United Rentals, Inc. — Q3 2016 Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2016. The filing is jointly submitted by United Rentals, Inc. and its wholly owned operating subsidiary, United Rentals (North America), Inc. Financial statements are unaudited and presented in millions, except per-share data.
Business Context
United Rentals operates approximately 890 rental locations across the United States and Canada, offering about 3,200 equipment classes. Its reportable segments are general rentals and trench, power and pump. Equipment rentals represented 86% of revenue for the first nine months of 2016. The business is cyclical and sensitive to construction, industrial activity, oil and gas conditions, fleet capacity, pricing and utilization.
Key Financial Metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Total revenue | $1,508 | $1,550 | $4,239 | $4,294 |
| Equipment rental revenue | $1,322 | $1,326 | $3,643 | $3,671 |
| Gross profit | $656 | $690 | $1,746 | $1,832 |
| Operating income | $412 | $446 | $1,013 | $1,121 |
| Net income | $187 | $215 | $413 | $416 |
| Diluted EPS | $2.16 | $2.25 | $4.66 | $4.27 |
| EBITDA | $724 | $762 | $1,943 | $2,057 |
| Adjusted EBITDA | $747 | $780 | $2,010 | $2,088 |
Margins: Q3 total gross margin was 43.5%, down 100 basis points; nine-month gross margin was 41.2%, down 150 basis points. Q3 EBITDA margin was 48.0%, down 120 basis points, and adjusted EBITDA margin was 49.5%, down 80 basis points. Nine-month EBITDA margin was 45.8%, down 210 basis points, while adjusted EBITDA margin was 47.4%, down 120 basis points.
Cash flow and capital spending: Nine-month operating cash flow was $1,630, compared with $1,557 in the prior-year period. Capital expenditures were $1,210, including $1,145 for rental equipment, versus $1,501 in the prior-year period. Reported free cash flow increased to $846 from $508.
Liquidity and debt: Cash and equivalents were $297 at September 30, 2016, compared with $179 at December 31, 2015. Total debt was $8,002, including $609 of short-term debt and $7,393 of long-term debt, compared with total debt of $8,162 at year-end 2015. Available liquidity was approximately $1.06 billion, comprising cash and available borrowing capacity. The ABL facility had $716 available, net of letters of credit, and the accounts receivable securitization facility had $44 available. The company was in compliance with its debt covenants.
Material Changes Versus Prior Comparable Period
- Q3 revenue declined 2.7%; nine-month revenue declined 1.3%.
- Equipment rental revenue decreased 0.3% in Q3 and 0.8% for the nine-month period. Rental rates declined 1.7% in Q3 and 2.2% for nine months, partly offset by increases in equipment volume on rent of 2.2% and 2.6%, respectively.
- General rentals remained under pressure: nine-month equipment rental revenue declined 2.4% and gross margin declined 210 basis points to 40.5%.
- Trench, power and pump performed better: nine-month rental revenue increased 9.3% and gross margin increased 40 basis points to 47.6%.
- Net income declined 13.0% in Q3 and 0.7% for nine months, while diluted EPS increased for nine months because of lower share count from repurchases.
- Interest expense declined substantially for the nine-month period, primarily due to lower average debt and borrowing costs, although 2016 included $36 of losses related to debt redemptions and the ABL amendment. The comparable 2015 period included $123 of similar losses.
- The company repurchased $488 of common stock during the first nine months. Approximately $624 had been repurchased under the current $1 billion program as of October 17, 2016, leaving approximately $413 million authorized at September 30.
Guidance, Outlook and Unusual Items
- Management updated its 2016 forecast to expect rental rate and adjusted EBITDA results in the upper range of prior guidance. Operating cash flow and free cash flow were expected to exceed prior guidance despite modestly higher capital spending plans. Specific guidance amounts are not provided in the filing text.
- Management expects rental-rate pressure to continue through the remainder of 2016 because of industry fleet expansion, softness in Canada and weakness among oil and gas customers, but expects solid industry growth over the foreseeable future.
- The 2015–2016 cost-savings restructuring program was expected to be completed in 2016, with total costs of approximately $20; $11 had been recognized through September 30, 2016. Nine-month 2016 restructuring expense was $8.
- Goodwill at the Pump Solutions reporting unit was $313. An August 2016 impairment test indicated estimated fair value exceeded carrying value by approximately 19%, and the unit passed sensitivity testing. Future impairment remains possible if projected growth does not occur or assumptions deteriorate.
- Outstanding diesel swaps covered 9.8 million gallons through 2016–2018, with an average contract price of $2.60 per gallon versus an average forward price of $2.56 at September 30, 2016.
- Key risks include cyclical construction and industrial demand, pricing and utilization pressure, fleet overcapacity, oil and gas exposure, substantial leverage and refinancing risk, covenant restrictions, impairment risk, equipment residual values, litigation, cybersecurity, labor matters and foreign exchange exposure.
- Contractual obligations totaled $11,370, including $8,057 of debt and capital lease principal and $2,661 of estimated interest. The company stated that existing cash sources should be sufficient to support operations for the next 12 months.
Investor Verification Checklist
- Verify the final 2016 results against the updated guidance, particularly rental rates, adjusted EBITDA, operating cash flow, free cash flow and capital expenditures.
- Monitor whether general-rental pricing and gross margins stabilize, and whether higher equipment volume on rent offsets rate pressure.
- Assess Pump Solutions revenue and profitability, including the risk of future goodwill impairment.
- Review debt maturities, variable-rate exposure, refinancing needs and availability under the ABL and receivables facilities.
- Evaluate the sustainability of free cash flow after rental-fleet investment, debt service and share repurchases.
- Consider the effect of continued Canadian weakness, oil and gas volatility, industry fleet expansion and equipment resale pricing.
- Confirm the timing and total cost of the restructuring program and whether anticipated Lean savings are realized.