10-K Delay May Result in Watch Negative for United Rentals

Fitch Ratings said that the ratings for United Rentals Inc. and its principal operating subsidiary, United Rentals (North America) Inc., may be placed on Rating Watch negative if the company does not complete its 2004 Report on Form 10-K by Aug. 15, 2005.

URI announced on June 24, 2005, that the lenders under its secured credit facility have agreed to allow the company until Dec. 31, 2005, to complete its 2004 10-K, as well as Reports on Form 10-Q for 2005 interim periods, until after the company’s 2004 results are finalized.

A Rating Watch Negative placement would be driven by further delays in the filing of URI’s 2004 10-K beyond the period it is required to complete the June 30, 2005 10-Q. The delay in the filing of the 2004 10-K is directly related to the financial restatements arising principally as a result of a tax issue. The size and scope of this project may have been more comprehensive than Fitch had previously anticipated, although the financial effect is not significantly material.

Additionally, as United’s 2004 10-K approaches being 180 days delinquent, Fitch believes that the New York Stock Exchange will become increasingly focused on this matter. This could ultimately lead to URI’s common stock listing on the NYSE being suspended. If URI’s listing is suspended, it could reduce the company's access to an important source of capital, common equity, and have negative implications for financial flexibility.

United has delayed finalizing 2004 results to allow time to review matters relating to the Securities and Exchange Commission inquiry of the company; complete work on an income tax restatement; complete the evaluation and testing of internal controls required by Sarbanes-Oxley section 404 (SOX 404); and conduct additional testing of its self insurance reserves in 2004 and prior periods.

While Fitch believes that securing a waiver from its bank group to extend the filing time for URI to complete its 2004 10-K is an important step in completing its financial statements, it is also recognized that this waiver does not include all of the company’s lenders. Therefore, URI could be put into default if 25 percent of the non-bank lenders, for each issue, choose to do so. However, Fitch views this as an unlikely scenario given management's representations that United’s operating performance has trended upward in 2005 and well as overall improvement in the domestic non-residential construction sector.

Aside from the SEC investigation, there are two distinct financial accounting challenges facing United, Fitch said. During testing of the company's internal controls, as required by SOX 404, URI determined that the provision for income taxes was higher than required for the reporting periods prior to 2004. URI has not finally determined the ramifications this will have on specific periods, but estimates the correction of this will result in a decrease in the provision for income taxes for prior years by a total of approximately $25 million, with a corresponding increase in net income. URI expects that it will restate its financial statements for the years 1999 through 2003 to correct the income tax provision. While it is believed that this will not have a material effect on URI's financial statements prior to 2004, the scope of this project is extensive given the size of the company’s 500,000-piece revenue earning equipment portfolio.

The second area of focus as a result of the testing of the company's internal controls, as required by adoption of SOX 404, is URI’s self-insurance reserves. United self-insures itself for claims of up to $2 million, currently. As such, URI’s quarterly operating expenses include a provision for future insurance losses. Through nine months in 2004, URI took $22.5 million provision for future insurance losses and the reserve stood at $68.7 million at Sept. 30, 2004. In connection with SOX 404, URI will need to demonstrate, in consultation with outside actuaries, that its insurance provisions and reserves are appropriate.

Greenwich, Conn.-based United Rentals is No. 1 on the RER 100.

TAGS: Syndicate
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