United Rentals, Inc. — Form 10-Q Summary
Business context and reporting period
Combined quarterly report for United Rentals, Inc. and wholly owned United Rentals (North America), Inc. for the three and six months ended June 30, 2011. United Rentals rents construction, industrial, infrastructure, specialty, power and HVAC equipment in the United States and Canada and also sells rental and new equipment, contractor supplies, parts and services. The company operated 539 locations, with a fleet having original equipment cost of approximately $4.2 billion.
Equipment rentals represented 83% of revenue for the six months. In April 2011, the company acquired Venetor Group, a seven-location Canadian rental company, and GulfStar Rental Solutions, a three-location power and HVAC rental company, for an aggregate cash purchase price of $143 million.
Financial performance and key metrics
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $629 million | $557 million | $1,152 million | $1,035 million |
| Equipment rental revenue | $524 million | $450 million | $958 million | $830 million |
| Gross profit | $211 million | $171 million | $349 million | $274 million |
| Gross margin | 33.5% | 30.7% | 30.3% | 26.5% |
| Operating income | $95 million | $59 million | $125 million | $57 million |
| Income from continuing operations | $28 million | $12 million | $8 million | $(28) million |
| Net income | $27 million | $12 million | $7 million | $(28) million |
| Diluted EPS | $0.37 | $0.18 | $0.09 | $(0.46) |
| Adjusted EBITDA | $221 million | $179 million | $366 million | $294 million |
| Adjusted EBITDA margin | 35.1% | 32.1% | 31.8% | 28.4% |
Rental rates increased 6.1% in the quarter and 5.2% year to date, while the volume of original equipment cost on rent increased 13.8% and 13.4%, respectively. Time utilization improved to 69.0% in the quarter from 65.4% and to 65.8% year to date from 60.8%.
Six-month operating cash flow was $296 million, compared with $219 million in the prior-year period. Capital expenditures were $425 million, including $412 million for rental equipment, and proceeds from equipment sales were $81 million. Reported free cash flow was negative $48 million, compared with positive $107 million in 2010.
At June 30, 2011, cash and cash equivalents were $58 million, total debt was $2.889 billion, and total liabilities were $3.928 billion. Stockholders’ deficit was $20 million. Available borrowing capacity was $541 million under the ABL facility, net of letters of credit, and $12 million under the accounts receivable securitization facility.
Material changes versus the prior comparable period
- Q2 revenue increased 12.9%, while six-month revenue increased 11.3%; equipment rental revenue increased 16.4% and 15.4%, respectively.
- Q2 operating income increased 61.0% and six-month operating income more than doubled, reflecting stronger rental profitability, improved equipment-sale margins and lower restructuring charges.
- Gross margin expanded 2.8 percentage points in Q2 and 3.8 percentage points for the six months. SG&A as a percentage of revenue declined modestly to 15.9% from 16.2% in Q2 and to 16.9% from 17.0% year to date.
- Adjusted EBITDA increased 23.5% in Q2 and 24.5% year to date. Management attributed the improvement primarily to higher rental profit, better margins and operating leverage.
- Rental capital spending increased substantially. Net rental capital expenditures were $339 million versus $102 million in the prior-year period, driving negative free cash flow despite stronger operating cash flow.
- Cash declined to $58 million from $203 million at December 31, 2010, primarily reflecting capital expenditures, acquisitions and working-capital needs.
- Current liabilities increased to $840 million from $569 million, and short-term debt increased to $347 million from $229 million.
Guidance, outlook, risks and unusual items
Management expected existing cash sources to support operations for the following 12 months and expected gross and net rental capital expenditures to increase significantly in 2011 relative to 2010. The filing does not provide a clear numerical earnings or revenue forecast.
- Management cited a modest recovery in construction and industrial markets, a continued shift from equipment ownership to rental, and increased activity from National Accounts and other large customers, but cautioned that these trends may not continue.
- Restructuring charges were $2 million in Q2 and $3 million year to date, with restructuring activity expected to be substantially complete by year-end 2011. The remaining restructuring reserve was $23 million at June 30.
- The company recorded $1 million of asset impairment charges in Q2 and year to date. It also recognized a $1 million loss on retirement of subordinated convertible debentures.
- The company remained in compliance with its debt covenants. ABL maintenance covenants were suspended while availability remained above the applicable threshold, but could become applicable if availability falls below 10% of the maximum revolver amount.
- Key risks include the company’s highly leveraged structure, debt-service requirements, restricted payment limitations, access to capital, economic weakness in construction and industrial markets, equipment utilization and rental-rate pressure, equipment residual values, maintenance costs, acquisitions, litigation, customer collections, competition and information-technology disruptions.
- Variable-rate debt totaled approximately $980 million; management estimated that a one-percentage-point increase in applicable rates would reduce annual after-tax earnings by approximately $7 million.
- Diesel swap contracts covered 6.4 million gallons of expected purchases through 2011 and 2012. Operating lease residual-value guarantees could create a maximum potential liability of approximately $10 million if related equipment values were zero.
- Holders of the 4% Convertible Senior Notes had conversion rights in the third quarter of 2011. Through July 15, holders had submitted notices to convert $1 million principal amount.
Important facts for investors to verify
- Whether rental-rate growth, utilization gains and equipment-on-rent volume continued after June 30, 2011.
- Whether the significantly higher rental fleet investment generated sufficient incremental revenue and cash returns.
- The company’s ability to manage negative free cash flow while maintaining debt-service capacity and adequate revolver availability.
- Compliance with ABL and receivables-securitization requirements, including availability and receivable performance tests.
- The integration and earnings contribution of Venetor and GulfStar and any changes to their preliminary purchase-price allocations.
- Potential dilution from conversions of the 4% Convertible Senior Notes and the effectiveness of the related convertible-note hedge.
- Exposure to construction-market weakness, equipment resale values, diesel costs, foreign exchange, litigation and operating lease residual guarantees.