United Rentals Inc. Reports Operating Results (10-Q)
United Rentals Inc. is one of North America's largest equipment rental companies with over branches in the majority of states several Canadian provinces and Mexico. The company offers for rent different types of equipment to customers that include construction and industrial companies manufacturers utilities municipalities homeowners and others. United Rentals Inc. has a market cap of $552.6 million; its shares were traded at around $9.19 with a P/E ratio of 8 and P/S ratio of 0.2. United Rentals Inc. had an annual average earning growth of 4.9% over the past 10 years. Highlight of Business Operations: Revenue Recognition. We recognize equipment rental revenue on a straight-line basis. Our rental contract periods are daily, weekly or monthly. By way of example, if a customer were to rent a piece of equipment and the daily, weekly and monthly rental rates for that particular piece were (in actual dollars) $100, $300 and $900, respectively, we would recognize revenue of $32.14 per day. The daily rate for recognition purposes is calculated by dividing the monthly rate of $900 by the monthly term of 28 days. As part of this straight-line methodology, when the equipment is returned, we recognize as incremental revenue the excess, if any, between the amount the customer is contractually required to pay over the cumulative amount of revenue recognized to date. In any given accounting period, we will have customers return equipment and be contractually required to pay us more than the cumulative amount of revenue recognized to date. For instance, continuing the above example, if the above customer rented a piece of equipment on March 29 and returned it at the close of business on April 1, we would recognize incremental revenue on April 1 of $171.44 (in actual dollars, representing the difference between the amount the customer is contractually required to pay and the cumulative amount recognized to date on a straight-line basis). We record amounts billed to customers in excess of recognizable revenue as deferred revenue on our balance sheet. We had deferred revenue of $13 and $11 as of September 30, 2009 and December 31, 2008, respectively. Revenues from the sale of rental equipment and new equipment are recognized at the time of delivery to, or pick-up by, the customer and when collectibility is reasonably assured. Sales of contractor supplies are also recognized at the time of delivery to, or pick-up by, the customer.
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 which ranges from zero percent to ten percent of cost. Costs we incur in connection with refurbishment programs that extend the life of our equipment are capitalized and amortized over the remaining useful life of the related equipment. The costs incurred under these refurbishment programs were $29 and $22 for the nine months ended September 30, 2009 and 2008, respectively, and are included in purchases of rental equipment in our condensed consolidated statements of cash flows.
To the extent that the useful lives of all of our rental equipment were to increase or decrease by one year, we estimate that our annual depreciation expense would change by approximately $39. Similarly, to the extent the estimated salvage values of all of our rental equipment were to increase or decrease by one percentage point, we estimate that our annual depreciation expense would change by approximately $4. Any change in depreciation expense as a result of a hypothetical change in either useful lives or salvage values would generally result in a proportional increase or decrease in the gross profit we would recognize upon the ultimate sale of the asset. To the extent that the useful lives of all of our depreciable property and equipment were to increase or decrease by one year, we estimate that our annual non-rental depreciation expense would change by approximately $7.
Impairment of Long-lived Assets. We review the recoverability of our long-lived assets, including rental equipment and property and equipment, when events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable. The assessment of possible impairment is based on our ability to recover the carrying value of the asset from the expected future pre-tax cash flows (undiscounted and without interest charges). If these cash flows are less than the carrying value of such asset, an impairment loss is recognized for the difference between the estimated fair value and carrying value. During the nine months ended September 30, 2009, we recognized an asset impairment charge of $9 in our general rentals segment. The impairment charge includes $7 reflected in depreciation of rental equipment in the accompanying condensed consolidated statements of operations related to certain rental equipment that had been classified as held for sale, as well as $2 of leasehold improvement write-offs which are reflected in non-rental depreciation and amortization in the accompanying condensed consolidated statements of operations. Our estimate of the impairment charge for the rental fleet was calculated by comparing the proceeds estimated to be realized from the expected disposition of these rental assets to their carrying values. The impairment of the rental fleet, as well as the leasehold improvement write-offs, followed from our decision to close 38 branches in the second quarter of 2009. There were no impairment charges in the 2008 periods presented. As of September 30, 2009 and December 31, 2008, there were no held for sale assets in our condensed consolidated balance sheets.
During the fourth quarter of 2008, and in connection with the preparation of our year-end financial statements, we recognized an aggregate non-cash goodwill impairment charge of $1.1 billion related to certain reporting units within our general rentals segment. The charge reflects the challenges of the current construction cycle, as well as the broader economic and credit environment, and includes $1.0 billion, reflecting conditions at the time of our annual October 1 testing date, as well as an additional $100 as of December 31, reflecting further deterioration in the economic and credit environment during the fourth quarter. Substantially all of the impairment charge related to goodwill arising from acquisitions made by the Company between 1997 and 2000. Following these goodwill impairment charges, and as of December 31, 2008, we had goodwill on our balance sheet of $190. Further, substantially all of this goodwill related to reporting units which had, as of December 31, 2008, estimated fair values significantly in excess of the corresponding carrying values.
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