dividends or make other restricted payments on
its common stock and certain other securities and (iv) make acquisitions unless
certain financial conditions are satisfied. In addition, the agreement
governing the Credit Facility provides that failure by
18
any two of Messrs. Jacobs, Milne, Nolan and Miner to continue to hold executive
positions with the Company for a period of 30 consecutive days constitutes an
event of default unless replacement officers satisfactory to the lenders are
appointed.
Term Loan B. In July 1998, URI obtained a $250.0 million term loan (the
"Term Loan B") from a group of financial institutions. The Term Loan B matures
on June 30, 2005. Prior to maturity, quarterly installments of principal in the
amount of $0.6 million are due on the last day of each calendar quarter,
commencing September 30, 1999. The amount due at maturity is $235.6 million.
The Term Loan B accrues interest, at the Company's option, at either (a) the
Base Rate (as defined with respect to the Credit Facility) plus a margin of
0.375% per annum, or (b) the Eurodollar Rate (as defined with respect to the
Credit Facility for borrowings by URI) plus a margin of 2.25% per annum. If at
any time an event of default exists, the interest rate applicable to the Term
Loan B will increase by 2% per annum. The Term Loan B is secured pari passu
with the Credit Facility, Term Loan C and Term Loan D (described below). The
agreement governing the Term Loan B contains restrictive covenants
substantially similar to those provided under the Credit Facility.
Term Loan C. In July 1999, URI obtained a $750.0 million term loan (the
"Term Loan C") from a group of financial institutions. The Term Loan C matures
in June 2006. Prior to maturity, quarterly installments of principal in the
amount of $1.9 million are due on the last day of each calendar quarter,
commencing September 30, 2000. The amount due at maturity is $706.3 million.
The Term Loan C accrues interest, at URI's option, at either (a) the Base Rate
(as defined with respect to the Credit Facility) plus a margin of 0.625% per
annum, or (b) the Eurodollar Rate (as defined with respect to the Credit
Facility for borrowings by URI) plus a margin of 2.5% per annum. If at any time
an event of default exists, the interest rate applicable to the Term Loan C
will increase by 2% per annum. The Term Loan C is secured pari passu with the
Credit Facility, Term Loan B and Term Loan D. The agreement governing the Term
Loan C contains restrictive covenants substantially similar to those provided
under the Credit Facility.
Term Loan D. In June 2000, URI obtained a $100.0 million term loan from a
financial institution (the "Term Loan D"). In October 2000, URI obtained an
additional $100.0 million under the existing Term Loan D. The Term Loan D
matures in June 2006. Prior to maturity, quarterly installments of principal
are due on the last day of each calendar quarter, in the amount of $0.25
million on September 30, 2000 and in the amount of $0.5 million commencing
December 31, 2000 to maturity. The amount due at maturity is $188.5 million.
The Term Loan D accrues interest, at URI's option, at either (a) the Base Rate
(as defined above with respect to the Credit Facility) plus a margin of 0.625%
per annum, or (b) the Eurodollar Rate (as defined above with respect to the
Credit Facility) plus a margin of 2.5% per annum. If at any time an event of
default exists, the interest rate applicable to the Term Loan D will increase
by 2% per annum. The Term Loan D is secured pari passu with the Credit
Facility, Term Loan B and Term Loan C. The agreement governing the Term Loan D
contains restrictive covenants substantially similar to those provided under
the Credit Facility.
Receivables Securitization. In December 2000, the Company obtained $100.0
million through the securitization of certain of its accounts receivable. In
the securitization, the Company transferred $203.0 million of its accounts
receivable to a special purpose subsidiary (the "SPV") which in turn pledged
those receivables to secure $100.0 million of borrowings that the SPV incurred
to finance its acquisition of those receivables from the Company. These
borrowings accrue interest at Credit Lyonnais' blended commercial paper rate
plus a margin of 0.75% per annum. These borrowings are an obligation of the SPV
and not of Holdings or URI, and the lenders' recourse in respect of the
borrowings is generally limited to collections that the SPV receives on the
receivables. Collections on the receivables are used to service the borrowings.
Subject to certain conditions, collections from the receivables may also be
used by the SPV from time to time until December 2003 to acquire additional
accounts receivables from the Company that the SPV will pledge to the lenders
to secure the borrowings.
9 1/2% Senior Subordinated Notes. In May 1998, URI issued $200.0 million
aggregate principal amount of 9 1/2% senior subordinated notes (the "9 1/2%
Notes"), which are due June 1, 2008. The
19
9 1/2% Notes are unsecured. URI may, at its option, redeem the 9 1/2% Notes on
or after June 1, 2003 at specified redemption prices which range from 104.75%
in 2003 to 100.0% in 2006 and thereafter. In addition, on or prior to June 1,
2001, URI may, at its option, use the proceeds of a public equity offering to
redeem up to 35% of the outstanding 9 1/2% Notes, at a redemption price of
109.5%. The indenture governing the 9 1/2% Notes contains certain restrictive
covenants, including (i) limitations on additional indebtedness, (ii)
limitations on restricted payments, (iii) limitations on liens, (iv)
limitations on dividends and other payment restrictions, (v) limitations on
preferred stock of certain subsidiaries, (vi) limitations on transactions with
affiliates, (vii) limitations on the disposition of proceeds of asset sales and
(viii) limitations on the ability of the Company to consolidate, merge or sell
all or substantially all of its assets.
8.80% Senior Subordinated Notes. In August 1998, URI issued $205.0 million
aggregate principal amount of 8.80% senior subordinated notes (the "8.80%
Notes"), which are due August 15, 2008. The 8.80% Notes are unsecured. URI may,
at its option, redeem the 8.80% Notes on or after August 15, 2003 at specified
redemption prices which range from 104.4% in 2003 to 100.0% in 2006 and
thereafter. In addition, on or prior to August 15, 2001, URI may, at its
option, use the proceeds of a public equity offering to redeem up to 35% of the
outstanding 8.80% Notes, at a redemption price of 108.8%. The indenture
governing the 8.80% Notes contains restrictions substantially similar to those
applicable to the 9 1/2% Notes.
9 1/4% Senior Subordinated Notes. In December 1998, URI issued $300.0
million aggregate principal amount of 9 1/4% senior subordinated notes (the "9
1/4% Notes"), which are due January 15, 2009. The 9 1/4% Notes are unsecured.
URI may, at its option, redeem the 9 1/4% Notes on or after January 15, 2004 at
specified redemption prices which range from 104.625% in 2004 to 100.0% in 2007
and thereafter. In addition, on or prior to January 15, 2002, URI may, at its
option, use the proceeds of a public equity offering to redeem up to 35% of the
outstanding 9 1/4% Notes, at a redemption price of 109.25%. The indenture
governing the 9 1/4% Notes contains restrictions substantially similar to those
applicable to the 9 1/2% Notes.
9% Senior Subordinated Notes. In March 1999, URI sold $250.0 million
aggregate principal amount of 9% senior subordinated notes, (the "9% Notes")
which are due on April 1, 2009. The 9% Notes are unsecured. URI may, at its
option, redeem the 9% Notes on or after April 1, 2004 at specified redemption
prices which range from 104.5% in 2004 to 100.0% in 2007 and thereafter. In
addition, on or prior to April 1, 2002, URI may, at its option, use the
proceeds of a public equity offering to redeem up to 35% of the outstanding 9%
Notes, at a redemption price of 109.0%. The indenture governing the 9% Notes
contains restrictions substantially similar to those applicable to the 9 1/2%
Notes.
Other Debt. In addition to the debt described above, the Company had
approximately $94.1 million of other debt outstanding as of December 31, 2000.
Certain Information Concerning Operating Leases
The Company, from time to time, has entered into operating leases pursuant
to which it leases, as lessee, equipment or real estate. Certain of these
leases were entered into as part of sale and lease-back transactions, where the
Company sells its equipment and then enters into an operating lease that
provides for the Company to lease the equipment for a specified period. Sale
and lease-back transactions in 2000 generated gross proceeds of $218.8 million
and gave rise to $12.5 million of recognized gain and $4.0 million of deferred
gain. For information concerning the lease payment obligations under the
Company's operating leases, see Note 13 of the Notes to the Consolidated
Financial Statements included elsewhere in this Report.
20
Certain Information Concerning Preferred Securities
Trust Preferred Securities
In August 1998, a subsidiary trust (the "Trust") of Holdings sold $300.0
million of 6 1/2% Convertible Quarterly Income Preferred Securities (the "Trust
Preferred Securities"). The net proceeds from the sale of the Trust Preferred
Securities were approximately $290.0 million. The Trust used such proceeds to
purchase convertible subordinated debentures from Holdings which resulted in
Holdings receiving all of the proceeds from the sale of the Trust Preferred
Securities. Holdings in turn contributed the net proceeds from the sale of the
Trust Preferred Securities to its wholly owned subsidiary URI. The Trust
Preferred Securities are convertible into common stock of Holdings at a
conversion price equivalent to $43.63 per share.
Other Preferred Securities
In January 1999, Holdings sold 300,000 shares of its Series A Preferred.
The outstanding shares of Series A Preferred are convertible into an aggregate
of 12,000,000 shares of Holdings common stock, subject to adjustment
(equivalent to a conversion price of $25 per share based upon the liquidation
preference of $1,000 per share of Series A Preferred).
In September 1999, Holdings sold 150,000 shares of its Series B Preferred.
The outstanding shares of Series B Preferred are convertible into an aggregate
of 5,000,000 shares of Holdings common stock, subject to adjustment (equivalent
to a conversion price of $30 per share based upon the liquidation preference of
$1,000 per share of Series B Preferred).
Fluctuations in Operating Results
The Company expects that its revenues and operating results may fluctuate
from quarter to quarter or over the longer term. Certain of the general factors
that may cause such fluctuations are discussed under "--Factors that May
Influence Future Results and Accuracy of Forward Looking
Statements--Fluctuations of Operating Results." In addition, information
concerning certain projected charges that may impact quarterly results over the
near term is set forth under "--Certain Projected Charges."
The Company is continually involved in the investigation and evaluation of
potential acquisitions. In accordance with accounting principles generally
accepted in the United States, the Company capitalizes certain direct
out-of-pocket expenditures (such as legal and accounting fees) relating to
potential or pending acquisitions. Indirect acquisition costs, such as
executive salaries, general corporate overhead, public affairs and other
corporate services, are expensed as incurred. The Company's policy is to charge
against earnings any capitalized expenditures relating to any potential or
pending acquisition that the Company determines will not be consummated. There
can be no assurance that the Company in future periods will not be required to
incur a charge against earnings in accordance with such policy, which charge,
depending upon the magnitude thereof, could adversely affect the Company's
results of operations.
The Company will be required to incur significant start-up expenses in
connection with establishing each start-up location. Such expenses may include,
among others, pre-opening expenses related to setting up the facility, and
expenses in connection with training employees, installing information systems
and marketing. The Company expects that, in general, start-up locations will
initially operate at a loss or at less than normalized profit levels.
Consequently, the opening of a start-up location may negatively impact the
Company's margins until the location achieves normalized profitability.
21
There may be a lag between the time that the Company purchases new
equipment and begins to incur the related depreciation and interest expenses
and the time that the equipment begins to generate revenues at normalized
rates. As a result, the purchase of new equipment, particularly equipment
purchased in connection with expanding and diversifying the Company's rental
equipment, may periodically reduce margins.
Seasonality
The Company's business is seasonal with demand for the Company's rental
equipment tending to be lower in the winter months. The seasonality of the
Company's business has been heightened by the Company's acquisition of
businesses that specialize in renting traffic control equipment. These
businesses tend to generate most of their revenues and profits in the second
and third quarters of the year, slow down during the fourth quarter and operate
at a loss during the first quarter.
Inflation
Although the Company cannot accurately anticipate the effect of inflation
on its operations, the Company believes that inflation has not had, and is not
likely in the foreseeable future to have, a material impact on its results of
operations.
Impact of Recently Issued Accounting Standards
In June 1999, the Financial Accounting Standards Board (''FASB") issued
Statement of Financial Accounting Standards (''SFAS") No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date
of FASB Statement No. 133". This standard delays the effective date of SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities", for one
year, to fiscal years beginning after June 15, 2000. SFAS No. 133 establishes a
new model for accounting for derivatives and hedging activities. The adoption
of SFAS No. 133 on January 1, 2001 is not expected to have a material effect on
the Company's consolidated financial position or results of operations.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities". This standard amends
SFAS No. 133 and addresses a limited number of issues causing implementation
difficulties. The Company will adopt SFAS No. 138 on January 1, 2001 and it is
not expected to have a material effect on the Company's consolidated financial
position or results of operations.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities--a
replacement of FASB Statement No. 125". This standard revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures. This standard is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001 and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15, 2000.
The adoption of SFAS No. 140 is not expected to have a material effect on the
Company's consolidated financial position or results of operations.
Factors that May Influence Future Results and Accuracy of Forward-Looking
Statements
Sensitivity to Changes in Construction and Industrial Activities
Our equipment is principally used in connection with construction and
industrial activities. Consequently, a downturn in construction or industrial
activity may lead to a decrease in demand for
22
our equipment, which could adversely affect our business. We have identified
below certain of the factors which may cause such a downturn, either
temporarily or long-term:
. the recent slow-down of the economy worsens or continues over the
long-term;
. an increase in interest rates; or
. adverse weather conditions which may temporarily affect a particular
region.
In addition, demand for our traffic control equipment may not reach
projected levels in the event that funding for highway and other construction
projects under government programs, such as the Transportation Equity Act for
the 21st Century ("TEA-21"), does not reach expected levels.
Fluctuations of Operating Results
We expect that our revenues and operating results may fluctuate from
quarter to quarter or over the longer term due to a number of factors,
including:
. seasonal rental patterns of our customers--with rental activity tending
to be lower in the winter;
. our recent acquisitions of businesses that specialize in renting
traffic control equipment, which tend to operate at a loss during the
first quarter;
. the timing of expenditures for new equipment and the disposition of
used equipment;
. changes in demand for our equipment or the prices therefor due to
changes in economic conditions, competition or other factors;
. changes in the interest rates applicable to our floating rate debt;
. if we determine that a potential acquisition will not be consummated,
the need to charge against earnings any expenditures relating to such
transaction (such as financing commitment fees, merger and acquisition
advisory fees and professional fees) previously capitalized; and
. the possible need, from time to time, to take other write-offs or
special charges due to a variety of occurrences, such as store
consolidations or closings or the refinancing of existing indebtedness.
Dependence on Additional Capital
We may require additional capital for, among other purposes, purchasing
rental equipment, completing acquisitions, and establishing new rental
locations. If the cash that we generate from our business, together with cash
that we may borrow under our credit facility, is not sufficient to fund our
capital requirements, we will require additional debt and/or equity financing.
We cannot, however, be certain that any additional financing will be available
or, if available, will be available on terms that are satisfactory to us. If we
are unable to obtain sufficient additional capital in the future, our business
could be adversely affected.
Certain Risks Relating to Acquisitions
The making of acquisitions entails certain risks, including:
. acquired companies could have unrecorded liabilities that we fail to
discover during our due diligence investigations;
23
. we may have difficulty in assimilating the operations and personnel of
the acquired company with our existing operations;
. we may lose key employees of the acquired company; and
. we may have difficulty maintaining uniform standards, controls,
procedures and policies.
Dependence on Management
We are highly dependent upon our senior management team. Consequently, our
business could be adversely affected in the event that we lose the services of
any member of senior management. Furthermore, if we lose the services of
certain members of senior management, it is an event of default under the
agreements governing our credit facility and certain of our other indebtedness,
unless we appoint replacement officers satisfactory to the lenders within 30
days. We do not maintain "key man" life insurance with respect to members of
senior management.
Competition
The equipment rental industry is highly fragmented and competitive. Our
competitors primarily include small, independent businesses with one or two
rental locations; regional competitors which operate in one or more states;
public companies or divisions of public companies; and equipment vendors and
dealers who both sell and rent equipment directly to customers. We may in the
future encounter increased competition from our existing competitors or from
new companies. In addition, certain equipment manufacturers may commence (or
increase their existing efforts relating to) renting and selling equipment
directly to our customers.
Liability and Insurance
We are exposed to various possible claims relating to our business. These
include claims relating to (1) personal injury or death caused by equipment
rented or sold by us, (2) motor vehicle accidents involving our delivery and
service personnel and (3) employment related claims. We carry a broad range of
insurance for the protection of our assets and operations. However, such
insurance may not fully protect us for a number of reasons, including:
. our coverage is subject to a deductible of $1.0 million and limited to
a maximum of $98 million per occurrence;
. we do not maintain coverage for environmental liability, since we
believe that the cost for such coverage is high relative to the benefit
that it provides; and
. certain types of claims, such as claims for punitive damages or for
damages arising from intentional misconduct, which are often alleged in
third party lawsuits, might not be covered by our insurance.
We cannot be certain that insurance will continue to be available to us on
economically reasonable terms, if at all.
Environmental and Safety Regulations
There are numerous federal, state and local laws and regulations governing
environmental protection and occupational health and safety matters. These
include laws and regulations that govern wastewater discharges, the use,
treatment, storage and disposal of solid and hazardous wastes and materials,
air quality and the remediation of contamination associated with the release of
hazardous substances. Under these laws, an owner or lessee of real estate may
be liable for, among other things,
24
(1) the costs of removal or remediation of hazardous or toxic substances
located on, in, or emanating from, the real estate, as well as related costs of
investigation and property damage and substantial penalties, and (2)
environmental contamination at facilities where its waste is or has been
disposed. These laws often impose liability whether or not the owner or lessee
knew of the presence of the hazardous or toxic substances and whether or not
the owner or lessee was responsible for these substances. Our activities that
are or may be affected by these laws include our use of hazardous materials to
clean and maintain equipment and our disposal of solid and hazardous waste and
wastewater from equipment washing. We also dispense petroleum products from
underground and above-ground storage tanks located at certain rental locations,
and at times we must remove or upgrade tanks to comply with applicable laws.
Furthermore, we have acquired or lease certain locations which have or may have
been contaminated by leakage from underground tanks or other sources and are in
the process of assessing the nature of the required remediation. Based on the
conditions currently known to us, we believe that any unreserved environmental
remediation and compliance costs required with respect to those conditions will
not have a material adverse effect on our business. However, we cannot be
certain that we will not identify adverse environmental conditions that are not
currently known to us, that all potential releases from underground storage
tanks removed in the past have been identified, or that environmental and
safety requirements will not become more stringent or be interpreted and
applied more stringently in the future. If we are required to incur
environmental compliance or remediation costs that are not currently
anticipated by us, our business could be adversely affected depending on the
magnitude of the cost.
Risks Related to International Operations
Our operations outside the United States are subject to risks normally
associated with international operations. These include the need to convert
currencies, which could result in a gain or loss depending on fluctuations in
exchange rates, and the need to comply with foreign laws.
Dependence on Information Technology Systems
Our ability to monitor and control our operations depends to a large extent
on the proper functioning of our information technology systems. Any disruption
in these systems or the failure of these systems to operate as expected could,
depending on the magnitude and duration of the problem, adversely affect our
business.
Labor Matters
Certain of our employees are represented by unions and covered by
collective bargaining agreements. If we should experience a prolonged labor
dispute involving a significant number of our employees, our business could be
adversely affected.
Restrictive Covenants
The agreements governing our existing long-term indebtedness contain, and
future agreements governing our long-term indebtedness may also contain,
certain restrictive financial and operating covenants which affect, and in many
respects significantly limit or prohibit, among other things, our ability to
incur indebtedness, make prepayments of certain indebtedness, make investments,
create liens, make acquisitions, sell assets and engage in mergers and
consolidations. These covenants may significantly limit our operating and
financial flexibility.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
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.
25
Interest Rate Risk. The Company periodically utilizes interest rate swap
agreements to manage and mitigate its exposure to changes in interest rates. At
December 31, 2000, the Company had interest rate protection in the form of swap
agreements with an aggregate notional amount of $200.0 million. The effect of
these agreements is to limit the interest rate exposure to 8.75% on $200.0
million of Term Loan B.
All borrowings under our $827.5 million Credit Facility bear interest at a
variable rate of interest. The outstanding indebtedness under the Credit
Facility was $337.0 million as of December 31, 2000. Our other variable rate
debt primarily consists of a $246.9 million Term Loan B, a $748.1 million Term
Loan C, a $198.1 Term Loan D and $100.0 million of receivables securitization
described earlier. The weighted average interest rates applicable to our
variable rate debt as of December 31, 2000 were (i) 7.8% for the Credit
Facility, (ii) 8.80% for the Term Loan B, (iii) 9.26% for the Term Loan C, (iv)
9.18% for the Term Loan D and (v) 7.44% for the receivables securitization
described earlier. Based upon the amount of variable debt that we had
outstanding as of December 31, 2000 (approximately $1.63 billion in the
aggregate), our net income would decrease by approximately $9.5 million 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 the Credit Facility from time to time. For additional information
concerning the terms of our variable rate debt, see Note 7 of the Notes to the
Consolidated Financial Statements included elsewhere herein.
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 current level of our Canadian operations, a 10% change in this
exchange rate would not have a material impact on our earnings. In addition,
the Company periodically enters into foreign exchange contracts to hedge its
transaction exposures. At December 31, 2000, the Company had no outstanding
foreign exchange contracts. The Company does not engage in purchasing forward
exchange contracts for speculative purposes.
26
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
Page
----
(1) Consolidated Financial Statements:
Report of Independent Auditors........................................................... 28
United Rentals, Inc. Consolidated Balance Sheets--December 31, 2000 and 1999............. 29
United Rentals, Inc. Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998....................................................... 30
United Rentals, Inc. Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2000, 1999 and 1998....................................................... 31
United Rentals, Inc. Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998....................................................... 32
Notes to Consolidated Financial Statements............................................... 34
Report of Independent Auditors........................................................... 55
United Rentals (North America), Inc. Consolidated Balance Sheets--December 31, 2000
and 1999............................................................................... 56
United Rentals (North America), Inc. Consolidated Statements of Operations for the years
ended December 31, 2000, 1999 and 1998................................................. 57
United Rentals (North America), Inc. Consolidated Statements of Stockholder's Equity for
the years ended December 31, 2000, 1999 and 1998....................................... 58
United Rentals (North America), Inc. Consolidated Statements of Cash Flows for the years
ended December 31, 2000, 1999 and 1998................................................. 59
Notes to Consolidated Financial Statements............................................... 60
(2) Financial Statement Schedules:
Report of Independent Auditors on Financial Statement Schedules.......................... 69
Schedule I Condensed Financial Information of the Registrant............................. 70
Schedule II Valuation and Qualifying Accounts............................................ 74
Schedules other than those listed are omitted as they are not applicable or
the required or equivalent information has been included in the financial
statements or notes thereto.
27
REPORT OF INDEPENDENT AUDITORS
Board of Directors
United Rentals, Inc.
We have audited the accompanying consolidated balance sheets of United
Rentals, Inc. as of December 31, 2000 and 1999 and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 2000. These consolidated financial
statements are the responsibility of the management of United Rentals, Inc. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of United Rentals, Inc. at December 31, 2000 and 1999, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States.
/s/ ERNST & YOUNG LLP
MetroPark, New Jersey
February 23, 2001
28
UNITED RENTALS, INC.
CONSOLIDATED BALANCE SHEETS
December 31
----------------------
2000 1999
---------- ----------
(In thousands, except
share data)
Assets
Cash and cash equivalents.............................................. $ 34,384 $ 23,811
Accounts receivable, net of allowance for doubtful accounts of $55,624
and $58,376 at 2000 and 1999, respectively........................... 469,594 434,985
Inventory.............................................................. 133,380 129,473
Prepaid expenses and other assets...................................... 104,493 81,457
Rental equipment, net.................................................. 1,732,835 1,659,733
Property and equipment, net............................................ 422,239 304,907
Intangible assets, net of accumulated amortization of $108,066 and
$51,231 at 2000 and 1999, respectively............................... 2,227,008 1,863,372
---------- ----------
$5,123,933 $4,497,738
========== ==========
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable.................................................... $ 260,155 $ 242,946
Debt................................................................ 2,675,367 2,266,148
Deferred taxes...................................................... 206,243 81,229
Accrued expenses and other liabilities.............................. 136,225 209,929
---------- ----------
Total liabilities............................................... 3,277,990 2,800,252
Commitments and contingencies
Company-obligated manditorily redeemable convertible preferred
securities of a subsidiary trust..................................... 300,000 300,000
Stockholders' equity:
Preferred stock--$.01 par value, 5,000,000 shares authorized:
Series A perpetual convertible preferred stock--$300,000
liquidation preference, 300,000 shares issued and outstanding
in 2000 and 1999................................................ 3 3
Series B perpetual convertible preferred stock--$150,000
liquidation preference, 150,000 shares issued and outstanding
in 2000 and 1999................................................ 2 2
Common stock--$.01 par value, 500,000,000 shares authorized,
71,065,707 shares issued and outstanding in 2000 and
72,051,095 shares issued and outstanding in 1999.................. 711 721
Additional paid-in capital.......................................... 1,196,324 1,216,968
Retained earnings................................................... 355,850 179,475
Accumulated other comprehensive (loss) income....................... (6,947) 317
---------- ----------
Total stockholders' equity...................................... 1,545,943 1,397,486
---------- ----------
$5,123,933 $4,497,738
========== ==========
See accompanying notes.
29
UNITED RENTALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31
----------------------------------------
2000 1999 1998
---------- ---------- ----------
(in thousands, except per share amounts)
Revenues:
Equipment rentals............................................. $2,056,683 $1,581,026 $ 895,466
Sales of rental equipment..................................... 347,678 235,678 119,620
Sales of equipment and merchandise and other revenues......... 514,500 416,924 205,196
---------- ---------- ----------
Total revenues................................................. 2,918,861 2,233,628 1,220,282
Cost of revenues:
Cost of equipment rentals, excluding depreciation............. 907,477 676,972 394,750
Depreciation of rental equipment.............................. 328,131 280,641 175,910
Cost of rental equipment sales................................ 208,182 136,678 66,136
Cost of equipment and merchandise sales and other
operating costs............................................. 386,501 314,419 160,038
---------- ---------- ----------
Total cost of revenues......................................... 1,830,291 1,408,710 796,834
---------- ---------- ----------
Gross profit................................................... 1,088,570 824,918 423,448
Selling, general and administrative expenses................... 454,330 352,595 195,620
Merger-related expenses........................................ 47,178
Non-rental depreciation and amortization....................... 86,301 62,867 35,248
---------- ---------- ----------
Operating income............................................... 547,939 409,456 145,402
Interest expense............................................... 228,779 139,828 64,157
Preferred dividends of a subsidiary trust...................... 19,500 19,500 7,854
Other (income) expense, net.................................... (1,836) 8,321 (4,906)
---------- ---------- ----------
Income before provision for income taxes and extraordinary item 301,496 241,807 78,297
Provision for income taxes..................................... 125,121 99,141 43,499
---------- ---------- ----------
Income before extraordinary item............................... 176,375 142,666 34,798
Extraordinary item, net of tax benefit of $14,255.............. 21,337
---------- ---------- ----------
Net income..................................................... $ 176,375 $ 142,666 $ 13,461
========== ========== ==========
Earnings per share--basic:
Income before extraordinary item.............................. $ 2.48 $ 2.00 $ 0.53
Extraordinary item, net....................................... 0.33
---------- ---------- ----------
Net income.................................................... $ 2.48 $ 2.00 $ 0.20
========== ========== ==========
Earnings per share--diluted:
Income before extraordinary item.............................. $ 1.89 $ 1.53 $ 0.48
Extraordinary item, net....................................... 0.30
---------- ---------- ----------
Net income.................................................... $ 1.89 $ 1.53 $ 0.18
========== ========== ==========
See accompanying notes.
30
UNITED RENTALS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Series A Series B
Perpetual Perpetual
Convertible Convertible
Preferred Stock Preferred Stock Common Stock
--------------- --------------- ------------------
Number Number Number Additional Compre-
of of of Paid-in Retained hensive
Shares Amount Shares Amount Shares Amount Capital Earnings Income
------- ------ ------- ------ ---------- ----- ---------- -------- --------
(In thousands, except share amounts)
Balance, December 31, 1997......... 56,239,375 $562 $ 401,758 $ 44,068
Comprehensive income:
Net income...................... 13,461 $ 13,461
Other comprehensive income:
Foreign currency translation
adjustments................... (281)
--------
Comprehensive income............. $ 13,180
========
Issuance of common stock and
warrants........................ 10,813,255 108 267,214
Conversion of convertible notes.. 30,947 461
Cancellation of common stock..... (137,600) (1) 1
Reclassification of Subchapter S
accumulated earnings to paid-
in-capital...................... 18,979 (18,979)
Pooling-of-interests............. 1,456,997 15 (14) 1,795
Exercise of common stock
options......................... 25,025 619
Subchapter S distributions of a
pooled entity................... (3,536)
---------- ----- ---------- --------
Balance, December 31, 1998......... 68,427,999 684 689,018 36,809
Comprehensive income:
Net income...................... 142,666 $142,666
Other comprehensive income:
Foreign currency translation
adjustments................... 598
--------
Comprehensive income............. $143,264
========
Issuance of Series A perpetual
convertible preferred stock..... 300,000 $3 286,997
Issuance of Se