United Rentals, Inc. — Q1 2016 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 three months ended March 31, 2016. The company operates an equipment-rental business in the United States and Canada through 901 rental locations, offering approximately 3,200 equipment classes. Reportable segments are general rentals and trench, power and pump.
Key Financial Metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $1,310 million | $1,315 million | Down 0.4% |
| Equipment-rental revenue | $1,117 million | $1,125 million | Down 0.7% |
| Gross profit | $500 million | $524 million | Down 4.6% |
| Gross margin | 38.2% | 39.8% | Down 160 bps |
| Operating income | $254 million | $300 million | Down 15.3% |
| Operating margin | 19.4% | 22.8% | Down approximately 340 bps |
| Net income | $92 million | $115 million | Down 20.0% |
| Diluted EPS | $1.01 | $1.16 | Down 12.9% |
| Adjusted EBITDA | $584 million | $602 million | Down 3.0% |
| Adjusted EBITDA margin | 44.6% | 45.8% | Down 120 bps |
| Net cash from operating activities | $604 million | $675 million | Down $71 million |
| Free cash flow | $627 million | $450 million | Up $177 million |
Equipment-rental revenue represented 85% of total revenue. Rental volume, measured by original equipment cost on rent, increased 2.7%, but a 2.8% rental-rate decline more than offset the volume gain. Excluding currency effects, rental revenue would have increased 0.3% year over year. Total equipment-rental gross profit was $425 million, with a 38.0% margin versus 39.6% in the prior-year quarter.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $219 million at March 31, 2016, compared with $179 million at December 31, 2015.
- Total debt was $7.753 billion, including $550 million of short-term debt and current maturities; long-term debt was $7.203 billion.
- Debt declined from $8.162 billion at December 31, 2015, primarily reflecting net debt repayments.
- Available liquidity was $1.46 billion, including cash, as of March 31, 2016.
- The ABL facility had approximately $1.224 billion of borrowing capacity net of letters of credit, and the accounts receivable securitization facility had $14 million available.
- The company was in compliance with its debt covenants. The ABL fixed-charge coverage covenant was not applicable because specified availability exceeded the required threshold.
- Variable-rate debt totaled approximately $1.7 billion. Management estimated that a one-percentage-point increase in variable interest rates would reduce annual after-tax earnings by approximately $11 million.
Material Changes Versus the Prior Comparable Period
- Revenue was broadly stable, but profitability declined because of lower rental rates, lower margins on rental-equipment sales and continuing pressure from oil and gas customers, Canada and industry fleet expansion.
- General-rentals equipment-rental revenue decreased 2.2%, while its equipment-rental gross margin declined to 37.4% from 39.2%. Time utilization increased slightly to 65.7% from 65.4%.
- Trench, power and pump rental revenue increased 8.7%, supported by a 10.7% increase in average fleet size, but gross margin declined modestly to 42.0% from 42.3%.
- Service and other revenue increased 26.1%, while sales of rental equipment and new equipment were not materially changed.
- SG&A decreased 2.2% to $177 million, and interest expense declined 11.6% to $107 million, primarily due to a lower average cost of debt.
- Q1 2015 included a $27 million pretax merger-related credit associated with the National Pump acquisition; no comparable merger-related item was recorded in Q1 2016.
- Capital spending fell substantially to $123 million from $345 million, while proceeds from equipment sales remained approximately $119 million.
- The company repurchased $164 million of common stock during the quarter, including 2.7 million shares under its announced repurchase program.
Outlook, Commentary, Risks and Unusual Items
Management stated that it expects solid industry growth in 2016 and improving demand in many core markets. However, it lowered its 2016 outlook for rental rates, revenue and adjusted EBITDA because of continuing rate pressure, recent industry fleet expansion, softness in Canada and weakness among upstream oil and gas customers. The company slightly increased its outlook for time utilization. The filing does not provide clear numerical full-year guidance values.
- A cost-savings restructuring program initiated in the fourth quarter of 2015 continued during the quarter. Q1 restructuring charges were $2 million, and total program costs were not yet estimable.
- The Pump Solutions reporting unit had $314 million of goodwill at March 31, 2016. Its estimated fair value exceeded carrying value by only 1% in the November 2015 impairment test, and management continues to monitor the unit for potential impairment.
- Fixed-price diesel swaps covered 9.7 million gallons scheduled for purchase during 2016 and 2017, at an average contract price of $2.79 per gallon versus an average forward price of $2.30 per gallon at March 31, 2016.
- Key risks include the cyclical nature of construction and industrial activity, fleet overcapacity, rental-rate and utilization pressure, oil and gas weakness, significant leverage, refinancing and covenant risk, residual-value risk, impairment charges, competition, cybersecurity, litigation and regulatory matters.
- Ordinary-course claims and proceedings were not expected to have a material adverse effect on consolidated financial condition, results of operations or cash flows.
- The company expects existing cash sources to fund operations, working capital, fleet purchases, debt service and planned share repurchases for the next 12 months.
Most Important Facts for Investors to Verify
- Whether rental-rate pressure moderates and whether the reported increase in equipment volume converts into sustained revenue growth.
- Progress toward the revised 2016 revenue, rental-rate, adjusted EBITDA and time-utilization outlook, noting that numerical guidance is not clearly provided in the filing.
- The sustainability of free cash flow after considering fleet replacement needs, equipment-sale proceeds, debt repayments and share repurchases.
- Leverage, refinancing needs, variable-rate exposure and remaining borrowing capacity under the ABL and receivables facilities.
- The operating performance and goodwill-impairment sensitivity of the Pump Solutions reporting unit.
- The costs and savings achieved under the 2015–2016 restructuring program and Lean initiatives.
- The effect of Canadian currency movements, oil and gas conditions, fleet overcapacity and used-equipment pricing on margins and asset values.