United Rentals, Inc. — Q2 2012 Form 10-Q Summary
Business context and reporting period
United Rentals, Inc. and United Rentals (North America), Inc. reported unaudited results for the three and six months ended June 30, 2012. The company rents construction, industrial and specialty equipment across the United States and Canada and also sells used and new equipment, contractor supplies, and services. The April 30, 2012 acquisition of RSC Holdings materially expanded the company’s scale; RSC results are included from the acquisition date.
- Network: 969 rental locations, approximately 11,500 employees and approximately 3,400 equipment classes.
- Rental fleet original equipment cost: $7.3 billion at June 30, 2012, compared with $4.0 billion at December 31, 2011.
Financial performance and key metrics
| Metric | Three months ended June 30, 2012 | Three months ended June 30, 2011 | Six months ended June 30, 2012 | Six months ended June 30, 2011 |
|---|---|---|---|---|
| Total revenue | $993 million | $629 million | $1.649 billion | $1.152 billion |
| Equipment rental revenue | $845 million | $524 million | $1.368 billion | $958 million |
| Gross profit | $374 million | $211 million | $587 million | $349 million |
| Gross margin | 37.7% | 33.5% | 35.6% | 30.3% |
| Operating income | $46 million | $95 million | $133 million | $125 million |
| Net income (loss) | $(52) million | $27 million | $(39) million | $7 million |
| Diluted EPS | $(0.63) | $0.37 | $(0.53) | $0.09 |
| Adjusted EBITDA | $418 million | $221 million | $649 million | $366 million |
| Adjusted EBITDA margin | 42.1% | 35.1% | 39.4% | 31.8% |
Equipment rental gross margin increased to 38.2% in the quarter and 35.5% year to date, compared with 33.4% and 28.9%, respectively, in the prior-year periods. Management attributed the improvement primarily to higher rental rates, cost improvements and, year to date, a 1.0 percentage-point increase in time utilization. Rental rates increased 7.4% year over year and OEC on rent increased 63.7% in the quarter and 42.9% year to date, substantially reflecting the RSC acquisition.
- Cash flow from operating activities was $342 million for the six months, compared with $296 million in the prior-year period.
- Capital expenditures were $898 million, including $836 million of rental equipment purchases.
- Free cash usage was $388 million, compared with $48 million in the prior-year period.
- Cash and cash equivalents were $41 million at June 30, 2012, compared with $36 million at December 31, 2011.
- Total debt was $7.289 billion, including $6.868 billion of long-term debt, compared with total debt of $2.987 billion at December 31, 2011.
- Interest expense, net increased to $121 million in the quarter and $189 million year to date, from $57 million and $113 million, respectively, primarily due to acquisition-related debt.
Material changes versus the prior comparable period
- Revenue increased 57.9% in the quarter and 43.1% year to date, driven principally by RSC and stronger rental activity.
- Equipment rental revenue increased 61.3% in the quarter and 42.8% year to date.
- Operating income declined in the quarter despite higher gross profit because of $80 million of RSC merger costs and $53 million of restructuring charges. Year-to-date operating income increased modestly to $133 million but included $90 million of merger costs and $53 million of restructuring charges.
- Net losses replaced prior-year profits as acquisition-related costs, restructuring charges, higher depreciation and amortization, and substantially higher interest expense more than offset operating growth.
- Balance sheet assets increased to $10.942 billion from $4.143 billion, primarily due to the RSC acquisition, including $2.657 billion of acquired goodwill and $1.239 billion of acquired identifiable intangible assets.
- SG&A increased to $146 million in the quarter and $248 million year to date, but declined as a percentage of revenue to 14.7% and 15.0%, respectively, from 15.9% and 16.9%.
Acquisition, outlook, risks and unusual items
United Rentals acquired RSC for total purchase consideration of $2.586 billion, consisting of $1.161 billion in cash, $1.396 billion in stock and $29 million of replacement equity awards. The purchase accounting remains preliminary. The company issued $2.825 billion of merger financing notes and assumed certain RSC debt. Management expects the transaction to provide greater scale, operating efficiencies and additional revenue opportunities.
- Expected additional RSC merger-related costs: $30 million to $50 million through March 31, 2013.
- Expected additional restructuring charges: $60 million to $80 million, with the program substantially complete by March 31, 2013.
- Expected 2012 gross rental capital expenditures: $1.3 billion to $1.4 billion; expected net rental capital expenditures: $925 million to $975 million.
- Management stated that existing cash sources are expected to support operations over the next 12 months.
- At June 30, $494 million was available under the $1.9 billion ABL facility, net of letters of credit, and $20 million was available under the accounts receivable securitization facility.
- The company was in compliance with its debt covenants. However, its highly leveraged structure, restrictive covenants, limited restricted payment capacity and dependence on capital access remain material risks.
- Other risks include cyclicality of construction and industrial markets, utilization and pricing pressure, fleet residual values, integration of RSC, impairment charges, litigation, credit and collection risk, labor and regulatory matters, insurance exposure, technology disruptions and supplier dependence.
- A $10 million gain was recognized on the sale of a former software subsidiary. The company also recorded a $9 million benefit related to self-insurance reserves and an $8 million deferred tax charge related to the RSC acquisition.
- A proposed settlement in litigation challenging the RSC merger remained subject to definitive documentation and court approval. The company denied liability.
Important facts for investors to verify
- Whether RSC integration produces the expected cost savings, revenue opportunities and operating synergies.
- The final purchase-price allocation and resulting depreciation, amortization, goodwill and potential impairment exposure.
- Actual additional merger and restructuring charges versus the disclosed ranges.
- Ability to generate sufficient cash after capital expenditures, debt service and working-capital needs; reported free cash usage was $388 million year to date.
- Debt maturity schedule, interest burden, covenant headroom and availability under the ABL and receivables facilities.
- Sustainability of the 7.4% rental-rate increase, utilization improvement and equipment rental margins in cyclical end markets.
- Completion of the authorized $200 million stock repurchase; $100 million had been repurchased as of July 13, 2012.
- Potential dilution or cash settlement related to the convertible notes, including the $168 million principal amount of 4% Convertible Senior Notes.