United Rentals, Inc. — 2015 Q2 Form 10-Q Summary
Business Context and Reporting Period
United Rentals, Inc. and wholly owned United Rentals (North America), Inc. filed a combined unaudited Form 10-Q for the quarter and six months ended June 30, 2015. The company rents construction, industrial, specialty, power, HVAC and pump equipment in the United States and Canada, and also sells rental and new equipment, contractor supplies, and related services. Operations comprised 896 rental locations, approximately 12,600 employees and a rental fleet with original equipment cost of approximately $8.9 billion.
Reportable segments were general rentals and trench, power and pump. Equipment rentals represented 85% of total revenue for the six-month period.
Financial Performance and Key Metrics
| Metric | Three Months Ended June 30, 2015 | Three Months Ended June 30, 2014 | Six Months Ended June 30, 2015 | Six Months Ended June 30, 2014 |
|---|---|---|---|---|
| Total revenue | $1,429 million | $1,399 million | $2,744 million | $2,577 million |
| Equipment rental revenue | $1,220 million | $1,179 million | $2,345 million | $2,184 million |
| Gross profit | $618 million | $589 million | $1,142 million | $1,037 million |
| Operating income | $375 million | $325 million | $675 million | $543 million |
| Net income | $86 million | $94 million | $201 million | $154 million |
| Diluted EPS | $0.88 | $0.90 | $2.04 | $1.46 |
| Adjusted EBITDA | $706 million | $663 million | $1,308 million | $1,182 million |
| Adjusted EBITDA margin | 49.4% | 47.4% | 47.7% | 45.9% |
Six-month revenue increased 6.5%, while equipment rental revenue increased 7.4%, driven by a 5.3% increase in volume of original equipment cost on rent and a 2.2% rental-rate increase. Six-month gross margin improved to 41.6% from 40.2%, and equipment-rental gross margin improved to 41.8% from 40.4%.
Six-month EBITDA increased 15.2% to $1,295 million and adjusted EBITDA increased 10.7% to $1,308 million. The second quarter benefited from improved rental profitability and lower SG&A; the six-month EBITDA comparison also benefited from a $26 million reduction in merger-related costs.
Cash Flow, Capital Expenditures, Debt and Liquidity
- Cash provided by operating activities was $1,250 million for the six months, compared with $1,054 million in the prior-year period.
- Free cash flow, as defined by management, was $432 million versus $240 million.
- Purchases of rental and non-rental equipment were $1,066 million; net rental capital expenditures were $776 million.
- Cash and cash equivalents were $200 million at June 30, 2015, compared with $158 million at December 31, 2014.
- Total debt was $8,410 million, including $590 million of short-term debt and current maturities; total debt was $8,052 million at December 31, 2014.
- Available liquidity was $881 million, consisting of $200 million of cash, $680 million available under the amended ABL facility, net of letters of credit, and $1 million available under the accounts receivable securitization facility.
- The ABL facility was increased to $2.5 billion and extended to March 2020. Borrowings outstanding were $1.8 billion, with an interest rate of 1.8% at June 30, 2015.
- Accounts receivable securitization borrowings were $549 million at an interest rate of 0.9%; only $1 million of capacity remained available.
- The company reported compliance with applicable debt covenants. The ABL fixed-charge coverage covenant was not applicable because specified availability exceeded the required threshold.
Material Changes Versus the Prior Comparable Period
- Revenue, operating income and adjusted EBITDA increased year over year, while reported second-quarter net income declined from $94 million to $86 million because of higher interest expense and taxes.
- Six-month net income increased 30.5% and diluted EPS increased from $1.46 to $2.04, despite higher debt-related costs.
- Interest expense increased $45 million in the second quarter and $41 million for the six months, primarily because of $121 million and $123 million, respectively, of losses from debt redemptions and related refinancing actions.
- General rentals equipment-rental gross margin increased to 41.5% from 39.4% for the six months, reflecting cost improvements. Time utilization declined to 66.7% from 67.0%.
- Trench, power and pump equipment-rental gross margin declined to 44.2% from 48.3% for the six months, primarily because of weakness in the Pump Solutions region and upstream oil and gas exposure.
- National Pump, acquired in April 2014, generated $111 million of revenue and a $4 million pretax loss in the first six months of 2015, compared with $67 million of revenue and $14 million of pretax income in the prior-year period. The loss reflected volume and pricing pressure from upstream oil and gas customers.
- The company repurchased $501 million of common stock during the first six months. As of July 20, 2015, cumulative repurchases under the existing $750 million authorization were $573 million. A new $1 billion authorization was approved in July 2015 after completion of the existing program.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management lowered its 2015 outlook for rental rates, time utilization, revenue and adjusted EBITDA because of industry fleet expansion and continuing softness in the upstream oil and gas sector.
- Management expected 2015 net rental capital expenditures of approximately $1.1 billion, after gross rental equipment purchases of approximately $1.6 billion.
- Management expected 2015 free cash flow of $725 million to $775 million, primarily to fund share repurchases, and believed existing sources of cash would support operations for the following 12 months.
- Debt refinancing actions included issuing $1.0 billion of 4.625% senior secured notes and $800 million of 5.5% senior notes, redeeming all 5.75% senior secured notes and 8.375% senior subordinated notes, and redeeming $350 million principal amount of 8.25% senior notes.
- Unusual items included debt redemption losses, acquisition-related amortization, a $26 million favorable merger-cost adjustment related to reduced National Pump contingent consideration, restructuring charges of $1 million for the six months, and stock compensation expense of $25 million.
- The National Pump contingent consideration liability was paid in June 2015 after its fair value declined to zero because performance was below agreed targets. No significant additional acquisition-related charges were expected after June 30, 2015.
- Key risks include the cyclical nature of construction and industrial markets, energy-sector weakness, rental-rate and utilization pressure, significant indebtedness and refinancing requirements, covenant compliance, residual values of equipment, credit and collection risk, acquisitions and integration, litigation and regulatory matters, cybersecurity, foreign exchange, insurance coverage and supplier dependence.
- Ordinary-course legal claims and proceedings were not expected by management to have a material adverse effect, individually or in aggregate, based on information available at the filing date.
- Interest-rate sensitivity was material: a one-percentage-point increase in variable-rate debt rates was estimated to reduce annual after-tax earnings by approximately $14 million. A 10% change in the Canadian dollar exchange rate was estimated to change annual after-tax earnings by approximately $12 million.
Most Important Facts for Investors to Verify
- Whether upstream oil and gas weakness continues to reduce Pump Solutions utilization, pricing and margins.
- Progress against the lowered 2015 revenue, rental-rate, utilization and adjusted EBITDA outlook.
- Debt maturities, refinancing needs, variable-rate exposure and remaining liquidity under the ABL and receivables facilities.
- The sustainability of free cash flow after rental fleet investment, debt service and share repurchases.
- The economic effect and timing of the $1 billion new share-repurchase authorization.
- Whether National Pump performance improves and whether any further acquisition-related liabilities or impairment charges arise.
- The effect of lower equipment residual values, maintenance costs, currency movements and market cyclicality on margins and cash generation.
- That management’s EBITDA, adjusted EBITDA and free cash flow measures are non-GAAP measures and should be reconciled to GAAP results.