United Rentals, Inc. — Q1 2012 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, 2012. The company operates 542 rental locations in the United States and Canada and provides equipment rentals, rental-equipment sales, new-equipment sales, contractor supplies, and related services.
Reportable segments are general rentals and trench safety, power and HVAC. Results are seasonal, with rental activity generally lower during winter. The proposed acquisition of RSC Holdings, Inc. was a major transaction during the quarter and had not yet closed as of March 31, 2012.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Total revenue | $656 million | $523 million | +25.4% |
| Equipment rental revenue | $523 million | $434 million | +20.5% |
| Gross profit | $213 million | $138 million | +54.3% |
| Gross margin | 32.5% | 26.4% | +6.1 percentage points |
| Operating income | $87 million | $30 million | +$57 million |
| Net income (loss) | $13 million | $(20) million | Improved by $33 million |
| Diluted EPS | $0.17 | $(0.34) | Improved by $0.51 |
| Adjusted EBITDA | $231 million | $145 million | +59.3% |
| Adjusted EBITDA margin | 35.2% | 27.7% | +7.5 percentage points |
| Cash flow from operations | $254 million | $154 million | +$100 million |
| Free cash flow (usage) | $(89) million | $70 million | Down $159 million |
Rental rates increased 6.3%, volume of original equipment cost on rent increased 18.4%, and time utilization increased to 62.3% from 61.1%. Equipment-rental gross margin increased to 31.0% from 23.5%. SG&A increased to $102 million from $95 million, but declined to 15.5% of revenue from 18.2%.
Sales of rental equipment increased 137.5% to $76 million, while its gross margin decreased to 38.2% from 43.8%, primarily due to a greater proportion of auction sales and sales of higher-cost equipment. Contractor supplies sales declined 14.3% to $18 million.
Balance sheet, debt and liquidity
| Balance-sheet item | March 31, 2012 | December 31, 2011 |
|---|---|---|
| Total assets | $7.297 billion | $4.143 billion |
| Cash and cash equivalents | $26 million | $36 million |
| Restricted cash | $2.850 billion | None |
| Total debt | $5.961 billion | $2.987 billion |
| Long-term debt | $5.590 billion | $2.592 billion |
| Stockholders’ equity | $90 million | $64 million |
The company issued $2.825 billion of merger financing notes in March 2012. The proceeds, together with $25 million of related interest payable, were held in restricted cash pending satisfaction of merger-closing conditions. Total debt increased substantially as a result of this financing.
At March 31, 2012, $982 million was outstanding under the $1.9 billion ABL facility, with $868 million available net of letters of credit. The accounts receivable securitization facility had $230 million outstanding and $5 million available. The company reported compliance with its debt covenants; specified ABL maintenance covenants were generally inapplicable because availability exceeded the required threshold.
Operating activities generated $254 million. Investing activities used $400 million, including $390 million of rental-equipment purchases, $36 million of non-rental-equipment purchases, and $57 million for acquisitions. Financing activities provided $135 million after debt proceeds, debt repayments, restricted-cash funding, financing costs, and share withholding transactions.
Material changes versus the prior comparable period
- Revenue growth was driven by higher rental rates, increased equipment volume on rent, improved utilization, and stronger rental demand.
- Profitability improved materially, with operating income rising to $87 million from $30 million and net income turning positive.
- Operating leverage and rental-rate increases expanded gross and adjusted EBITDA margins.
- RSC merger-related costs of $10 million and related interest expense of $13 million were recorded in Q1 2012; these items were not present in Q1 2011.
- Capital spending increased sharply, reducing free cash flow to a usage of $89 million from positive free cash flow of $70 million.
- Total debt nearly doubled due primarily to the RSC merger financing notes, while restricted cash increased by $2.850 billion.
Guidance, outlook, commentary and unusual items
- Management expected the RSC acquisition to close on April 30, 2012, subject to stockholder approval and other closing conditions. Stockholder meetings were scheduled for April 27, 2012.
- The proposed RSC transaction had an enterprise value of approximately $4.2 billion and contemplated approximately $2.4 billion of merger consideration, consisting of cash, United Rentals common stock, and equity awards.
- For 2012 on a stand-alone basis, management expected gross rental capital expenditures of approximately $1.0 billion and net rental capital expenditures of $700 million to $750 million.
- Management believed existing liquidity sources would be sufficient to support existing operations for the next 12 months, but identified the RSC cash consideration, repayment of certain RSC debt, fleet investment, working capital, lease payments, debt service, and potential acquisitions as principal cash needs.
- Management cautioned that rental demand is cyclical and sensitive to North American construction and industrial activity. The filing did not provide a broader full-year revenue or earnings forecast.
- The company had diesel swaps covering 3.0 million gallons for 2012, with an average contract price of $3.97 per gallon compared with an average forward price of $4.15 per gallon at quarter-end.
- A putative class action challenged the proposed RSC merger. The company stated that it believed the claims lacked merit and intended to defend them vigorously.
Principal risks and contingencies
- Execution, approval, integration, financing, and potential undiscovered liabilities associated with the RSC acquisition.
- High leverage, substantial debt-service requirements, restrictive covenants, and potential limits on transfers of cash from operating subsidiaries to the holding company.
- Dependence on construction and industrial activity, rental rates, utilization, fleet residual values, equipment sales, and access to capital.
- Interest-rate, foreign-currency, equity-price, credit, collection, litigation, regulatory, environmental, safety, labor, supplier, insurance, and information-technology risks.
- Potential dilution or cash settlement requirements related to convertible notes; no conversions or redemptions were reported between April 1 and April 13, 2012.
Important facts for investors to verify
- Whether the RSC merger closed as anticipated and the final consideration, assumed debt, integration costs, and purchase accounting effects.
- Post-merger leverage, liquidity availability, covenant compliance, credit ratings, and the release and use of the $2.850 billion restricted cash balance.
- Whether rental-rate growth and utilization improvements continued after the first-quarter seasonal period.
- The sustainability of elevated rental-equipment capital expenditures and the effect on free cash flow and debt reduction.
- The future mix, pricing, and margins of rental-equipment sales, particularly auction versus retail channels.
- Developments in the RSC merger litigation and other ordinary-course claims.