United Rentals last week announced that its board of directors determined that John Milne, the company’s president and chief financial officer, failed to perform his duties and that this failure would constitute cause for termination if not cured in accordance with his employment agreement. A special committee of the board took the action after Milne refused to answer its questions relating to the Securities and Exchange Commission inquiry of the company. The board notified Milne that he would be given 30 days to attempt to “cure” his performance failure, as his performance agreement provides.
A spokesman for Milne characterized the situation as “unfortunate” and added: “Mr. Milne’s lawyers have advised that – at least at this point – it would be careless for him for him to meet with the board’s special committee to discuss complex matters that occurred several years ago. Mr. Milne remains open to assisting the special committee and speaking with its members if mutually agreeable circumstances can be reached.” The spokesman said Milne is committed to doing everything he can to help the company achieve an orderly transition of his responsibilities if such a resolution cannot be reached.
The SEC is conducting an inquiry regarding certain accounting irregularities at United. The company issued a statement last week, offering some explanations and updates.
“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,” the statement said. “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 to the SEC inquiry.”
United is also reviewing its self-insurance reserve recorded in 2004 and before in response to the SEC inquiry. “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,” the company said. “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…. 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 previous years.”
United added that it believes it has taken adequate measures to remedy material weaknesses related in its internal control over financial reporting. 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, estimating that the restatement would decrease the provision for income taxes by about $25 million prior to 2004. Subsequently, however, United determined additional analysis will be required to quantify the restatement, believing that the restatement would decrease aggregate income tax expenses for periods prior to 2004.
CEO Wayland Hicks reiterated the company’s commitment to full cooperation with the board’s special committee and the SEC inquiry. “We remain focused on driving revenue growth, improving our margins and increasing our return on capital, as we continue to benefit from favorable business conditions. 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.”
Greenwich, Conn.-based United Rentals is North America’s largest rental company, No. 1 on the RER 100.