United Rentals' President and CFO Faces Termination, <br>Company Offers Accounting Update

July 14, 2005 — The board of directors for United Rentals, Inc., Greenwich, Conn., announced today that John Milne, the company's president and CFO, has failed to perform his duties. As such, this failure constitutes cause for termination if not cured within 30 days in accordance with his employment agreement.

For commentary on this recent development, read a Perspective from Guy Ramsey.

 

This action was taken on the recommendation of the special committee of the board reviewing matters relating to the previously disclosed SEC inquiry of the company, after Milne informed the committee he was not willing at this time to respond to the committee's questions. The board notified Milne that, to the extent his failure of performance may be curable, he would be afforded the thirty-day cure period provided by his employment agreement.

 

United Rentals also provided an update on the special committee's review as well as the previously disclosed self-insurance reserve review and income tax restatement. The company also affirmed previous diluted earnings per share expectations for full year 2005 of $1.60 to $1.70.

 

 

Update on Special Committee Review Relating to SEC Inquiry

In the years 2000, 2001, and 2002, the company was party to several short-term, equipment sale-leaseback transactions that resulted in the company reporting aggregate gross profit from these transactions of $12.5 million, $20.2 million, and $1.5 million in those respective years. Although no final conclusion has been reached, the special committee has developed information that suggests the accounting for at least some of these transactions was incorrect. The special committee is continuing to review these transactions as part of its broader review relating to the SEC inquiry. As previously disclosed, the SEC inquiry appears to relate to a broad range of the company's accounting practices and is not confined to a specific period or the matters discussed in this release.

 

Self-Insurance Reserve Restatement Expected

As previously announced, the company is reviewing its self-insurance reserve recorded in 2004 and prior years. The company retained an independent actuary to assist with this matter. Based on work completed to date, the company has concluded that, although the reserve level at year-end 2004 is appropriate, a portion of the reserve recorded in 2003 and 2004 should have been recorded in prior periods. As a result, the expense associated with the self-insurance reserve was too high in 2003 and 2004 and too low in 2002 and prior years.

 

The company is presently quantifying by reporting period the financial restatement necessary. When this review is completed, the company expects to restate its financial statements for 2000 through 2003 and the first nine months of 2004 to correct the expense associated with the self-insurance reserve. This restatement will have a positive impact on pre-tax results for 2003 and 2004 and a negative impact on pre-tax results for prior years.

 

As previously announced, in the third quarter of 2004 the company identified a material weakness relating partially to its self-insurance reserve estimation and evaluation process. Self-insurance reserves reflect the company's estimate of the liability associated with workers' compensation claims and claims by third parties for damage or injury caused by the company. The company subsequently retained an independent actuary to assist in reviewing its historical reserve levels. The company has determined that deficiencies relating to its self-insurance reserve estimation process represented a material weakness in the company's internal control over financial reporting at December 31, 2004. The company believes that it has taken adequate measures to remedy this weakness.

 

Update on Previously Announced Income Tax Restatement

The company announced in March 2005 that it expected to restate its financial statements for years prior to 2004 to correct the provision for income taxes. The company's initial estimate was that this restatement would decrease the provision for income taxes by a total of approximately $25 million for years prior to 2004. Subsequently, the company determined that additional analysis is required to quantify the restatement for periods prior to 2004. Accordingly, the company is withdrawing its prior estimates relating to this matter. The company continues to believe the restatement is likely to decrease aggregate income tax expense for periods prior to 2004, although the expense in particular periods could increase. Further analysis is required to confirm this conclusion.

United Rentals believes that this restatement will not impact 2004.

 

Caution on Historical Financial Statements

In view of the expected restatements for income tax and self insurance, as well as the matters discussed above relating to certain sale-leaseback transactions, investors are cautioned not to rely on the company's historical financial statements.

 

“The board and management are committed to ensuring full cooperation with the board's special committee and the SEC inquiry,” said Wayland Hicks, chief executive officer. “We are working to resolve outstanding issues and file our financial statements as soon as possible.”

 

While the company addresses these challenges, Hicks says United Rentals will remain focused on driving revenue growth, improving margins, and increasing our return on capital. “Our full year 2005 outlook continues to be for total revenues of $3.4 billion, diluted earnings per share of $1.60 to $1.70 and free cash flow of at least $200 million,” he said.