United Rentals, Inc. — 2013 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
United Rentals, Inc. and United Rentals (North America), Inc. reported unaudited results for the three months ended March 31, 2013. The company rents construction and industrial equipment, sells rental and new equipment, and provides contractor supplies and related services across the United States and Canada. It operated 830 rental locations and had a rental fleet with original equipment cost of approximately $7.2 billion.
The April 30, 2012 acquisition of RSC Holdings significantly affects year-over-year comparisons because RSC results were included only from the acquisition date in the 2012 reported results. Pro forma 2012 revenue, including RSC for the full comparable quarter, was $1.064 billion versus reported 2013 revenue of $1.100 billion.
Key Financial Metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $1.100 billion | $656 million | 67.7% reported increase |
| Equipment rental revenue | $916 million | $523 million | 75.1% increase |
| Gross profit | $385 million | $213 million | 80.8% increase |
| Total gross margin | 35.0% | 32.5% | Up 2.5 percentage points |
| Operating income | $149 million | $87 million | 71.3% increase |
| Net income | $21 million | $13 million | 61.5% increase |
| Diluted EPS | $0.19 | $0.17 | Increase of $0.02 |
| EBITDA | $416 million | $217 million | 91.7% increase |
| Adjusted EBITDA | $451 million | $231 million | 95.2% increase |
| Adjusted EBITDA margin | 41.0% | 35.2% | Up 5.8 percentage points |
| Net cash from operating activities | $409 million | $254 million | Increase of $155 million |
| Free cash flow | $234 million | $(89) million | Improvement of $323 million |
Rental activity benefited from a 78.2% increase in original equipment cost on rent and a 5.4% increase in rental rates. Overall time utilization increased to 64.2% from 62.3%. Equipment-rental gross margin increased to 35.0% from 31.0%; general rentals margin was 34.5% and trench safety, power and HVAC margin was 41.9%.
SG&A increased to $160 million from $102 million, but declined to 14.5% of revenue from 15.5%. Interest expense, net increased to $118 million from $68 million, primarily because of additional debt issued or assumed in connection with the RSC acquisition. The effective tax rate was 30.0%, compared with 31.6%.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $147 million at March 31, 2013, compared with $106 million at December 31, 2012.
- Total debt was $7.147 billion, including $567 million classified as short-term debt and current maturities and $6.580 billion of long-term debt. Subordinated convertible debentures were $17 million.
- Total liabilities were $9.326 billion and stockholders’ equity was $1.566 billion.
- The accounts receivable securitization facility was increased from $475 million to $550 million; $60 million was available at quarter-end.
- The ABL facility had $748 million available, net of $61 million of letters of credit. Borrowings were $1.091 billion at an interest rate of 2.3%.
- Accounts receivable securitization borrowings were $390 million at an interest rate of 0.8%.
- The company stated that it was in compliance with applicable debt covenants and expected existing cash sources to support operations for the next 12 months.
Material Changes Versus the Prior Comparable Period
- The reported revenue and operating growth primarily reflects the RSC acquisition, with additional contribution from improved rental rates, utilization and operating conditions. On a pro forma revenue basis, growth was approximately 3.4%.
- Gross margins improved because rental-rate increases, higher utilization and cost improvements outpaced variable cost growth.
- Rental-equipment sales increased 61.8%, but related gross margin declined to 32.5% from 38.2%, primarily because of fair-value adjustments to RSC equipment subsequently sold.
- Non-rental depreciation and amortization increased to $64 million from $14 million, largely due to acquired RSC assets and intangibles.
- RSC merger-related costs declined to $6 million from $10 million, while restructuring charges increased from none to $6 million.
- Operating cash flow increased substantially, while capital expenditures declined. Purchases of rental and non-rental equipment were $303 million versus $426 million.
- The company repurchased $30 million of common stock during the quarter. As of April 12, 2013, it had repurchased $133 million under a $200 million buyback authorization.
- An aggregate $38 million of subordinated convertible debentures was retired through conversion into common stock during the quarter.
Guidance, Outlook, Commentary and Unusual Items
- Management expected approximately $1.05 billion of net rental capital expenditures for full-year 2013, based on gross rental-equipment purchases of approximately $1.5 billion.
- Management expected approximately $5 million of additional restructuring charges after March 31, with the program expected to be substantially complete by June 30, 2013.
- Management cited modest improvement in operating conditions and a continuing shift from equipment ownership to rental, but cautioned that the trends may not continue.
- Reported results included RSC merger costs, RSC-related amortization, acquired-fleet fair-value impacts, restructuring and impairment charges, and a loss on retirement of subordinated convertible debentures.
- Seasonality affects results, with rental activity generally lower during winter months.
- Key risks include the highly leveraged capital structure, debt-service requirements, restrictive covenants, inability to access capital, cyclical construction and industrial markets, acquisition integration, equipment residual values, rental rates and utilization, credit collections, litigation, insurance coverage, supplier dependence, competition, labor matters, regulatory compliance and information-technology disruptions.
- Variable-rate debt totaled $1.481 billion; management estimated that a one-percentage-point increase in applicable rates would reduce annual after-tax earnings by approximately $9 million. A 10% change in the U.S. dollar/Canadian dollar exchange rate was estimated to change annual after-tax earnings by approximately $10 million.
- Controls and procedures were reported effective as of March 31, 2013, with no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Separate the effects of the RSC acquisition from organic rental-rate, utilization and volume growth; reported year-over-year growth is not fully comparable.
- Monitor debt reduction, refinancing needs, available borrowing capacity and compliance with ABL and receivables-securitization covenants.
- Assess whether the planned $1.05 billion of net rental capital expenditures can be funded while reducing leverage and completing the stock buyback.
- Evaluate the sustainability of the 35.0% rental gross margin, 64.2% utilization and 5.4% rental-rate increase.
- Track remaining RSC integration, restructuring and acquisition-related costs, including the expected additional $5 million restructuring charge.
- Review the potential dilution and cash-settlement exposure associated with the 4% Convertible Senior Notes, including the reported redemption and conversion terms.
- Consider the sensitivity of earnings and liquidity to construction-market conditions, interest rates, Canadian currency movements, equipment resale prices and insurance or litigation claims.