United Rentals, Inc. — Q3 2017 Form 10-Q Summary
Business context and reporting period
United Rentals is a North American equipment rental company serving construction, industrial, government, utility and other customers through approximately 950 locations in the United States and Canada. The filing covers the three and nine months ended September 30, 2017. Equipment rentals represented 86% of nine-month revenue. Results are unaudited and seasonal, with rental activity generally lower in winter.
Financial performance and liquidity
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total revenue | $1.766 billion, up 17.1% | $4.719 billion, up 11.3% |
| Equipment rental revenue | $1.536 billion, up 16.2% | $4.069 billion, up 11.7% |
| Gross profit | $773 million | $1.942 billion |
| Gross margin | 43.8%, up 30 basis points | 41.2%, unchanged |
| Operating income | $448 million | $1.045 billion |
| Net income | $199 million, up 6.4% | $449 million, up 8.7% |
| Diluted EPS | $2.33, versus $2.16 | $5.26, versus $4.66 |
| Adjusted EBITDA | $879 million; 49.8% margin | $2.217 billion; 47.0% margin |
| Operating cash flow | $1.766 billion for nine months, versus $1.630 billion | |
| Free cash flow | $582 million, versus $846 million |
Equipment rental gross margin was 44.9% in the quarter and 42.0% for the nine months. Time utilization improved to 71.9% in the quarter and 69.3% for the nine months, compared with 70.3% and 67.4%, respectively, in the prior-year periods.
At September 30, 2017, cash and cash equivalents were $324 million, rental equipment net was $7.391 billion and total assets were $13.744 billion. Total debt was $8.371 billion, including $694 million of current debt and $7.677 billion of long-term debt. Management reported available liquidity of $2.88 billion, including cash, and stated that available sources were sufficient to support existing operations for the next 12 months. ABL availability was $2.545 billion net of letters of credit, while only $9 million was available under the accounts receivable securitization facility.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by higher rental volume. The volume of original equipment cost on rent increased 18.2% in the quarter and 14.5% for the nine months, including the impact of the NES acquisition.
- On a pro forma basis including NES pre-acquisition results, equipment rental revenue increased 8.9% in the quarter and 6.5% for the nine months. Rental rates were up 0.1% in the quarter but down 0.7% for the nine months.
- The trench, power and pump segment produced particularly strong growth: rental revenue increased 32.9% in the quarter and 23.6% for the nine months. Its rental gross margin increased 280 basis points in both periods.
- SG&A increased 32.4% in the quarter and 21.6% for the nine months, reaching 13.4% and 13.7% of revenue, respectively. Management attributed the increase primarily to compensation and stock compensation, including the effect of NES and improved profitability.
- Adjusted EBITDA increased 17.7% in the quarter and 10.3% for the nine months, but the nine-month adjusted EBITDA margin declined 40 basis points to 47.0%.
- Free cash flow declined $264 million because rental equipment purchases increased to $1.485 billion from $1.145 billion, despite higher operating cash flow.
- Accounts receivable increased 25.1% and net rental equipment increased 19.4% from December 31, 2016, reflecting higher revenue, the NES acquisition and increased fleet investment.
Acquisitions, financing and unusual items
- United Rentals completed the $960 million NES acquisition in April 2017. NES contributed 73 branches, approximately 1,100 employees and approximately $900 million of rental assets at original equipment cost as of December 31, 2016.
- The Neff acquisition closed on October 2, 2017, after the reporting date, for approximately $1.3 billion. Neff had 69 branches, approximately 1,100 employees and approximately $860 million of rental assets at original equipment cost as of September 30, 2017.
- Debt issued or refinanced during 2017 included senior notes due 2025, 2026, 2027 and 2028. The company also increased its ABL facility to $3.0 billion and its receivables securitization facility to $675 million.
- Interest expense included $43 million of losses on debt redemptions and the ABL amendment during the nine months. Merger-related costs were $32 million and restructuring charges were $28 million.
- The NES/Neff/Project XL restructuring program is expected to be completed in the first half of 2018; total expected costs were not estimable as of the filing date.
- The company adopted share-based payment guidance in 2017, including an $8 million tax benefit that increased nine-month net income by approximately $8 million, or $0.10 per diluted share.
Outlook, management commentary and risks
Management emphasized improving demand in many core markets, continued Lean initiatives, fleet and customer-mix optimization, expansion of specialty rentals and Project XL cost and revenue initiatives. No specific revenue, earnings or cash-flow guidance is provided in the filing. Management expected to resume its $1 billion share repurchase program in October 2017 and intended to complete it in 2018.
Key risks include the cyclical nature of construction and industrial activity, industry overcapacity and rental-rate pressure, significant indebtedness and refinancing requirements, covenant compliance, integration of NES and Neff, execution of expected synergies and restructuring actions, fleet residual values and maintenance costs, customer credit risk, oil and gas exposure, competition, cybersecurity, foreign currency movements and litigation or regulatory matters. The company reported compliance with its debt covenants at September 30, 2017, and stated that reported legal proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- Post-closing debt and liquidity following the October 2, 2017 Neff acquisition; management indicated total debt was approximately $9.7 billion after closing.
- Whether NES and Neff integration, cost synergies and the restructuring program meet expected timing and economics.
- Rental-rate trends, time utilization and segment margins as fleet capacity expands.
- Free cash flow after elevated fleet capital expenditures and acquisition-related spending.
- Compliance with debt covenants and availability under the ABL and receivables facilities.
- The effect of higher SG&A, merger costs, restructuring charges and debt-related interest expense on reported and adjusted margins.
- Future accounting effects from the pending adoption of revenue recognition and lease standards, particularly the expected significant balance-sheet recognition of lease assets and liabilities.