United Rentals, Inc. — Q2 2016 Form 10-Q Summary
Business context and reporting period
United Rentals, Inc. and United Rentals (North America), Inc. filed a combined unaudited Form 10-Q for the quarter and six months ended June 30, 2016. United Rentals is a large equipment-rental provider operating 895 locations across the United States and Canada, with approximately $8.9 billion of rental fleet original equipment cost and about 3,200 equipment classes. Reportable segments are general rentals and trench, power and pump.
Key financial metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $1,421 million | $1,429 million | $2,731 million | $2,744 million |
| Equipment-rental revenue | $1,204 million | $1,220 million | $2,321 million | $2,345 million |
| Gross profit | $590 million | $618 million | $1,090 million | $1,142 million |
| Operating income | $347 million | $375 million | $601 million | $675 million |
| Net income | $134 million | $86 million | $226 million | $201 million |
| Diluted EPS | $1.52 | $0.88 | $2.52 | $2.04 |
| Net cash from operating activities | Not separately disclosed for quarter | Not separately disclosed for quarter | $1,247 million | $1,250 million |
| Adjusted EBITDA | $679 million | $706 million | $1,263 million | $1,308 million |
| Free cash flow | Not separately disclosed for quarter | Not separately disclosed for quarter | $792 million | $432 million |
Total gross margin was 41.5% in Q2 and 39.9% for the six-month period, down 170 basis points in both comparisons. Equipment-rental gross margin was 42.0% in Q2 and 40.1% year to date, compared with 43.9% and 41.8%, respectively, in the prior-year periods. Q2 EBITDA margin was 46.1% and adjusted EBITDA margin was 47.8%; six-month margins were 44.6% and 46.2%, respectively.
At June 30, 2016, cash and cash equivalents were $265 million, total assets were $12.1 billion, and total debt was $7.841 billion, including $576 million classified as short-term debt or current maturities and $7.265 billion of long-term debt. Reported available liquidity was approximately $1.32 billion, including cash. The ABL facility had $1.043 billion of borrowing capacity net of letters of credit, while the accounts receivable securitization facility had $16 million available.
Material changes versus the prior comparable period
- Q2 revenue decreased 0.6%; six-month revenue decreased 0.5%. Equipment-rental revenue declined 1.3% in Q2 and 1.0% year to date.
- Rental volume, measured by original equipment cost on rent, increased 3.0% in Q2 and 2.8% year to date, but rental rates declined 2.4% and 2.6%, respectively. Currency effects also reduced reported rental revenue.
- General-rentals equipment-rental revenue declined 3.1% in Q2 and 2.7% year to date. Trench, power and pump rental revenue increased 9.9% and 9.3%, respectively.
- Equipment-rental gross profit declined $29 million in Q2 and $50 million year to date. General-rentals gross margin fell to 41.1% in Q2 and 39.3% year to date, while trench, power and pump margins improved to 47.1% and 44.7%.
- Operating income declined 7.5% in Q2 and 11.0% year to date, despite lower interest expense. Net income increased because interest expense was substantially lower, primarily reflecting lower debt and lower average borrowing costs.
- Interest expense included $26 million of losses related to debt redemptions and the ABL amendment in 2016, compared with $121 million in Q2 2015 and $123 million for the first half of 2015 from prior debt redemptions.
- Capital expenditures fell to $764 million from $1.066 billion, while share repurchases declined to $336 million from $501 million. The company repurchased approximately 2.69 million shares during Q2 at an average price of $63.55.
Guidance, outlook, commentary and risks
Management expects solid industry growth in 2016 but anticipates continued pressure on rental rates and time utilization from industry fleet expansion, softness in Canada, and weakness in oil and gas markets. Sequential rental-rate increases occurred in May and June, the first in 16 months. The company updated its 2016 forecast to reflect a smaller expected full-year rental-rate decline, offset by a lower expected time-utilization outlook. No specific revenue, EPS, or EBITDA numerical guidance is provided in the filing.
The company initiated a 2015–2016 cost-savings restructuring program in response to volume and pricing pressure and lower-than-expected Lean savings. It expects to complete the program in 2016, but total costs are not currently estimable. Restructuring charges were $2 million in Q2 and $4 million year to date.
United Rentals issued $750 million of 5 7/8% senior notes in May 2016, redeemed all 8 1/4% senior notes and $550 million of 7 3/8% senior notes, and amended and extended its $2.5 billion ABL facility through June 2021. It expected to redeem the remaining $200 million of 7 3/8% senior notes in August 2016, with an estimated additional loss of approximately $10 million.
Management stated that it was in compliance with its debt covenants and that the ABL fixed-charge coverage covenant was not applicable at June 30, 2016 because availability exceeded the trigger threshold. Principal risks include high leverage and refinancing risk, cyclical construction and industrial demand, overcapacity, rental-rate and utilization pressure, oil and gas weakness, residual-value and equipment-sale risk, acquisitions and integration, litigation and regulatory matters, cybersecurity, foreign-currency exposure, and potential impairment charges.
The Pump Solutions reporting unit had $314 million of goodwill at June 30, 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 impairment.
Investor verification items
- Verify the sustainability of rental-rate and utilization trends, particularly after the May and June sequential rate improvements.
- Assess whether general-rentals margin pressure from Canada, oil and gas, and fleet overcapacity is temporary or structural.
- Reconcile reported net-income growth with declining operating income and adjusted EBITDA, including debt-redemption losses and acquisition-related amortization.
- Review total leverage, variable-rate debt exposure, refinancing needs, covenant headroom, and the planned August 2016 debt redemption.
- Monitor Pump Solutions performance and the risk of a future goodwill impairment.
- Evaluate the effect of the cost-savings restructuring program and whether Lean initiatives deliver the expected savings.
- Confirm the pace and funding of the remaining share-repurchase authorization, subject to debt-agreement restrictions.
- Consider the filing’s statement that interim results are unaudited and may not be indicative of full-year results.