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Article by DailyStocks_admin    (11-03-08 04:06 AM)

Filed with the SEC from Oct 16 to Oct 22:

United Rentals (URI)
Fairholme Capital Management, United Rentals' largest shareholder, said that a recent amendment to its rights agreement is "unacceptable." UR announced that it had amended the rights plan, or "poison pill," to reduce to 15% from 25% the ownership stake by a shareholder that can trigger the plan.
Fairholme said that it is "particularly disturbing" that United Rentals chose to substantively amend the rights agreement at a time when most large public firms have eliminated poison pills. Fairholme holds about 11.18 million shares (18.9%).
BUSINESS OVERVIEW

General

United Rentals is the largest equipment rental company in the world and our network consists of 697 rental locations in the United States, Canada and Mexico. We offer for rent over 2,900 classes of rental equipment, including heavy machines and hand tools, to customers that include construction and industrial companies, manufacturers, utilities, municipalities, homeowners and others. In 2007, we generated revenue of $3.7 billion, including $2.6 billion of equipment rental revenue.

As of December 31, 2007, our fleet of rental equipment included over 260,000 units having an original purchase price (based on initial consideration paid) of $4.2 billion, as compared to $3.9 billion at December 31, 2006. The fleet includes:


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General construction and industrial equipment, such as backhoes, skid-steer loaders, forklifts, earth moving equipment, material handling equipment, compressors, pumps and generators;


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Aerial work platforms , such as scissor lifts and boom lifts;


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General tools and light equipment , such as pressure washers, water pumps, heaters and hand tools; and


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Trench safety equipment for underground work, such as trench shields, aluminum hydraulic shoring systems, slide rails, crossing plates, construction lasers and line testing equipment.

In addition to renting equipment, we sell new and used rental equipment as well as related contractor supplies, parts and service.

Strategy

In the second half of 2007, in response to internal analyses and a study we commissioned from a nationally-recognized consulting firm, we began to implement a change in strategy aimed at growing our earnings at higher margins, while also continuing to generate significant cash flow. The three key elements of this strategy are: refocusing our employees and sales representatives on our core rental business; optimizing the management of our rental fleet; and reducing our operating costs.

We believe this strategy, coupled with our broad geographic footprint, extensive rental fleet, advanced information technology systems, disciplined purchasing power, industry experience and ability to deliver extraordinary customer service, will enable us to strengthen our leadership position in the equipment rental industry and improve our returns to shareholders. In particular, we plan to achieve our objectives by:

Optimizing Our Field Operations. We intend to continue the process of analyzing and optimizing our field operations in order to improve fleet allocation, service and delivery and sales management efforts. We expect this process will create opportunities for rental location closures as fleet assets are moved from low-return locations to high-return locations, as well as additional cost-saving opportunities from the consolidation of administrative and back-office functions. We believe optimizing our field operations will increase equipment utilization and reduce operating costs.

Reducing Operating Costs. In an effort to bring our cost structure in line with those of other leading equipment rental companies, in the spring of 2007 we undertook a thorough review of our back-office functions related to the general and administrative aspects of our business in order to identify opportunities for increased efficiencies. As a result of this process, we identified a number of opportunities to consolidate duplicative functions, outsource certain back-office operations and automate processes. As a result, we have implemented a headcount reduction program that, as of December 31, 2007, had achieved a 9 percent workforce reduction as compared to December 31, 2006, and undertaken specific initiatives to reduce our selling, general and administrative expenses and cost of goods sold.

Accelerating Sourcing Initiatives. Our rental equipment purchases have been centralized for many years which we believe has enabled us to negotiate more favorable pricing and other terms from our equipment providers. We launched a strategic sourcing initiative in 2006 that was designed to centralize our non-equipment purchases. We believe that centralizing the procurement of these items will allow us to leverage our significant purchasing power to obtain better pricing and/or terms from our suppliers. To date, we have realized approximately $22 million in cumulative savings across a wide range of products, and we expect additional savings associated with this initiative in 2008.

Optimizing Time Utilization. We continue to reassess existing fleet investments and have recently realigned certain of our incentive programs to reward equipment sharing across districts and increase the time utilization of our rental fleet. Additionally, we intend to better allocate resources, including limited growth capital, to where there is strong customer demand, resulting in fleet rationalization opportunities. By coupling such initiatives with an increased focus on preventative maintenance and improved turn-around time for returned equipment, we believe we can further increase the time utilization of our rental fleet, which was up 2.5 percentage points year-over-year in 2007.

Refocusing Contractor Supplies Business. We sell a variety of contractor supplies, such as construction consumables, tools, small equipment and safety supplies, through several channels, including our sales representatives, rental branches and U.S. and Canadian product catalogues. Although revenues from the contractor supplies business grew from $125 million in 2002 to $378 million in 2007, this business has required us to maintain significant volumes of inventory in order to meet customer demand and carries a higher cost structure relative to our core equipment rental business. In 2007, the gross margin for our contractor supplies business was 19.0 percent as compared to 38.7 percent for equipment rentals.

We have refocused our contractor supplies business and positioned it more clearly as a complementary offering to our equipment rental business. We expect this to result in productivity improvements within our sales force, thus helping to improve the utilization of our rental fleet. As part of this initiative, we are reducing the number of stock keeping units associated with these operations, especially in lower margin commodity categories. Additionally, we have recently closed three of our nine distribution centers and we intend to close an additional two distribution centers in the first half of 2008. We expect these changes will reduce our revenues associated with contractor supplies, but improve our margins.

Industry Overview

Based on industry sources, we estimate that the U.S. equipment rental industry had total revenues of approximately $37 billion in 2007. This represents a compound annual growth rate of approximately 10 percent since 1990.

Our principal end-market for rental equipment is private non-residential construction, and our business is particularly sensitive to changes in activity in this end-market. According to U.S. Department of Commerce data (which has not been adjusted for inflation), private non-residential construction activity increased 5.0 percent in 2005 compared to 2004, increased 16.2 percent in 2006 compared with 2005 and increased 16.7 percent in 2007 compared with 2006. Reflecting current economic conditions, we and other forecasters expect this growth to slow significantly in 2008—most likely flat as compared to 2007 or low single digit growth.

Approximately 10 percent of our revenues have historically been derived from private residential construction, where activity decreased 18.3 percent in 2007 compared with 2006 (based on the same Department of Commerce data), with further decreases expected in 2008. This market primarily impacts our southwest and southeast regions.

We believe that long-term industry growth, in addition to reflecting general economic expansion, is driven by an end-user market that increasingly recognizes the many advantages of renting equipment rather than owning. Customers recognize that by renting they can:


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avoid the large capital investment required for equipment purchases;


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access a broad selection of equipment and select the equipment best suited for each particular job;


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reduce storage, maintenance and transportation costs; and


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access the latest technology without investing in new equipment.

While the construction industry has to date been the principal user of rental equipment, industrial companies, utilities and others are increasingly using rental equipment for plant maintenance, plant changeovers and other operations requiring the periodic use of equipment. We believe that over the long-term, increasing rentals by governmental entities and the industrial sector could become a more significant factor in driving our industry’s growth.

Competitive Advantages

We believe that we benefit from the following competitive advantages:

Large and Diverse Rental Fleet . Our rental fleet is the largest and most comprehensive in the industry, which allows us to:


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serve a diverse customer base and reduce our dependence on any particular customer or group of customers; and


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serve large customers that require substantial quantities and/or wide varieties of equipment.

Significant Purchasing Power . We purchase large amounts of equipment, contractor supplies and other items, which enables us to negotiate favorable pricing, warranty and other terms with our vendors.

Operating Efficiencies . We benefit from the following operating efficiencies:


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Equipment Sharing Among Branches . We generally group our branches into districts of 6 to 12 locations that are in the same geographic area. Each branch within a district can access all available equipment in the district. This increases equipment utilization because equipment that is idle at one branch can be marketed and rented through other branches. Districts report into a region structure where management teams identify additional opportunities for equipment sharing and fleet transfers.

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Ability to Transfer Equipment Among Branches . The size of our branch network gives us the ability to take advantage of strength at a particular branch or in a particular region by transferring underutilized equipment from weaker areas to stronger areas.


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National Call Center . We have established a national call center in Tampa, Florida, to handle all 1-800-UR-RENTS telephone calls without having to route them to individual branches. This provides us with the ability to provide a more uniform quality experience to customers, manage fleet sharing more effectively and free up branch employee time.


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Consolidation of Common Functions . We reduce costs through the consolidation of functions that are common to our branches, such as payroll, accounts payable, benefits and risk management, information technology and credit and collection.

Information Technology Systems . We have a wide variety of information technology systems, some proprietary and some licensed, that support our operations. This information technology infrastructure facilitates our ability to make rapid and informed decisions, respond quickly to changing market conditions and share rental equipment among branches. We have an in-house team of information technology specialists that support our systems.

Strong Brand Recognition . We have strong brand recognition, which helps us to attract new customers and build customer loyalty.

Geographic and Customer Diversity . We have 697 rental locations in 48 states, ten Canadian provinces and Mexico and serve customers that range from Fortune 500 companies to small businesses and homeowners. We believe that our geographic and customer diversity provide us with many advantages including: (i) enabling us to better serve National Account customers with multiple locations, (ii) helping us achieve favorable resale prices by allowing us to access used equipment resale markets across North America, (iii) reducing our dependence on any particular customer and (iv) reducing the impact that fluctuations in regional economic conditions have on our overall financial performance.

National Account Program . Our National Account sales force is dedicated to establishing and expanding relationships with large companies, particularly those with a national or multi-regional presence. We offer our National Account customers the benefits of a consistent level of service across North America, a wide selection of equipment and a single point of contact for all their equipment needs. We currently serve approximately 1,500 National Account customers as well as approximately 200 agencies within the United States government. Combined revenues from National Account customers and government agencies have increased to approximately $775 million in 2007 from approximately $700 million in 2006 and approximately $625 million in 2005, reflecting the growth and success of this program.

Strong and Motivated Branch Management . Each of our full service branches has a branch manager who is supervised by a district manager from one of our 92 districts and a vice president from one of our 11 regions. We believe that our managers are among the most knowledgeable and experienced in the industry and we empower them, within budgetary guidelines, to make day-to-day decisions concerning branch matters. Each region office has a management team that monitors branch, district and regional performance with extensive systems and controls, including performance benchmarks and detailed monthly operating reviews.

Employee Training Programs . We are dedicated to providing training and development to our employees. In 2007, our employees enhanced their skills through over 485,000 hours of training. Many employees participated in one of eight, week-long, programs held in 2007 at our training facility located at our corporate headquarters. In addition to these training sessions, our employees are provided equipment-related training from our suppliers as well as on-line eLearning courses covering a variety of subjects.

Risk Management and Safety Programs . We believe that we have one of the most comprehensive risk management and safety programs in the industry. Our risk management department is staffed by experienced

professionals and is responsible for implementing our safety programs and procedures, developing our employee and customer training programs and, in coordination with third party professionals, managing any claims against us.

Segment Information

Our reportable segments are general rentals and trench safety, pump and power. Segment financial information is presented in note 4 to our consolidated financial statements. 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.

Products and Services

Our principal products and services are described below.

Equipment Rental . We offer for rent over 2,900 classes of rental equipment on an hourly, daily, weekly or monthly basis. The types of equipment that we offer include general construction and industrial equipment; aerial work platforms; trench safety equipment; and general tools and light equipment. The weighted-average age of our fleet was 38.0 months at December 31, 2007 as compared to 39.2 months at December 31, 2006.

Used Equipment Sales . We routinely sell used rental equipment and invest in new equipment in order to manage repairs and maintenance costs as well as the age, composition and size of our fleet. We also sell used equipment in response to customer demand for this equipment. The rate at which we replace used equipment with new equipment depends on a number of factors, including changing general economic conditions, growth opportunities, the need to adjust fleet composition to meet customer requirements and local demand, and the age of the fleet.

We principally sell used equipment through our national sales force, which can access many resale markets across North America. We also sell used equipment through our website, which includes an online database of used equipment available for sale. In addition, we hold United Rentals Certified Auctions on eBay to provide customers with another convenient online tool for purchasing used equipment.

New Equipment Sales . We sell equipment for many leading equipment manufacturers. The manufacturers that we represent and the brands that we carry include: Genie, JLG and Skyjack (aerial lifts); Multiquip, Wacker, and Honda USA (compaction equipment, generators and pumps); Sullair (compressors); Skytrak and Lull (rough terrain reach forklifts); John Deere and Takeuchi (skid-steer loaders and mini-excavators); Terex (telehandlers); and DeWalt (generators). The type of new equipment that we sell varies by location.

Contractor Supplies Sales . We sell a variety of contractor supplies including construction consumables, tools, small equipment and safety supplies. Our target customers for contractor supplies are our existing rental customers. As previously discussed, we are refocusing our contractor supplies business to position it more clearly as a complementary offering to our equipment rental business.

Service and Other Revenue . We also offer repair and maintenance services and sell parts for equipment that is owned by our customers. Our target customers for these types of ancillary services are our current rental customers as well as those who purchase both new and used equipment from our branches.

RENTALMAN ® and INFOMANAGER ® Software . We have two subsidiaries that develop and market software. One of the subsidiaries develops and markets RENTALMAN ® , which is an enterprise resource planning application used by ourselves and several of the other largest equipment rental companies. The other subsidiary develops and markets INFOMANAGER ® , which provides a complete solution for creating an advanced business intelligence system. INFOMANAGER ® helps with extracting raw data from transactional applications and transforming it into meaningful information and saving it in a database that is specifically optimized for analytical use.

Customers

Our customer base is highly diversified and ranges from Fortune 500 companies to small businesses and homeowners. Our largest customer accounted for less than 1 percent of our revenues in 2007 and our top 10 customers accounted for less than 2 percent of our revenues in 2007. Historically, we have typically retained over 90 percent of our customer base year-over-year.

Our customer base varies by branch and is determined by several factors, including the equipment mix and marketing focus of the particular branch as well as the business composition of the local economy. Our customers include:


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construction companies that use equipment for constructing and renovating commercial buildings, warehouses, industrial and manufacturing plants, office parks, airports, residential developments and other facilities;


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industrial companies—such as manufacturers, chemical companies, paper mills, railroads, ship builders and utilities—that use equipment for plant maintenance, upgrades, expansion and construction;


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municipalities that require equipment for a variety of purposes; and


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homeowners and other individuals that use equipment for projects that range from simple repairs to major renovations.

Our business is seasonal, with demand for our rental equipment tending to be lower in the winter months.

Sales and Marketing

We market our products and services through multiple channels as described below.

Sales Force . We have over 2,700 sales people, including approximately 1,400 outside sales representatives and 1,300 inside sales people. Our sales people are responsible for calling on existing and potential customers as well as assisting our customers in planning for their equipment needs. We have ongoing programs for training our employees in sales and service skills and on strategies for maximizing the value of each transaction.

National Account Program . Our National Account sales force is dedicated to establishing and expanding relationships with large customers, particularly those with a national or multi-regional presence. Our National Account team, which consists of approximately 50 sales professionals and includes those who service governmental agencies, closely coordinates its efforts with the local sales force in each area.

E-Rentals . Our customers can rent or buy equipment online 24 hours a day, seven days a week, at our E-Rentals portal, which can be found at unitedrentals.com . Our customers can also use our UR data ® application to access real-time reports on their business activity with us.

Advertising . We promote our business through local and national advertising in various media, including trade publications, yellow pages, the Internet, radio and direct mail. We also regularly participate in industry trade shows and conferences and sponsor a variety of local promotional events.

Suppliers

Our strategic approach with respect to our suppliers is to maintain the minimum number of suppliers per category of equipment that can satisfy our anticipated volume and business requirements. This approach is designed to ensure the terms we negotiate are competitive and that there is sufficient product available to meet anticipated customer demand. We utilize a comprehensive selection process to determine our equipment vendors. We consider product capabilities and industry position, product liability history and financial strength.

We have been making ongoing efforts to consolidate our vendor base in order to further increase our purchasing power. We estimate that our largest supplier accounted for approximately 38 percent of our 2007 purchases of equipment for rental or resale, and that our 10 largest suppliers accounted for approximately 70 percent of such purchases. We believe we have sufficient alternative sources of supply available for each of our major equipment categories.

Information Technology Systems

In support of our rental business, we have advanced information technology systems which facilitate rapid and informed decision-making and enable us to respond quickly to changing market conditions. Each branch is equipped with one or more workstations that are electronically linked to our other locations and to our AS/400 system located at our data center. Rental transactions are entered at these workstations and processed on a real-time basis. Management, branch and call center personnel can access the systems 24 hours a day.

These systems:


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allow management to obtain a wide range of operational and financial data;


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enable branch personnel to (i) determine equipment availability, (ii) access all equipment within a geographic region and arrange for equipment to be delivered from anywhere in the region directly to the customer, (iii) monitor business activity on a real-time basis and (iv) obtain customized reports on a wide range of operating and financial data, including equipment utilization, rental rate trends, maintenance histories and customer transaction histories; and


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permit customers to access their accounts online.

Our information technology systems and our website are supported by our in-house group of information technology specialists. This group trains our branch personnel; upgrades and customizes our systems; provides hardware and technology support; operates a support desk to assist branch and other personnel in the day-to-day use of the systems; extends the systems to newly acquired locations; and manages our website.

We have a fully functional back-up facility designed to enable business continuity in the event that our main computer facility becomes inoperative. This backup facility also allows us to perform system upgrades and maintenance without interfering with the normal ongoing operation of our information technology systems.

Competition

The equipment rental industry is highly fragmented and competitive. Our competitors primarily include small, independent businesses with one or two rental locations; regional competitors which operate in one or more states; public companies or divisions of public companies that operate nationally or internationally; and equipment vendors and dealers who both sell and rent equipment directly to customers. 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 our smaller competitors. These advantages include greater purchasing power, the ability to provide customers with a broader range of equipment and services, and greater flexibility to transfer equipment among locations in response to, and in anticipation of, customer demand. For additional information, see “Competitive Advantages.”

Securities and Exchange Commission Inquiry

As previously reported and as discussed in note 13 to our consolidated financial statements and elsewhere in this report, the Company is the subject of a non-public, fact-finding inquiry by the Securities and Exchange Commission (the “SEC”) that appears to relate to a broad range of the Company’s accounting practices prior to 2005 and does not otherwise seem to be confined to a specific time period. The U.S. Attorney’s office has also requested information from the Company informally and by subpoena about matters related to the SEC inquiry. The Company is cooperating fully with the SEC and the U.S. Attorney’s office.

Environmental and Safety Regulations

Our operations are subject to numerous laws governing environmental protection and occupational health and safety matters. These laws regulate such issues as wastewater, storm water, solid and hazardous wastes and materials, and air quality. Our operations generally do not raise significant environmental risks, but we use and store hazardous materials as part of maintaining our rental equipment fleet and the overall operations of our business, dispose of solid and hazardous waste and wastewater from equipment washing, and store and dispense petroleum products from underground and above-ground storage tanks located at certain of our locations. Under environmental and safety laws, we may be liable for, among other things, (i) the costs of investigating and remediating contamination at our sites as well as sites to which we sent hazardous wastes for disposal or treatment regardless of fault and (ii) fines and penalties for non-compliance. We incur ongoing expenses associated with the performance of appropriate investigation and remediation activities at certain of our locations.

Employees

We had approximately 10,900 employees at January 1, 2008, as compared to approximately 12,000 at January 1, 2007. Of these, approximately 3,400 are salaried personnel and approximately 7,500 are hourly personnel. Collective bargaining agreements relating to 68 separate locations cover approximately 800 of our employees. We monitor employee satisfaction through ongoing surveys and we consider our relationship with our employees to be good.

CEO BACKGROUND

Michael J. Kneeland was appointed our interim chief executive officer upon the resignation of Mr. Hicks in June 2007, having previously served as our executive vice president and chief operating officer since March 2007 and as our executive vice president—operations since September 2003. Mr. Kneeland joined the Company as a district manager in 1998 upon the acquisition of Equipment Supply Co., and was subsequently named vice president—aerial operations, and then vice president—southeast region. Mr. Kneeland’s more than 25 years of experience in the equipment rental industry includes a number of senior management positions with Freestate Industries Inc. and Equipment Supply.



Martin E. Welch III was appointed our executive vice president and chief financial officer in March 2006, having previously served as our interim chief financial officer since September 2005. Previously, Mr. Welch served as director and business advisor to the private equity firm York Management Services. Mr. Welch joined Kmart Corporation as chief financial officer in 1995 and served in that capacity until 2001. From 1991 until 1995, Mr. Welch served as chief financial officer for Federal-Mogul Corporation. From 1982 until 1991, he held various finance positions at Chrysler Corporation, including chief financial officer for Chrysler Canada. Mr. Welch began his career in 1970 at Arthur Young (now Ernst & Young), and is a certified public accountant. Mr. Welch currently serves on the boards of Delphi Corporation and York portfolio company Northern Reflections, Ltd., and he is a member of the board of trustees of the University of Detroit Mercy.



Roger E. Schwed joined us as executive vice president and general counsel in June 2006 and became secretary in September 2006. Before joining the Company, Mr. Schwed served for nine years as the executive vice president, general counsel and secretary of Maxcor Financial Group Inc. and its Euro Brokers subsidiaries. Previously, he was a corporate attorney specializing in mergers and acquisitions at each of Skadden, Arps, Slate, Meagher & Flom LLP and Cleary Gottlieb Steen & Hamilton LLP. He is a trustee of the New York Foundation and chairman of the board of I Challenge Myself, Inc.



John J. Fahey was appointed our vice president—controller in 2008, and, in that role, continues to serve the Company as principal accounting officer, as he has since August 2006. Mr. Fahey joined the Company in 2005 as vice president—assistant corporate controller. His prior experience includes senior positions as manager—corporate business development for Xerox Corporation; vice president and chief financial officer for Xerox Engineering Systems, Inc.; and vice president—finance and controller for Faulding Pharmaceutical Company. Mr. Fahey is a licensed certified public accountant who previously served as a general practice manager in accounting and auditing for Deloitte & Touche LLP.



Wayland R. Hicks was our chief executive officer from December 2003 until his retirement in June 2007. He currently is, and has been since 1998, a director and vice chairman of the Company. He joined the Company in November 1997 and served as chief operating officer from 1997 until being appointed chief executive officer. Previously, Mr. Hicks served as chief executive officer and president of Indigo N.V. from 1996 to 1997, and as vice chairman and chief executive officer of Nextel Communications Corp. from 1994 to 1995. From 1967 to 1994 he held various senior executive positions with Xerox Corporation, including managing director of Rank Xerox in Great Britain, and chief staff officer for Rank Xerox, Ltd., where he had senior responsibility for the marketing strategy of Xerox products in Europe, Eastern Europe and parts of Asia and Africa. In 1983, Mr. Hicks was appointed a group vice president of Xerox Corporation and president of the Reprographics Business Group, and in 1986 he was named executive vice president and president of the Xerox Business Products and Systems Group with responsibility for the engineering and manufacturing of all Xerox products. In 1989, he was appointed executive vice president—marketing and customer operations, with management responsibility for 75,000 employees. Mr. Hicks is also a director of Perdue Farms Incorporated.



Michael S. Gross became a director of the Company in January 1999, and was appointed as lead director of the Company in April 2006. Mr. Gross has been co-chairman of the investment committee and a senior partner of Magnetar Capital Partners LP, a multi-strategy hedge fund firm, since July 2006. Prior to that, Mr. Gross was one of the founding partners in 1990 of Apollo Advisors, L.P., which, together with its affiliates, acts as the managing general partner of several private securities funds. Mr. Gross also previously served as chief executive officer of Apollo Investment Corporation, a closed-end investment company of which he is a founder, from January 2004 to February 2006, and as president and chairman of the board of directors of Apollo Investment Corporation until July 2006. Mr. Gross is chairman of the board of directors and chief executive officer of Marathon Acquisition Corp. and of Solar Capital, LLC, as well as a director of Saks Incorporated, Alternative Asset Management and Jarden Corporation. He is also a founding member and serves on the Executive Committee of the Youth Renewal Fund, is the chairman of the board of the Mt. Sinai Children’s Center Foundation, serves as a trustee of the Trinity School and is a member of the corporate advisory board for the University of Michigan Business School.



Leon D. Black became a director of the Company in January 1999. Mr. Black is one of the founding principals of Apollo Advisors, L.P. (which was established in August 1990 and which, together with its affiliates, acts as the managing general partner of several private securities investment funds) and Apollo Real Estate Advisors, L.P. (which, together with its affiliates, acts as the managing general partner of several real estate investment funds). Prior to that, since 1977, Mr. Black worked at Drexel Burnham Lambert Incorporated, where he served as managing director, head of the Mergers & Acquisitions Group and co-head of the Corporate Finance Department. Mr. Black is also a director of Sirius Satellite Radio Inc. and the general partner of AP Alternative Assets. He serves as a trustee of The Museum of Modern Art, Mount Sinai Hospital, The Metropolitan Museum of Art, Prep for Prep, The Asia Society and Dartmouth College. He is also a member of The Council on Foreign Relations, The Partnership for New York City and the National Advisory Board of JPMorganChase. Mr. Black is also a member of the boards of Faster Cures and the Port Authority Task Force.



Jenne K. Britell, Ph.D. became a director of the Company in December 2006. Dr. Britell has been chairman and chief executive officer of Structured Ventures, Inc., advisors on financial services and product strategy to U.S. and foreign companies, since 2001. She is also a director of Crown Holdings, Inc., Quest Diagnostics, Inc., West Pharmaceutical Services, Inc. and the U.S. – Russia Investment Fund. From 1996 to 2000, Dr. Britell was a senior executive of GE Capital, the Financial Services subsidiary of General Electric. At GE Capital, she most recently served as the executive vice president of Global Consumer Finance and president of Global Commercial and Mortgage Banking. From January 1998 to July 1999, she was president and chief executive officer of GE Capital, Central and Eastern Europe, based in Vienna. Before joining GE Capital, she held significant management positions with Dime Bancorp, Inc., HomePower, Inc., Citicorp and Republic New York Corporation. Earlier, she was the founding chairman and chief executive officer of the Polish-American Mortgage Bank in Warsaw, Poland. Dr. Britell is also a sustaining trustee of the Fox Chase Cancer Center and is involved in other not-for-profit organizations.



Howard L. Clark, Jr . became a director of the Company in April 2004. Mr. Clark has been vice chairman of Lehman Brothers Inc. since 1993. From 1990 until assuming his current position, he was chairman, president and chief executive officer of Shearson Lehman Brothers Holdings Inc. Mr. Clark was previously a senior executive at American Express Company from 1981 to 1990, and a managing director of Blyth Eastman Paine Webber Incorporated or predecessor firms from 1968 to 1981. While at American Express, his positions included five years as executive vice president and chief financial officer. Mr. Clark is also a director of White Mountains Insurance Group, Ltd., Mueller Water Products, Inc. and Walter Industries, Inc., in addition to Lehman Brothers Inc.



Singleton B. McAllister became a director of the Company in April 2004. Ms. McAllister has been a partner in the Washington D.C. office of the law firm of LeClairRyan since October 2007. She was previously with the law firm of Mintz, Levin Cohn, Ferris, Glovsky and Popeo P.C. from July 2005 until October 2007. She also served as chair of the Corporate Diversity Counsel Practice Group and in the Public Law and Policy Strategies group of Sonnenschein, Nath & Rosenthal from 2003 to 2005. Prior to entering private practice, Ms. McAllister served for five years as the general counsel for the United States Agency for International Development. Ms. McAllister has also been a director of Alliant Energy Corporation since 2001.



Brian D. McAuley became a director of the Company in April 2004. Mr. McAuley has served since August 2004 as Chairman of Pacific DataVision Inc., a privately held telecommunications software applications and hosting company. He also has been a partner at NH II, LLC, a consulting firm that specializes in telecommunications businesses, since 2003. Mr. McAuley is a cofounder of Nextel Communications, Inc. and held senior executive positions at Nextel from the company’s inception in 1987 until 1996, including seven years as president and chief executive officer. Upon leaving Nextel, he joined Imagine Tile, a custom tile manufacturer, where he served as chairman and chief executive officer from 1996 to 1999 and continues to serve as chairman. He also served as president and chief executive officer of NeoWorld Communications, Inc., a wireless telecommunications company, from 1999 until the sale of that company to Nextel in 2003. Mr. McAuley is a certified public accountant and, prior to co-founding Nextel, his positions included chief financial officer of Millicom Incorporated, corporate controller at Norton Simon Inc. and manager at Deloitte & Touche.



John S. McKinney became a director of the Company in September 1998 following the merger of the Company with U.S. Rentals. He also served as vice president of the Company until the end of 2000. Mr. McKinney served as chief financial officer of U.S. Rentals from 1990 until the merger and as controller of U.S. Rentals from 1988 until 1990. Prior to joining U.S. Rentals, Mr. McKinney held various positions at Iomega Corporation, including assistant controller, and at the accounting firm of Arthur Andersen & Co. In November 2006, Mr. McKinney became assistant dean of the Fulton College of Engineering and Technology at Brigham Young University.



Jason Papastavrou became a director of the Company in June 2005. Dr. Papastavrou has served as chief executive officer and chief investment officer of ARIS Capital Management since founding the company in January 2004. He previously held senior positions at Banc of America Capital Management, where he served as managing director, fund of hedge fund strategies from 2001 to 2003, and Deutsche Asset Management, where he served as director, alternative investments group from 1999 to 2001. Dr. Papastavrou, who holds a Ph.D. in electrical engineering and computer science from the Massachusetts Institute of Technology, taught at Purdue University’s School of Industrial Engineering from 1990 to 1999 and is the author of numerous academic publications.



Gerald Tsai, Jr ., became a director of the Company in July 2002, having previously served as a director of the Company from December 1997 to December 2001. Mr. Tsai served as chairman, chief executive officer and president of Delta Life Corporation, an insurance company, from 1993 until its sale in 1997. He was chairman of the executive committee of the board of directors of Primerica Corporation, a diversified financial services company, from December 1988 until April 1991 and chief executive officer of Primerica Corporation from April 1986 until December 1988. Mr. Tsai, a private investor, serves as a director of Apollo Investment Corporation, Triarc Companies, Inc. and Zenith National Insurance Corp. and director emeritus of Saks Incorporated. Mr. Tsai is an honorary trustee of Boston University and trustee of NYU Hospitals Center and the New York University School of Medicine Foundation.



Lawrence “Keith” Wimbush became a director of the Company in April 2006. From January 2003 until August 2005, Mr. Wimbush was with Korn/Ferry International, an executive search firm, where he served as a senior client partner in the firm’s Stamford, Connecticut office, and was also co-practice leader of the firm’s legal specialist group and a member of the firm’s consumer products group and diversity practice group. From April 1997 until January 2003, Mr. Wimbush served as senior vice president and general counsel of Diageo North America, Inc., a consumer goods company.

MANAGEMENT DISCUSSION FROM LATEST 10K

Executive Overview

We are the largest equipment rental company in the world with an integrated network of 697 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 newer and better maintained equipment, and greater flexibility to transfer equipment among branches.

We offer for rent over 2,900 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. In 2007, rental equipment revenues represented 70 percent of our total revenues. We expect this percentage to increase to approximately 77 percent in 2008 as we reposition our contractor supplies business and sell less used equipment.

In the second half of 2007, in response to internal analyses and a study we commissioned from a nationally-recognized consulting firm, we began to implement a change in strategy aimed at growing our earnings at higher margins, while also continuing to generate significant cash flow. The three key elements of this strategy are: refocusing our employees and sales representatives on our core rental business; optimizing the management of our rental fleet; and reducing our operating costs.

We believe this strategy, coupled with our broad geographic footprint, extensive rental fleet, advanced information technology systems, disciplined purchasing power, industry experience and ability to deliver extraordinary customer service, will enable us to strengthen our leadership position in the equipment rental industry and improve our returns to shareholders. In particular, we plan to achieve our objectives by:

Optimizing Our Field Operations. We intend to continue the process of analyzing and optimizing our field operations in order to improve fleet allocation, service and delivery and sales management efforts. We expect this process will create opportunities for rental location closures as fleet assets are moved from low-return locations to high-return locations, as well as additional cost-saving opportunities from the consolidation of administrative and back-office functions. We believe optimizing our field operations will increase equipment utilization and reduce operating costs.

Reducing Operating Costs. In an effort to bring our cost structure in line with those of other leading equipment rental companies, in the spring of 2007 we undertook a thorough review of our back-office functions related to the general and administrative aspects of our business in order to identify opportunities for increased efficiencies. As a result of this process, we identified a number of opportunities to consolidate duplicative functions, outsource certain back-office operations and automate processes. As a result, we have implemented a headcount reduction program that, as of December 31, 2007, had achieved a 9 percent workforce reduction as compared to December 31, 2006, and undertaken specific initiatives to reduce our selling, general and administrative expenses and cost of goods sold.

Accelerating Sourcing Initiatives. Our rental equipment purchases have been centralized for many years which we believe has enabled us to negotiate more favorable pricing and other terms from our equipment providers. We launched a strategic sourcing initiative in 2006 that was designed to centralize our non-equipment purchases. We believe that centralizing the procurement of these items will allow us to leverage our significant purchasing power to obtain better pricing and/or terms from our suppliers. To date, we have realized approximately $22 in cumulative savings across a wide range of products, and we expect additional savings associated with this initiative in 2008.

Optimizing Time Utilization. We continue to reassess existing fleet investments and have recently realigned certain of our incentive programs to reward equipment sharing across districts and increase the time utilization of our fleet assets. Additionally, we intend to better allocate resources, including limited growth capital, to where there is strong customer demand, resulting in fleet rationalization opportunities. By coupling such initiatives with an increased focus on preventative maintenance and improved turn-around time for returned equipment, we believe we can further increase the time utilization of our fleet, which was up 2.5 percentage points year-over-year in 2007.

Refocusing Contractor Supplies Business. We sell a variety of contractor supplies, such as construction consumables, tools, small equipment and safety supplies, through several channels, including our sales representatives, rental branches and U.S. and Canadian product catalogues. Although revenues from the contractor supplies business grew from $125 in 2002 to $378 in 2007, this business has required us to maintain significant volumes of inventory in order to meet customer demand and carries a higher cost structure relative to our core equipment rental business. In 2007, the gross margin for our contractor supplies business was 19.0 percent as compared to 38.7 percent for equipment rentals.

We have refocused our contractor supplies business and positioned it more clearly as a complementary offering to our equipment rental business. We expect this to result in productivity improvements within our sales force, thus helping to improve equipment utilization. As part of this initiative, we are reducing the number of stock keeping units associated with these operations, especially in lower margin commodity categories. Additionally, we have recently closed three of our nine distribution centers and we intend to close an additional two distribution centers in the first half of 2008. We expect these changes will reduce our revenues associated with contractor supplies, but improve our margins.

As discussed in note 13 to our consolidated financial statements and elsewhere in this report, the Company is subject to certain ongoing class action and derivative suits, as well as the subject of an SEC inquiry. The U.S. Attorney’s office has also requested information from the Company about matters related to the SEC inquiry. Although we have not accrued any amounts related to the ultimate disposition of these matters to date, 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 reimbursement of attorneys’ fees incurred by indemnified officers and directors, are expensed as incurred.

Financial Overview

2007 income from continuing operations of $363, or $3.26 per diluted share, was a record for the company and included an after-tax gain of $57, or $0.50 per diluted share, related to the recent termination of our merger agreement with affiliates of Cerberus (see other income below). Excluding the merger termination benefit, our income from continuing operations of $306, which was also a record for the company, increased 22.9 percent from $249 for 2006. 2006 income from continuing operations of $249, or $2.28 per diluted share, increased 23.3 percent from $202 for 2005. For 2008, we are forecasting diluted earnings per share from continuing operations of $2.80-$3.00.

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 Generally Accepted Accounting Principles (“GAAP”). Accordingly, free cash flow should not be considered an alternative to net income 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.

In 2007, we reported revenues and free cash flow of $3.7 billion and $242, respectively. Our 2007 equipment rental revenue growth of 4.0 percent trailed our primary end market, private non-residential construction, which grew 16.7 percent in 2007 according to Department of Commerce data (which has not been adjusted for inflation). The lag in growth rate between our equipment rental revenue and our primary end market primarily reflects a more targeted allocation of our growth capital, which we deliberately did not increase to a level that would have kept pace on a nation-wide basis with industry demand. Our 2.5 percent overall revenue growth, which includes rental revenue growth of 4.0 percent, reflects a 2.5 percentage point improvement in time utilization to 64.0 percent, partially offset by a 1.1 percent decline in rental rates. Free cash flow for 2007 includes $100 of cash we received following the termination of our merger agreement with affiliates of Cerberus Capital Management, L.P. (“Cerberus”), less transaction related costs of $9; see other income below.

In 2006, we reported revenues and free cash flow of $3.6 billion and $235, respectively. Our 2006 equipment rental revenue growth of 8.2 percent trailed our primary end market, private non-residential construction, which grew 16.2 percent in 2006 according to Department of Commerce data. Our 10.7 percent revenue growth, which includes equipment rental growth of 8.2 percent, reflects increased rental rates of 5.1 percent, partially offset by a 0.3 percentage point decline in time utilization to 61.5 percent. In addition to generating significant revenue and free cash flow growth in 2006, we reduced our total debt (including our subordinated convertible debentures) by $450.

Equipment rentals include our revenues from renting equipment, as well as related revenues such as the fees we charge for equipment delivery, fuel, repair or maintenance of rental equipment and damage waivers. Sales of rental equipment represent our revenues from the sale of used rental equipment. Contractor supplies sales include our sales of supplies utilized by contractors, which include construction consumables, tools, small equipment and safety supplies. Services and other includes our repair services (including parts sales) as well as the operations of our subsidiaries that develop and market software for use by equipment rental companies in managing and operating multiple branch locations.

2007 total revenues of $3.7 billion increased 2.5 percent compared with total revenues of $3.6 billion in 2006. The increase primarily reflects a 4.0 percent increase in equipment rental revenue, partially offset by a 4.8 percent decline in used equipment sales. The increase in equipment rental revenue reflects a 2.5 percentage point improvement in time utilization, partially offset by a 1.1 percent decline in rental rates. The decline in used equipment sales reflects volume declines and a shift in the mix of equipment sold. The 1.8 percent decline in contractor supplies sales is consistent with the strategic shift we began in the second half of 2007 to reposition our contractor supplies business. Looking forward, we expect contractor supplies and used equipment sales to decline by approximately 40 percent and 35 percent, respectively, in 2008 as compared to 2007. These anticipated reductions are consistent with our refocus on the core rental business as well as our efforts to improve time utilization.

2006 total revenues of $3.6 billion increased 10.7 percent compared with total revenues of $3.3 billion in 2005. The increase primarily reflects an 8.2 percent increase in equipment rentals and a 27.9 percent increase in contractor supplies sales. The increase in equipment rentals reflects a 5.1 percent increase in rental rates, partially offset by a 0.3 percentage point decline in time utilization to 61.5 percent. The increase in contractor supplies sales reflects increased volume as we expanded our product offering.

Critical Accounting Policies

We prepare our consolidated financial statements in accordance with U.S GAAP. A summary of our significant accounting policies is contained in note 2 to our consolidated financial statements. In applying many accounting principles, we make assumptions, estimates and/or judgments. These assumptions, estimates and judgments are often subjective and may change based on changing circumstances or changes in our analysis. Material changes in these assumptions, estimates and judgments have the potential to materially alter our results of operations. We have identified below our accounting policies that we believe could potentially produce materially different results were we to change underlying assumptions, estimates and judgments. Although actual results may differ from those estimates, we believe the estimates are reasonable and appropriate.

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 is calculated by dividing the monthly rate of $900 by 28 days, the monthly term. 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. 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.

Allowance for Doubtful Accounts . We maintain allowances for doubtful accounts. These allowances reflect our estimate of the amount of our receivables that we will be unable to collect based on historical write-off experience. Our estimate could require change based on changing circumstances, including changes in the economy or in the particular circumstances of individual customers. Accordingly, we may be required to increase or decrease our allowance.

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. The useful life of an asset is determined based on our estimate of the period the asset will generate revenues, and the salvage value is determined based on our estimate of the minimum value we will realize from the asset after such period. We may be required to change these estimates based on changes in our industry or other changing circumstances. If these estimates change in the future, we may be required to recognize increased or decreased depreciation expense for these assets.

Purchase Price Allocation . We have made a significant number of acquisitions in the past and expect that we will continue to make acquisitions in the future. We allocate the cost of the acquired enterprise to the assets acquired and liabilities assumed based on their respective fair values at the date of acquisition. With the exception of goodwill, long-lived fixed assets generally represent the largest component of our acquisitions. The long-lived fixed assets that we acquire are primarily rental equipment, transportation equipment and real estate. With limited exceptions, virtually all of the rental equipment that we have acquired through purchase business combinations has been classified as “To be Used,” rather than as “To be Sold.” Equipment that we acquire and classify as “To be Used” is recorded at fair value, as determined by replacement cost to the Company of such equipment. We use third party valuation experts to help calculate replacement cost.

In addition to long-lived fixed assets, we also acquire other assets and assume liabilities. These other assets and liabilities typically include, but are not limited to, parts inventory, accounts receivable, accounts payable and other working capital items. Because of their short-term nature, the fair values of these other assets and liabilities generally approximate the book values reflected on the acquired entities’ balance sheets. However, when appropriate, we adjust these book values for factors such as collectibility and existence. The intangible assets that we have acquired are primarily goodwill, customer relationships and covenants not-to-compete. Goodwill is calculated as the excess of the cost of the acquired entity over the net of the amounts assigned to the assets acquired and the liabilities assumed. Customer relationships and non-compete agreements are valued based on an excess earnings or income approach with consideration to projected cash flows.

Income Taxes . We recognize deferred tax assets and liabilities for certain future deductible or taxable temporary differences expected to be reported in our income tax returns. These deferred tax assets and liabilities are computed using the enacted tax rates that are expected to apply in the periods when the related future deductible or taxable temporary difference is expected to be settled or realized. In the case of deferred tax assets, the future realization of the deferred tax benefits and carryforwards are determined with consideration to historical profitability, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. We generally evaluate projected taxable income over an appropriate period for each jurisdiction to determine the recoverability of all deferred tax assets and, in addition, examine the length of the carryforward to ensure the deferred tax assets are established at an amount that is more likely than not to be realized. We have provided a partial valuation allowance against a deferred tax asset for state operating loss carryforward amounts. This valuation allowance was required because it is more likely than not that some of the state carryforward amounts will expire unused.

Effective January 1, 2007, we adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes , which requires the use of a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return and disclosures regarding uncertainties in income tax positions. The first step is recognition: we determine whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, we presume that the position will be examined by the appropriate taxing authority with full knowledge of all relevant information. The second step is measurement: a tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

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 and operating results fluctuate from quarter to quarter reflecting the seasonal rental patterns of our customers, with rental activity tending to be lower in the winter.

Three months ended June 30, 2008 and 2007 . 2008 equipment rentals of $621 decreased $38, or 6 percent, reflecting a 1.4 percent decrease in rental rates, a 0.8 percentage point decrease in time utilization, and a change in mix. Equipment rentals represented 75 percent of total revenues for the three months ended June 30, 2008. On a segment basis, equipment rentals represented approximately 74 percent and 82 percent of total revenues for general rentals and trench safety, pump and power, respectively. General rentals equipment rentals decreased $34, or 6 percent, reflecting a 5.4 percent decrease in same-store rental revenues. Trench safety, pump and power equipment rentals decreased $4, or 9 percent, reflecting a 6.0 percent decrease in same-store rental revenues.

Six months ended June 30, 2008 and 2007 . 2008 equipment rentals of $1,192 decreased $34, or 3 percent, reflecting a 1.1 percent decline in rental rates and a change in mix. Equipment rentals represented 74 percent of total revenues for the six months ended June 30, 2008. On a segment basis, equipment rentals represented approximately 74 percent and 81 percent of total revenues for general rentals and trench safety, pump and power, respectively. General rentals equipment rentals decreased $28, or 2 percent, reflecting a 2.5 percent decrease in same-store rental revenues. Trench safety, pump and power equipment rentals decreased $6, or 7 percent, reflecting a 5.8 percent decrease in same-store rental revenues.

Sales of rental equipment . For the three and six months ended June 30, 2008, sales of rental equipment represented 8 percent of our total revenues and our general rentals segment accounted for approximately 95 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, 2008, sales of rental equipment decreased approximately 19 percent, primarily reflecting a decline in the volume of equipment sold as we focus on selling older assets, in line with our life-cycle management strategy.

Sales of new equipment. For the three and six months ended June 30, 2008, sales of new equipment represented approximately 6 percent of our total revenues and our general rentals segment accounted for 96 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, 2008, sales of new equipment decreased 31 and 27 percent, respectively, primarily reflecting lower volume.

Sales of contractor supplies. Sales of contractor supplies 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, 2008, sales of contractor supplies decreased 47 and 44 percent, respectively, compared to the same periods in 2007. Consistent with our strategy of refocusing our contractor supplies business, the decline reflects a reduction in the volume of supplies sold, partially offset by improved pricing. The decline in volume is consistent with the reduction in our product offering (fewer SKUs are offered in our catalogue).

Service and other . Service and other primarily represents 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 revenue. For the three and six months ended June 30, 2008, service and other revenue decreased approximately 11 percent, primarily reflecting reduced revenues from selling parts and licensing software.

Segment Operating Income

General rentals . For the three and six months ended June 30, 2008, operating income decreased $42 and $38, respectively, and operating margin decreased 2.7 and 0.7 percentage points, respectively, primarily reflecting reduced gross margin from equipment rentals and the $14 charge associated with the ongoing SEC inquiry.



Trench safety, pump and power . For the three and six months ended June 30, 2008, operating income decreased by $2 and $3, respectively, and operating margin increased by 0.1 percentage points and decreased by 0.2 percentage points, respectively, reflecting slightly improved gross margin performance offset by reduced selling, general and administrative leverage.

For the three months ended June 30, 2008, total gross margin decreased 0.4 percentage points, primarily reflecting reduced gross margin from equipment rentals, partially offset by improved gross margin on contractor supplies sales. Equipment rentals gross margin decreased 2.8 percentage points, reflecting revenue declines in excess of savings realized from cost savings initiatives. The improvement in gross margin on contractor supplies sales of 3.9 percentage points primarily reflects improvements in pricing and product mix.

For the six months ended June 30, 2008, total gross margin increased 0.2 percentage points, primarily reflecting improved gross margin on contractor supplies, partially offset by reduced gross margin on equipment rentals. The gross margin improvement in contractor supplies sales of 4.1 percentage points primarily reflects improvements in pricing and product mix. Equipment rentals gross margin decreased 1.4 percentage points, reflecting revenue declines in excess of savings realized from cost savings initiatives.

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, 2008, SG&A expense of $126 decreased $21 as compared to 2007. This improvement reflects the benefits we are realizing from our cost saving initiatives, including reduced compensation costs and travel expenses, partially offset by normal inflationary increases.

For the six months ended June 30, 2008, SG&A expense of $257 decreased $39 as compared to 2007. This improvement reflects the benefits we are realizing from our cost-saving initiatives, including reduced compensation costs and travel expenses, partially offset by normal inflationary increases.

Provision relating to SEC inquiry. Our results for the three and six months ended June 30, 2008 include a $14 charge, representing our best estimate for the liability associated with the SEC inquiry. See note 7 to our condensed consolidated financial statements for additional information concerning the status of this inquiry as well as related matters.

Interest expense for the three and six months ended June 30, 2008 decreased by $7 and $13, respectively, primarily relating to the decline in interest rates applicable to our variable rate debt, partially offset by increased interest expense associated with the recently issued 14% HoldCo Notes (see- “Liquidity and Capital Resources” below) as well as the write-off of debt issuance costs associated with the retirement of our former credit facility.

CONF CALL

Michael Kneeland

Thanks, Operator. Good morning everyone, and thank you for joining us today. With me is Marty Welch, our Chief Financial Officer, and other members of our senior management team.

I want to open today’s call by saying how pleased we were to announce the election of Jenne Britell as Chairman of our Board of Directors earlier this month. Jenne has been an invaluable member of our Board since 2006. I can say with certainty, that she shares our excitement about the future of United Rentals, and I look forward to working closely with her as we move forward.

We would like to discuss with you this morning, starting with our recent share repurchases and our second quarter results. Marty will cover both of these topics in detail with you in the call. I also want to address our strategy in operating environment, specifically what the second quarter told us about our end markets and how they may perform in the balance of 2008.

But first, let’s start with the repurchases. As you know, in June we repurchased all of our outstanding C and D preferred stock in preparation for launching a tender offer. We have now completed the tender and brought back 27 million shares of common stock at a price of $22 per share. These repurchases give us greater flexibility in many respects earning the best interest of our company and shareholders. The net result is, that with the share repurchases complete, we expect the company’s fully diluted share count to decrease by approximately 39% to 70 million shares in 2009.

Now let’s turn to our operating results for the second quarter. And we continue to focus on driving profitable growth in our core rental business, managing our fleet and controlling our costs.

The construction [stocks] environment which was robust at the start of the year began to falter in the second quarter, impacting our topline numbers. Rental revenue was $620 million, down about 6% year-over-year, due primarily to a 1.4% decline in rental rates and a 0.8 percentage point decline in time utilization.

Total revenue was $831 million, down 13.6% year-over-year. Our decision to de-emphasize our contractor supplies business in favor of more profitable revenue [for] our top line down by about $52 million in the quarter as we expected.

Our pro forma EBITDA of $266 million for the quarter tracked about 10% less than last year. However, our pro forma EBITDA margin grew 1.3 percentage points to 32%. So even though our revenues were down, we operated our business more profitably. Our stronger EBITDA margin is a sign that our strategy is working and that right dynamics are in place. Let me give you a few examples:

On the sourcing side alone, we saved incremental $8 million in non-rental purchases through the first six months. We've targeted about $20 million incremental savings this year, which will give us about $40 million in savings towards our goal of $70 million by the end of 2009.

We’re operating at the business more efficiently, with a workforce that is down by 1787 FTEs at the end of June 30. That’s 15% lower than last year, and we managed the adjustment without impacting our customer service.

Our contractor supply business has been retooled to be a support function for our rental operations and is on track to become more profitable. Contractor supplies generated 24% gross margin in the second quarter.

Our fleet management initiatives are hitting their stride. Fleet transfers are mechanisms we use to enhance customer service, and we purpose our capital. In the second quarter, transfers were four times higher than 2007 on OEC basis. While our OEC was up slightly, our fleet was basically flat on a unit basis as of June 30, and we expect to sell off more of our older assets between now and year end.

We’ve already adjusted our fleet plan to slow down our spending rental CapEx by $167 million versus last year, leading to a $269 million improvement in free cash year-to date. We've a lot of additional flexibility to CapEx and we won’t hesitate to exercise it if we need to.

Now our decision to slow CapEx spending was triggered in part by our operating environment. We believe that the back-end of 2008 will be weaker than the first six months, particularly for non-residential construction. This is supported by several key industry forecasts, as well as our own market intelligence.

Now I’d like to share some of that information with you. We had some disappointments in the second quarter. A large number of our large projects were delayed in our Aerial East region in our Canadian markets. Our performance in Aerial East in particular fell short of its plan, based on its timing. And we’re seeing some large parts come back on stream there. In addition, a few regional economies have been affected by the housing slump, particularly in the northwest, southwest and Florida. And we had some weather delays in the Gulf which impacted our quarter.

By contrast, Aerial East and Midwest were bright spots for us, with the infrastructure projects; and our Rocky Mountain region which stretches from Arizona to Alberta is continuing to turn in some strong numbers. We continue to deliver on our promise to weed out underperforming branches, closing another six locations in the second quarter, which makes 29 so far this year.

Now in terms of our customer base, our national class program’s on the front burner, including the industrial accounts factor. Our size and scope gives us a competitive advantage with large accounts and we know from experience that these customers are capable of delivering long-term profitability. And that gives you a view of the inside in United Rentals. Now I want to share what we’re seeing on a macro level.

While non-residential construction spending year-over-year was up in the quarter overall, indications are that the construction starts have declined. The Dodge forecast estimates non-residential starts at $57.1 billion in the second quarter, a decrease of nearly 14% from last year. Our own customers are telling us that while they currently have work on the books; the landscape is becoming more competitive as fewer projects are being put out to bid. We watch these leading indicators very closely and very carefully, and the second quarter was a definite cautious sign for our industry.

As I mentioned earlier, we believe that we are seeing the start of what will be a slow but steady downturn to the balance of 2008. The turning point came earlier than anticipated, but the scenario is exactly what we've been preparing for since late last year. We expect 2009 to continue to be challenging, and we have a lot of levers that we can pull if the environment worsens. They include, further reducing our CapEx, increasing our used equipment sales, aging our fleet by several months on average while staying within our optimum range to 35 to 45 months, and in addition, we have the option of making further adjustments to our headcount branch network.

The net result is that we're in a strong position to weather the cycles in our end markets. The updated guidance we released last night based on our share repurchases is for full year pro forma earnings per share in a range of $3.15 to $3.25. This assumes a 1.5% decline of rental rates for the year and a slight decline in time utilization. Operationally, this outlook ties to our previous guidance of $2.65 to $2.75 per share. So you can see that it is entirely with our rationale for doing these share repurchases.

As far as other elements of our guidance, it's important to remember that our pro forma EBITDA range remains unchanged at $1.15 billion to $1.17 billion, and our free cash flow is expected to be strong at $350 million to $400 million, and we intend to use some of that cash to pay down debt. The important thing is, nothing about 2008 has taken us by surprise. We've made dramatic moves over the past year to prepare for exactly this kind of macro environment, and we continue to be vigilant and proactive.

Instead of pulling in our horns, our focus has been turned outward on driving EBITDA and incremental gains of EBITDA margins and free cash flow. Our business model is capable of delivering profitable growth even when revenues are down, and our strategy is now well established with a relatively short but solid track record with plenty of upside untapped.

As we move to what is historically our strongest quarter, we intend to use as many operating levers at our disposal to continue to build [singular] value for our shareholders.

Now before I turn the microphone over to Marty, I want to officially welcome Joe Dixon, who recently joined us as Vice President Sales as part of our initiative to improve our sales force effectiveness. You may know Joe from Hertz and Home Depot, but most recently at JLG where was in charge of global services. We're very pleased to have someone of Joe's caliber and industry experience to head our sales organization.

And with that, I'll ask Marty to go in to more detail with our share repurchases and second quarter numbers. And then we'll go into Q&A and we'll take questions. Marty?

Marty Welch

Thank you Michael and good morning everyone. Thanks for joining us today. Michael's discussed some of our highlights for the quarter, and now I'd like to get into some of the details of the recently completed share repurchases, and our second quarter performance including the progress we are making on our cost saving initiatives, and then I'll review the outlook for the year.

First, the share repurchases. As Michael mentioned, in the second quarter we repurchased all of our outstanding Series C and D preferred stock for $679 million. The removal of the preferred stock from our capital structure was a necessary step in proceeding with the tender offer, and will give us greater flexibility going forward.

The preferred stock repurchase was funded with $254 million of cash and the issuance of $425 million principal amount of new 14% HoldCo notes due 2014. It's important to point out that the reason we issued the HoldCo notes was not for liquidity reasons. Rather, we were careful to protect the restricted payments basket contained in the indentures for our existing notes which have very attractive low coupon rates.

I should also point out that the most important feature of the new 14% HoldCo notes is that there is no call protection, which means we can prepay them at any time without penalty. In fact, as we pointed out in our earnings release last night, we've already given notice of our intent to repay 125 million of these notes at the end of the third quarter. After this payment, the restricted payment basket will be approximately $200 million.

Our tender offer closed and funded last week. In the tender, we repurchased 27.16 million of our common stock at a price of $22 per share for a total cost of $598 million. The tender offer was funded primarily through borrowings under our new $1.25 billion ABL facility and our existing accounts receivable securitization facility.

Now let me discuss what these transactions mean in terms of leverage and accretion. First, with respect to leverage, since the company's inception, on a debt-to-EBITDA basis, United Rentals has operated at an average leverage ratio of 3.4 times. Following the completion of the tender, we're at 3.1 times, and we expect the ratio to be 2.9 times by year end, a level that is within our comfort zone. This means that the share repurchases have added less than one turn of leverage as compared to our pre-repurchase ratio of 2.3 times, and significantly below the historic high for the company of 5 times.

From an accretion perspective, the repurchase of the common and preferred shares will reduce our 2009 fully diluted share account by about 39% to 70 million shares. And as Michael mentioned and as our outlook for 2008 illustrates, these repurchases represent an opportunity for us to achieve significantly more accretion and to capture it more quickly than through any other means.

Before I turn to our second quarter performance, let me just touch on one more point. We've consistently talked about how this business can generate significant free cash flow in any environment. Our ability is secure financing under the ABL, the size we did - 1.25 billion at attractive prices and in the middle of one of the most challenging credit markets seen in recent history, is a testament to the resilience of our business model and to the credibility of the strategy we have put in place.

I'd like to turn next to the second quarter performance. First let's talk about equipment rentals. Our rental revenue decreased 6%, reflecting a decline of 1.4% in rental rates and 0.8% in time utilization. The balance of the decline primarily relates to a shift in mix towards monthly contracts.

Second, our SG&A of $126 million was 15.2% of revenue for the quarter, an improvement of 10 basis points compared to 2007, reflecting lower rental revenue and the ongoing benefits of our cost-saving initiatives. On an absolute dollar basis, SG&A decreased by $21 million.

Third; earnings per share. On a pro forma basis, our EPS for the quarter was $0.62 on a share count of 97 million, compared with $0.60 on a share count of 115 million shares in 2007, and a GAAP loss per share of $2.33. Our pro forma EPS essentially adjusts our GAAP EPS to reflect our new capital structure and to exclude the impact of the $14 million provision relating to the SEC inquiry.

As I discussed earlier, the share repurchase will reduce our 2009 share count by about 39%. For these reasons, we believe pro forma EPS is a meaningful measure of our future profitability. And finally; EBITDA. Pro forma EBITDA margin, which excludes the impact of the SEC provision, increased 130 basis points to 32%, reflecting the success of our cost initiatives.

Turning to our contractor supplies business; our second quarter contractor supplies margin of 23.7% improved 390 basis points versus the prior year. These results are consistent with our strategy of repositioning the supplies business and reducing the number of SKUs, especially in lower-margin commodity categories.

In terms of our cost saving initiatives and in line with our goal of generating $500 million of incremental annual EBITDA within five years, we believe we can generate about $200 million of that improvement from the execution of our cost saving plans.

During the second quarter, where we saw a pro forma EBITDA margin improve 130 basis points, we realized $34 million in cost savings. These savings came from a number of initiatives including our strategic sourcing initiative and our headcount reductions. To put it in perspective, our work force at June 30, 2008 is lower by about 1800 FTEs, which is the equivalent of 15% of our work force, as compared to last year at this time. And importantly, we believe these reductions remain without impacting customer service.

Now let's take a moment to review our expectations for 2008. Our pro forma EPS range is $3.15 to $3.25, reflecting the benefits of a lower share count. From an operational perspective, this outlook is in line with our previous guidance of $2.65 to $2.75 per share.

Our revenue EBITDA and free cash flow guidance is as follows: We expect total revenue of between $3.3 billion and $3.4 billion, including rental revenue of about $2.5 billion. Our pro forma EBITDA guidance of $1.15 billion to $1.17 billion is unchanged, and represents a pro forma EBITDA margin of 34.1%.

We're forecasting a full year tax rate before discrete items of about 37.6%, and approximately $350 million to $400 million of free cash flow. We were pleased with our DSO performance, which has improved from 53.9 days in the prior period to 53.1 days currently. Our free cash flow guidance which reflects total CapEx of about $715 million has decreased by about $50 million, primarily because of additional interest expense following the share repurchases.

That summarizes our outlook. And now we'd like to turn it over to the operator to begin the Q&A session. Chris, if you can start the Q&A.

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