United Rentals, Inc. — 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, 2017. The company operates approximately 960 rental locations in the United States and Canada and provides equipment rentals, used and new equipment sales, contractor supplies, and service activities. Equipment rentals represented 86% of total revenue for the six months.
The reportable segments are general rentals and trench, power and pump. Results are seasonal, with rental activity typically lower during the winter.
Financial performance and key metrics
| Metric | Three months ended June 30, 2017 | Three months ended June 30, 2016 | Six months ended June 30, 2017 | Six months ended June 30, 2016 |
|---|---|---|---|---|
| Total revenue | $1,597 million | $1,421 million | $2,953 million | $2,731 million |
| Equipment rental revenue | $1,367 million | $1,204 million | $2,533 million | $2,321 million |
| Gross profit | $655 million | $590 million | $1,169 million | $1,090 million |
| Gross margin | 41.0% | 41.5% | 39.6% | 39.9% |
| Operating income | $340 million | $347 million | $597 million | $601 million |
| Net income | $141 million | $134 million | $250 million | $226 million |
| Diluted EPS | $1.65 | $1.52 | $2.92 | $2.52 |
| EBITDA | $672 million | $655 million | $1,237 million | $1,219 million |
| Adjusted EBITDA | $747 million | $679 million | $1,338 million | $1,263 million |
| Adjusted EBITDA margin | 46.8% | 47.8% | 45.3% | 46.2% |
Equipment rental gross margin was 42.1% in the second quarter and 40.3% for the six-month period. Time utilization increased to 69.4% in the quarter and 67.8% for the six months, compared with 67.5% and 65.8%, respectively, in the prior-year periods.
For the six months, operating cash flow was $1,337 million, compared with $1,247 million in 2016. Capital expenditures were $968 million, including $913 million for rental equipment. Proceeds from equipment sales were $245 million, resulting in reported free cash flow of $614 million, down from $792 million.
At June 30, 2017, cash and cash equivalents were $338 million, rental equipment net was $7,076 million, total assets were $13,284 million, and total debt was $8,215 million, including $644 million of short-term debt and current maturities. Available liquidity was approximately $1.04 billion, including cash. The ABL facility had approximately $689 million of borrowing capacity net of letters of credit, and the accounts receivable securitization facility had $10 million of capacity.
Material changes versus the prior comparable period
- Second-quarter revenue increased 12.4%; six-month revenue increased 8.1%. Equipment rental revenue increased 13.5% in the quarter and 9.1% for the six months.
- Rental revenue growth was driven primarily by higher volume of original equipment cost on rent, up 17.4% in the quarter and 12.4% for the six months, including the NES acquisition. Rental rates decreased 1.2% in both periods.
- On a pro forma basis including NES's pre-acquisition results, equipment rental revenue increased 6.2% in the quarter and 5.1% for the six months.
- Net income and diluted EPS increased despite lower operating income, reflecting lower net interest expense and higher revenue. Interest expense declined 14.4% in the quarter and 13.4% for the six months.
- SG&A increased 23.2% in the quarter and 16.1% for the six months. SG&A as a percentage of revenue increased to 13.7% and 13.9%, respectively.
- Operating income was affected by $14 million of second-quarter and $16 million of six-month merger-related costs, plus $19 million of restructuring charges in each 2017 period. No merger-related costs were recorded in the comparable 2016 periods.
- Free cash flow declined by $178 million, primarily because rental equipment purchases increased from $722 million to $913 million.
Acquisition, outlook, risks and unusual items
United Rentals completed the acquisition of NES Rentals Holdings II, Inc. on April 3, 2017, for approximately $964 million. NES operated 73 branches, had approximately 1,100 employees, approximately $900 million of rental assets at original equipment cost at December 31, 2016, and annual revenue of approximately $369 million. The preliminary purchase price allocation included $199 million of goodwill and $139 million of acquired intangible assets. Integration, fleet transfers, merger costs, and restructuring actions are expected to continue.
The company initiated the NES/Project XL restructuring program in the second quarter and expects to complete it in the first half of 2018. Total expected restructuring costs were not yet estimable. Project XL targets profitable growth, revenue opportunities, and cost savings. Management expects service and other revenue margins to remain below historic levels during 2017 because of a changed allocation of labor costs, with improvement expected beyond 2017 from Project XL initiatives.
Management cited improving demand in many core markets, particularly in trench safety, power and HVAC, and Pump Solutions. The company plans to continue focusing on customer and fleet mix, rate management, Lean initiatives, specialty rental expansion, cross-selling, and profitability and return on invested capital. The filing does not provide a specific quantitative earnings or revenue guidance range.
In June 2017, the company redeemed $250 million principal amount of 7 5/8% senior notes and recorded a $12 million loss in interest expense. In February, it issued $250 million each of additional 5 7/8% senior notes due 2026 and 5 1/2% senior notes due 2027, with proceeds initially used to reduce ABL borrowings and subsequently to help fund the NES acquisition.
Principal risks include the cyclical nature of construction and industrial activity, fleet overcapacity and rental-rate pressure, significant indebtedness and refinancing risk, covenant restrictions, integration of NES, uncertain restructuring costs, equipment residual values, customer credit risk, oil and gas exposure, competition, cybersecurity, labor issues, litigation, regulation, and foreign currency movements. A one-percentage-point increase in variable borrowing rates was estimated to reduce annual after-tax earnings by approximately $15 million.
The company stated that it was in compliance with applicable debt covenants at June 30, 2017, and that existing cash sources should support operations over the next 12 months. Legal claims arising in the ordinary course were not expected to have a material adverse effect based on information available at filing.
Important facts for investors to verify
- Whether NES integration produces the expected revenue synergies, cost savings, and fleet utilization improvements.
- The ultimate cost and timing of the NES/Project XL restructuring program, which were not yet estimable.
- Whether rental-rate pressure, industry fleet expansion, and higher delivery costs continue to offset utilization gains.
- The sustainability of free cash flow after substantially higher rental fleet capital expenditures and acquisition spending.
- Debt reduction, refinancing needs, variable-rate exposure, liquidity availability, and continued covenant compliance.
- The effect of the paused share repurchase program and the company’s competing uses of capital following the NES acquisition.
- The adoption effects of forthcoming lease and revenue-recognition accounting standards, particularly the expected significant balance-sheet impact of lease accounting.
- Whether improving demand in construction, infrastructure, industrial, mining, and oil and gas markets persists, given the company’s cyclical exposure.