United Rentals, Inc. — 2014 Q3 Form 10-Q Summary
Business context and reporting period
Unaudited results for the three and nine months ended September 30, 2014, compared with the corresponding 2013 periods. United Rentals is a North American equipment-rental company serving construction, industrial, energy, government and other customers through 882 rental locations in the United States and Canada. Its fleet had original equipment cost of approximately $8.6 billion and included about 3,300 equipment classes.
Equipment rentals represented 85% of revenue for the nine months. Reportable segments were general rentals and trench safety, power and HVAC, and pump solutions.
Financial performance and key metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Total revenue | $1,544 million | $1,311 million | $4,121 million | $3,617 million |
| Equipment-rental revenue | $1,315 million | $1,138 million | $3,499 million | $3,063 million |
| Gross profit | $688 million | $564 million | $1,725 million | $1,420 million |
| Gross margin | 44.6% | 43.0% | 41.9% | 39.3% |
| Operating income | $422 million | $337 million | $965 million | $736 million |
| Net income | $192 million | $143 million | $346 million | $247 million |
| Diluted EPS | $1.84 | $1.35 | $3.29 | $2.33 |
| Adjusted EBITDA | $761 million | $642 million | $1,943 million | $1,642 million |
| Adjusted EBITDA margin | 49.3% | 49.0% | 47.1% | 45.4% |
Q3 revenue increased 17.8% and nine-month revenue increased 13.9%. Net income increased 34.3% in Q3 and 40.1% for the nine months. Operating margin was approximately 27.3% in Q3 versus 25.7% in the prior-year quarter. Interest expense was $124 million in Q3 and $436 million for the nine months, including debt-redemption losses of $80 million for the nine months.
Equipment-rental revenue increased 15.6% in Q3 and 14.2% for the nine months, driven by rental-rate increases of 4.7% and 4.6%, respectively, and higher volume of original equipment cost on rent. Nine-month rental volume increased 9.2%. Total equipment-rental gross margin improved to 45.6% in Q3 and 42.3% for the nine months, from 43.7% and 39.8%, respectively.
Cash flow, capital spending, debt and liquidity
- Nine-month cash flow from operating activities was $1,466 million, up from $1,115 million.
- Free cash flow was $312 million, compared with free cash usage of $84 million in 2013. Management defines free cash flow as operating cash flow less equipment purchases plus equipment-sale proceeds.
- Rental and non-rental equipment purchases totaled $1,568 million, while related sale proceeds totaled $414 million.
- Total debt was $8.095 billion at September 30, 2014, including $618 million classified as short-term and $7.477 billion classified as long-term. Debt increased from $7.173 billion at December 31, 2013.
- Cash and cash equivalents were $168 million. Available liquidity was approximately $1.1 billion, including $908 million available under the ABL facility, net of letters of credit. The accounts-receivable securitization facility had no remaining borrowing capacity and $550 million outstanding.
- Management stated that existing cash sources were expected to support operations for the next 12 months. The company was in compliance with applicable debt covenants at September 30, 2014.
- Variable-rate debt totaled approximately $1.9 billion. Management estimated that a one-percentage-point increase in applicable variable interest rates would reduce annual after-tax earnings by approximately $11 million.
Material changes versus the prior comparable period
- In April 2014, United Rentals acquired National Pump, a specialty pump-rental business, for total purchase consideration of $849 million, including $773 million of cash consideration and $76 million of contingent consideration. The preliminary allocation included $322 million of goodwill and $289 million of identifiable intangible assets.
- National Pump contributed $140 million of revenue and $30 million of pretax income to the nine-month 2014 results. The specialty segment’s nine-month revenue increased to $481 million from $267 million, and equipment-rental gross margin increased to 51.2% from 47.7%.
- The company redeemed its 10.25% senior notes in January and its 9.25% senior notes in April. It issued $525 million of 6.125% senior notes and $850 million of 5.75% senior notes in March, principally to help finance the National Pump acquisition and refinance debt.
- Merger-related costs were $4 million in Q3 and $13 million for the nine months, compared with zero and $8 million, respectively. Restructuring income was $2 million in Q3 and for the nine months, compared with restructuring charges of $1 million and $12 million in the prior-year periods.
- The company repurchased $399 million of common stock during the nine months. As of October 13, 2014, it had repurchased $395 million under a $500 million program and intended to complete the program by December 2014.
- Assets increased to $12.483 billion from $11.231 billion at year-end 2013, primarily because of the National Pump acquisition. Goodwill increased to $3.270 billion from $2.953 billion, and rental equipment increased to $6.146 billion from $5.374 billion.
Guidance, outlook, commentary and risks
- Management expected approximately $1.2 billion of net rental capital expenditures for full-year 2014, based on gross purchases of approximately $1.7 billion.
- Management expected 2014 free cash flow of $475 million to $525 million, with the primary intended use being share repurchases.
- Management’s strategy emphasized rate management, fleet optimization, customer segmentation, specialty-rental expansion and the rollout of “Operation United 2” lean-management initiatives.
- The business is cyclical and sensitive to North American construction, industrial activity, infrastructure spending and the energy sector. Rental activity may be affected by slower economic recovery, lower utilization or pricing pressure.
- Significant risks include approximately $8.1 billion of indebtedness, refinancing and covenant risk, integration and contingent-payment risk from National Pump, equipment residual-value risk, credit and collection risk, competition, cybersecurity, regulatory and litigation matters, labor issues, insurance shortfalls and foreign-currency exposure.
- The National Pump purchase-price allocation remained preliminary. Contingent consideration was valued at $81 million at September 30, 2014, and changes in management’s forecasts or valuation assumptions could materially affect future results.
- Ordinary-course claims and proceedings were not expected by management to have a material adverse effect, individually or in the aggregate, although litigation, regulatory and insurance outcomes remain uncertain.
Important facts for investors to verify
- Whether rental-rate growth, utilization and specialty-segment performance continue after the National Pump acquisition impact is fully annualized.
- Progress toward the $475 million to $525 million 2014 free-cash-flow outlook and approximately $1.2 billion net rental-capital-expenditure expectation.
- Debt maturities, refinancing needs, interest-rate sensitivity and the availability of the ABL facility and receivables facility.
- The final National Pump purchase-price allocation, contingent consideration payments and realization of expected operating synergies.
- The effect of share repurchases on liquidity, leverage and diluted share count, including potential dilution from the convertible notes.
- Whether construction, industrial and energy-market conditions support continued rental-rate and utilization improvements.