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;
. 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,
(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.
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
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
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
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.
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.
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
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).
Item 3.
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.
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.
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.
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.
PART II
Item 6.
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
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.
- -------- (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.
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
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.
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:
- -------- (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.
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.
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.
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");
. 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.
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
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."
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:
- -------- (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.
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;
. 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.
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.
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.
Item 7A.
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.
Item 8.
Item 8. Financial Statements and Supplementary Data
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.
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
UNITED RENTALS, INC.
CONSOLIDATED BALANCE SHEETS
See accompanying notes.
UNITED RENTALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes.
UNITED RENTALS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
See accompanying notes.
UNITED RENTALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes.
UNITED RENTALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
See accompanying notes.
UNITED RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Basis of Presentation
United Rentals, Inc. is principally a holding company ("Holdings") and conducts its operations primarily through its wholly owned subsidiary United Rentals (North America), Inc. ("URI") and subsidiaries of URI. Holdings was incorporated in July 1998 and became the parent of URI on August 5, 1998, pursuant to the reorganization of the legal structure of URI. Prior to such reorganization, the name of URI was United Rentals, Inc. References herein to the "Company" refer to Holdings and its subsidiaries, with respect to periods following the reorganization, and to URI and its subsidiaries, with respect to periods prior to the reorganization. As a result of the reorganization, Holdings' primary asset is its sole ownership of all issued and outstanding shares of common stock of URI. URI's various credit agreements and debt instruments place restrictions on its ability to transfer funds to its shareholder.
The Company rents a broad array of equipment to a diverse customer base that includes construction and industrial companies, manufacturers, utilities, municipalities, homeowners and others in the United States, Canada and Mexico. In addition to renting equipment, the Company sells used rental equipment, acts as a dealer for new equipment and sell related merchandise, parts and service. The nature of the Company's business is such that short-term obligations are typically met by cash flow generated from long-term assets. Therefore, the accompanying balance sheets are presented on an unclassified basis.
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, giving retroactive effect for the reorganization for all periods presented. All significant intercompany accounts and transactions have been eliminated.
2. Summary of Significant Accounting Policies
Cash Equivalents
The Company considers all highly liquid instruments with a maturity of three months or less when purchased to be cash equivalents.
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts. This allowance reflects the Company's estimate of the amount of its receivables that it will be unable to collect.
Inventory
Inventory consists of equipment, tools, parts, fuel and related supply items. Inventory is stated at the lower of cost or market and is net of a reserve for obsolescence and shrinkage of $9.4 million and $15.5 million at December 31, 2001 and 2000, respectively. Cost is determined on either a weighted average or first-in, first-out method.
Rental Equipment
Rental equipment is recorded at cost and depreciated over the estimated useful lives of the equipment using the straight-line method. The range of estimated useful lives for rental equipment is two to ten years. Rental equipment is depreciated to a salvage value of zero to ten percent of cost. Ordinary repair and maintenance costs are charged to operations as incurred.
UNITED RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property and Equipment
Property and equipment are recorded at cost and depreciated over their estimated useful lives using the straight-line method. The range of estimated useful lives for property and equipment is two to thirty-nine years. Ordinary repair and maintenance costs are charged to operations as incurred. Leasehold improvements are amortized using the straight-line method over their estimated useful lives or the remaining life of the lease, whichever is shorter.
Goodwill
Goodwill consists of 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, goodwill will no longer be amortized, but will be tested on at least an annual basis for impairment, see "--Impact of Recently Issued Accounting Standards" for further information.
Other Intangible Assets
Other intangible assets consists of non-compete agreements. The non-compete agreements are being amortized on a straight-line basis for a period ranging from three to eight years.
Long-Lived Assets
Long-lived assets are recorded at the lower of amortized cost or fair value. As part of an ongoing review of the valuation of long-lived assets, the Company assesses the carrying value of such assets if facts and circumstances suggest they may be impaired. If this review indicates that the carrying value of these assets may not be recoverable, as determined by a nondiscounted cash flow analysis over the remaining useful life, the carrying value would be reduced to its estimated fair value. There have been no material impairments recognized in these financial statements.
Derivative Financial Instruments
The FASB issued, and subsequently amended, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which became effective for the Company on January 1, 2001. Under SFAS No. 133, all derivatives are required to be recorded as assets or liabilities and measured at fair value. Gains or losses resulting from changes in the values of derivatives are recognized immediately or deferred, depending on the use of the derivative and whether or not it qualifies as a hedge. Derivative financial instruments are periodically used by the Company in the management of its interest rate and foreign currency exposures. Derivative financial instruments are not used for trading purposes.
Translation of Foreign Currency
Assets and liabilities of the Company's subsidiaries operating outside the United States which account in a functional currency other than U.S. dollars are translated into U.S. dollars using exchange rates at the end of the year. Revenues and expenses are translated at average exchange rates effective during the year. Foreign currency translation gains and losses are included as a component of accumulated other comprehensive loss within shareholders' equity.
UNITED RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fair Value of Financial Instruments
The carrying amounts reported in the balance sheets for accounts receivable, accounts payable, accrued expenses and other liabilities approximate fair value due to the immediate to short-term maturity of these financial instruments. The fair values of the revolving credit facility, term loan, and receivables securitization are determined using current interest rates for similar instruments as of December 31, 2001 and 2000 and approximate the carrying value of these financial instruments due to the fact that the underlying instruments include provisions to adjust interest rates to approximate fair market value. The estimated fair value of the Company's other financial instruments at December 31, 2001 and 2000 are based upon available market information and are as follows:
Preferred Stock
The Company issued Series A Perpetual Convertible Preferred Stock ("Series A Preferred") and Series B Perpetual Convertible Preferred Stock ("Series B Preferred") in 1999 and included such preferred 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. This guidance indicates that preferred stock that would be subject to redemption on the occurrence of an event outside the control of the issuer may not be classified as equity and that the probability of the event occurring is not a factor to be considered. Under this guidance, the Series A Preferred and Series B Preferred would not be included in stockholders' equity because this stock would be subject to mandatory redemption on a hostile change of control. On September 28, 2001, the Company entered into an agreement effecting the exchange of new Series C Perpetual Convertible Preferred Stock ("Series C Preferred") for the Series A Preferred and new Series D Perpetual Convertible Preferred Stock ("Series D Preferred") for the Series B Preferred (see Note 10). The Series C Preferred and Series D Preferred stock is not subject to mandatory redemption on a hostile change of control, and is classified as stockholders' equity under the recently issued SEC guidance.
The effect of the foregoing is that the Company's perpetual convertible preferred stock is classified as stockholders' equity as of September 28, 2001 and thereafter, but is classified outside of stockholders' equity for earlier dates. Accordingly, the Company has restated the 2000 balance sheet to show its $430.8 million of perpetual convertible preferred stock under "Series A and B Preferred Stock" rather than under "Stockholders' Equity." The Company has also made a corresponding change to the related Consolidated Statements of Stockholders' Equity. In all other respects, the financial statements remain unchanged, including total assets and liabilities, revenues, operating income, net income and earnings per share.
Revenue Recognition
Revenue related to the sale of equipment and merchandise is recognized at the time of delivery to, or pick-up by, the customer. Revenue related to rental equipment is recognized over the contract term.
UNITED RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Advertising Expense
The Company advertises primarily through trade publications and yellow pages. Advertising costs are expensed as incurred and totaled $11.9 million, $23.8 million and $19.0 million for the years ended December 31, 2001, 2000 and 1999, respectively.
Income Taxes
The Company uses the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between financial statement and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Recognition of deferred tax assets is limited to amounts considered by management to be more likely than not realized in future periods.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates include restructuring charges, allowance for doubtful accounts, useful lives for depreciation, goodwill and other asset impairments, loss contingencies and fair values of financial instruments. Actual results could differ from those estimates.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash investments and accounts receivable. The Company maintains cash and cash equivalents with high quality financial institutions.
Concentration of credit risk with respect to accounts receivable are limited because a large number of geographically diverse customers make up the Company's customer base. No single customer represents greater than 1% of total accounts receivable. The Company controls credit risk through credit approvals, credit limits, and monitoring procedures.
Stock-Based Compensation
The Company accounts for its stock based compensation arrangements under the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees". Since stock options are granted by the Company with exercise prices at or greater than the fair value of the shares at the date of grant, no compensation expense is recognized.
Insurance
The Company is insured for general liability, workers' compensation, and group medical claims up to a specified claim and aggregate amounts (subject to a deductible of one million dollars). Insured losses subject to this deductible are accrued based upon the aggregate liability for reported claims incurred and an estimated liability for claims incurred but not reported. These liabilities are not discounted.
UNITED RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. Effective 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 intangible assets are acquired after June 30, 2001. Under this standard, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests. Goodwill amortization for the year ended December 31, 2001 was approximately $58.4 million. The Company is currently performing impairment tests in connection with the adoption of this standard on January 1, 2002 and estimates the non-cash transition charge to be approximately $350 million, which will be recognized in the first quarter of 2002. 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.
In August 2001, the FA issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This standard addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". This standard is effective for fiscal years beginning after December 15, 2001. The adoption of SFAS No. 144 is not expected to have a material effect on the Company's consolidated financial position or results of operations.
Reclassifications
Certain prior year balances have been reclassified to conform to the 2001 presentation.
3. Acquisitions
The acquisitions completed during the years ended December 31, 2001, 2000 and 1999 include 3, 53 and 102 acquisitions, respectively, that were accounted for as purchases. The results of operations of the businesses acquired in these acquisitions have been included in the Company's results of operations from their respective acquisition dates.
The aggregate initial consideration paid by the Company for 2001 acquisitions that were accounted for as purchases was $12.1 million and consisted of approximately $11.5 million in cash and $0.6 million in seller notes. In addition, the Company repaid or assumed outstanding indebtedness in the aggregate amount of approximately $4.9 million.
During 2000, the Company purchased the outstanding stock and certain assets of (i) Liddell Brothers Inc., in February, (ii) Safety Lites Sales and Leasing, Inc., in March, (iii) Durante Equipment Corp., Inc., in June, (iv) Horizon High Reach, Inc., in September, and (v) Wiese Planning & Engineering Inc., in December. The aggregate initial consideration paid for these five acquisitions that were accounted for as purchases was approximately $153.1 million and consisted of $83.8 million in cash and 761,905 shares of common stock and $59.3 million in seller notes. In addition, the Company repaid or assumed outstanding indebtedness of these companies acquired in the aggregate amount of approximately $5.5 million.
UNITED RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The aggregate initial consideration paid by the Company for other 2000 acquisitions that were accounted for as purchases was $210.2 million and consisted of approximately $184.6 million in cash and $6.2 million in seller notes. In addition, the Company repaid or assumed outstanding indebtedness of the companies acquired in the other 2000 acquisitions in the aggregate amount of $77.5 million.
During 1999, the Company purchased the outstanding stock and certain assets of (i) National Equipment Finance Company, in June, (ii) Mi-Jack Products, Inc. and related entities, in May, (iii) Elmen Rent All, Inc., in June (iv) Forte, Inc., in March, and (v) Arayco, Inc. in June. The aggregate initial consideration paid for these five acquisitions that were accounted for as purchases was approximately $275.4 million and consisted of $270.4 million in cash and $5.0 million in seller notes. In addition, the Company repaid or assumed outstanding indebtedness of these companies acquired in the aggregate amount of approximately $99.8 million.
The aggregate initial consideration paid by the Company for other 1999 acquisitions accounted for as purchases was $663.6 million and consisted of approximately $659.2 million in cash and $4.4 million in seller notes. In addition, the Company repaid or assumed outstanding indebtedness of the companies acquired in the other 1999 acquisitions in the aggregate amount of approximately $239.3 million.
The purchase prices for all acquisitions accounted for as purchases have been allocated to the assets acquired and liabilities assumed based on their respective fair values at their respective acquisition dates. However, the Company has not completed its valuation of all of its purchases and, accordingly, the purchase price allocations are subject to change when additional information concerning asset and liability valuations are completed. The preliminary purchase price allocations that are subject to change primarily consists of rental and non-rental equipment valuations. These allocations are finalized within 12 months of the acquisition date and are not expected to result in significant differences between the preliminary and final allocations.
The following table summarizes, on an unaudited pro forma basis, the combined results of operations of the Company for the year ended December 31, 2000 as though each acquisition described above was made on January 1, 2000 (in thousands, except per share data).
Since the acquisitions made during the year ended December 31, 2001 had an insignificant impact on the Company's pro forma results of operations, the pro forma results of operations for the year ended December 31, 2001 are not shown.
The unaudited pro forma results are based upon certain assumptions and estimates which are subject to change. These results are not necessarily indicative of the actual results of operations that might have occurred, nor are they necessarily indicative of expected results in the future.
Other Costs
The results of operations for the year ended December 31, 1999 include pre-tax expenses related to a terminated tender offer totaling approximately $18.2 million ($10.8 million after tax), primarily consisting of $8.3 million in professional fees recorded in selling, general and administrative expense and $9.9 million in financing commitment fees recorded in other (income) expense, net.
UNITED RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Restructuring Charge
During the second quarter of 2001, the Company recorded a restructuring charge of approximately $28.9 million. The charge primarily relates to the closure or consolidation of underperforming branches and administrative offices, a reduction in the Company's workforce, and the abandonment of certain information technology projects. 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.
Components of the restructuring charge are as follows:
Under the restructuring plan, 31 underperforming branches and five administrative offices were closed or consolidated as of December 31, 2001, the Company's workforce will be reduced by 489 through the termination of branch and administrative personnel (including 440 terminated as of December 31, 2001), and certain information technology hardware and software will no longer be used. The workforce reduction costs primarily represent severance. The costs to vacate facilities primarily represent the payment of obligations under leases offset by estimated sublease opportunities ($9.9 million), the write-off of capital improvements made to such facilities ($2.8 million) and the write-off of related goodwill ($5.6 million). The information technology costs represent the abandonment of certain information technology projects ($2.5 million) and the payment of obligations under equipment leases relating to such projects ($2.5 million).
5. Rental Equipment
Rental equipment consists of the following:
UNITED RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Property and Equipment
Property and equipment consist of the following:
7. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of the following:
UNITED RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Debt
Debt consists of the following:
Refinancing Transaction. In April 2001, the Company obtained the new senior secured credit facility and issued the 10 3/4% senior notes both described below. The proceeds from the senior secured credit facility and senior notes were used to refinance outstanding secured indebtedness of approximately $1,664.5 million and obligations under a synthetic lease of $31.2 million. As a result of the refinancing, the Company recorded an extraordinary charge of approximately $18.1 million ($11.3 million, net of tax), primarily related to the write-off of financing fees, and a charge of approximately $7.8 million recorded in other (income) expense, net related to refinancing costs of the synthetic lease.
UNITED RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
New Senior Secured Credit Facility. The new senior secured credit facility that the Company obtained in April 2001 is comprised of a revolving credit facility and a term loan.
New Revolving Credit Facility. The revolving credit facility enables URI to borrow up to $750 million on a revolving basis and enables one of its Canadian subsidiaries to borrow up to $40 million (provided that the aggregate borrowings of URI and the Canadian subsidiary may not exceed $750 million). Up to $100 million of the revolving credit facility is available in the form of letters of credit ($65.5 million outstanding as of December 31, 2001). The revolving credit facility will mature and terminate on October 20, 2006.
As of December 31, 2001, borrowings under the revolving credit facility accrue interest, at the Company's 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 the Company's 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.
As of December 31, 2001, borrowings by the Canadian subsidiary under the revolving credit facility accrue interest, at such subsidiary's option, at either (X) the Prime rate (which is equal to the Chase Manhattan Bank of Canada's prime rate) plus a margin of 1.25% or (Y) the B/A rate (which is equal to the Chase Manhattan Bank of Canada's B/A rate) plus a margin of 2.25%. The above interest rate margins are adjusted quarterly based on the Company's financial leverage ratio, up to maximum margins of 1.75% and 2.75%, for revolving loans based on the Prime rate and the B/A rate, respectively, and down to minimum margins of 0.75% and 1.75%, for revolving loans based on the Prime rate and the B/A rate, respectively. If at any time an event of default exists, the interest rate applicable to each loan will increase by 2% per annum.
The Company is also required to pay the lenders a commitment fee equal to 0.5% per annum in respect of undrawn commitments under the revolving credit facility.
New Term Loan. On April 20, 2001, URI obtained a $750 million term loan. Amounts repaid in respect of the term loan may not be reborrowed. URI must repay the principal of the term loan in installments, over six and one-half years, as follows: (i) on June 30, 2001 and on the last day of each calendar quarter thereafter up to and including September 30, 2006, URI must repay $1.9 million and (ii) on the last day of each calendar quarter thereafter up to and including September 30, 2007, URI must repay $177.2 million.
Borrowings under the term loan accrue interest, at URI's option, at either (a) the ABR rate (which is equal to the greater of (i) the Federal Funds Rate plus 0.5% or (ii) the Chase Manhattan Bank's prime rate) plus a margin of 2.0%, or (b) an adjusted LIBOR rate plus a margin of 3.0%.
UNITED RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Covenants. The agreements governing the new senior secured credit facility contain certain covenants that require the Company to, among other things, satisfy certain financial tests relating to: (a) the ratio of senior debt to cash flow, (b) minimum interest coverage ratio, (c) the ratio of funded debt to cash flow, and (d) the ratio of senior debt to tangible assets. These agreements also contain various other covenants that restrict the Company's ability to, among other things, (i) incur additional indebtedness, (ii) permit liens to attach to its assets, (iii) pay dividends or make other restricted payments on its common stock and certain other securities and (iv) make acquisitions unless certain financial conditions are satisfied.
Guarantees and Security. URI's obligations under the new senior secured facility are, subject to limited exceptions, (i) guaranteed by Holdings and URI's United States subsidiaries and (ii) secured by substantially all of URI's assets, the stock of URI and the stock of Holding's other United States subsidiaries and a portion of the stock of Holding's Canadian subsidiaries. The obligations of the Canadian subsidiary that may borrow under the revolving credit facility are guaranteed by the Company's other Canadian subsidiaries and secured by substantially all of the assets of this Canadian subsidiary and the stock of its subsidiaries.
10 3/4% Senior Notes. URI issued $450 million aggregate principal amount of 10 3/4% Senior Notes (the "10 3/4% Notes") which are due April 15, 2008. The net proceeds from the sale of the 10 3/4% Notes were approximately $439.9 million (after deducting the initial purchasers' discount and offering expenses). The 10 3/4% Notes are unsecured and are guaranteed by Holdings and URI's domestic subsidiaries. The 10 3/4% Notes mature on April 15, 2008 and may be redeemed by URI on or after April 15, 2005, at specified redemption prices that range from 105.375% in 2005 to 100.0% in 2007 and thereafter. In addition, on or prior to April 15, 2004, URI may, at its option, use the proceeds of a public equity offering to redeem up to 35% of the outstanding 10 3/4% Notes at a redemption price of 110.75%. The indenture governing the 10 3/4% Notes contains certain restrictive covenants, including limitations on (i) additional indebtedness, (ii) restricted payments, (iii) liens, (iv) dividends and other payments, (v) preferred stock of certain subsidiaries, (vi) transactions with affiliates, (vii) the disposition of proceeds of asset sales and (viii) the Company's ability to consolidate, merge or sell all or substantially all of its assets.
Senior Subordinated Notes. The senior subordinated notes shown in the debt table above were issued by URI, are unsecured, and are guaranteed by URI's domestic subsidiaries. The 9 1/2% Senior Subordinate Notes mature on June 1, 2008 and may be redeemed by URI on or after June 1, 2003, at specified redemption prices that range from 104.75% in 2003 to 100.0% in 2006 and thereafter. The 8.80% Senior Subordinated Notes mature on August 15, 2008 and may be redeemed by URI on or after August 15, 2003, at specified redemption prices that range from 104.4% in 2003 to 100.0% in 2006 and thereafter. The 9 1/4% Senior Subordinated Notes mature on January 15, 2009 and may be redeemed by URI on or after June 15, 2004, at specified redemption prices that range from 104.625% in 2004 to 100.0% in 2007 and thereafter. The 9% Senior Subordinated Notes mature on April 1, 2009 and may be redeemed by URI on or after April 1, 2004, at specified redemption prices that range from 104.5% in 2004 to 100.0% in 2007 and thereafter.
The indentures governing URI's senior subordinated notes contain certain restrictive covenants, including limitations on (i) additional indebtedness, (ii) restricted payments, (iii) liens, (iv) dividends and other payments, (v) preferred stock of certain subsidiaries, (vi) transactions with affiliates, (vii) the disposition of proceeds of asset sales and (viii) the Company's ability to consolidate, merge or sell all or substantially all of its assets.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Receivables Securitization. The Company has an accounts receivable securitization facility under which one of its 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 the Company's consolidated balance sheet. Key terms of this facility include: (i) 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, (ii) the facility is structured so that the receivables in the collateral pool are the lenders only source of repayment, (iii) 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 (iv) 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. The Company plans to seek the lender's approval for renewal.
Interest Rate Swap Agreements. As of December 31, 2001, the Company had outstanding interest rate swap agreements that convert $200.0 million of its variable rate term loan to a fixed rate instrument through 2003. These swap agreements are designated as cash flow hedges. Changes in the fair values of the Company's cash flow hedges are recorded in other comprehensive income and reclassified into earnings in the same periods during which the hedged transactions affect earnings. The Company also had outstanding interest rate swap agreements that convert $300.0 million of its fixed rate 9 1/4% Notes to a floating rate instrument through 2009. These swap agreements are designated as fair value hedges. Changes in the fair values of the Company's fair value hedges, as well as the offsetting fair value changes in the hedged items, are recorded in current income. The Company estimates the amount that will be reclassified into earnings in 2002 is approximately $2.8 million. There is no ineffectiveness related to the Company's hedges. Maturities. Maturities of the Company's debt for each of the next five years at December 31, 2001 are as follows (In thousands):
The maturities in 2002 are comprised primarily of amounts outstanding under the accounts receivable securitization facility. As described above, the annual renewal of the Company's accounts receivable securitization facility requires the lender's consent. If the Company does not obtain this consent, then the facility will terminate in June 2002 and the Company will repay the borrowings thereunder.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Income Taxes
The provision for federal, state and provincial income taxes is as follows:
A reconciliation of the provision for income taxes and the amount computed by applying the statutory federal income tax rate of 35% to income before provision for income taxes and extraordinary item is as follows:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components of deferred income tax assets (liabilities) are as follows:
The current and deferred tax assets and liabilities at December 31, 2001 include the effects of certain reclassifications related to differences between the income tax provisions and tax returns for prior years. These reclassifications had no effect on net income.
For financial reporting purposes, income before income taxes and extraordinary items for the Company's foreign subsidiaries was $11.6 million and $15.6 million for the years ended December 31, 2001 and 2000, respectively. At December 31, 2001 and 2000, unremitted earnings of foreign subsidiaries were approximately $30.6 million and $22.9 million, respectively. Since it is the Company's intention to indefinitely reinvest these earnings, no United States taxes have been provided. Determination of the amount of unrecognized deferred tax liability on these unremitted taxes is not practicable.
The Company has net operating loss carryforwards ("NOL's") of $341.3 million for federal income tax purposes that expire through 2021.
10. Company-Obligated Mandatorily Redeemable Convertible Preferred Securities of a Subsidiary Trust and Series A, B, C and D Preferred Stock
Trust Securities. In August 1998, a subsidiary trust (the "Trust") of Holdings issued and sold in a private offering (the "Preferred Securities Offering") $300.0 million of 30 year, 6 1/2% Convertible Quarterly Income Preferred Securities (the "Preferred Securities"). The Trust used the proceeds from the Preferred Securities Offering to purchase 6 1/2% convertible subordinated debentures due 2028 (the "Debentures") from Holdings which resulted in Holdings receiving all of the net proceeds of the Preferred Securities Offering. Holdings in turn contributed the net proceeds of the Preferred Securities Offering to URI. The Preferred Securities are non-voting securities, carry a liquidation value of $50 per security and are convertible into the Company's common stock at an initial rate of 1.146 shares per security (equivalent to an initial conversion price of $43.63 per share). They are convertible at any time at the holders' option and are redeemable, at the Company's option, after three years, subject to certain conditions.
Holders of the Preferred Securities are entitled to preferential cumulative cash distributions from the Trust at an annual rate of 6 1/2% of the liquidation value, accruing from the original issue date and payable quarterly in arrears beginning February 1, 1999. The distribution rate and dates correspond to the interest rate and payments dates on the Debentures. Holdings may defer interest payments on the Debentures for up to twenty consecutive quarters, but not beyond the maturity date of the Debentures. If interest payments on the Debentures are deferred, so are the payments on the Preferred Securities. Under this circumstance, Holdings will be prohibited from paying dividends on any of its capital stock or making payments with respect to its debt that rank pari passu with or junior to the Debentures.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Holdings has executed a guarantee with regard to payment of the Preferred Securities to the extent that the Trust has sufficient funds to make the required payments.
Series A Preferred and Series B Preferred. The Company sold 300,000 shares of its Series A Preferred on January 7, 1999 and sold 150,000 shares of its Series B Preferred on September 30, 1999. On September 28, 2001, the Company entered into an agreement effecting (a) the exchange of the outstanding Series A Preferred for an equal number of shares of Series C Preferred and (b) the exchange of the outstanding Series B Preferred for an equal number of shares of Series D Preferred.
Series C Preferred and Series D Preferred. There are 300,000 shares of the Company's Series C Preferred outstanding and 150,000 shares of the Company's Series D Preferred outstanding. The Series D Preferred includes 105,252 shares designated as Class D-1 and 44,748 shares designated as Class D-2. The rights of the two classes of Series D Preferred are substantially the same, except that only the Class D-1 has the voting rights described below.
Principal terms of the Series C Preferred and Series D Preferred include the following (subject to the special provisions described below that will apply in the event of certain Non-Approved Change of Control transactions): (i) each share is entitled to a liquidation preference of $1,000 per share; (ii) at holder's option, each share of Series C Preferred is convertible into 40 shares of common stock subject to adjustment (representing a conversion price of $25 per share based on the liquidation preference) and each share of Series D Preferred is convertible into 33 1/3 shares of common stock subject to adjustment (representing a conversion price of $30 per share based on the liquidation preference); (iii) the holders of the Series C Preferred and Series D Preferred (on an as converted basis) and the holders of the common stock vote together as a single class on all matters (except that the Series C Preferred may vote as a separate class as described in the next clause); (iv) the holders of the Series C Preferred, voting separately as a single class, may elect two directors (subject to reduction to one, if the shares of Series C Preferred owned by specified holders cease to represent, on an as converted basis, at least eight million shares of common stock, and reduction to zero, if such shares of Series C Preferred cease to represent at least four million shares of common stock), (v) there are no stated dividends on the Series C Preferred or Series D Preferred, but the Series C Preferred and Series D Preferred, on an as converted basis, will participate in any dividends declared on the common stock, (vi) upon the occurrence of specified change of control transactions, other than a Non-Approved Change of Control (as defined below), the Company must offer to redeem the Series C Preferred and Series D Preferred at a price per share equal to the liquidation preference plus an amount equal to 6.25% of the liquidation preference compounded annually from the date of the issuance of the Series A Preferred, in the case of the Series C Preferred, and the date of the issuance of the Series B Preferred, in the case of the Series D Preferred, to the redemption date, (vii) if the Company issues for cash, common stock (or a series of preferred stock convertible into common stock) and the price for the common stock is below the conversion price of the Series C Preferred, then the Company must offer to repurchase a specified portion of the outstanding Series C Preferred at the price per share set forth in the preceding clause, and (viii) if the Company issues for cash, common stock (or a series of preferred stock convertible into common stock) for a price for the common stock below the conversion price of the Series D Preferred, then the Company must offer to repurchase a specified portion of the outstanding Series D Preferred at the price per share specified in the second preceding clause.
Special Rights of Series C Preferred and Series D Preferred Upon Non-Approved Change of Control. In general, a Non-Approved Change of Control transaction is a change of control transaction that the board has disapproved and which the board has not facilitated by such actions as weakening or eliminating the Company's Stockholder Rights Plan. If a Non-Approved Change of Control occurs,
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and the board does not offer the holders of the Series C Preferred and Series D Preferred essentially the same redemption rights that apply to an Approved Change of Control transaction: (i) the holders of the Series C Preferred would elect a majority of the board for a specified period, (ii) the holders of the Series C Preferred and Series D Preferred would be entitled to an additional 6.25% return on the liquidation preference, compounded annually from January 1999 for the Series C Preferred and from September 1999 for the Series D Preferred, (iii) after the holders of the common stock receive an amount equivalent to the liquidation preference, the holders of the Series C Preferred and Series D Preferred would share with the holders of the common stock, on an as converted basis, in any remaining amounts available for distribution and (iv) the Series C Preferred and Series D Preferred would accrue dividends at a maximum annual rate, compounded annually, equal to 18% of the liquidation preference.
11. Capital Stock
Warrants. As of December 31, 2001 there are outstanding warrants to purchase an aggregate of 7,139,296 shares of common stock. The weighted average exercise price of the warrants is $11.76 per share. All warrants are currently exercisable and may be exercised at any time through 2011.
Common Stock. The Company has a share repurchase program to acquire up to $200 million of its issued and outstanding common stock. Share repurchases under the program may be made from time to time, continuing through May 2003. The Company repurchased and retired 1,350,600 and 1,785,015 shares of common stock during 2001 and 2000, respectively.
2001 Senior Stock Plan. In June 2001, the Company's shareholders approved the adoption of the 2001 Senior Stock Plan. This plan provides for the awarding of common stock and other equity-linked awards to our officers and directors. The maximum number of shares of common stock that can be issued under the plan is 4,000,000. The Company records each share that is awarded under this plan at an amount not less than 100% of the fair market value per share at the date of the award. No shares may be awarded under this plan after June 5, 2011. As of December 31, 2001, 2,042,933 shares had been awarded under this plan at a weighted-average price of $23.71 per share with vesting periods up to ten years. Determinations concerning the persons to receive awards, the form, amount and timing of such awards and terms and provisions of such awards are made by the Board of Directors (or a committee appointed by the Board of Directors).
2001 Stock Plan. In March 2001, the Company adopted the 2001 Stock Plan. This plan provides for the awarding of common stock and other equity-linked awards to certain employees (other than officers and directors) and others who render services to the Company. The maximum number of shares of common stock that can be issued under the plan is 2,000,000. The Company records each share that is awarded under this plan at an amount not less than 100% of the fair market value per share at the date of the award. No shares may be awarded under this plan after March 23, 2011. As of December 31, 2001, 885,054 shares had been awarded under this plan at a weighted-average price of $15.30 per share with vesting periods up to three years. Determinations concerning the persons to receive awards, the form, amount and timing of such awards and terms and provisions of such awards are made by the Board of Directors (or a committee appointed by the Board of Directors).
The Company records the issuance of common shares at the quoted market price on the date of the grants. Amortization of deferred compensation is then recognized on a straight-line basis over the
UNITED RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
related vesting period. Amortization expense recognized for the year ended December 31, 2001 for the awards of the above stock plans was approximately $6.2 million.
1997 Stock Option Plan. The Company's 1997 Stock Option Plan provides for the granting of options to purchase not more than an aggregate of 5,000,000 shares of common stock. Some or all of such options may be "incentive stock options" within the meaning of the Internal Revenue Code. All officers, directors and employees of the Company and other persons who perform services on behalf of the Company are eligible to participate in this plan. Each option granted pursuant to this plan must provide for an exercise price per share that is at least equal to the fair market value per share of common stock on the date of grant. No options may be granted under this plan after August 31, 2007. As of December 31, 2001 and 2000, options to purchase an aggregate of 4,845,783 shares and 4,950,536 shares of common stock, respectively, were outstanding under this plan. The exercise price of each option, the period during which each option may be exercised and other terms and conditions of each option are determined by the Board of Directors (or by a committee appointed by the Board of Directors).
1998 Stock Option Plan. The Company's 1998 Stock Option Plan provides for the granting of options to purchase not more than an aggregate of 4,200,000 shares of common stock. Some or all of the options issued under the 1998 Stock Option Plan may be "incentive stock options" within the meaning of the Internal Revenue Code. All officers and directors of the Company and its subsidiaries are eligible to participate in the 1998 Stock Option Plan. Each option granted pursuant to the 1998 Stock Option Plan must provide for an exercise price per share that is at least equal to the fair market value per share of common stock on the date of grant. No options may be granted under the 1998 Stock Option Plan after August 20, 2008. As of December 31, 2001 and 2000, options to purchase an aggregate of 3,686,667 shares and 4,200,000 shares of common stock, respectively, were outstanding pursuant to this plan to executive officers and directors. The exercise price of each option, the period during which each option may be exercised and other terms and conditions of each option are determined by the Board of Directors (or by a committee appointed by the Board of Directors).
1998 Supplemental Stock Option Plan. The Company has adopted a stock option plan pursuant to which options, for up to an aggregate of 5,600,000 shares of common stock, may be granted to employees who are not officers or directors and to consultants and independent contractors who perform services for the Company or its subsidiaries. As of December 31, 2001 and 2000, options to purchase an aggregate of 5,342,097 shares and 5,373,509 shares of common stock, respectively, were outstanding pursuant to this plan. The exercise price of each option, the period during which each option may be exercised and other terms and conditions of each option are determined by the Board of Directors (or by a committee appointed by the Board of Directors).
1997 Performance Award Plan. Effective February 20, 1997, U.S. Rentals adopted the 1997 Performance Award Plan under which stock options and other awards could be granted to key employees and directors at prices and terms established by U.S. Rentals at the date of grant. The options expire in 2007. As a result of the Merger, all outstanding options to purchase shares of U.S. Rentals common stock became fully vested and were converted into options to purchase the Company's common stock. As of December 31, 2001 and 2000, options to purchase an aggregate of 2,547,467 shares and 2,572,050 shares of common stock, respectively, were outstanding pursuant to this plan.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of the transactions within the Company's stock option plans follows:
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to Employees" in accounting for stock-based employee compensation arrangements whereby no compensation cost related to stock options is deducted in determining net income. Had compensation cost for the Company's stock option plans been determined pursuant to SFAS No. 123, "Accounting for Stock-Based Compensation", the Company's net income and earnings per share would have differed. The weighted average fair value of options granted was $7.34, $7.70 and $10.99 during 2001, 2000 and 1999, respectively. The fair value is estimated on the date of grant using the Black-Scholes option pricing model which uses subjective assumptions which can materially affect fair value estimates and, therefore, does not necessarily provide a single measure of fair value of options. Using the Black-Scholes option pricing model and a risk-free interest rate average of 3.74%, 5.15% and 6.29% in 2001, 2000 and 1999, respectively, a volatility factor for the market price of the Company's common stock of 49%, 69% and 52% in 2001, 2000 and 1999, respectively, and a weighted-average expected life of options of approximately three years in 2001, 2000 and 1999, the Company's net income, basic earnings per share and diluted earnings per share would have been $103.1 million, $1.43 and $1.09,
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
respectively, for the year ended December 31, 2001, $156.4 million, $2.20 and $1.69, respectively, for the year ended December 31, 2000 and $104.3 million, $1.46 and $1.12, respectively, for the year ended December 31, 1999. For purposes of these pro forma disclosures, the estimated fair value of options is amortized over the options' vesting period. Since the number of options granted and their fair value may vary significantly from year to year, the pro forma compensation expense in future years may be materially different.
At December 31, 2001 there are (i) 7,139,296 shares of common stock reserved for the exercise of warrants, (ii) 16,422,014 shares of common stock reserved for issuance pursuant to options granted and that may be granted in the future under the Company's stock option plans, (iii) 6,875,580 shares of common stock reserved for the issuance of outstanding preferred securities of a subsidiary trust, (iv) 17,000,000 shares of common stock reserved for the issuance of Series C and Series D preferred stock and (v) 371,168 shares of common stock reserved for the conversion of convertible debt.
Stockholders Rights Plan. The Company adopted a Stockholders Rights Plan on September 28, 2001 (with a record date of October 19, 2001). This plan and other provisions of the Company's charter and bylaws may have the effect of deferring hostile takeovers or delaying or preventing changes in control or management of the Company, including transactions in which the shareholders of the Company might otherwise receive a premium for their shares over then current market prices. The rights expire on September 27, 2011.
12. Comprehensive Income
The following table sets forth the Company's comprehensive income:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Earnings Per Share
The following table sets forth the computation of historical basic and diluted earnings per share:
UNITED RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Commitments and Contingencies
Operating Leases
The Company leases rental equipment, real estate and certain office equipment under operating leases. Certain real estate leases require the Company to pay maintenance, insurance, taxes and certain other expenses in addition to the stated rentals. Future minimum lease payments, by year and in the aggregate, for noncancellable operating leases with initial or remaining terms of one year or more are as follows at December 31, 2001:
The Company was the seller-lessee in sale-leaseback transactions with unrelated third parties in which it sold rental equipment and real estate for aggregate proceeds of $51.0 million in 2001, rental equipment for aggregate proceeds of $218.8 million in 2000, and rental equipment for aggregate proceeds of $88.0 million in 1999. For the 2001 transactions, the Company leased back the real estate over a 10-year period and the rental equipment for a minor period of one to eight months. For the 2000 transactions, the Company leased back a portion of the rental equipment for a minor period of one to eight months, and the balance over a five-year period. For the 1999 transactions, the Company leased back the rental equipment over a five-year period. The total gains related to these transactions in 2001, 2000 and 1999 were, respectively, approximately $21.6 million of which $1.4 million was deferred, approximately $16.5 million of which $4.0 million was deferred, and approximately $6.3 million all of which was deferred. The deferred gains are being amortized over the respective lease periods on a straight-line basis.
Rent expense under non-cancelable operating leases totaled $170.9 million, $137.3 million and $65.5 million for the years ended December 31, 2001, 2000 and 1999, respectively. The Company's real estate 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.
Employee Benefit Plans
The Company currently sponsors one defined contribution 401(k) retirement plan which is subject to the provisions of ERISA. The Company also sponsors a deferred profit sharing plan for the benefit of the full time employees of its Canadian subsidiaries. Under these plans, the Company matches a percentage of the participants contributions up to a specified amount. Company contributions to the plans were $6.0 million, $6.2 million and $4.6 million for the years ended December 31, 2001, 2000 and 1999, respectively.
UNITED RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Legal Matters
The Company is party to legal proceedings and potential claims arising in the ordinary course of its business. In the opinion of management, the Company has adequate legal defenses, reserves, or insurance coverage with respect to these matters so that the ultimate resolution will not have a material adverse effect on the Company's financial position, results of operations, or cash flows. The Company had accrued $7.6 million at December 31, 2001 and 2000, to cover the uninsured portion of estimated costs arising from these pending claims and other potential unasserted claims.
Environmental Matters
The Company and its operations are subject to various laws and related regulations governing environmental matters. Under such laws, an owner or lessee of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances located on or in, or emanating from, such property, as well as investigation of property damage. The Company incurs ongoing expenses associated with the removal of underground storage tanks and the performance of appropriate remediation at certain of its locations. The Company believes that such removal and remediation will not have a material adverse effect on the Company's financial position, results of operations, or cash flows.
15. Segment Information
Each of the Company's branch locations is an operating segment which consists of the rental and sales of equipment and related merchandise and parts. Certain of the Company's branches also provide speciality traffic control services as a product line and the amount of revenue attributable to such services was $272.2 million, $245.0 million and $79.3 million during the years ended December 31, 2001, 2000 and 1999, respectively. All of the Company's branches have been aggregated into one reportable segment because they offer similar products and services in similar markets and the factors determining strategic decisions are comparable.
UNITED RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company operates in the United States, Canada and Mexico. Revenues are attributable to countries based upon the location of the customers. Geographic area information for the years ended December 31, 2001, 2000 and 1999 is as follows:
UNITED RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
16. Quarterly Financial Information (Unaudited)
Selected Financial Data
The following table of quarterly financial information has been prepared from unaudited financial statements of the Company, and reflects adjustments which are, in the opinion of management, necessary for a fair presentation of the interim periods presented.
UNITED RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
17. Condensed Consolidating Financial Information of Guarantor Subsidiaries
Certain indebtedness of URI, a wholly owned subsidiary of Holdings (the "Parent"), is guaranteed by URI's United States subsidiaries (the "guarantor subsidiaries") and, in certain cases, also by Parent. However, this indebtedness is not guaranteed by URI's foreign subsidiaries (the "non-guarantor subsidiaries"). The guarantor subsidiaries are all wholly-owned and the guarantees are made on a joint and several basis and are full and unconditional (subject to subordination provisions and subject to a standard limitation which provides that the maximum amount guaranteed by each guarantor will not exceed the maximum amount that can be guaranteed without making the guarantee void under fraudulent conveyance laws). Separate consolidated financial statements of the guarantor subsidiaries have not been presented because management believes that such information would not be material to investors. However, condensed consolidating financial information as of December 31, 2001 and 2000, and for each of the three years in the period ended December 31, 2001, are presented. The condensed consolidating financial information of the Company and its subsidiaries are as follows:
CONDENSED CONSOLIDATING BALANCE SHEET
December 30, 2001
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2000
UNITED RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS For the Year Ended December 31, 2001
UNITED RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS For the Year Ended December 31, 2000
UNITED RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS For the Year Ended December 31, 1999
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING CASH FLOW INFORMATION For the Year Ended December 31, 2001
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING CASH FLOW INFORMATION For the Year Ended December 31, 2000
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING CASH FLOW INFORMATION For the Year Ended December 31, 1999
REPORT OF INDEPENDENT AUDITORS
Board of Directors United Rentals, Inc. (Parent Company of United Rentals (North America), Inc.)
We have audited the accompanying consolidated balance sheets of United Rentals (North America), Inc. as of December 31, 2001 and 2000 and the related consolidated statements of operations, stockholder's 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 (North America), 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 (North America), 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
UNITED RENTALS (NORTH AMERICA), INC.
CONSOLIDATED BALANCE SHEETS
See accompanying notes.
UNITED RENTALS (NORTH AMERICA), INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes.
UNITED RENTALS (NORTH AMERICA), INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
See accompanying notes.
UNITED RENTALS (NORTH AMERICA), INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes.
UNITED RENTALS (NORTH AMERICA), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
United Rentals (North America), Inc., ("URI") and subsidiaries is a wholly owned subsidiary of United Rentals, Inc., which is principally a holding company ("Holdings" or "Parent"). Holdings was incorporated in July 1998 and became the parent of URI on August 5, 1998, pursuant to the reorganization of the legal structure of URI. Prior to such reorganization, the name of URI was United Rentals, Inc. References herein to the "Company" refer to URI and its subsidiaries.
Certain footnotes are not provided for the accompanying financial statements as the information in Notes 1 through 9, 11, 12 and 14 through 16 to the consolidated financial statements of United Rentals, Inc. included elsewhere in this report is substantially equivalent to that required for the consolidated financial statements of URI and its subsidiaries. Earnings per share data is not provided for the operating results of URI and subsidiaries, as they are wholly owned subsidiaries of Holdings. URI's various credit agreements and debt instruments place restrictions on its ability to transfer funds to its shareholder.
Holdings provides certain services to URI in connection with its operations. These services principally include: (i) senior management services, (ii) finance related services and support, (iii) information technology systems and support and (iv) acquisition related services. In addition, Holdings leases certain equipment and real property that are made available for use by URI and its subsidiaries. URI has made, and expects to continue to make, certain payments to Holdings in respect of the services provided by Holdings to the Company. The expenses relating to URI's payments to Holdings are reflected on URI's financial statements as selling, general and administrative expenses. In addition, although not legally obligated to do so, URI has in the past made, and expects that it will in the future make, distributions to Holdings for, among other things, enabling Holdings to pay dividends on its preferred securities.
2. Capital Stock and Contributions
At December 31, 2001, the Company has authorized 3,000 shares of its $0.01 par value common stock of which 1,000 shares are issued and outstanding. All of the issued and outstanding common shares are owned by its Parent.
Pursuant to the reorganization described in Note 1, the net proceeds from the Company's initial public offering completed in December 1997 and the public offering completed in March 1998 have been reflected as Contributed Capital from the Parent in the accompanying statement of stockholder's equity. Holdings also contributed the net proceeds from the issuance of redeemable convertible preferred securities in August 1998 to URI. During 1999, Holdings contributed the net proceeds from the issuance of common stock in a public offering and the net proceeds from the issuance of perpetual convertible preferred stock to URI.
3. Condensed Consolidating Financial Information of Guarantor Subsidiaries
Certain indebtedness of URI is guaranteed by URI's United States subsidiaries (the "guarantor subsidiaries") but is not guaranteed by URI's foreign subsidiaries (the "non-guarantor subsidiaries"). The guarantor subsidiaries are all wholly-owned and the guarantees are made on a joint and several basis and are full and unconditional (subject to subordination provisions and subject to a standard limitation which provides that the maximum amount guaranteed by each guarantor will not exceed the maximum amount that can be guaranteed without making the guarantee void under fraudulent
UNITED RENTALS (NORTH AMERICA), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
conveyance laws). Separate consolidated financial statements of the guarantor subsidiaries have not been presented because management believes that such information would not be material to investors. However, condensed consolidating financial information as of December 31, 2001 and 2000, and for each of the three years in the period ended December 31, 2001, are presented. The condensed consolidating financial information of URI and its subsidiaries are as follows:
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2001
UNITED RENTALS (NORTH AMERICA), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2000
UNITED RENTALS (NORTH AMERICA), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS For the Year Ended December 31, 2001
UNITED RENTALS (NORTH AMERICA), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS For the Year Ended December 31, 2000
UNITED RENTALS (NORTH AMERICA), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS For the Year Ended December 31, 1999
UNITED RENTALS (NORTH AMERICA), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING CASH FLOW INFORMATION For the Year Ended December 31, 2001
UNITED RENTALS (NORTH AMERICA), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING CASH FLOW INFORMATION For the Year Ended December 31, 2000
UNITED RENTALS (NORTH AMERICA), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING CASH FLOW INFORMATION For the Year Ended December 31, 1999
REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULES
Board of Directors United Rentals, Inc.
We have audited the consolidated financial statements of United Rentals, Inc. as of December 31, 2001 and 2000, and for each of the three years in the period ended December 31, 2001, and have issued our report thereon dated February 26, 2002, included elsewhere in this Form 10-K. Our audits also included the financial statement schedules listed in Item 14(a)(2). These schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedules referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
MetroPark, New Jersey February 19, 2002
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
UNITED RENTALS, INC.
CONDENSED BALANCE SHEET
See accompanying notes.
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
UNITED RENTALS, INC.
CONDENSED STATEMENT OF OPERATIONS
See accompanying notes.
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
UNITED RENTALS, INC.
CONDENSED CASH FLOW INFORMATION
See accompanying notes.
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
UNITED RENTALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation
United Rentals, Inc. is principally a holding company ("Holdings") and conducts its operations primarily through its wholly owned subsidiary United Rentals (North America), Inc. ("URI") and subsidiaries. In the parent company-only financial statements, Holdings, investment in subsidiaries is stated at cost plus equity in undistributed earnings of subsidiaries since the date of acquisition. Holdings share of net income of its unconsolidated subsidiaries is included in consolidated income using the equity method. The parent company-only financial statements should be read in conjunction with the Company's consolidated financial statements.
2. Debt
See Note 10 to the Consolidated Financial Statements for information concerning debt.
3. Guarantee
See Note 10 to the Consolidated Financial Statements for information concerning the guarantee.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
UNITED RENTALS, INC.
- -------- (a)Represents allowance for doubtful accounts established through acquisitions. (b)Represents reserve for inventory obsolescence and shrinkage assumed through acquisitions. (c)Represents write-offs of accounts, net of recoveries. (d)Represents write-offs of inventory items. (e)Represents payments.
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item is incorporated by reference to the applicable information in the 2002 Proxy Statement, including the information set forth under the captions "Election of Directors" and "Compliance with Section 11(A) of the Securities Exchange Act of 1934". The "2002 Proxy Statement" refers to the Company's definitive Proxy Statement for its 2002 Annual Meeting of Stockholders, to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, prior to April 30, 2002.
Item 11.
Item 11. Executive and Director Compensation
The information required by this Item is incorporated by reference to the applicable information in the 2002 Proxy Statement, including the information set forth under the captions "Executive and Director Compensation" and "Compensation Committee Interlocks and Insider Participation".
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is incorporated by reference to the applicable information in the 2002 Proxy Statement, including the information set forth under the caption "Security Ownership of Certain Beneficial Owners and Management".
Item 13.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is incorporated by reference to the applicable information in the 2002 Proxy Statement, including the information set forth under the caption "Certain Transactions".
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1)Consolidated Financial Statements:
Report of Independent Auditors
United Rentals, Inc. Consolidated Balance Sheets--December 31, 2001 and
United Rentals, Inc. Consolidated Statements of Operations for the years ended December 31, 2001, 2000, and 1999
United Rentals, Inc. Consolidated Statements of Stockholders' Equity for the years ended December 31, 2001, 2000, and 1999
United Rentals, Inc. Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000, and 1999
Notes to Consolidated Financial Statements
Report of Independent Auditors
United Rentals (North America), Inc. Consolidated Balance Sheets--December 31, 2001 and 2000
United Rentals (North America), Inc. Consolidated Statements of Operations for the years ended December 31, 2001, 2000, and 1999
United Rentals (North America), Inc. Consolidated Statements of Stockholder's Equity for the years ended December 31, 2001, 2000, and 1999
United Rentals (North America), Inc. Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000, and 1999
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules:
Report of Independent Auditors on Financial Statement Schedules
Schedule I Condensed Financial Information of Registrant
Schedule II Valuation and Qualifying Accounts
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.
(a)(3) Exhibits
- -------- * Filed herewith. ++This document is a management contract or compensatory plan or arrangement. (1)United Rentals, Inc. issued a warrant in this form to the following current and former officers and other employees of United Rentals, Inc. (or in certain cases to an entity controlled by such officer) for the number of shares indicated: Bradley S. Jacobs (5,000,000); John N. Milne (714,286); Michael J. Nolan (285,715); others (342,847).
(b) Reports on Form 8-K:
1. Form 8-K filed on October 5, 2001 (earliest event reported September 28, 2001); Items 5 and 7 were reported.
2. Form 8-K filed on October 29, 2001 (earliest event reported October 25, 2001); Items 7 and 9 were reported.
3. Form 8-K filed on November 15, 2001 (earliest event reported November 12, 2001); Items 7 and 9 were reported.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
UNITED RENTALS, INC.
Date: March 28, 2002 By: /s/ Michael J. Nolan Michael J. Nolan Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
Signatures Title Date ---------- ----- ----
/S/ BRADLEY S. JACOBS Chairman of the Board of Directors and March 28, 2002 ----------------------- Chief Executive Officer (Principal Bradley S. Jacobs Executive Officer)
/s/ WAYLAND R. HICKS Director March 28, 2002 ----------------------- Wayland R. Hicks
/S/ JOHN N. MILNE Director March 28, 2002 ----------------------- John N. Milne
/S/ JOHN S. MCKINNEY Director March 28, 2002 ----------------------- John S. McKinney
/S/ LEON D. BLACK Director March 28, 2002 ----------------------- Leon D. Black
/S/ RICHARD D. COLBURN Director March 28, 2002 ----------------------- Richard D. Colburn
/S/ RONALD M. DEFEO Director March 28, 2002 ----------------------- Ronald M. DeFeo
/S/ MICHAEL S. GROSS Director March 28, 2002 ----------------------- Michael S. Gross
Signatures Title Date ---------- ----- ----
/S/ RICHARD J. HECKMANN Director March 28, 2002 ------------------------ Richard J. Heckmann
/S/ TIMOTHY J. TULLY Director March 28, 2002 ------------------------ Timothy J. Tully
/S/ CHRISTIAN M. WEYER Director March 28, 2002 ------------------------ Christian M. Weyer
/S/ MICHAEL J. NOLAN Chief Financial Officer (Principal March 28, 2002 ------------------------ Financial Officer) Michael J. Nolan
/S/ JOSEPH B. SHERK Vice President, Corporate March 28, 2002 ------------------------ Controller (Principal Joseph B. Sherk Accounting Officer)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
UNITED RENTALS (NORTH AMERICA), INC.
Date: March 28, 2002 /s/ MICHAEL J. NOLAN By: _______________________________ Michael J. Nolan Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
Signatures Title Date ---------- ----- ----
/S/ BRADLEY S. JACOBS Chairman of the Board March 28, 2002 ----------------------- of Directors and Chief Bradley S. Jacobs Executive Officer (Principal Executive Officer)
/S/ WAYLAND R. HICKS Director March 28, 2002 ----------------------- Wayland R. Hicks
/S/ JOHN N. MILNE Director March 28, 2002 ----------------------- John N. Milne
/S/ JOHN S. MCKINNEY Director March 28, 2002 ----------------------- John S. McKinney
/S/ LEON D. BLACK Director March 28, 2002 ----------------------- Leon D. Black
/S/ RICHARD D. COLBURN Director March 28, 2002 ----------------------- Richard D. Colburn
/S/ RONALD M. DEFEO Director March 28, 2002 ----------------------- Ronald M. DeFeo
/S/ MICHAEL S. GROSS Director March 28, 2002 ----------------------- Michael S. Gross