UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
For the quarterly period ended June 30, 2009
For the transition period from to
Commission File Number 1-14387
Commission File Number 1-13663
United Rentals, Inc.
United Rentals (North America), Inc.
(Exact Names of Registrants as Specified in Their Charters)
Delaware
06-1522496
06-1493538
Five Greenwich Office Park,
Greenwich, Connecticut
(203) 622-3131
Registrants’ Telephone Number Including Area Code
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No x (registrant is not yet required to provide financial disclosure in an Interactive Data File format)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
As of July 27, 2009, there were 60,128,333 shares of United Rentals, Inc. common stock, $.01 par value, outstanding. There is no market for the common stock of United Rentals (North America), Inc., all outstanding shares of which are owned by United Rentals, Inc.
This combined Form 10-Q is separately filed by (i) United Rentals, Inc. and (ii) United Rentals (North America), Inc. (which is a wholly owned subsidiary of United Rentals, Inc.). United Rentals (North America), Inc. meets the conditions set forth in General Instruction (H)(1)(a) and (b) of Form 10-Q and is therefore filing this report with the reduced disclosure format permitted by such instruction.
UNITED RENTALS, INC.
UNITED RENTALS (NORTH AMERICA), INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2009
INDEX
PART I
Item 1
Item 2
Item 3
Item 4
PART II
Item 1A
Item 6
2
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements can be identified by the use of forward-looking terminology such as “believe,” “expect,” “may,” “will,” “should,” “seek,” “on-track,” “plan,” “project,” “forecast,” “intend” or “anticipate,” or the negative thereof or comparable terminology, or by discussions of strategy or outlook. You are cautioned that our business and operations are subject to a variety of risks and uncertainties, many of which are beyond our control, and, consequently, our actual results may differ materially from those projected. Factors that could cause actual results to differ materially from those projected include, but are not limited to, the following: (1) the depth and duration of the current economic downturn and accompanying decreases in North American construction and industrial activities, which have significantly affected revenues and, because many of our costs are fixed, our profitability, and which may further reduce demand and prices for our products and services; (2) inability to benefit from government spending associated with stimulus-related construction projects; (3) our highly leveraged capital structure, which requires us to use a substantial portion of our cash flow for debt service and can constrain our flexibility in responding to unanticipated or adverse business conditions; (4) noncompliance with financial or other covenants in our debt agreements, which could result in our lenders terminating our credit facilities and requiring us to repay outstanding borrowings; (5) inability to access the capital that our businesses or growth plans may require; (6) increases in our maintenance and replacement costs as we age our fleet, and decreases in the residual value of our equipment; (7) inability to sell our new or used fleet in the amounts, or at the prices, we expect; (8) rates we can charge and time utilization we can achieve being less than anticipated; and (9) costs we incur being more than anticipated, and the inability to realize expected savings in the amounts or time frames planned. For a fuller description of these and other possible uncertainties, please refer to our Annual Report on Form 10-K for the year ended December 31, 2008, as well as to our subsequent filings with the SEC. Our forward-looking statements contained herein speak only as of the date hereof, and we make no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances or changes in expectations.
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PART I. FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In millions, except per share data)
ASSETS
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts of $23 at June 30, 2009 and December 31, 2008
Inventory
Prepaid expenses and other assets
Deferred taxes
Total current assets
Rental equipment, net
Property and equipment, net
Goodwill and other intangible assets, net
Other long-term assets
Total assets
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current maturities of long-term debt
Accounts payable
Accrued expenses and other liabilities
Total current liabilities
Long-term debt
Subordinated convertible debentures
Other long-term liabilities
Total liabilities
Common stock—$0.01 par value, 500,000,000 shares authorized, 60,128,333 and 59,890,226 shares issued and outstanding at June 30, 2009 and December 31, 2008, respectively
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive income
Total stockholders’ deficit
Total liabilities and stockholders’ deficit
See accompanying notes.
4
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In millions, except per share amounts)
Revenues:
Equipment rentals
Sales of rental equipment
New equipment sales
Contractor supplies sales
Service and other revenues
Total revenues
Cost of revenues:
Cost of equipment rentals, excluding depreciation
Depreciation of rental equipment
Cost of rental equipment sales
Cost of new equipment sales
Cost of contractor supplies sales
Cost of service and other revenues
Total cost of revenues
Gross profit
Selling, general and administrative expenses
Restructuring charge
Charge related to settlement of SEC inquiry
Non-rental depreciation and amortization
Operating income
Interest expense, net
Interest expense—subordinated convertible debentures, net
Other expense, net
(Loss) income before (benefit) provision for income taxes
(Benefit) provision for income taxes
Net (loss) income
Preferred stock redemption charge
Net loss available to common stockholders
Loss per share:
Basic and diluted loss per share (inclusive of preferred stock redemption charge)
5
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT (UNAUDITED)
(Dollars in millions)
Balance at December 31, 2008
Comprehensive loss:
Net loss
Other comprehensive loss:
Foreign currency translation adjustments
Comprehensive loss
Other, net
Balance at June 30, 2009
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Cash Flows From Operating Activities:
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization
Amortization and write-off of deferred financing and related costs
Gain on sales of rental equipment
Loss (gain) on sales of non-rental equipment
Non-cash adjustments to equipment
Stock compensation expense, net
Gain on repurchase of debt securities
Gain on retirement of subordinated convertible debentures
(Decrease) increase in deferred taxes
Changes in operating assets and liabilities:
Decrease in accounts receivable
Decrease (increase) in inventory
Decrease (increase) in prepaid expenses and other assets
(Decrease) increase in accounts payable
Decrease in accrued expenses and other liabilities
Net cash provided by operating activities
Cash Flows From Investing Activities:
Purchases of rental equipment
Purchases of non-rental equipment
Proceeds from sales of rental equipment
Proceeds from sales of non-rental equipment
Purchases of other companies
Net cash used in investing activities
Cash Flows From Financing Activities:
Proceeds from debt
Payments of debt
Cash paid in connection with preferred stock redemption
Payments of financing costs
Excess tax benefits from share-based payment arrangements
Net cash used in financing activities
Effect of foreign exchange rates
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
See accompanying notes
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data unless otherwise indicated)
1. Organization, Description of Business and Basis of Presentation
General
United Rentals, Inc. (“Holdings,” “United Rentals” or the “Company”) is principally a holding company and conducts its operations primarily through its wholly owned subsidiary, United Rentals (North America), Inc. (“URNA”), and subsidiaries of URNA. Holdings’ primary asset is its sole ownership of all issued and outstanding shares of common stock of URNA. URNA’s various credit agreements and debt instruments place restrictions on its ability to transfer funds to its shareholder.
We rent equipment to a diverse customer base that includes construction and industrial companies, manufacturers, utilities, municipalities, homeowners and others in the United States, Canada and Mexico. In addition to renting equipment, we sell new and used rental equipment, as well as related contractor supplies, parts and service.
We have prepared the accompanying unaudited condensed consolidated financial statements in accordance with the accounting policies described in our annual report on Form 10-K for the year ended December 31, 2008 (the “2008 Form 10-K”) and the interim reporting requirements of Form 10-Q. Accordingly, certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the 2008 Form 10-K. Certain reclassifications have been made to prior year financial information to conform to the current year presentation.
In our opinion, all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair statement of financial condition, operating results and cash flows for the interim periods presented have been made. Interim results of operations are not necessarily indicative of the results of the full year.
New Accounting Pronouncements
In 2006, the Financial Accounting Standards Board (“FASB”) issued Statement No. 157, “Fair Value Measurements”
(“Statement 157”). We adopted the provisions of Statement 157 on January 1, 2008. Statement 157 defines fair value, establishes a market-based framework or hierarchy for measuring fair value and expands disclosures about fair value measurements. Statement 157 is applicable whenever another accounting pronouncement requires or permits assets and liabilities to be measured at fair value. Statement 157 does not expand or require any new fair value measures; however, the application of this statement may change current practice. In February 2008, the FASB decided that an entity need not apply this standard to nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis until 2009. Accordingly, our adoption of this standard in 2008 was limited to financial assets and liabilities. The partial adoption of Statement 157 in 2008 for financial assets and liabilities did not have a material effect on our financial condition or results of operations. In the first quarter of 2009, we adopted the provisions of Statement 157 for our nonfinancial assets and liabilities, including those measured at fair value in impairment testing and those initially measured at fair value in a business combination. The full adoption of Statement 157 did not have a material effect on our financial condition or results of operations.
In April 2009, the FASB issued FASB Staff Position (“FSP”) FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies” (“FSP FAS 141(R)-1”). FSP FAS 141 (R)-1 amends and clarifies Statement No. 141(R), “Business Combinations,” to address application issues on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. Under FSP FAS 141 (R)-1, an acquirer is required to recognize at fair value an asset acquired or liability assumed in a business combination that arises from a contingency if the acquisition date fair value can be determined during the measurement period. If the acquisition date fair value cannot be determined, the acquirer applies the recognition criteria in Statement No. 5, “Accounting for Contingencies,” and Interpretation No. 14, “Reasonable Estimation of the Amount of a Loss,” to determine whether the contingency should be recognized as of the acquisition date or after it. While there is no expected impact on our unaudited condensed consolidated financial statements with respect to the accounting for acquisitions completed prior to December 31, 2008, the adoption of FSP FAS 141 (R)-1 could materially change the accounting for business combinations consummated subsequent to that date.
In April 2009, the FASB announced that the proposed FSP FAS 107-b and APB 28-a, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-b and APB 28-a”), would be effective for interim and annual periods ending after June 15, 2009. FSP FAS 107-b and APB 28-a requires disclosure of the fair value of all financial assets and financial liabilities within the scope of Statement No. 107, “Disclosures about Fair Value of Financial Instruments,” for which it is practicable to estimate fair value, for interim and annual periods. See note 5 to our unaudited condensed consolidated financial statements (“Fair Value of Financial Instruments”) for the required FSP FAS 107-b and APB 28-a disclosures.
In May 2009, the FASB issued Statement No. 165, “Subsequent Events” (“Statement 165”). Statement 165 is effective for interim and annual periods ending after June 15, 2009. Statement 165 establishes general standards of accounting for, and disclosure of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, Statement 165 establishes (i) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and (iii) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The adoption of Statement 165 did not have a material effect on our financial condition or results of operations. See note 9 to our unaudited condensed consolidated financial statements for the required Statement 165 disclosures.
In June 2009, the FASB issued Statement No. 167, “Amendments to FASB Interpretation No. 46(R)” (“Statement 167”). Statement 167 is effective for fiscal years beginning after November 15, 2009, and for interim and annual reporting periods thereafter. Statement 167 amends FASB Interpretation No. 46 (R) (“FIN 46 (R)”), “Consolidation of Variable Interest Entities,” to require an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity. This analysis identifies the primary beneficiary of a variable interest entity as the enterprise that has both of the following characteristics: (i) the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (ii) the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. Additionally, Statement 167 amends FIN 46 (R) to, among other things, require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity, eliminate the quantitative approach previously required for determining the primary beneficiary of a variable interest entity and require enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity. The adoption of Statement 167 is not expected to have a material effect on our financial condition or results of operations.
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2. Segment Information
Our reportable segments are general rentals and trench safety, pump and power. The general rentals segment includes the rental of construction, aerial, industrial and homeowner equipment and related services and activities. The general rentals segment’s customers include construction and industrial companies, manufacturers, utilities, municipalities and homeowners. The general rentals segment operates throughout the United States and Canada and has one location in Mexico. The trench safety, pump and power segment includes the rental of specialty construction products and related services. The trench safety, pump and power segment’s customers include construction companies involved in infrastructure projects, municipalities and industrial companies. This segment operates in the United States and has one location in Canada. These segments align our external segment reporting with how management evaluates and allocates resources. We evaluate segment performance based on segment operating results.
Operating segment revenues and profitability for the three and six months ended June 30, 2009 and 2008 were as follows:
Total reportable segment revenues
General rentals
Trench safety, pump and power
Total reportable segment depreciation and amortization expense
Total depreciation and amortization expense
Total reportable segment operating (loss) income
Total operating income
Total reportable segment capital expenditures
Total capital expenditures
Total reportable segment assets
3. Restructuring and Asset Impairment Charges
In 2008, our strategy was designed to grow our earnings at higher margins, and a key element of this strategy was reducing our operating costs. In connection with this strategy, and in recognition of the challenging economic environment, we reduced our employee headcount from approximately 10,900 at December 31, 2007 to approximately 9,900 at December 31, 2008. Additionally, we reduced our branch network from 697 at December 31, 2007 to 628 at December 31, 2008. In 2009, we have continued to reduce our headcount and branch network. In the first half of 2009, we reduced our headcount by approximately 1,300 employees, or 13 percent, and closed 48 of our least profitable branches. The restructuring charges for the three and six months ended June 30, 2009 and 2008 include severance costs associated with our headcount reductions, as well as branch closure charges, the latter of which principally relates to continuing lease obligations at vacant facilities.
The table below provides certain information concerning our restructuring charges:
Description
Branch closure charges
Severance costs
Total
We have incurred total restructuring charges between January 1, 2008 and June 30, 2009 of $44, comprised of $34 of branch closure charges and $10 of severance costs. We expect that the restructuring activity will be substantially completed by the end of 2009.
In addition to the restructuring charges discussed above, during the three and six months ended June 30, 2009, the company recorded asset impairment charges of $9. These asset impairment charges include a charge of $7 related to certain rental equipment that has been classified as “held for sale” in accordance with the provisions of FASB Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. This non-cash impairment charge has been reflected in depreciation of rental equipment in the accompanying condensed consolidated statements of operations. Additionally, in connection with the consolidation of our branch network discussed above, we recognized leasehold improvement write-offs of $2. The leasehold improvement write-offs are reflected in non-rental depreciation and amortization in the accompanying condensed consolidated statements of operations.
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4. Goodwill and Other Intangible Assets
The carrying amount of the Company’s goodwill was $192 and $190 at June 30, 2009 and December 31, 2008, respectively. We are required to review our goodwill for impairment annually as of a scheduled review date. However, if events or circumstances suggest that goodwill could be impaired, we may be required to conduct an earlier review. The scheduled review date is October 1 of each year.
Other intangible assets consist of customer relationships and non-compete agreements and are amortized over periods ranging from one to 12 years. Amortization expense for other intangible assets was $2 for the three months ended June 30, 2009 and 2008 and $4 for the six months ended June 30, 2009 and 2008. The cost of other intangible assets and the related accumulated amortization as of June 30, 2009 was as follows:
Gross carrying amount
Accumulated amortization
Net amount
5. Debt and Subordinated Convertible Debentures
Long-term debt consists of the following:
URNA and subsidiaries:
$1.285 billion ABL Facility (1)
Accounts Receivable Securitization Facility (1)
6 1/2 percent Senior Notes
10 7/8 percent Senior Notes
7 3/4 percent Senior Subordinated Notes
7 percent Senior Subordinated Notes
1 7/8 percent Convertible Senior Subordinated Notes
Other debt, including capital leases
Total URNA and subsidiaries debt
Less current portion
Long-term URNA and subsidiaries debt
Holdings:
14 percent Senior Notes
Total long-term debt (2)
In August 1998, a subsidiary trust of Holdings (the “Trust”) issued and sold $300 of 6 1/2 percent Convertible Quarterly Income Preferred Securities (“QUIPS”) in a private offering. The Trust used the proceeds from the offering to purchase 6 1/2 percent subordinated convertible debentures due 2028 (the “Debentures”), which resulted in Holdings receiving all of the net proceeds of the offering. The QUIPS are non-voting securities, carry a liquidation value of $50 (fifty dollars) per security and are convertible into Holdings’ common stock. Total long-term debt at June 30, 2009 and December 31, 2008 excludes $124 and $146, respectively, of these Debentures, which are separately classified in our condensed consolidated balance sheets and referred to as “subordinated convertible debentures.” The subordinated convertible debentures reflect the obligation to our subsidiary that has issued the QUIPS. This subsidiary is not consolidated in our financial statements because we are not the primary beneficiary of the trust.
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10 7/8 percent Senior Notes. In June 2009, URNA issued $500 aggregate principal amount of 10 7/8percent Senior Notes (the “10 7/8 percent Notes”), which are due June 15, 2016. The net proceeds from the sale of the 10 7/8 percent Notes were $471 (after deducting the initial purchasers’ discount and offering expenses). The 10 7/8 percent Notes are unsecured and are guaranteed by Holdings and, subject to limited exceptions, URNA’s domestic subsidiaries. The 10 7/8percent Notes may be redeemed on or after June 15, 2013 at specified redemption prices that range from 105.438 percent in 2013 to 100.0 percent in 2015 and thereafter. The indenture governing the 10 7/8 percent Notes contains certain restrictive covenants, including, among others, limitations on (i) indebtedness; (ii) restricted payments; (iii) liens; (iv) asset sales; (v) issuance of preferred stock of restricted subsidiaries; (vi) transactions with affiliates; (vii) dividend and other payment restrictions affecting restricted subsidiaries; (viii) designations of unrestricted subsidiaries; (ix) additional subsidiary guarantees and (x) mergers, consolidations or sales of substantially all of its assets. The indenture also requires that, in the event of a change of control (as defined in the indenture), URNA must make an offer to purchase all of the then outstanding 10 7/8 percent Notes tendered at a purchase price in cash equal to 101 percent of the principal amount thereof plus accrued and unpaid interest, if any, thereon. The difference between the June 30, 2009 carrying value of the 10 7/8 percent Notes and the $500 principal amount relates to a $15 original issue discount initially recognized in conjunction with the issuance of these notes.
Retirement of Debt and Subordinated Convertible Debentures. During the three and six months ended June 30, 2009, we repurchased and retired certain of our outstanding debt securities. In connection with these repurchases, we recognized gains based on the difference between the net carrying amounts of the repurchased securities and the repurchase prices. A summary of our debt repurchase activity for the three and six months ended June 30, 2009 is as follows:
In addition to the above debt repurchases, during the three and six months ended June 30, 2009, we purchased an aggregate of $22 of QUIPS for $9. In connection with this transaction, we retired $22 principal amount of our subordinated convertible debentures, and recognized a gain of $13. This gain is reflected in interest expense-subordinated convertible debentures, net, in our condensed consolidated statements of operations.
Loan Covenants and Compliance. As of June 30, 2009, we were in compliance with the covenants and other provisions of our ABL facility, the senior notes, the subordinated convertible debentures and our accounts receivables securitization facility. Any failure to be in compliance with any material provision or covenant of these agreements could have a material adverse effect on our liquidity and operations. The only financial covenants which currently exist relate to the fixed charge coverage ratio and the senior secured leverage ratio under the ABL facility. Both of these covenants “sprung off” on June 9, 2009 because our availability, as defined, had exceeded the necessary 20 percent threshold. Since the June 9, 2009 spring off date and through June 30, 2009, availability under the ABL facility has exceeded the 10 percent threshold and, as a result, these maintenance covenants were not applicable. Subject to certain limited exceptions specified in the credit agreement governing the ABL facility, these covenants will only apply in the future if availability under the ABL facility falls below 10 percent.
Fair Value of Financial Instruments
The carrying amounts reported in our condensed consolidated balance sheets for accounts receivable, accounts payable and accrued expenses and other liabilities approximate fair value due to the immediate to short-term maturity of these financial instruments. The fair values of our ABL facility, accounts receivable securitization facility and convertible senior subordinated notes approximate their book values as of June 30, 2009 and December 31, 2008. The estimated fair values of our other financial instruments at June 30, 2009 and December 31, 2008 have been calculated based upon available market information and are as follows:
Senior and senior subordinated notes
Other debt
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6. Legal and Regulatory Matters
The Company is subject to certain ongoing class action and derivative lawsuits, and settled an SEC inquiry in September 2008. The U.S. Attorney’s office has also requested information from the Company about matters related to the SEC inquiry. Other than the previously disclosed charges we recognized in the third quarter of 2008 related to the settlement of the SEC inquiry and in the fourth quarter of 2008 related to our contribution toward the settlement of the In re United Rentals, Inc. Securities Litigation, which became final in May 2009, we have not accrued any amounts related to their ultimate disposition. Any liabilities resulting from an adverse judgment or settlement of these matters may be material to our results of operations and cash flows during the period incurred. Other costs associated with the SEC inquiry, the U.S. Attorney’s office inquiry and the class action and derivative suits, including advancement or reimbursement of attorneys’ fees incurred by indemnified officers and directors, are expensed as incurred.
The following information is limited to recent developments concerning certain legal proceedings in which we are involved, and supplements the discussions of these proceedings included in Note 13 to our consolidated financial statements for the year ended December 31, 2008, filed on Form 10-K on February 26, 2009.
In the In re United Rentals, Inc. Securities Litigationmatter, on May 27, 2009, the United States District Court for the District of Connecticut entered a Final Judgment and Order of Dismissal with Prejudice approving the settlement of the action as fair, reasonable and adequate.
In the Brundridge v. Black , et al. matter, by notice dated June 11, 2009, plaintiff withdrew its action against all defendants.
In the DeCicco v. United Rentals, Inc., et al. matter, on March 10, 2009, the Court rendered an opinion and ruling granting defendants’ motions to dismiss and dismissing the consolidated amended complaint without prejudice. The ruling granted lead plaintiffs leave to move to reopen the case within 30 days and to file a proposed amended complaint. On April 9, 2009, lead plaintiffs filed a motion to reopen judgment and filed a second consolidated amended complaint. The second consolidated amended complaint continues to assert claims under Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 thereunder and, among other things: (i) amends the purported class period to include purchasers of our publicly traded securities from August 30, 2007 to November 14, 2007, and (ii) drops as defendants one of our directors and the Cerberus related defendants. The actions are now consolidated under the caption First New York Securities, L.L.C., et al. v. United Rentals, Inc. et al. On May 14, 2009, defendants moved to dismiss the second consolidated amended complaint and briefing on the motion is now complete. We intend to continue to defend against the action vigorously.
We are also subject to a number of claims and proceedings that generally arise in the ordinary conduct of our business. These matters include, but are not limited to, general liability claims (including personal injury, product liability, and property and auto claims), indemnification and guarantee obligations, employee injuries and employment-related claims, self-insurance obligations and contract and real estate matters. Based on advice of counsel and available information, including the current status or stage of such proceeding, and taking into account accruals for matters where we have established them, we currently believe that any liabilities ultimately resulting from such claims and proceedings will not, individually or in the aggregate, have a material adverse effect on our consolidated financial condition, results of operations or cash flows.
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7. Loss Per Share
Basic loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding. Diluted loss per share for the three and six months ended June 30, 2008 excludes the impact of approximately 10.9 million common stock equivalents since the effect of including these securities would be anti-dilutive. Diluted loss per share for the three and six months ended June 30, 2009 excludes the impact of approximately 9.6 million and 10.0 million common stock equivalents, respectively, since the effect of including these securities would be anti-dilutive. The following table sets forth the computation of basic and diluted loss per share (shares in thousands):
Numerator:
Denominator:
Weighted-average common shares- basic and diluted
Loss per share available to common stockholders:
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8. Condensed Consolidating Financial Information of Guarantor Subsidiaries
URNA is 100 percent owned by Holdings (“Parent”) and has outstanding (i) certain indebtedness that is guaranteed by Parent and (ii) certain indebtedness that is guaranteed by both Parent and, with the exception of its U.S. special purpose entity (the “SPV”) which holds receivable assets relating to the Company’s accounts receivable securitization facility, all of URNA’s U.S. subsidiaries (the “guarantor subsidiaries”). However, this indebtedness is not guaranteed by URNA’s foreign subsidiaries and the SPV (together, the “non-guarantor subsidiaries”). The guarantor subsidiaries are all 100 percent-owned and the guarantees are made on a joint and several basis and are full and unconditional (subject to subordination provisions and to a standard limitation which provides that the maximum amount guaranteed by each guarantor will not exceed the maximum amount that can be guaranteed without making the guarantee void under fraudulent conveyance laws). Separate consolidated financial statements of the guarantor subsidiaries have not been presented because management believes that such information would not be material to investors; however, condensed consolidating financial information is presented. The condensed consolidating financial information of the Company and its subsidiaries is as follows:
CONDENSED CONSOLIDATING BALANCE SHEET
June 30, 2009
Accounts receivable, net
Intercompany receivable (payable)
Investments in subsidiaries
Goodwill and other intangibles, net
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
Total stockholders’ (deficit) equity
Total liabilities and stockholders’ (deficit) equity
14
December 31, 2008
Intercompany receivable (payable) (1)
Investments in subsidiaries (1)
Total stockholders’ (deficit) equity (1)
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CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Three Months Ended June 30, 2009
REVENUES
Operating (loss) income
Interest expense-subordinated convertible debentures, net
Other (income) expense, net
Income (loss) before provision (benefit) for income taxes
Provision (benefit) for income taxes
Income (loss) before equity in net (loss) earnings of subsidiaries
Equity in net (loss) earnings of subsidiaries
16
For the Three Months Ended June 30, 2008
(Loss) income before provision (benefit) for income taxes
(Loss) income before equity in net earnings (loss) of subsidiaries
Equity in net earnings (loss) of subsidiaries
Net income (loss)
17
For the Six Months Ended June 30, 2009
18
For the Six Months Ended June 30, 2008
Income before provision for income taxes
Provision for income taxes
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CONDENSED CONSOLIDATING CASH FLOW INFORMATION
Net cash provided by (used in) operating activities
Net cash (used in) provided by investing activities
Net cash provided by (used in) financing activities
Net increase in cash and cash equivalents
Net cash (used in) provided by operating activities
Net (decrease) increase in cash and cash equivalents
9. Subsequent Event
Subsequent to June 30, 2009 and through our financial statement issuance date of July 29, 2009, we completed the repurchase of an additional $24 principal amount of our outstanding 6 1/2percent senior notes. Additionally, on July 21, 2009, we announced that we had acquired the operating assets of Leasco Equipment Services, Inc., a Marietta, Ohio-based rental company with annual revenues of approximately $14 that serves the industrial sector with a focus on power generation, petroleum, chemical, and pulp and paper companies. Except as it relates to these matters, there were no other subsequent events during this period.
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Executive Overview
We are the largest equipment rental company in the world with an integrated network of 582 rental locations in the United States, Canada and Mexico. Although the equipment rental industry is highly fragmented and diverse, we believe we are well positioned to take advantage of this environment because as a larger company we have more resources and certain competitive advantages over smaller competitors. These advantages include greater purchasing power, the ability to provide customers with a broader range of equipment and services as well as with better maintained equipment, and greater flexibility to transfer equipment among branches.
We offer for rent approximately 2,700 classes of rental equipment, including construction equipment, industrial and heavy machinery, aerial work platforms, trench safety equipment and homeowner items. Our revenues are derived from the following sources: equipment rentals, sales of used rental equipment, sales of new equipment, contractor supplies sales and service and other revenues. In 2008, rental equipment revenues represented 76 percent of our total revenues.
As we expected, and consistent with the decline in non-residential construction activity over the first half of the year, the first six months of 2009 have been challenging for both our company and the U.S. equipment rental industry. Despite these challenges, we believe our strategy- which includes a continued focus on our core rental business, optimization of fleet management, disciplined cost controls, and free cash flow generation- will position us to weather the economic downturn, enable us to strengthen our leadership position and improve our returns to stockholders once economic conditions improve.
As previously reported, the Company is subject to certain ongoing class action and derivative lawsuits, and settled an SEC inquiry in September 2008. The U.S. Attorney’s office has also requested information from the Company about matters related to the SEC inquiry. Other than the previously disclosed charges we recognized in the third quarter of 2008 related to the settlement of the SEC inquiry and in the fourth quarter of 2008 related to our contribution toward the settlement of the In re United Rentals, Inc. Securities Litigation, which became final in May 2009, we have not accrued any amounts related to their ultimate disposition. Any liabilities resulting from an adverse judgment or settlement of these matters may be material to our results of operations and cash flows during the period incurred. Other costs associated with the SEC inquiry, the U.S. Attorney’s office inquiry and the class action and derivative suits, including advancement or reimbursement of attorneys’ fees incurred by indemnified officers and directors, are expensed as incurred.
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Financial Overview
Net loss available to common stockholders. Net loss available to common stockholders and diluted loss per share for the three and six months ended June 30, 2009 and 2008 were as follows:
Diluted loss per share (inclusive of preferred stock redemption charge)
Net (loss) income and diluted loss per share for the three and six months ended June 30, 2009 and 2008 include the impacts of the following special items (amounts presented on an after-tax basis):
Restructuring charge (1)
Gains on repurchases of debt securities and retirement of subordinated convertible debentures
Asset impairment charge (2)
Preferred stock redemption charge (3)
Foreign tax credit valuation allowance and other
In addition to the matters discussed above, our 2009 performance reflects lower gross profit from equipment rental revenues and from the sale of rental equipment in a very challenging construction environment, partially offset by savings realized from our ongoing initiatives to reduce operating costs.
EBITDA GAAP Reconciliation. EBITDA represents the sum of (loss) income before (benefit) provision for income taxes, interest expense, net, interest expense-subordinated convertible debentures, net, depreciation-rental equipment, non-rental depreciation and amortization and stock compensation expense, net. Adjusted EBITDA represents EBITDA plus the sum of the restructuring charge and the charge related to the settlement of the SEC inquiry. Management believes that EBITDA and adjusted EBITDA provide useful information about operating performance and period-over-period growth. However, EBITDA and adjusted EBITDA are not measures of financial performance or liquidity under GAAP and, accordingly, should not be considered as alternatives to net income (loss) or cash flow from operating activities as indicators of operating performance or liquidity. The table below provides a reconciliation between (loss) income before (benefit) provision for income taxes and EBITDA and adjusted EBITDA.
Interest expense – subordinated convertible debentures, net
Depreciation – rental equipment
EBITDA
Adjusted EBITDA
For the three and six months ended June 30, 2009, adjusted EBITDA decreased $119, or 44.2 percent, and $203, or 40.8 percent, respectively, primarily reflecting lower gross profits from equipment rentals and from the sale of rental equipment, partially offset by cost reductions.
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Results of Operations
As discussed in note 2 to our unaudited condensed consolidated financial statements, our reportable segments are general rentals and trench safety, pump and power. The general rentals segment includes the rental of construction, aerial, industrial and homeowner equipment and related services and activities. The general rentals segment’s customers include construction and industrial companies, manufacturers, utilities, municipalities and homeowners. The general rentals segment operates throughout the United States and Canada and has one location in Mexico. The trench safety, pump and power segment includes the rental of specialty construction products and related services. The trench safety, pump and power segment’s customers include construction companies involved in infrastructure projects, municipalities and industrial companies. This segment operates in the United States and has one location in Canada.
These segments align our external segment reporting with how management evaluates and allocates resources. We evaluate segment performance based on segment operating results. Our revenues, operating results, and financial condition fluctuate from quarter to quarter reflecting the seasonal rental patterns of our customers, with rental activity tending to be lower in the winter.
Revenues by segment were as follows:
Three months ended June 30, 2009
Sales of new equipment
Total revenue
Three months ended June 30, 2008
Six months ended June 30, 2009
Six months ended June 30, 2008
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Three months ended June 30, 2009 and 2008. 2009 equipment rentals of $454 decreased $174, or 27.7 percent, reflecting a 14.0 percent decrease in rental rates, a 2.4 percentage point decrease in time utilization, and a change in mix. Dollar utilization, which reflects the impact of both rental rates and time utilization, and is calculated based on annualized rental revenue divided by the average original equipment cost of our fleet, decreased 12.5 percentage points to 44.9 percent. Equipment rentals represented 74 percent of total revenues for the three months ended June 30, 2009. On a segment basis, equipment rentals represented 73 percent and 79 percent of total revenues for general rentals and trench safety, pump and power, respectively. General rentals equipment rentals decreased $164, or 27.9 percent, reflecting a 24.2 percent decrease in same-store rental revenues. Trench safety, pump and power equipment rentals decreased $10, or 24.4 percent, reflecting a 21.6 percent decrease in same-store rental revenues.
Six months ended June 30, 2009 and 2008. 2009 equipment rentals of $902 decreased $304, or 25.2 percent, reflecting a 12.8 percent decline in rental rates, a 2.5 percentage point decrease in time utilization, and a change in mix. Dollar utilization decreased 11.6 percentage points to 43.9 percent. Equipment rentals represented 75 percent of total revenues for the six months ended June 30, 2009. On a segment basis, equipment rentals represented 74 percent and 81 percent of total revenues for general rentals and trench safety, pump and power, respectively. General rentals equipment rentals decreased $288, or 25.5 percent, reflecting a 22.3 percent decrease in same-store rental revenues. Trench safety, pump and power equipment rentals decreased $16, or 20.8 percent, reflecting an 18.3 percent decrease in same-store rental revenues.
Sales of rental equipment. For the three and six months ended June 30, 2009, sales of rental equipment represented 14 and 12 percent, respectively, of our total revenues and our general rentals segment accounted for approximately 97 percent of these sales. Sales of rental equipment for trench safety, pump and power were insignificant. For the three and six months ended June 30, 2009, sales of rental equipment increased 23.5 and 12.7 percent, respectively, primarily reflecting our focus on reducing our fleet size and generating strong free cash flow in a challenging construction environment.
New equipment sales. For the three and six months ended June 30, 2009, new equipment sales represented approximately 3 percent of our total revenues and our general rentals segment accounted for approximately 94 percent of these sales. Sales of new equipment for trench safety, pump and power were insignificant. For the three and six months ended June 30, 2009, sales of new equipment decreased 56.5 and 51.1 percent, respectively, primarily reflecting a decline in the volume of equipment sold.
Contractor supplies sales. Contractor supplies sales represent our revenues associated with selling a variety of supplies including construction consumables, tools, small equipment and safety supplies. Consistent with sales of rental and new equipment, general rentals accounts for substantially all of our contractor supplies sales. For the three and six months ended June 30, 2009, contractor supplies sales decreased 44.1 and 43.5 percent, respectively, reflecting a reduction in the volume of supplies sold, consistent with a weak construction environment, partially offset by improved pricing and product mix.
Service and other revenues. Service and other revenues primarily represent our revenues earned from providing repair and maintenance services (including parts sales). Consistent with sales of rental and new equipment as well as sales of contractor supplies, general rentals accounts for substantially all of our service and other revenues. For the three and six months ended June 30, 2009, service and other revenues decreased 20 percent, primarily reflecting reduced revenues from service labor and parts sales.
Segment Operating (Loss) Income
Segment operating (loss) income and operating margin were as follows:
Operating (Loss) Income
Operating Margin
Operating Income
General rentals. For the three and six months ended June 30, 2009, operating (loss) income decreased $117 and $195, respectively, and operating margin decreased 15.0 and 12.7 percentage points, respectively, primarily reflecting reduced gross profit from equipment rentals and sales of rental equipment, partially offset by cost reductions and the 2008 impact of the $14 charge associated with the settlement of the SEC inquiry. Additionally, operating (loss) income for the three and six months ended June 30, 2009 included aggregate restructuring and asset impairment charges of $29 and $33, respectively, as compared to restructuring charges for the three and six months ended June 30, 2008 of $1 and $4, respectively.
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Trench safety, pump and power. For the three and six months ended June 30, 2009, operating income decreased by $6 and $12, respectively, and operating margin decreased by 8.1 and 9.9 percentage points, respectively, reflecting weakness in non-residential construction activity, partially offset by cost reductions.
Gross Margin. Gross margins by revenue classification were as follows:
Total gross margin
For the three months ended June 30, 2009, total gross margin decreased 11.5 percentage points, primarily reflecting reduced gross margins from equipment rentals and sales of rental equipment. Equipment rentals gross margin decreased 9.0 percentage points, primarily reflecting a 14.0 percent decrease in rental rates and a 2.4 percentage point decrease in time utilization on a smaller fleet, partially offset by savings realized from ongoing cost saving initiatives. Equipment rentals gross margin for the three months ended June 30, 2009 also includes the impact of a $7 impairment charge which was recorded in depreciation of rental equipment in the condensed consolidated statements of operations. Sales of rental equipment gross margin decreased 38.9 percentage points to (9.5) percent, primarily reflecting lower pricing. The lower pricing reflects deflationary pressures created by the current construction environment and a higher proportion of auction-related sales which tend to yield lower margins. The average age of rental equipment sold in the three months ended June 30, 2009 was 78 months, as compared to 80 months in the same period last year.
For the six months ended June 30, 2009, total gross margin decreased 9.8 percentage points, primarily reflecting reduced gross margin from equipment rentals and sales of rental equipment. Equipment rentals gross margin decreased 9.2 percentage points, primarily reflecting a 12.8 percent decrease in rental rates and a 2.5 percentage point decrease in time utilization on a smaller fleet, partially offset by savings realized from ongoing cost saving initiatives. Sales of rental equipment gross margin decreased 27.6 percentage points, primarily reflecting lower pricing.
Selling, general and administrative expenses (SG&A). SG&A expense information for the three and six months ended June 30, 2009 and 2008 was as follows:
Total SG&A expenses
SG&A as a percentage of revenue
SG&A expense primarily includes sales force compensation, bad debt expense, information technology costs, advertising and marketing expenses, professional fees, management salaries and clerical and administrative overhead. For the three months ended June 30, 2009, SG&A expense of $101 decreased $27 as compared to 2008 and increased by 1.0 percentage point as a percentage of revenue. The decline in the absolute level of our SG&A reflects the benefits we are realizing from our cost-saving initiatives, including reduced compensation costs, partially offset by normal inflationary increases. The deterioration in our SG&A ratio reflects the combination of rental rate pressure and lower utilization levels in a weak construction environment.
For the six months ended June 30, 2009, SG&A expense of $209 decreased $48 as compared to 2008 and increased by 1.3 percentage points as a percentage of revenue. The decline in the absolute level of our SG&A reflects the benefits we are realizing from our cost-saving initiatives, including reduced compensation costs, partially offset by normal inflationary increases. The deterioration in our SG&A ratio reflects the combination of rental rate pressure and lower utilization levels in a weak construction environment.
Restructuring charge. For the three months ended June 30, 2009 and 2008, restructuring charges of $20 and $1 relate to the closure of 38 and 6 branches, respectively. Additionally, restructuring charges for the three months ended June 30, 2009 include severance costs associated with reductions in headcount of approximately 800. For the six months ended June 30, 2009 and 2008, restructuring charges of $24 and $4 relate to the closure of 48 and 29 branches, respectively, and severance costs associated with reductions in headcount of approximately 1,300 and 400, respectively. See note 3 to our unaudited condensed consolidated financial statements for additional information.
Charge related to settlement of SEC inquiry. Our results for the three and six months ended June 30, 2008 include a $14 charge, which represented our best estimate for the liability associated with the SEC inquiry. In September 2008, we announced that we had reached a final settlement with the SEC and we paid a civil penalty of $14.
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Interest expense, net for the three and six months ended June 30, 2009 and 2008 was as follows:
Interest expense, net for the three and six months ended June 30, 2009 decreased by $6 and increased by $3, respectively. Interest expense, net for the three and six months ended June 30, 2009 includes gains of $13 and $17, respectively, related to repurchases of $306 and $328 principal amounts of our outstanding debt during the three and six months ended June 30, 2009, respectively. Excluding the impact of these gains, interest expense, net increased primarily due to increased debt following the preferred stock repurchase and the modified “Dutch auction” tender offer completed in the second and third quarters of 2008.
Interest expense- subordinated convertible debentures, netfor the three and six months ended June 30, 2009 and 2008 was as follows:
Interest expense- subordinated convertible debentures, net
As discussed in note 5 to our unaudited condensed consolidated financial statements, the subordinated convertible debentures included in our consolidated balance sheets reflect the obligation to our subsidiary trust that has issued Quarterly Income Preferred Securities (“QUIPS”). This subsidiary is not consolidated in our financial statements because we are not the primary beneficiary of the trust. As of June 30, 2009 and December 31, 2008, the aggregate amount of subordinated convertible debentures outstanding was $124 and $146, respectively. Interest expense-subordinated convertible debentures, net for the three and six months ended June 30, 2009 decreased by $13 due to a $13 gain we recognized in connection with the simultaneous purchase of $22 of QUIPS and retirement of $22 principal amount of our subordinated convertible debentures.
Income taxes. The following table summarizes our (benefit) provision for income taxes and the related effective tax rates for the three and six months ended June 30, 2009 and 2008:
Effective tax rate
The difference between the 2009 effective tax rates and the U.S. federal statutory income tax rate of 35 percent primarily relates to the geographical mix of income between U.S. and foreign and state operations. The difference between the 2008 effective tax rates and the U.S. federal statutory income tax rate primarily relates to state taxes as well as certain non-deductible charges. During the second quarter of 2008, we established a valuation allowance of $6 related to foreign tax credits that, as a result of the preferred stock redemption, are no longer expected to be realized. This charge is net of the federal tax benefit that results from a deduction for the foreign taxes. Additionally, during the second quarter of 2008, no tax benefit was provided for the $14 provision relating to the SEC inquiry.
Our effective tax rate is based on recurring factors including the geographical mix of income before taxes and the related tax rates in those jurisdictions. In addition, our effective tax rate will change based on discrete or other nonrecurring events (such as audit settlements) that may not be predictable.
Liquidity and Capital Resources
Liquidity. We manage our liquidity using internal cash management practices, which are subject to (i) the policies and cooperation of the financial institutions we utilize to maintain and provide cash management services, (ii) the terms and other requirements of the agreements to which we are a party and (iii) the statutes, regulations and practices of each of the local jurisdictions in which we operate.
In June 2009, URNA issued $500 aggregate principal amount of 10 7/8 percent Senior Notes (the “10 7/8 percent Notes”), which are due June 15, 2016. We received $471 in net proceeds from the issuance of the notes, after underwriting discounts and commissions, fees and expenses. Of the net proceeds received from the offering, $196 was spent in the month of June to repurchase outstanding 6 1/2percent Senior Notes. The balance of the proceeds was used to repay amounts borrowed under our ABL facility. In the second half of 2009, we expect to draw down some or all of these amounts to repurchase outstanding senior indebtedness.
Our principal existing sources of cash are cash generated from operations, including from the sale of rental equipment, and borrowings available under our ABL facility and accounts receivable securitization facility. As of June 30, 2009, we had (i) $764 of borrowing capacity available under our ABL facility, (ii) $26 of borrowing capacity available under our accounts receivable securitization facility and (iii) cash and cash equivalents of $125. Cash equivalents at June 30, 2009 consist of high quality, low risk investments. 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 over the next 12 months will be to fund (i) operating activities and working capital, (ii) the purchase of rental equipment and inventory items offered for sale and (iii) debt service and retirement. We plan to fund such cash requirements from our existing sources of cash. In addition, we may seek additional financing through the securitization of some of our equipment or real estate or through the use of additional operating leases.
Retirement of Debt and Subordinated Convertible Debentures. As discussed above and in note 5 to our unaudited condensed consolidated financial statements, we repurchased and retired $306 and $328 principal amounts of our outstanding debt during the three and six months ended June 30, 2009, respectively. In addition, during the three and six months ended June 30, 2009, we purchased $22 of QUIPS and retired $22 principal amount of our subordinated convertible debentures.
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Loan Covenants and Compliance. As of June 30, 2009, we were in compliance with the covenants and other provisions of our ABL facility, the senior notes, the subordinated convertible debentures and our accounts receivables securitization facility. Any failure to be in compliance with any material provision or covenant of these agreements could have a material adverse effect on our liquidity and operations.
The only financial covenants which currently exist relate to the fixed charge coverage ratio and the senior secured leverage ratio in the ABL facility. Both of these covenants “sprung off” on June 9, 2009 because our availability, as defined, had exceeded the necessary 20 percent threshold. Since the June 9, 2009 spring off date and through June 30, 2009, availability under the ABL facility has exceeded the 10 percent threshold and, as a result, these maintenance covenants were not applicable. Subject to certain limited exceptions specified in the credit agreement governing the ABL facility, these covenants will only apply in the future if availability under the ABL facility falls below 10 percent.
Sources and Uses of Cash. During the six months ended June 30, 2009, we (i) generated cash from operating activities of $205 and (ii) generated cash from the sale of rental equipment of $151. The balance of accounts receivable, net decreased $79, or 17.4 percent, as compared to December 31, 2008, primarily due to a decline in total revenues. We used cash during this period principally to (i) purchase rental equipment of $138, (ii) purchase other property and equipment of $26 and (iii) fund payments, net of proceeds, on debt of $141. During the six months ended June 30, 2008, we (i) generated cash from operating activities of $447 and (ii) generated cash from the sale of rental equipment of $134. We used cash during this period principally to (i) purchase rental equipment of $437, (ii) purchase other property and equipment of $32, (iii) redeem our preferred stock of $254 and (iv) fund payments, net of proceeds, on debt of $133.
Free Cash Flow GAAP Reconciliation. We define free cash flow as (i) net cash provided by operating activities less (ii) purchases of rental and non-rental equipment plus (iii) proceeds from sales of rental and non-rental equipment and excess tax benefits from share-based payment arrangements. Management believes free cash flow provides useful additional information concerning cash flow available to meet future debt service obligations and working capital requirements. However, free cash flow is not a measure of financial performance or liquidity under GAAP. Accordingly, free cash flow should not be considered an alternative to net income (loss) or cash flow from operating activities as indicators of operating performance or liquidity. The table below provides a reconciliation between net cash provided by operating activities and free cash flow.
Free cash flow
Free cash flow generation for the six months ended June 30, 2009 was $199, an increase of $82 as compared to free cash flow generation of $117 in the six months ended June 30, 2008. The year-over-year increase in free cash flow was primarily the result of a $299 reduction in purchases of rental equipment, partially offset by lower cash generated from operating activities.
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Our credit ratings as of July 24, 2009 were as follows:
Corporate Rating
Outlook
Moody’s (1)
S&P (1)
Fitch (1)
Following the Company’s June 2009 announcement of the issuance of URNA’s 10 7/8 percent Senior Notes, and in recognition of the deteriorating economic environment, Standard & Poor’s and Fitch downgraded the Company to a corporate rating of B. Standard & Poor’s also placed the Company on negative outlook. Moody’s has retained its B2 rating and negative outlook.
Both our ability to obtain financing and the related cost of borrowing are affected by our credit ratings, which are periodically reviewed by these rating agencies. Our current credit ratings are below investment grade and we expect our access to the public debt markets to be limited to the non-investment grade segment.
A security rating is not a recommendation to buy, sell or hold securities insofar as such ratings do not comment as to market price or suitability for a particular investor. There is no assurance that any rating will remain in effect for a given period of time or that any rating will not be revised or withdrawn entirely by a rating agency in the future if in its judgment circumstances warrant.
Certain Information Concerning Contractual Obligations. The table below provides certain information concerning the payments coming due under certain categories of our existing contractual obligations as of June 30, 2009:
Debt and capital leases (1)
Interest due on debt (2)
Operating leases (1):
Real estate
Non-rental equipment
Service agreements (3)
Purchase obligations (4)
Subordinated convertible debentures (5)
Total (6)
Certain Information Concerning Off-Balance Sheet Arrangements. We lease real estate and non-rental equipment under operating leases as a regular business activity. As part of some of our non-rental equipment operating leases, we guarantee that the value of the equipment at the end of the lease term will not be less than a specified projected residual value. If the actual residual value for all equipment subject to such guarantees were to be zero, then our maximum potential liability under these guarantees would be approximately $17. Under current circumstances we do not anticipate paying significant amounts under these guarantees; however, we cannot be certain that changes in market conditions or other factors will not cause the actual residual values to be lower than those currently anticipated. In accordance with Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” this potential liability was not reflected on our balance sheet as of June 30, 2009 or December 31, 2008 as we believe that proceeds from the sale of the equipment under these operating leases would approximate the payment obligation.
Relationship between Holdings and URNA. Holdings is principally a holding company and primarily conducts its operations through its wholly owned subsidiary, URNA, and subsidiaries of URNA. Holdings licenses its tradename and other intangibles and provides certain services to URNA in connection with its operations. These services principally include: (i) senior management services; (ii) finance and tax-related services and support; (iii) information technology systems and support; (iv) acquisition-related services; (v) legal services; and (vi) human resource support. In addition, Holdings leases certain equipment and real property that are made available for use by URNA and its subsidiaries.
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Our exposure to market risk primarily consists of (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. As of June 30, 2009, we had an aggregate of $651 of indebtedness that bears interest at variable rates. As of June 30, 2009, the variable rate debt included $452 of borrowings under our ABL facility and $199 of borrowings under our accounts receivable securitization facility. The interest rates applicable to our variable rate debt on June 30, 2009 were (i) 3.1 percent for the ABL facility and (ii) 1.6 percent for the accounts receivable securitization facility. As of June 30, 2009, based upon the amount of our variable rate debt outstanding, our annual after-tax earnings would decrease by approximately $4 for each one percentage point increase in the interest rates applicable to our variable rate debt.
The amount of our variable rate indebtedness may fluctuate significantly as a result of changes in the amount of indebtedness outstanding under our ABL facility and accounts receivable securitization facility.
Currency Exchange Risk. The functional currency for our Canadian operations is the Canadian dollar. As a result, our future earnings could be affected by fluctuations in the exchange rate between the U.S. and Canadian dollars. Based upon the level of our Canadian operations during 2008 relative to the Company as a whole, a 10 percent change in this exchange rate would not have a material impact on our earnings. We had no outstanding foreign exchange contracts as of June 30, 2009. We do not engage in purchasing forward exchange contracts for speculative purposes.
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
The Company’s management carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a–15(e) and 15d–15(e) of the Exchange Act, as of June 30, 2009. Based on the evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2009.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended June 30, 2009 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
The information set forth under note 6 to our unaudited condensed consolidated financial statements of this quarterly report on Form 10-Q is incorporated by reference in answer to this item. Such information is limited to certain recent developments and should be read in conjunction with note 13 to our consolidated financial statements for the year ended December 31, 2008 filed on Form 10-K on February 26, 2009.
Our results of operations and financial condition are subject to numerous risks and uncertainties described in our 2008 Form 10-K, which risk factors are incorporated herein by reference. You should carefully consider these risk factors in conjunction with the other information contained in this report. Should any of these risks materialize, our business, financial condition and future prospects could be negatively impacted.
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(c) The following table provides information about purchases of Holdings’ common stock by Holdings during the second quarter of 2009:
Period
April 1, 2009 to April 30, 2009
May 1, 2009 to May 31, 2009
June 1, 2009 to June 30, 2009
Total (1)
The Company’s Annual Meeting of Stockholders was held on June 11, 2009. The following directors were elected by holders of shares of our common stock as follows:
José B. Alvarez
Jenne K. Britell
Bobby J. Griffin
Michael J. Kneeland
Singleton B. McAllister
Brian D. McAuley
John S. McKinney
Jason D. Papastavrou
Filippo Passerini
Each of the above-named directors was elected for a one-year term expiring in 2010.
In accordance with the continuing de-classification of our Board of Directors that was approved at our 2007 Annual Meeting, Howard L. Clark, Jr. and L. Keith Wimbush, our Class Three directors, have one year of their three-year terms remaining. Messrs. Clark and Wimbush are the only members of our board currently serving a term lasting more than one year. Upon expiration of the terms of Messrs. Clark and Wimbush in 2010, our transition to a de-classified Board of Directors will be complete and all directors will be elected annually for one-year terms.
The other matters voted upon at the 2009 Annual Meeting of Stockholders are as follows:
To approve the 2009 Annual Incentive Compensation Plan:
To ratify the appointment of Ernst & Young LLP as independent auditors of the Company for the fiscal year ending December 31, 2009:
There were no additional matters voted upon at the 2009 Annual Meeting of Stockholders.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
/s/ JOHN J. FAHEY
Vice President, Controller
and Principal Accounting Officer
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