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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, 2001.
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________________ to ________________
Commission File 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
ng 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 22, 2002, there were 75,420,254 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 22, 2002 was approximately
$1,541.7 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 $26.35. 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................................................................ 8
Item 3 Legal Proceedings......................................................... 9
Item 4 Submission of Matters to a Vote of Security Holders....................... 9
PART II
Item 5 Market for the Registrant's Common Equity and Related Stockholder Matters. 9
Item 6 Selected Financial Data................................................... 10
Item 7 Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................ 12
Item 7A Quantitative and Qualitative Disclosures About Market Risk................ 26
Item 8 Financial Statements and Supplementary Data............................... 27
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure................................................................ 86
PART III
Item 10 Directors and Executive Officers of the Registrant........................ 86
Item 11 Executive and Director Compensation....................................... 86
Item 12 Security Ownership of Certain Beneficial Owners and Management............ 86
Item 13 Certain Relationships and Related Transactions............................ 86
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......... 86
Certain statements contained in this Report are forward-looking in nature.
Such statements can be identified by the use of forward-looking terminology
such as "believe," "expect," "may," "will," "should," "seek," "on-track,"
"plan," "intend" or "anticipate," or the negative thereof or comparable
terminology, or by discussions of strategy. You are cautioned that our business
and operations are subject to a variety of risks and uncertainties and,
consequently, our actual results may materially differ from those projected by
any forward-looking statements. Certain of such risks and uncertainties are
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, 2002.
Item 1. Business
General
United Rentals is the largest equipment rental company in the world. We
offer for rent over 600 types of equipment--everything from heavy machines to
hand tools--through our network of more than 740 rental locations in the United
States, Canada and Mexico. Our customers include construction and industrial
companies, manufacturers, utilities, municipalities, homeowners and others. In
2001, we served more than 1.4 million customers, completed over 8.4 million
rental transactions and generated revenues of $2.9 billion.
Our fleet of rental equipment, the largest in the world, includes over
500,000 units having an original purchase price of approximately $3.6 billion.
The fleet includes:
. General construction and industrial equipment, such as backhoes,
skid-steer loaders, forklifts, earth moving equipment, material handling
equipment, compressors, pumps and generators;
. Aerial work platforms, such as scissor lifts and boom lifts;
. General tools and light equipment, such as power washers, water pumps,
heaters and hand tools;
. Traffic control equipment, such as barricades, cones, warning lights,
message boards and pavement marking systems; and
. 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.
In addition to renting equipment, we sell used rental equipment, act as a
dealer for new equipment and sell related merchandise, parts and service.
Industry Background
We estimate that the U.S. equipment rental industry has grown from
approximately $6.5 billion in annual rental revenues in 1990 to over $25
billion in 2000, representing a compound annual growth rate of approximately
14.5%. Industry data for 2001 is not yet available, but we expect that industry
growth during the recession was significantly lower than the historical
long-term growth rate. We believe that long-term industry growth, in addition
to reflecting general economic expansion, is being driven by the increasing
recognition by equipment users of the many advantages that equipment rental may
offer compared with ownership. They recognize that by renting they can:
. avoid the large capital investment required for equipment purchases;
. access a broad selection of equipment and select the equipment best
suited for each particular job;
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. reduce storage and maintenance costs; and
. access the latest technology without investing in new equipment.
While the construction industry has to date been the principal user of
rental equipment, industrial companies, utilities and others are increasingly
using rental equipment for plant maintenance, plant turnarounds and other
functions requiring the periodic use of equipment. The market for rental
equipment is also benefiting from increased government funding for
infrastructure projects.
Competitive Advantages
We believe that we benefit from the following competitive advantages:
Large and Diverse Rental Fleet. Our rental fleet is the largest and most
comprehensive in the industry, which allows us to:
. attract customers by providing "one-stop" shopping;
. serve a diverse customer base and reduce our dependence on any particular
customer or group of customers; and
. serve customers that require substantial quantities and/or wide varieties
of equipment.
Significant Purchasing Power. We purchase large amounts of equipment,
merchandise and other items, which enables us to negotiate favorable pricing,
warranty and other terms with our vendors.
Operating Efficiencies. We benefit from the following operating
efficiencies:
Equipment Sharing Among Branches. We generally group our branches into
clusters of 10 to 30 locations that are in the same geographic area. Each
branch within a cluster can access all available equipment in the cluster area.
This increases equipment utilization because equipment that is idle at one
branch can be marketed and rented through other branches. In 2001, the sharing
of equipment among branches accounted for approximately 10.2%, or $226 million,
of our total rental revenue.
Ability to Transfer Equipment Among Branches. The size of our branch
network allows us to transfer equipment from branches that may have
underutilized equipment to branches that require additional equipment. For
example, in 2001, we transferred $793 million of equipment among our branches.
Consolidation of Common Functions. We reduce costs through the
consolidation of functions that are common to our more than 740 branches, such
as payroll, accounts payable and credit and collection, into 18 credit offices
and three service centers.
State-of-the-Art Information Technology Systems. We have state-of-the-art
information technology systems that facilitate our ability to make rapid and
informed decisions, respond quickly to changing market conditions, and share
equipment among branches. We have an in-house team of approximately 100
information technology specialists that supports our systems.
Geographic and Customer Diversity. We have more than 740 branches in 47
states, seven Canadian provinces and Mexico and serve customers that range from
Fortune 500 companies to small companies and homeowners. In 2001, we served
more than 1.4 million customers and our top ten customers accounted for less
than 3% of our revenues. We believe that our geographic and customer diversity
provide us with many advantages including: (1) enabling us to better serve
National Account customers with multiple locations,
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(2) helping us achieve favorable resale prices by allowing us to access used
equipment resale markets across the country, (3) reducing our dependence on any
particular customer and (4) reducing the impact that fluctuations in regional
economic conditions have on our overall financial performance.
National Account Program. Our National Account sales force is dedicated to
establishing and expanding relationships with large 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, a
wide selection of equipment and a single point of contact for all their
equipment needs. Our National Account team includes 34 professionals serving
approximately 1,700 National Account customers. Our revenues from National
Account customers increased more than 50%, to $372 million, in 2001 from $245
million in 2000. We estimate that these revenues will increase to approximately
$450 million in 2002.
Risk Management and Safety Programs. We believe that we have one of the
most comprehensive risk management and safety programs in the industry. Our
risk management department is staffed by 41 experienced professionals and is
responsible for implementing our safety programs and procedures, developing our
employee and customer training programs and managing any claims against us.
Strong and Motivated Branch Management. Each of our branches has a
full-time branch manager who is supervised by one of our 59 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 branch matters.
Senior management closely tracks branch, district and regional performance with
extensive systems and controls, including performance benchmarks and detailed
monthly operating reviews. The compensation of branch managers and other branch
personnel is linked to their branch's financial performance and return on
assets. This incentivizes branch personnel to control costs, optimize pricing,
share equipment with other branches and manage their fleet efficiently.
Strategy
Key elements of our business strategy include:
Continue to Increase Rental Revenues. Despite the recession, we increased
total rental revenues in 2001 by 7.6% and same store rental revenues by 5.6%.
We also added 300,000 new rental customers. We will continue to promote this
growth by:
. actively managing the composition and size of our fleet to meet customer
needs, respond to local demand and adjust to changing economic conditions;
. promoting equipment sharing and cross-marketing of equipment specialties;
. focusing on providing outstanding customer service and support;
. marketing our services to existing and potential National Account
customers that can benefit from our ability to provide a broad selection
of equipment and a consistently high level of service throughout
North America; and
. marketing our extensive fleet of specialized lines of equipment,
including (1) aerial work platforms, (2) traffic control equipment and
(3) trench safety equipment.
Increase Merchandise Sales. We generated about $175 million of revenues in
2001 from our business of selling merchandise--such as drill bits, gloves, hard
hats and safety equipment--that can be used with our equipment. Approximately
50% of our 2001 merchandise revenues were generated by less than 15% of our
branch locations. Towards the end of 2001, we initiated efforts to encourage
all of our branches to aggressively build this business. Our goal is to double
the size of this business over the next two to three years.
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Continue to Control Expenses. We reduced selling, general and
administrative expenses in 2001 by $12.6 million. We are seeking to continue to
control these expenses in a number of ways, including further reducing
administrative costs, further consolidating credit and collection centers and
streamlining advertising.
Selectively Open New Branches and Make Acquisitions. We intend to continue
to selectively open new branches and make acquisitions that will expand our
geographic reach, enhance our operating efficiency and increase our market
share. In seeking acquisition candidates, we generally focus on those that will
have the potential to be accretive to earnings.
Continue Flexible Business Model. We have a flexible business model. When
the economy is strong, we increase investment in our fleet to support strong
revenue and earnings growth. During a recessionary environment, we reduce the
rate at which we invest in new equipment, which increases free cash flow
available to pay down debt. Although reducing fleet investment ages our fleet
somewhat, we have the flexibility to do so because the fleet investment that we
make during the up-part of the business cycle results in the age of our fleet
being at the low end of our target range as we enter a downturn. In view of the
recessionary environment, we reduced fleet investment in 2001. This enabled us
to generate $346 million in free cash flow, after capital expenditures of $497
million, and to pay down almost $250 million of debt. We expect to pay down an
additional $250 million of debt in 2002. As the economy improves, we will
resume operating the business for significant revenue and earnings growth and
again accelerate the rate at which we invest in new equipment to support
aggressive growth.
Products and Services
Our principal products and services are described below. For financial
information concerning our foreign and domestic operations, see Note 15 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 general construction and industrial equipment; aerial work platforms;
traffic control equipment; trench safety equipment; and general tools and light
equipment.
Our fleet of rental equipment is the largest in the world and includes over
500,000 units having an original purchase price of approximately $3.6 billion.
We estimate that each of the following categories accounted for 10% or more of
our equipment rental revenues in 2001: (i) aerial lift equipment (approximately
29%), (ii) earth moving equipment (approximately 15%) and (iii) forklifts
(approximately 11%).
Our fleet of rental equipment, which currently has a weighted average age
of 31 months, is one of the newest and best maintained in the industry. Based
on the rate at which we expect to purchase new equipment and sell used
equipment this year, we expect that the average age will increase to
approximately 37 months in 2002. Over the longer term we plan to maintain the
average age of our fleet in the 35 to 45 month range.
Used Equipment Sales. We routinely sell used rental equipment and invest
in new equipment in order to manage the age, composition and size of our fleet.
We also sell used equipment in response to customer demand for this equipment.
The rate at which we replace used equipment with new equipment depends on a
number of factors, including changing general economic conditions, growth
opportunities, the need to adjust fleet composition to meet customer
requirements and local demand, and the age of the fleet.
We principally sell used equipment through (1) our national sales force,
which can access many resale markets across North America and (2) our web site
(www.unitedrentals.com), which includes an online database
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of used equipment available for sale. We also dispose of our used equipment in
other ways, including sales to used equipment dealers, sales through public
auctions, and trade-ins to our vendors when we buy new equipment.
New Equipment Sales. We are a dealer for many leading equipment
manufacturers. The manufacturers that we represent and the brands that we carry
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); Skytrak and Lull (rough terrain reach forklifts);
Scattrak (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.
Related Merchandise, Parts and Other Services. At most of our branches, we
sell a variety of supplies and merchandise such as saw blades, fasteners, drill
bits, hard hats, gloves and other safety equipment and we also offer repair and
maintenance services and sell parts for equipment that is owned by our
customers.
Our Rentalman(TM) Software. We have a subsidiary that develops and markets
Rentalman/TM/ software for use by equipment rental companies in managing and
operating multiple branch locations. This software package developed by this
subsidiary is used by many of the largest equipment rental companies.
Customers
Our customer base is highly diversified and ranges from Fortune 500
companies to small businesses and homeowners. Our largest customer accounted
for approximately 1% of our revenues in 2001 and our top 10 customers accounted
for less than 3% of our revenues in 2001.
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; 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, 2002, we had a total of 2,418 salespeople,
including 1,171 store-based customer service representatives and 1,247
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
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Account team closely coordinates its efforts with the local sales force in each
area. Our National Account team currently includes 34 sales professionals.
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, radio 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 consolidate our vendor base in order
to further increase our purchasing power. We estimate that our largest supplier
accounted for approximately 31% of our equipment purchases in 2001, and that
our top 10 largest suppliers accounted for approximately 87% of our equipment
purchases during that period. We believe that we have alternative sources of
supply for each of our material equipment categories.
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. Management and branch personnel can access
the systems 24 hours a day.
These systems:
. allow management to obtain a wide range of operating and financial data;
. enable branch personnel to (1) determine equipment availability, (2)
access all equipment within a geographic region and arrange for equipment
to be delivered from anywhere in the region directly to the customer, (3)
monitor business activity on a real-time basis and (4) obtain customized
reports on a wide range of operating and financial data, including
equipment utilization, rental rate trends, maintenance histories and
customer transaction histories; and
. permit customers to access their accounts online.
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
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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 our disposal of
solid and hazardous waste and wastewater from equipment washing. We also
dispense petroleum products from underground and aboveground 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.
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Employees
As of March 1, 2002, we had 13,606 employees. Of these employees, 3,935 are
salaried personnel and 9,671 are hourly personnel. Collective bargaining
agreements relating to 68 separate locations cover approximately 1,013 of our
employees.
Item 2. Properties
We currently operate 741 locations. Of these locations, 662 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 (11) . Louisiana (8) . Oklahoma (7)
. Alaska (5) . Maine (3) . Oregon (24)
. Arizona (21) . Maryland (19) . Pennsylvania (16)
. Arkansas (3) . Massachusetts (11) . Rhode Island (2)
. California (102) . Michigan (5) . South Carolina (9)
. Colorado (18) . Minnesota (14) . South Dakota (7)
. Connecticut (10) . Mississippi (2) . Tennessee (7)
. Delaware (5) . Missouri (12) . Texas (55)
. Florida (36) . Montana (2) . Utah (9)
. Georgia (22) . Nebraska (5) . Virginia (12)
. Idaho (2) . Nevada (15) . Washington (32)
. Illinois (18) . New Hampshire (2) . Wisconsin (8)
. Indiana (17) . New Jersey (9) . Wyoming (2)
. Iowa (13) . New Mexico (5)
. Kansas (5) . New York (19)
. Kentucky (6) . North Carolina (23)
. North Dakota (11)
. Ohio (13)
Canada Mexico
. Alberta (3) . Nuevo Leon (1)
. British Columbia (17)
. Manitoba (2)
. Newfoundland (9)
. Ontario (34)
. Quebec (11)
. Saskatchewan (2)
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 90 of our rental locations and lease the other locations. In
addition to our rental locations we also lease non-rental locations, for
example district offices, region offices and service centers. Our leases
provide for varying terms and include 30 leases that are on a month-to-month
basis and 30 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 13,000 vehicles. These vehicles are
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).
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Item 3. Legal Proceedings
We are party to various litigation matters, in most cases involving
ordinary and routine claims incidental to our business. We cannot estimate with
certainty our ultimate legal and financial liability with respect to such
pending litigation matters. However, we believe, based on our examination of
such matters, that our ultimate liability will not have a material adverse
effect on our financial position, results of operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of 2001, no matter was submitted to a vote of our
security holders.
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters
Price Range of Common Stock
Our 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 our common stock, as reported by the New York Stock
Exchange.
High Low
------ ------
2001:
First Quarter.. $19.44 $13.19
Second Quarter. 26.25 15.19
Third Quarter.. 25.48 16.46
Fourth Quarter. 24.49 16.97
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 22, 2002, there were approximately 348 holders of record of our
common stock. We believe that the number of beneficial owners is substantially
greater than the number of record holders, because a large portion of our
common stock is held of record in broker "street names."
Dividend Policy
We intend to retain all earnings for the foreseeable future for use in the
operation and expansion of our business and, accordingly, we currently have no
plans to pay dividends on our common stock. The payment of any future dividends
will be determined by the Board of Directors in light of conditions then
existing, including our earnings, financial condition and capital requirements,
restrictions in financing agreements, business conditions and other factors.
Under the terms of certain agreements governing our outstanding indebtedness,
we are prohibited or restricted from paying dividends on our common stock. In
addition, under Delaware law, we are prohibited from paying any dividends
unless we have capital surplus or net profits available for this purpose.
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PART II
Item 6. Selected Financial Data
You should read the following data together with our Consolidated Financial
Statements and related Notes included elsewhere in this Report and
Item 7--"Management's Discussion and Analysis of Financial Condition and
Results of Operations."
We completed a number of acquisitions during the periods presented below.
We accounted for certain of these acquisitions, including our 1998 merger with
U.S. Rentals, as poolings-of-interests. This means that, for accounting and
financial reporting purposes, the acquired company is treated as having been
combined with us at all times since the inception of the acquired company.
Accordingly, we have restated our accounts to include the accounts of the
businesses that we acquired in these pooling-of-interests transactions, except
in one case where the transaction was not material. We accounted for our other
acquisitions as purchases. This means that the results of operations of the
acquired company are included in our financial statements only from the date of
acquisition. We believe that our results for the periods presented below are
not directly comparable because of the impact of the acquisitions accounted for
as purchases. For additional information, see Note 3 of the Notes to
Consolidated Financial Statements included elsewhere in this Report.
Year Ended December 31
-------------------------------------------------------
1997 1998 1999 2000 2001
-------- ---------- ---------- ---------- ----------
(dollars in thousands, except per share data)
Income statement data:
Total revenues..................................................... $489,838 $1,220,282 $2,233,628 $2,918,861 $2,886,605
Total cost of revenues............................................. 340,546 796,834 1,408,710 1,830,291 1,847,135
-------- ---------- ---------- ---------- ----------
Gross profit....................................................... 149,292 423,448 824,918 1,088,570 1,039,470
Selling, general and administrative expenses....................... 70,835 195,620 352,595 454,330 441,751
Restructuring charge............................................... 28,922
Merger-related expenses............................................ 47,178
Non-rental depreciation and amortization........................... 13,424 35,248 62,867 86,301 106,763
Termination cost of deferred compensation agreements............... 20,290
-------- ---------- ---------- ---------- ----------
Operating income................................................... 44,743 145,402 409,456 547,939 462,034
Interest expense................................................... 11,847 64,157 139,828 228,779 221,563
Preferred dividends of a subsidiary trust.......................... 7,854 19,500 19,500 19,500
Other (income) expense, net........................................ (2,021) (4,906) 8,321 (1,836) 6,421
-------- ---------- ---------- ---------- ----------
Income before provision for income taxes and extraordinary items... 34,917 78,297 241,807 301,496 214,550
Provision for income taxes......................................... 29,508 43,499 99,141 125,121 91,977
-------- ---------- ---------- ---------- ----------
Income before extraordinary items.................................. 5,409 34,798 142,666 176,375 122,573
Extraordinary items, net (1)....................................... 1,511 21,337 11,317
-------- ---------- ---------- ---------- ----------
Net income......................................................... $ 3,898 $ 13,461 $ 142,666 $ 176,375 $ 111,256
======== ========== ========== ========== ==========
Pro forma provision for income taxes before extraordinary items (2) $ 14,176 $ 44,386
Pro forma income before extraordinary items (2).................... 20,741 33,911
Basic earnings before extraordinary items per share................ $ 0.12 $ 0.53 $ 2.00 $ 2.48 $ 1.70
Diluted earnings before extraordinary items per share.............. $ 0.11 $ 0.48 $ 1.53 $ 1.89 $ 1.30
Basic earnings per share (3)....................................... $ 0.08 $ 0.20 $ 2.00 $ 2.48 $ 1.54
Diluted earnings per share (3)..................................... $ 0.08 $ 0.18 $ 1.53 $ 1.89 $ 1.18
Other financial data:
Depreciation and amortization...................................... $ 95,521 $ 211,158 $ 343,508 $ 414,432 $ 427,726
Dividends on common stock.......................................... -- -- -- -- --
December 31
----------------------------------------------------
1997 1998 1999 2000 2001
-------- ---------- ---------- ---------- ----------
(dollars in thousands)
Balance sheet data:
Cash and cash equivalents..................................... $ 72,411 $ 20,410 $ 23,811 $ 34,384 $ 27,326
Rental equipment, net......................................... 461,026 1,143,006 1,659,733 1,732,835 1,747,182
Goodwill, net(4).............................................. 73,648 922,065 1,853,279 2,215,532 2,199,774
Total assets.................................................. 826,010 2,634,663 4,497,738 5,123,933 5,061,516
Total debt.................................................... 264,573 1,314,574 2,266,148 2,675,367 2,459,522
Company-obligated mandatorily redeemable convertible preferred
securities of a subsidiary trust............................. 300,000 300,000 300,000 300,000
Series A and B preferred stock(5)............................. 430,800 430,800
Stockholders' equity.......................................... 446,388 726,230 966,686 1,115,143 1,625,510
10
- --------
(1)The charge in 1997 resulted from the prepayment of certain debt by U.S.
Rentals. The charge in 1998 resulted from the early extinguishment of
certain debt and primarily reflected prepayment penalties on certain debt of
U.S. Rentals. The charge in 2001 resulted from the refinancing of certain
debt and primarily reflected the write-off of deferred financing fees.
(2)U.S. Rentals was taxed as a Subchapter S Corporation until its initial
public offering in February 1997, and another company that we acquired in a
pooling-of-interests transaction was taxed as a Subchapter S Corporation
until being acquired by us 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)Our earnings during 1997 were impacted by $20.3 million ($0.40 per diluted
share) of expenses relating to the termination of certain deferred
compensation expenses in connection with U.S. Rentals' initial public
offering, a $7.5 million ($0.15 per diluted share) charge to recognize
deferred tax liabilities of U.S. Rentals and an extraordinary item (net of
income taxes) of $1.5 million ($0.03 per diluted share). Our earnings during
1998 were impacted by merger-related expenses of $47.2 million ($33.2
million net of taxes or $0.45 per diluted share), a $4.8 million ($0.07 per
diluted share) 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 ($0.30 per diluted share). Our
earnings during 1999 were impacted by $18.2 million ($10.8 million net of
taxes or $0.12 per diluted share) of expenses incurred related to a
terminated tender offer. Our earnings during 2001 were impacted by a
restructuring charge of $28.9 million ($19.2 million net of taxes or $0.20
per diluted share), a $7.8 million ($5.2 million net of taxes or $0.06 per
diluted share) charge, recorded in other expense, relating to refinancing
costs of a synthetic lease and an extraordinary item (net of income taxes)
of $11.3 million ($0.12 per diluted share).
(4)Goodwill is defined as the excess of cost over the fair value of
identifiable net assets of businesses acquired and is amortized on a
straight-line basis over forty years. Beginning January 1, 2002, in
accordance with the adoption of a new accounting standard, goodwill will no
longer be amortized. See Item 7--"Management's Discussion and Analysis of
Financial Condition and Results of Operations--Changes in Accounting
Treatment for Goodwill and Other Intangible Assets" and Note 2 to the Notes
to Consolidated Financial Statements included elsewhere in this Report.
(5)We issued series A and B perpetual convertible preferred stock in 1999 and
included such preferred stock in stockholders' equity. In July 2001, the SEC
issued guidance to all public companies as to when redeemable preferred
stock may be classified as stockholders' equity. Under this guidance, the
series A and B preferred would not be included in stockholders' equity
because this stock would be subject to mandatory redemption on a hostile
change of control. On September 28, 2001, we entered into an agreement
effecting the exchange of new series C and D perpetual convertible preferred
stock for the series A and B preferred. The series C and D preferred is not
subject to mandatory redemption on a hostile change of control, and is
included in stockholders' equity under the recent SEC guidance. The effect
of the foregoing is that our perpetual convertible preferred stock is
included in stockholders' equity as of September 28, 2001 and thereafter,
but is outside of stockholders' equity for earlier dates.
11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
We are the largest equipment rental company in the world. Our revenues are
divided into three categories:
. Equipment rentals--This category includes our revenues from renting
equipment. This category also includes related revenues such as the fees
we charge for equipment delivery, fuel, repair of rental equipment and
damage waivers.
. Sales of rental equipment--This category includes our revenues from the
sale of used rental equipment.
. Sales of equipment and merchandise and other revenues--This category
principally includes our revenues from the following sources: (i) the
sale of new equipment, (ii) the sale of supplies and merchandise, (iv)
repair services and the sale of parts for equipment owned by customers,
and (v) the operations of our subsidiary that develops and markets
software for use by equipment rental companies in managing and operating
multiple branch locations.
Our cost of operations consists primarily of: (i) depreciation costs
relating to the rental equipment that we own and lease payments for the rental
equipment that we hold under operating leases, (ii) the cost of repairing and
maintaining rental equipment, (iii) the cost of the items that we sell
including new and used equipment and related parts, merchandise and supplies
and (iv) personnel costs, occupancy costs and supply costs.
We record rental equipment expenditures at cost and depreciate equipment
using the straight-line method over the estimated useful life (which ranges
from 2 to 10 years), after giving effect to an estimated salvage value of 0% to
10% of cost.
Selling, general and administrative expenses primarily include sales
commissions, advertising and marketing expenses, management salaries, and
clerical and administrative overhead.
Non-rental depreciation and amortization includes (i) depreciation expense
associated with equipment that is not offered for rent (such as vehicles,
computers and office equipment) and amortization expense associated with
leasehold improvements, (ii) the amortization of deferred financing costs and
(iii) the amortization of goodwill and other intangible assets . Goodwill
represents the excess of the purchase price of acquired companies over the
estimated fair market value of the net assets acquired. As described below,
effective January 1, 2002, we will no longer amortize goodwill. Our other
intangible assets are principally non-compete agreements.
We completed acquisitions in each of 1999, 2000 and 2001. See Note 3 to the
Notes to our Consolidated Financial Statements included elsewhere in this
Report. In view of the fact that our operating results for these years were
affected by acquisitions, we believe that our results for these periods are not
directly comparable.
Change in Accounting Treatment for Goodwill and Other Intangible Assets
Effective January 1, 2002, we adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" issued by
the Financial Accountants Standards Board ("FASB"). Under this standard, our
goodwill, which we previously amortized over 40 years, will no longer be
amortized. We amortized $58.4 million of goodwill in 2001. Our approximately
$15.8 million of other intangible assets, which consist of non-compete
agreements, will continue to be amortized over their estimated useful lives. We
will be required to review our goodwill for impairment during the first six
months of 2002 and at least annually thereafter. In general, this means that we
must determine whether the fair value of the goodwill, determined in accordance
with applicable accounting standards, is at least equal to the recorded value
shown on our balance sheet. If the fair value of the goodwill falls below the
recorded value, we will be required to write-off the excess goodwill and to
12
treat this write-off as an expense. We are currently performing the initial
impairment analysis required by the new accounting standard and estimate that
we will record a non-cash charge in the first quarter of 2002 of approximately
$350 million. This charge will be recorded on the income statement as a
"Cumulative Effect of Change in Accounting Principle" and will reduce our
stockholders' equity by the amount of the charge.
Critical Accounting Policies
We prepare our financial statements in accordance with accounting
principles generally accepted in the United States. A summary of our
significant accounting policies is contained in Note 2 to the Notes to our
Consolidated Financial Statements included elsewhere in this Report. In
applying many accounting principles, we need to make assumptions, estimates
and/or judgments. These assumptions, estimates and judgments are often
subjective and may change based on changing circumstances or changes in our
analysis. Material changes in these assumptions, estimates and judgments have
the potential to materially alter our results of operations. We have identified
below those of our accounting policies that we believe could potentially
produce materially different results were we to change underlying assumptions,
estimates and judgments.
Allowance for Doubtful Accounts. We maintain allowances for doubtful
accounts. This allowance reflects our estimate of the amount of our receivables
that we will be unable to collect. Our estimate could require change based on
changing circumstances, including changes in the economy or in the particular
circumstances of individual customers. Accordingly, we may be required to
increase or decrease our allowance.
Useful Lives of Rental Equipment and Property and Equipment. We depreciate
rental equipment and property and equipment over their estimated useful lives,
after giving effect to an estimated salvage value of 0% to 10% of cost. The
useful life of an asset is determined based on our estimate of the period the
asset will generate revenues, and the salvage value is determined based on our
estimate of the minimum value we could realize from the asset after such
period. We may be required to change these estimates based on changes in our
industry or other changing circumstances. If these estimates change in the
future, we may be required to recognize increased or decreased depreciation
expense for these assets.
Impairment of Goodwill. As described above, we must periodically determine
whether the fair value of our goodwill is at least equal to the recorded value
shown on our balance sheet. See "Change in Accounting Treatment for Goodwill
and Other Intangible Assets." We must make estimates and assumptions in
evaluating the fair value of goodwill. We may be required to change these
estimates and assumptions based on changes in our business prospects or other
changing circumstances. If these estimates change in the future, we may be
required to record impairment charges for goodwill not previously recorded.
Restructuring. During 2001, we recorded reserves in connection with the
restructuring plan described below. These reserves include estimates pertaining
to workforce reduction costs and costs of vacating facilities and related
settlements of contractual obligations. Although we do not anticipate
significant changes, the actual costs may differ from these estimates and we
may be required to record additional expense not previously recorded.
Restructuring Plan in 2001
During 2001, we adopted a restructuring plan involving the following
principal elements: (i) 31 underperforming branches were closed or consolidated
with other locations; (ii) five administrative offices were closed or
consolidated with other locations; (iii) the reduction of our workforce by 489
through the termination of branch and administrative personnel (including 440
terminated as of December 31, 2001) and (iv) certain information technology
hardware and software was no longer used.
The aggregate annual revenues from the 31 branches that were eliminated
amounted to approximately $82 million. We expect that we will retain
approximately $54 million of this revenue by shifting the business of some of
the closed branches to other locations. We estimate that we will realize annual
cost savings from the branch closures of approximately $33 million.
13
We recorded, in the second quarter of 2001, a restructuring charge of
approximately $28.9 million relating to the restructuring plan described above.
During 2001, total activity was approximately $21.9 million consisting of
approximately $11.0 million of cash payments and approximately $10.9 million of
non-cash charges. Of the remaining $7.0 million of this charge, approximately
$3.6 million will be paid by December 31, 2002 and approximately $3.4 million
will be paid in future periods.
The restructuring charge includes: (1) the cost of vacating facilities,
primarily the payment of obligations under leases offset by estimated sublease
opportunities ($9.9 million); the write-off of capital improvements made to
such facilities ($2.8 million) and the write-off of related goodwill ($5.6
million); (2) workforce reduction costs, primarily severance, and (3)
information technology costs comprised of the abandonment of certain
information technology projects ($2.5 million) and the payment of obligations
under equipment leases relating to such projects ($2.5 million). The table
below provides certain information concerning the restructuring charge:
Balance
Amount of Activity December 31,
Components of Restructuring Charge Charge in 2001 (1) 2001 (2)
---------------------------------- --------- ----------- ------------
Cost to vacate facilities..... $18,291 $14,753 $3,538
Workforce reduction costs..... 5,666 3,611 2,055
Information technology costs... 4,965 3,548 1,417
------- ------- ------
Total..................... $28,922 $21,912 $7,010
======= ======= ======
- --------
(1)Represents the non-cash component of the charge plus the cash component that
was paid through December 31, 2001.
(2)Represents the portion of the cash component of the charge that had not been
paid as of December 31, 2001.
Debt Refinancing and Extraordinary Item
We refinanced an aggregate of $1,695.7 million of indebtedness and other
obligations in April 2001, as described under "--Liquidity and Capital
Resources--Financing Transactions in 2001." We recorded the following charges
relating to this refinancing in the second quarter of 2001: (i) a pre-tax
extraordinary charge of $18.1 million ($11.3 million, net of tax) that relates
to the refinancing of indebtedness and primarily reflects the write-off of
deferred financing fees and (ii) a pre-tax charge of $7.8 million ($5.2
million, net of tax) that is recorded in other (income) expense, net, and
relates to the refinancing of a synthetic lease.
Results of Operations
General Overview of 2001
Our revenues were $2,886.6 million in 2001 compared with $2,918.9 million
in 2000. The 1.1% decrease in 2001 revenues was due to lower sales of used
rental equipment. As further described below, in response to the recession, we
slowed investment in new equipment and held existing equipment longer. Our
other revenue categories increased in 2001. Rental revenues increased 7.6% and
revenues from "sale of equipment, and merchandise and other revenues" increased
2.4%. Growth in rental revenues at locations open more than one year, or same
store rental revenues, was 5.6% for 2001 and 3.0% in the fourth quarter of
2001. Rental rates for 2001 and the fourth quarter of 2001 were down 0.8% and
1.1%, respectively, compared to the corresponding prior year periods.
In response to weakness in the economy, we slowed investment in new
equipment and held existing equipment longer. This enabled us to increase free
cash flow and repay debt. We generated approximately $346 million of free cash
flow in 2001, after capital expenditures of approximately $497 million, and
used a portion of this cash to pay down approximately $247 million of debt and
synthetic lease obligations. Because we slowed our sale of used equipment, our
revenues from the sales of rental equipment was down $200.6 million, or 57.7%,
in 2001. Prices for used equipment were somewhat lower in the second half of
2001 than at the beginning of 2001.
14
The decrease in revenues from sales of rental equipment and the $28.9
million restructuring charge described above are the principal reasons for the
decrease in our operating income to $462.0 million in 2001 from $547.9 million
in 2000. This decrease in operating income and the $7.8 million pre-tax charge
described above relating to the refinancing of a synthetic lease are the
principal reasons for the decrease in our income before extraordinary item to
$122.6 million in 2001 from $176.4 million in 2000.
If the economy improves, we should have the potential to increase same
store revenue growth. However, we believe that our results will not reflect the
effects of a strengthening economy until the second half of 2002 at the
earliest. In addition, as described above under "--Change in Accounting
Treatment for Goodwill and Other Intangible Assets," we expect to incur a
charge in the first quarter associated with a change in accounting treatment.
Even without that charge, which will depress first quarter earnings, we would
not expect an increase in earnings per share for 2002 over 2001 levels (other
than earnings increases attributable to elimination of goodwill amortization
under the new accounting treatment).
Additional Information
Years Ended December 31, 2001 and 2000
Revenues. We had total revenues of $2,886.6 million in 2001, representing
a decrease of 1.1% from total revenues of $2,918.9 million in 2000. The
different components of our revenues are discussed below:
1. Equipment Rentals. Our revenues from equipment rentals was $2,212.9
million 2001, representing an increase of 7.6% from $2,056.7 million in 2000.
These revenues accounted for 76.7% of our total revenues in 2001 compared with
70.5% of our total revenues in 2000. The increase in rental revenues reflected
the following:
. We increased our revenues at locations open more than one year. This
increase accounted for approximately 5.6 percentage points of the total
increase of 7.6%. The increase in revenues at these locations was due to
an increase in the volume of transactions, which was more than sufficient
to offset a decline in rental rates. As described above, rental rates for
full year 2001 and fourth quarter 2001 were down 0.8% and 1.1%,
respectively, compared to the corresponding year ago periods.
. We also had additional revenues because we added new rental locations
through start-ups and acquisitions. These additional revenues, net of
revenues lost due to locations sold or closed, accounted for
approximately 2.0 percentage points of the total increase of 7.6%.
2. Sales of Rental Equipment. Our revenues from the sale of rental
equipment were $147.1 million in 2001, representing a decrease of 57.7% from
$347.7 million in 2000. These revenues accounted for 5.1% of our total revenues
in 2001 compared with 11.9% of our total revenues in 2000. This decrease
principally reflected our decision discussed above to slow investment in new
equipment and hold existing equipment longer during a recessionary environment.
3. Sales of Equipment and Merchandise and Other Revenues. Our revenues
from "sale of equipment, and merchandise and other revenues" were $526.6
million in 2001, representing an increase of 2.4% from $514.5 million in 2000.
These revenues accounted for 18.2% of our total revenues in 2001 compared with
17.6% of our total revenues in 2000. The 2.4% increase in sales of equipment
and merchandise and other revenues was attributable to the increase in the
volume of transactions.
Gross Profit. Our gross profit decreased to $1,039.5 million in 2001 from
$1,088.6 million in 2000. This decrease reflected the decrease in total
revenues discussed above, as well as the decrease in gross profit margin
described below from equipment rental and the sales of rental equipment.
Information concerning our gross profit margin by source of revenue is set
forth below:
1. Equipment Rentals. Our gross profit margin from equipment rental
revenues was 37.9% in 2001 and 39.9% in 2000. The decrease in 2001 principally
reflected: (i) an increase in our cost of equipment rental, which was
principally attributable to an increase in the amount of equipment that we hold
under operating leases rather than owning, and (ii) the decrease in rental
rates described above.
15
2. Sales of Rental Equipment. Our gross profit margin from the sales of
rental equipment was 39.7% in 2001 and 40.1% in 2000. This decrease was
primarily the result of modest price declines in some geographic areas.
3. Sales of Equipment and Merchandise and Other Revenues. Our gross profit
margin from "sales of equipment and merchandise and other revenues" was 27.1%
in 2001 and 24.9% in 2000. The increase in the gross profit margin in 2001
primarily reflected: (i) lower costs resulting from our ongoing efforts to
consolidate our suppliers and further capitalize on our purchasing power and
(ii) a shift in mix which resulted in more of our sales being attributable to
higher margin areas such as providing services and merchandise sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A) were $441.8 million, or 15.3% of total
revenues, during 2001 and $454.3 million, or 15.6% of total revenues, during
2000. The decrease in SG&A in 2001 primarily reflected cost-cutting measures
that we have taken, including reducing the number of administrative personnel,
reducing discretionary expenditures and consolidating certain credit and
collection facilities. We are seeking to continue to cut costs in a number of
ways, including further reducing administrative costs, further consolidating
credit and collection centers and streamlining advertising.
Restructuring Charge. We recorded a restructuring charge of $28.9 million
in 2001. See "--Restructuring Plan in 2001" for additional information.
Non-rental Depreciation and Amortization. Non-rental depreciation and
amortization was $106.8 million, or 3.7% of total revenues, in 2001 and $86.3
million, or 3.0% of total revenues, in 2000. The increase in the dollar amount
of non-rental depreciation and amortization in 2001 primarily reflected (1) the
amortization of goodwill attributable to acquisitions completed during 2000 and
(2) additional non-rental vehicles which generally have shorter useful lives.
Interest Expense. Interest expense decreased to $221.6 million in 2001
from $228.8 million in 2000. This decrease primarily reflected lower interest
rates on our variable rate debt.
Preferred Dividends of a Subsidiary Trust. During 2001 and 2000, preferred
dividends of a subsidiary trust were $19.5 million.
Other (Income) Expense. Other expense was $6.4 million in 2001 compared
with other income of $1.8 million in 2000. The increase in other expense in
2001 was primarily attributable to the $7.8 million charge we incurred relating
to the refinancing costs of a synthetic lease as described under "--Debt
Refinancing and Extraordinary Item."
Income Taxes. Income taxes were $92.0 million, or an effective rate of
42.9%, in 2001 compared to $125.1 million, or an effective rate of 41.5%, in
2000. The increase in the effective rate in 2001 was primarily attributable to
the non-deductibility for income tax purposes of certain costs included in the
restructuring charge.
Extraordinary Item. We recorded an extraordinary charge of $18.1 million
($11.3 million, net of tax) in 2001. See "--Debt Refinancing and Extraordinary
Item" for additional information.
Years Ended December 31, 2000 and 1999
Revenues. We had total revenues of $2,918.9 million in 2000, representing
an increase of 30.7% over total revenues of $2,233.6 million in 1999. Our
revenues in 2000 and 1999 by source were as follows: (i) equipment rental
revenues were $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) revenues from the sale of
rental equipment were $347.7 million, or 11.9% of revenues, in 2000 compared to
$235.7 million, or 10.6% of revenues, in 1999; and (iii) revenues from "sales
of equipment and merchandise and other revenues" were $514.5 million, or 17.6%
of revenues, in 2000 compared to $416.9 million, or 18.7% of revenues, in 1999.
16
The 30.7% increase in total revenues in 2000 reflected the following:
. We increased our revenues at locations open more than one year. This
increase accounted for approximately 12.9 percentage point of the total
increase of 30.7%. This same store growth was attributable to (i)
increases in the volume of transactions and utilization rates, which
accounted for 10.9 of the 12.9 percentage points, and (ii) price
increases, which accounted for 2.0 of the 12.9 percentage points. The
increase in volume primarily reflected (a) an increase in rental
transactions, (b) an increase in the sale of related merchandise and
parts which was driven by the increase in equipment rental transactions
and (c) an increase in the sale of used equipment.
. We also had additional revenues because we added new rental locations
through start-ups and acquisitions. These additional revenues, net of
revenues lost due to locations sold or closed, accounted for
approximately 17.8 percentage point of the total increase of 30.7%.
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. Our 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 a change in the age
mix of the used equipment sold. In general, the sale of relatively new
equipment generates lower gross profit margins than the sale of somewhat older
equipment.
Selling, General and Administrative Expenses. SG&A was $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 our indebtedness, principally to fund acquisitions, and (ii) an increase in
the interest rates applicable to our variable rate debt.
Preferred Dividends of a Subsidiary Trust. During 2000 and 1999, preferred
dividends of a subsidiary trust 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 that we
paid for a $2.0 billion financing commitment that was subsequently cancelled
upon termination of a tender offer made by us in 1999.
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.
Liquidity and Capital Resources
Financing Transactions in 2001
Set forth below is information concerning certain financing transactions
completed in 2001:
Refinancing Transaction. In April 2001, we refinanced all of the
indebtedness that was then outstanding on our old revolving credit facility and
term loans. In order to effect this refinancing, we:
. issued $450.0 million of 10 3/4% Senior Notes Due 2008 (the "103/4%
Notes");
17
. obtained a new senior secured credit facility comprised of a $750.0
million term loan and a $750.0 million revolving credit facility; and
. used the proceeds from the 103/4% Notes, the new term loan and borrowings
under the new revolving credit facility to (i) permanently repay the
outstanding balance under our old revolving credit facility ($476.0
million); (ii) repay outstanding term loans ($1,188.5 million) and (iii)
repay an outstanding synthetic lease ($31.2 million).
Receivables Securitization. We have an accounts receivable securitization
facility under which one of our subsidiaries can borrow up to $250 million
against a collateral pool of accounts receivable. During 2001, this subsidiary
increased its outstanding borrowings under this facility by $101.5 million. For
additional information, see "--Certain Information Concerning Receivables
Securitization."
Certain Balance Sheet Changes
The decrease in debt at December 31, 2001 compared to December 31, 2000 was
attributable to increased principal payments due to increased cash flow from
operations during 2001. The increase in additional paid in capital at December
31, 2001 compared to December 31, 2000 was primarily attributable to our
perpetual convertible preferred stock being included in Stockholders' Equity on
the December 31, 2001 balance sheet but not on the December 31, 2000 balance
sheet (see Note 2 to Notes to Consolidated Financial Statements included
elsewhere in this Report).
Sources and Uses of Cash
During 2001, we (i) generated cash from operations of approximately $696.7
million, and (ii) generated cash from the sale of rental equipment of
approximately $147.1 million. We used cash during this period principally to
(i) pay consideration for acquisitions and settle certain outstanding
liabilities due to former owners of businesses that we acquired (approximately
$54.8 million), (ii) purchase rental equipment (approximately $449.8 million),
(iii) purchase other property and equipment (approximately $47.5 million), (iv)
repay debt and a synthetic lease obligation (approximately $247.0 million), (v)
purchase and retire shares of our outstanding common stock (approximately $14.3
million, net of proceeds from option exercises), and (vi) pay financing fees
related to the refinancing of certain of our debt (approximately $29.0 million).
Certain Information Concerning Our Credit Facility
Our revolving credit facility enables URI to borrow up to $750 million on a
revolving basis and enables one of its Canadian subsidiaries to borrow up to
$40 million (provided that the aggregate borrowings of URI and the Canadian
subsidiary may not exceed $750 million). Up to $100 million of the revolving
credit facility is available in the form of letters of credit. The revolving
credit facility will mature and terminate on October 20, 2006.
As of December 31, 2001, borrowings under the revolving credit facility by
URI accrue interest, at our option, at either (A) the ABR Rate (which is equal
to the greater of (i) the Federal Funds Rate plus 0.5% or (ii) the Chase
Manhattan Bank's prime rate) plus a margin of 1.25% or (B) an adjusted LIBOR
rate plus a margin of 2.25%. The above interest rate margins are adjusted
quarterly based on our financial leverage ratio, up to maximum margins of 1.75%
and 2.75%, for revolving loans based on the ABR rate and the adjusted LIBOR
rate, respectively, and down to minimum margins of 0.75% and 1.75%, for
revolving loans based on the ABR rate and the adjusted LIBOR rate,
respectively. If at any time an event of default exists, the interest rate
applicable to each loan will increase by 2% per annum. We are also required to
pay the lenders a commitment fee equal to 0.5% per annum in respect of undrawn
commitments under the revolving credit facility.
18
Certain Information Concerning Receivables Securitization
We have an accounts receivable securitization facility under which one of
our subsidiaries can borrow up to $250 million against a collateral pool of
accounts receivable. The borrowings under the facility and the receivables in
the collateral pool are included in the liabilities and assets, respectively,
reflected on our consolidated balance sheet. Key terms of this facility include:
. borrowings may be made only to the extent that the face amount of the
receivables in the collateral pool exceeds the outstanding loans by a
specified amount;
. the facility is structured so that the receivables in the collateral pool
are the lenders only source of repayment;
. prior to expiration or early termination of the facility, amounts
collected on the receivables may, subject to certain conditions, be
retained by the borrower, provided that the remaining receivables in the
collateral pool are sufficient to secure the then outstanding borrowings;
and
. after expiration or early termination of the facility, we will repay the
borrowings.
As of December 31, 2001, (i) the outstanding borrowings under the facility
were approximately $201.5 million and (ii) the aggregate face amount of the
receivables in the collateral pool was approximately $337.6 million. The
agreement governing this facility, which was amended in June 2001, contemplates
that the term of the facility may extend for up to three years from the date of
the amended facility. However, on each anniversary of such date, the consent of
the lender is required for the facility to renew for the next year. The next
anniversary date is in June 2002. We plan to seek the lender's approval for
renewal.
Certain Information Concerning Operating Leases
From time to time we have entered into operating leases pursuant to which
we lease, as lessee, equipment or real estate. Certain of these leases were
entered into as part of sale and lease-back transactions. In 2001, we were the
seller-lessee in sale-leaseback transactions with unrelated third parities in
which we sold rental equipment and real estate for aggregate proceeds of $51.0
million. For additional information concerning lease payment obligations under
our operating leases, see "-Certain Information Concerning Contractual
Obligations" and Note 14 to the Notes to our Consolidated Financial Statements
included elsewhere in this Report.
Certain Information Concerning Trust Preferred Securities
In August 1998, a subsidiary trust of United Rentals, Inc. sold six million
shares of 6% Convertible Quarterly Income Preferred Securities ("Trust
Preferred Securities") for aggregate consideration of $300 million. During
2002, we repurchased 335,000 of these shares (having an aggregate liquidation
preference of approximately $16.8 million) for aggregate consideration of
approximately $11.5 million.
Relationship Between Holdings and URI
United Rentals, Inc. ("Holdings") is principally a holding company and
primarily conducts its operations through its wholly owned subsidiary United
Rentals (North America), Inc. ("URI") and subsidiaries of URI. Holdings
provides certain services to URI in connection with its operations. These
services principally include: (i) senior management services, (ii) finance
related services and support, (iii) information technology systems and support
and (iv) acquisition related services. In addition, Holdings leases certain
equipment and real property that are made available for use by URI and its
subsidiaries. URI has made, and expects to continue to make, certain payments
to Holdings in respect of the services provided by Holdings to URI. The
expenses relating to URI's payments to Holdings are reflected on URI's
financial statements as selling, general and administrative expenses. In
addition, although not legally obligated to do so, URI has in the past, and
expects that it will in the future, make
19
distributions to Holdings to, among other things, enable Holdings to pay
dividends on the Trust Preferred Securities that were issued by a subsidiary
trust of Holdings as described above .
The Trust Preferred Securities are the obligation of a subsidiary trust of
Holdings and are not the obligation of URI. As a result, the dividends payable
on these securities are reflected as an expense on the consolidated financial
statements of Holdings, but are not reflected as an expense on the consolidated
financial statements of URI. This is the principal reason why the net income
reported on the consolidated financial statements of URI is higher than the net
income reported on the consolidated financial statements of Holdings.
Cash Requirements Related to Operations
Our principal existing sources of cash are cash generated from operations
and borrowings available under our revolving credit facility. As of March 12,
2002, we had $502.6 million of borrowing capacity available under our $750
million revolving credit facility (reflecting outstanding loans of
approximately $167.5 million and outstanding letters of credit in the amount of
approximately $79.9 million). We believe that our existing sources of cash will
be sufficient to support our existing operations over the next 12 months.
We expect that our principal needs for cash relating to our existing
operations over the next 12 months will be to fund (i) operating activities and
working capital, (ii) the purchase of rental equipment and inventory items
offered for sale, (iii) payments due under operating leases, (iv) debt service
and (v) costs relating to the restructuring charge. We plan to fund such cash
requirements relating to our existing operations from our existing sources of
cash described above. In addition, we plan to seek additional financing through
the securitization of certain of our equipment.
As described above, the annual renewal of our accounts receivable
securitization facility requires the lender's consent. If we do not obtain this
consent, then the facility will terminate in June 2002 and we will repay the
borrowings thereunder. In addition, we are required to make principal payments
of approximately $21.3 million in 2002 in respect of other indebtedness. We may
also elect to repay debt that is not due.
The amount of our capital expenditures during 2002 will depend on a number
of factors, including general economic conditions and growth prospects. Based
on current conditions, we estimate that capital expenditures for the year 2002
will be approximately $435 million for our existing operations. These
expenditures are comprised of approximately (i) $280 million of expenditures to
replace rental equipment sold, (ii) $115 million of discretionary expenditures
to increase the size of our rental fleet and (iii) $40 million of expenditures
for the purchase of non-rental equipment. We expect that we will fund such
expenditures from proceeds from the sale of used equipment, cash generated from
operations and, if required, borrowings available under our revolving credit
facility.
We estimate that the weighted average age of our rental fleet, which
currently is approximately 31 months, will increase up to approximately 37
months in 2002 as a result of the rate at which we purchase new equipment and
sell used equipment. We ultimately plan to maintain an average age ranging from
35 to 45 months.
While emphasizing internal growth, we may also continue to expand through a
disciplined acquisition program. We expect to pay for future acquisitions using
cash, capital stock, notes and/or assumption of indebtedness. To the extent
that our existing sources of cash described above are not sufficient to fund
such future acquisitions, we will require additional debt or equity financing
and, consequently, our indebtedness may increase or the ownership of existing
stockholders may be diluted as we implement our growth strategy. There can be
no assurance, however, that any additional financing will be available or, if
available, will be on terms that are satisfactory to us.
For information on amounts due under operating leases in 2002, see
"--Certain Information Concerning Operating Lease."
20
Certain Information Concerning Contractual Obligations
The table below provides certain information concerning the payments coming
due under our existing contractual obligations described in the footnotes below:
2002 2003 2004 2005 2006 Thereafter Total
--------- -------- -------- -------- -------- ---------- ----------
(in thousands)
Debt (1)............. $222,784(3) $ 16,013 $ 25,088 $ 8,351 $254,071 $1,933,215 $2,459,522
Operating leases (2):
Real estate......... 61,139 57,356 52,955 45,573 41,081 125,506 383,610
Rental equipment.... 84,486 72,813 69,346 57,551 48,199 23 332,418
Other equipment..... 24,314 22,131 16,733 4,973 334 68,485
--------- -------- -------- -------- -------- ---------- ----------
Total................ $ 392,723 $168,313 $164,122 $116,448 $343,685 $2,058,744 $3,244,035
========= ======== ======== ======== ======== ========== ==========
- --------
(1)Represents the scheduled maturities of our debt for each of the next five
years and thereafter as of December 31, 2001. For additional information on
our debt, see Note 8 to the Notes to Consolidated Financial Statements
included elsewhere in this Report.
(2)Represents the future minimum lease payments under our noncancellable
operating leases with initial or remaining terms of one year or more for
each of the next five years and thereafter as of December 31, 2001. For
additional information on our operating leases, see Note 14 to the Notes to
Consolidated Financial Statements included elsewhere in this Report.
(3)Includes $201.5 million that is payable should our accounts receivable
securitization facility terminate in 2002. As described under "--Certain
Information Concerning Receivables Securitization,'' subject to lender's
consent being obtained, the term of this facility will be extended.
Extension of the facility in 2002 would reduce the debt payable in 2002 from
$222.8 million to $21.3 million and increase by a corresponding amount the
debt payable in the year during which the extended facility terminates.
Fluctuations in Operating Results
We expect that our 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."
Accounting For Certain Expenses Relating to Potential Acquisitions
In accordance with accounting principles generally accepted in the United
States, we capitalize 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. Our
policy is to charge against earnings any capitalized expenditures relating to
any potential or pending acquisition that we determine will not be consummated.
There can be no assurance that in future periods we 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 our results of
operations.
Seasonality
Our business is seasonal with demand for our rental equipment tending to be
lower in the winter months. The seasonality of our business has been heightened
by our acquisition of businesses that specialize in renting traffic control
equipment. These businesses tend to generate most of their revenues and profits
in the second and third quarters of the year, slow down during the fourth
quarter and operate at a loss during the first quarter.
Inflation
Although we cannot accurately anticipate the effect of inflation on our
operations, we believe that inflation has not had, and is not likely in the
foreseeable future to have, a material impact on our results of operations.
21
Impact of Recently Issued Accounting Standards
In June 2001, the FASB issued SFAS No. 141, "Business Combinations." This
standard addresses financial accounting and reporting for business combinations
and supersedes APB Opinion No. 16, "Business Combinations" and SFAS No. 38,
"Accounting for Preacquisition Contingencies of Purchased Enterprises." All
business combinations in the scope of this Statement are to be accounted for
using one method, the purchase method. Effectve July 1, 2001, the Company
adopted SFAS No. 141.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." This standard addresses financial accounting and reporting for
acquired goodwill and other intangible assets and supersedes APB Opinion No.
17, "Intangible Assets." This standard is effective for fiscal years beginning
after December 15, 2001. However, this standard is immediately effective in
cases where goodwill and other intangible assets are acquired after June 30,
2001. Under this standard, goodwill and other intangible assets deemed to have
indefinite lives will no longer be amortized but will be subject to annual
impairment tests. For additional information, see "Change in Accounting
Treatment For Goodwill and Other Intangible Assets."
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This standard addresses financial
accounting and reporting for the impairment or disposal of long-lived assets
and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of". This standard is effective
for fiscal years beginning after December 15, 2001. The adoption of SFAS No.
144 is not expected to have a material effect on our consolidated financial
position or results of operations.
Factors that May Influence Future Results and Accuracy of Forward-Looking
Statements
Sensitivity to Changes in Construction and Industrial Activities
Our equipment is principally used in connection with construction and
industrial activities. Consequently, decreases in construction or industrial
activity due to a recession or other reasons may lead to a decrease in the
demand for our equipment or the prices that we can charge. Any such decrease
could adversely affect our revenues and operating results. For example, as
discussed above, we expect that until the economy strengthens our same store
rental revenues and pricing will be down on a year-over-year basis due to the
current recessionary environment.
We have identified below certain factors that may cause a further downturn
in construction and industrial activity, either temporarily or long-term:
. a continuation or a worsening of the current recessionary environment;
. an increase in interest rates; or
. adverse weather conditions which may temporarily affect a particular
region.
In addition, demand for our equipment may not reach projected levels in the
event that funding for highway and other construction projects under government
programs, such as the Transportation Equity Act for the 21st Century ("TEA-21")
does not reach expected levels. A recent proposal by the President would, if
enacted by Congress, reduce TEA-21 spending by up to approximately $8.6 billion
beginning in late 2002.
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. These
factors include:
. seasonal rental patterns of our customers, with rental activity tending
to be lower in the winter;
. completion of acquisitions;
. changes in the amount of revenue relating to renting traffic control
equipment, since revenues from this equipment category tend to be more
seasonal than the rest of our business;
22
. changes in the size of our rental fleet or in the rate at which we sell
our 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 the adoption of new
accounting standards, store consolidations or closings or the refinancing
of existing indebtedness.
Substantial Indebtedness
At December 31, 2001, our total indebtedness was approximately $2,459.5
million. Our substantial indebtedness has the potential to affect us adversely
in a number of ways. For example, it will or could:
. require us to devote a substantial portion of our cash flow to debt
service, reducing the funds available for other purposes;
. constrain our ability to obtain additional financing, particularly since
substantially all of our assets are subject to security interests
relating to existing indebtedness; or
. make it difficult for us to cope with a downturn in our business or a
decrease in our cash flow.
Furthermore, if we are unable to service our indebtedness and fund our
business, we will be forced to adopt an alternative strategy that may include:
. reducing or delaying capital expenditures;
. limiting our growth;
. seeking additional capital;
. selling assets; or
. restructuring or refinancing our indebtedness.
We cannot be sure that any of these strategies could be effected on
favorable terms or at all.
A portion of our indebtedness bears interest at variable rates that are
linked to changing market interest rates. As a result, an increase in market
interest rates would increase our interest expense and our debt service
obligations. At December 31, 2001, we had $1,017.2 million of variable rate
indebtedness.
Dependence on Additional Capital
If the cash that we generate from our business, together with cash that we
may borrow under our credit facility, is not sufficient to fund our capital
requirements, we will require additional debt and/or equity financing. We
cannot, however, be certain that any additional financing will be available or,
if available, will be available on terms that are satisfactory to us. If we are
unable to obtain sufficient additional capital in the future, we may be unable
to fund the capital outlays required for the success of our business, including
those relating to purchasing equipment, making acquisitions, opening new rental
locations and refinancing existing indebtedness.
Restrictive Covenants
We are subject to various restrictive financial and operating covenants
under the agreements governing our indebtedness. These covenants limit or
prohibit, among other things, our ability to incur indebtedness, make
prepayments of certain indebtedness, make investments, create liens, make
acquisitions, sell assets and engage in mergers and acquisitions. These
covenants could adversely affect our business by significantly limiting our
operating and financial flexibility.
23
Certain Risks Relating to Acquisitions
We have grown in part through acquisitions and may continue to do so. The
making of acquisitions entails certain risks, including:
. unrecorded liabilities of acquired companies that we fail to discover
during our due diligence investigations;
. difficulty in assimilating the operations and personnel of the acquired
company with our existing operations;
. loss of key employees of the acquired company; and
. difficulty maintaining uniform standards, controls, procedures and
policies.
We cannot guarantee that we will realize the expected benefits from our
acquisitions or that our existing operations will not be harmed as a result of
acquisitions.
Substantial Goodwill
At December 31, 2001, we had on our balance sheet net goodwill in the
amount of $2,199.8 million, which represented approximately 43.5% of our total
assets at such date. This goodwill is an intangible asset and represents the
excess of the purchase price that we paid for acquired businesses over the
estimated fair market value of the net assets of those businesses. If the fair
value of the goodwill, determined in accordance with applicable accounting
standards, were to fall below the recorded value shown on the balance sheet, we
would be required to write off the excess goodwill. Any write-off would
adversely affect our results. For information concerning a charge relating to
goodwill that we expect to take in the first quarter of 2002, see "--Change in
Accounting Treatment For Goodwill and Other Intangible Assets."
Dependence on Management
Our success is highly dependent on the experience and skills of our senior
management team. If we lose the services of any member of this team and are
unable to find a suitable replacement, we may not have the depth of senior
management resources required to efficiently manage our business and execute
our strategy. We do not maintain "key man" life insurance on the lives of
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, equipment manufacturers may commence or increase
their existing efforts relating to renting and selling equipment directly to
our customers or potential customers. Competitive pressures could adversely
affect our revenues and operating results by decreasing our market share or
depressing the prices that we can charge.
Dependence on Information Technology Systems
Our information technology systems facilitate our ability to monitor and
control our operations and adjust to changing market conditions. Any
disruptions in these systems or the failure of these systems to operate as
expected could, depending on the magnitude of the problem, adversely affect our
operating results by limiting our capacity to effectively monitor and control
our operations and adjust to changing market conditions.
24
Liability and Insurance
We are exposed to various possible claims relating to our business. These
possible claims include those relating to (1) personal injury or death caused
by equipment rented or sold by us, (2) motor vehicle accidents involving our
delivery and service personnel and (3) employment related claims. We carry a
broad range of insurance for the protection of our assets and operations.
However, such insurance may not fully protect us for a number of reasons,
including:
. our coverage is subject to a deductible of $1.0 million and limited to a
maximum of $98.0 million per occurrence;
. we do not maintain coverage for environmental liability (other than
legally required fuel storage tank coverage), since we believe that the
cost for such coverage is high relative to the benefit that it provides;
and
. certain types of claims, such as claims for punitive damages or for
damages arising from intentional misconduct, which are often alleged in
third party lawsuits, might not be covered by our insurance.
If we are found liable for any significant claims that are not covered by
insurance, our operating results could be adversely affected. We cannot be
certain that insurance will continue to be available to us on economically
reasonable terms, if at all.
Environmental and Safety Regulations
Our operations are subject to numerous laws governing environmental
protection and occupational health and safety matters. These laws regulate such
issues as wastewater, stormwater, solid and hazardous wastes and materials, and
air quality. Under these laws, we may be liable for, among other things, (1)
the costs of investigating and remediating contamination at our sites as well
as sites to which we sent hazardous wastes for disposal or treatment regardless
of fault and (2) fines and penalties for non-compliance. Our operations
generally do not raise significant environmental risks, but we use hazardous
materials to clean and maintain equipment, and dispose of solid and hazardous
waste and wastewater from equipment washing, and store and dispense petroleum
products from underground and above-ground storage tanks located at certain of
our locations.
Based on the conditions currently known to us, we do not believe that any
pending or likely remediation and compliance costs will have a material adverse
effect on our business. We cannot be certain, however, as to the potential
financial impact on our business if new adverse environmental conditions are
discovered or environmental and safety requirements become more stringent. If
we are required to incur environmental compliance or remediation costs that are
not currently anticipated by us, our business could be adversely affected
depending on the magnitude of the cost.
Labor Matters
We have 1,013 employees that are represented by unions and covered by
collective bargaining agreements. If we should experience a prolonged labor
dispute involving a significant number of our employees, our ability to serve
our customers could be adversely affected. Furthermore, our labor costs could
increase as a result of the settlement of actual or threatened labor disputes.
Operations Outside the United States
Our operations outside the United States are subject to the risks normally
associated with international operations. These include (1) the need to convert
currencies, which could result in a gain or loss depending on fluctuations in
exchange rates, (2) the need to comply with foreign laws and (3) the
possibility of political or economic instability in foreign countries.
25
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.
Interest Rate Risk. We periodically utilize interest rate swap agreements
to manage and mitigate our exposure to changes in interest rates. At December
31, 2001, we had interest rate protection in the form of swap agreements with
an aggregate notional amount of $500.0 million. The effect of some of these
agreements is to limit the interest rate exposure to 9.5% on $200.0 million of
our term loan. The effect of the remainder of these agreements is to convert
$300.0 million of our fixed rate 9 1/4% Notes to a floating rate instrument
through 2009.
We have the following indebtedness that bears interest at a variable rate:
(i) all borrowings under our $750 million revolving credit facility ($71.3
million outstanding as of December 31, 2001); (ii) our term loan ($744.4
million remaining outstanding as of December 31, 2001); and (iii) all
borrowings under our $250 million accounts receivable securitization facility
($201.5 million outstanding as of December 31, 2001). The weighted average
interest rates applicable to our variable rate debt as of December 31, 2001
were (i) 4.5% for the revolving credit facility, (ii) 5.3% for the term loan
and (iii) 2.6% for the receivables securitization facility. Based upon the
amount of variable rate debt outstanding, taking into account our interest rate
swap agreements, as of December 31, 2001 (approximately $1.12 billion in the
aggregate), our net income would decrease by approximately $6.8 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 revolving credit facility from time to time. For additional
information concerning the terms of our variable rate debt, see Note 8 of the
Notes to Consolidated Financial Statements included elsewhere in this Report.
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, we periodically enter into foreign exchange contracts to hedge our
transaction exposures. At December 31, 2001, we had no outstanding foreign
exchange contracts. We do 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, 2001 and 2000............. 29
United Rentals, Inc. Consolidated Statements of Operations for the years ended
December 31, 2001, 2000 and 1999....................................................... 30
United Rentals, Inc. Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2001, 2000 and 1999....................................................... 31
United Rentals, Inc. Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999....................................................... 32
Notes to Consolidated Financial Statements............................................... 34
Report of Independent Auditors........................................................... 66
United Rentals (North America), Inc. Consolidated Balance Sheets--December 31, 2001
and 2000............................................................................... 67
United Rentals (North America), Inc. Consolidated Statements of Operations for the years
ended December 31, 2001, 2000 and 1999................................................. 68
United Rentals (North America), Inc. Consolidated Statements of Stockholder's Equity for
the years ended December 31, 2001, 2000 and 1999....................................... 69
United Rentals (North America), Inc. Consolidated Statements of Cash Flows for the years
ended December 31, 2001, 2000 and 1999................................................. 70
Notes to Consolidated Financial Statements............................................... 71
(2) Financial Statement Schedules:
Report of Independent Auditors on Financial Statement Schedules.......................... 80
Schedule I Condensed Financial Information of the Registrant............................. 81
Schedule II Valuation and Qualifying Accounts............................................ 85
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, 2001 and 2000 and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 2001. 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, 2001 and 2000, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States.
/s/ ERNST & YOUNG LLP
MetroPark, New Jersey
February 19, 2002
28
UNITED RENTALS, INC.
CONSOLIDATED BALANCE SHEETS
December 31
--------------------------------
2001 2000
---------- ----------
(In thousands, except share data)
ASSETS
Cash and cash equivalents......................................................... $ 27,326 $ 34,384
Accounts receivable, net of allowance for doubtful accounts of $47,744 in 2001 and
$55,624 in 2000................................................................. 450,273 469,594
Inventory......................................................................... 85,764 133,380
Prepaid expenses and other assets................................................. 133,217 104,493
Rental equipment, net............................................................. 1,747,182 1,732,835
Property and equipment, net....................................................... 410,053 422,239
Goodwill, net of accumulated amortization of $161,570 in 2001 and
$103,219 in 2000................................................................ 2,199,774 2,215,532
Other intangible assets, net...................................................... 7,927 11,476
---------- ----------
$5,061,516 $5,123,933
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable............................................................... $ 204,773 $ 260,155
Debt........................................................................... 2,459,522 2,675,367
Deferred taxes................................................................. 297,024 206,243
Accrued expenses and other liabilities......................................... 174,687 136,225
---------- ----------
Total liabilities.......................................................... 3,136,006 3,277,990
Commitments and contingencies
Company-obligated mandatorily redeemable convertible preferred securities of
a subsidiary trust.............................................................. 300,000 300,000
Series A and B preferred stock.................................................... 430,800
Stockholders' equity:
Preferred stock--$.01 par value, 5,000,000 shares authorized:
Series C perpetual convertible preferred stock--$300,000 liquidation
preference, 300,000 shares issued and outstanding............................ 3
Series D perpetual convertible preferred stock--$150,000 liquidation
preference, 150,000 shares issued and outstanding............................ 2
Common stock--$.01 par value, 500,000,000 shares authorized, 73,361,407
shares issued and outstanding in 2001 and 71,065,707 in 2000................. 734 711
Additional paid-in capital..................................................... 1,243,586 765,529
Deferred compensation.......................................................... (55,794)
Retained earnings.............................................................. 467,106 355,850
Accumulated other comprehensive loss........................................... (30,127) (6,947)
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Total stockholders' equity................................................. 1,625,510 1,115,143
---------- ----------
$5,061,516 $5,123,933
========== ==========
See accompanying notes.
29
UNITED RENTALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31
----------------------------------------
2001 2000 1999
---------- ---------- ----------
(In thousands, except per share amounts)
Revenues:
Equipment rentals.................................... $2,212,900 $2,056,683 $1,581,026
Sales of rental equipment............................ 147,101 347,678 235,678
Sales of equipment and merchandise and other revenues 526,604 514,500 416,924
---------- ---------- ----------
Total revenues........................................ 2,886,605 2,918,861 2,233,628
Cost of revenues:
Cost of equipment rentals, excluding depreciation.... 1,053,635 907,477 676,972
Depreciation of rental equipment..................... 320,963 328,131 280,641
Cost of rental equipment sales....................... 88,742 208,182 136,678
Cost of equipment and merchandise sales and other
operating costs.................................... 383,795 386,501 314,419
---------- ---------- ----------
Total cost of revenues................................ 1,847,135 1,830,291 1,408,710
---------- ---------- ----------
Gross profit.......................................... 1,039,470 1,088,570 824,918
Selling, general and administrative expenses.......... 441,751 454,330 352,595
Restructuring charge.................................. 28,922
Non-rental depreciation and amortization.............. 106,763 86,301 62,867
---------- ---------- ----------
Operating income...................................... 462,034 547,939 409,456
Interest expense...................................... 221,563 228,779 139,828
Preferred dividends of a subsidiary trust............. 19,500 19,500 19,500
Other (income) expense, net........................... 6,421 (1,836) 8,321
---------- ---------- ----------
Income before provision for income taxes and
extraordinary item.................................. 214,550 301,496 241,807
Provision for income taxes.........................