United Rentals, Inc. — 2011 Q3 Form 10-Q Summary
Business context and reporting period
Combined unaudited Form 10-Q for United Rentals, Inc. and wholly owned United Rentals (North America), Inc. for the quarter and nine months ended September 30, 2011. United Rentals operates an equipment-rental business across the United States and Canada, with 541 locations, approximately 2,900 equipment classes and a rental fleet with original equipment cost of approximately $4.3 billion. Reportable segments are general rentals and trench safety, power and HVAC.
Financial performance and key metrics
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|
| Total revenue | $713 million | $605 million | $1,865 million | $1,640 million |
| Equipment-rental revenue | $604 million | $507 million | $1,562 million | $1,337 million |
| Gross profit | $274 million | $209 million | $623 million | $483 million |
| Operating income | $156 million | $93 million | $281 million | $150 million |
| Income from continuing operations | $65 million | $23 million | $73 million | $(5) million |
| Net income | $65 million | $23 million | $72 million | $(5) million |
| Diluted EPS | $0.91 | $0.33 | $0.99 | $(0.09) |
| Adjusted EBITDA | $282 million | $216 million | $648 million | $510 million |
- Revenue increased 17.9% in Q3 and 13.7% for the nine-month period. Equipment-rental revenue increased 19.1% and 16.8%, respectively.
- Total gross margin improved to 38.4% in Q3 from 34.5%, and to 33.4% for nine months from 29.5%.
- EBITDA margin was 38.8% in Q3 and 34.0% for nine months; adjusted EBITDA margin was 39.6% and 34.7%, respectively.
- Rental-rate increases were 7.5% in Q3 and 6.0% for nine months. OEC on rent increased 15.0% and 14.1%, respectively. Time utilization reached a company-record 73.5% in Q3, compared with 71.3% in the prior-year quarter.
- SG&A increased to $103 million in Q3 and $298 million for nine months, but declined as a percentage of revenue to 14.4% and 16.0%, respectively.
- Nine-month operating cash flow was $453 million, versus $343 million in 2010. Capital expenditures were $655 million, including $631 million for rental equipment. Free cash flow was negative $76 million, versus positive $144 million in 2010.
Liquidity, debt and balance sheet
| Balance-sheet item | September 30, 2011 | December 31, 2010 |
|---|
| Cash and cash equivalents | $26 million | $203 million |
| Total assets | $4,005 million | $3,693 million |
| Total debt | $2,930 million | $2,805 million |
| Long-term debt | $2,529 million | $2,576 million |
| Stockholders’ equity | $14 million | $(20) million |
- Outstanding borrowings included $756 million under the ABL facility and $269 million under the accounts-receivable securitization facility. Available capacity was $553 million under the ABL facility, net of letters of credit, and $5 million under the securitization facility.
- The company stated that existing cash sources should support operations for the next 12 months, subject to funding working capital, fleet purchases, debt service, leases and acquisitions.
- As of September 30, 2011, the company was in compliance with applicable debt covenants. Maintenance covenants under the ABL facility remained suspended while availability exceeded specified thresholds.
Material changes, outlook and unusual items
- Management attributed the improvement primarily to higher rental rates, increased equipment volume, stronger utilization, improved rental-equipment sales margins and SG&A leverage. The recovery in construction and industrial markets remained modest, and management did not provide specific formal revenue or earnings guidance.
- During the nine months, the company acquired Venetor Group, GulfStar Rental Solutions and Ontario Laser Rentals for an aggregate cash cost of $198 million. The acquired businesses had stated annual revenues of approximately $50 million, $15 million and $20 million, respectively.
- Restructuring charges were $2 million in Q3 and $5 million for nine months, compared with $7 million and $19 million in the prior-year periods. Restructuring activity was expected to be substantially complete by year-end 2011; the remaining reserve was $19 million at September 30.
- The company reduced its workforce from approximately 10,900 employees at December 31, 2007 to approximately 7,500 at September 30, 2011, and its branch network from 697 to 541 locations.
- In October 2011, the ABL facility was amended to increase its size from $1.36 billion to $1.80 billion, with an additional uncommitted increase of up to $500 million, lower borrowing costs and an October 2016 maturity. The company also notified holders that $32 million of QUIPS would be redeemed in October 2011.
- Key risks include the highly leveraged capital structure, covenant compliance and access to capital; weaker construction, industrial or infrastructure demand; rental-rate and utilization pressure; fleet maintenance and residual-value risk; used-equipment sales; acquisitions and integration; customer collections; litigation and claims; foreign exchange, interest-rate and diesel-price exposure; competition; labor issues; and information-technology disruptions.
- Off-balance-sheet residual-value guarantees on certain operating leases could create a maximum potential liability of approximately $10 million if the related equipment had no residual value, although management did not expect significant payments under current conditions.
Investor verification points
- Verify whether improved rental rates, utilization and OEC on rent are sustainable as construction and industrial markets recover.
- Assess the effect of negative free cash flow, elevated fleet spending and the acquisition program on leverage and liquidity.
- Review debt maturities, refinancing needs, covenant thresholds and the practical availability of the amended ABL and securitization facilities.
- Evaluate integration results and purchase-price allocations for the three 2011 acquisitions, which were preliminary at the reporting date.
- Monitor potential dilution from convertible securities and the remaining QUIPS and convertible-debt obligations.
- Review exposure to fleet residual values, used-equipment pricing, diesel costs, interest rates and Canadian-dollar movements.
