United Rentals, Inc. — 2017 First-Quarter Form 10-Q
Business context and reporting period
Unaudited results for the three months ended March 31, 2017, compared with the same period in 2016. United Rentals operates an equipment-rental business in the United States and Canada through 895 locations, offering approximately 3,200 equipment classes. Equipment rentals represented 86% of total revenue. Reportable segments are general rentals and trench, power and pump.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $1,356 million | $1,310 million | +3.5% |
| Equipment-rental revenue | $1,166 million | $1,117 million | +4.4% |
| Gross profit | $514 million | $500 million | +2.8% |
| Gross margin | 37.9% | 38.2% | -30 bps |
| Operating income | $257 million | $254 million | +1.2% |
| Net income | $109 million | $92 million | +18.5% |
| Diluted EPS | $1.27 | $1.01 | +$0.26 |
| Adjusted EBITDA | $591 million | $584 million | +1.2% |
| Adjusted EBITDA margin | 43.6% | 44.6% | -100 bps |
Net income benefited from an $8 million tax benefit related to excess tax benefits from share-based compensation, contributing approximately $0.09 to basic and diluted EPS. Interest expense declined 12.1% to $94 million, while the effective tax rate decreased to 32.3% from 37.4%.
- Equipment-rental volume, measured by original equipment cost on rent, increased 7.0%; rental rates declined 1.4%.
- General-rentals revenue increased 2.3%, while trench, power and pump revenue increased 16.7%. Trench, power and pump equipment-rental gross margin rose to 44.4% from 42.0%.
- Time utilization increased to 66.0% from 64.1%; general-rentals utilization increased to 67.2% from 65.7%.
- SG&A increased 9.0% to $193 million, primarily due to higher stock compensation expense.
Cash flow, capital spending, debt and liquidity
- Operating cash flow was $623 million, compared with $604 million in the prior-year quarter.
- Free cash flow was $490 million, down from $627 million, primarily because rental-equipment purchases increased to $219 million from $100 million.
- Cash and cash equivalents were $337 million at March 31, 2017, compared with $312 million at December 31, 2016.
- Total debt was $7.349 billion at March 31, 2017, versus $7.790 billion at year-end 2016. Debt included $1.3 billion of variable-rate borrowings and approximately $6.1 billion of fixed-rate debt.
- Available liquidity was $2.09 billion, including cash. ABL availability was $1.736 billion, net of letters of credit, and accounts-receivable securitization availability was $18 million.
- The company was in compliance with applicable debt covenants, and the ABL fixed-charge coverage covenant was not applicable because specified availability exceeded the required threshold.
Material changes and unusual items
- United Rentals issued $250 million each of additional 2026 and 2027 senior notes in February 2017. Proceeds initially reduced ABL borrowings.
- The company acquired NES Rentals on April 3, 2017, after the reporting date, for approximately $965 million in cash. NES had 73 branches, approximately 1,100 employees, approximately $900 million of rental assets at original equipment cost, and annual revenue of approximately $369 million.
- The NES acquisition was funded with available cash, ABL borrowings and new debt. Following closing, total outstanding debt was approximately $8.0 billion. Management expected to initiate a restructuring program related to the acquisition.
- Share repurchases remained paused while management evaluated acquisition and other capital-allocation priorities. The company had repurchased $627 million under its $1 billion program as of April 17, 2017.
- The company adopted new share-based-payment accounting guidance prospectively in the first quarter; prior periods were not adjusted.
Outlook, management commentary and risks
Management expects to continue emphasizing profitable growth, rate management, fleet optimization, Lean operating initiatives, Project XL, expansion of trench, power and pump offerings, and cross-selling. Management stated that existing cash sources should support operations over the next 12 months, but the filing does not provide specific full-year revenue, earnings or cash-flow guidance.
Management cited improving demand in many core markets but continued rental-rate pressure from Canada and industry fleet expansion. Delivery costs increased 15.3%, reflecting higher rental volume and equipment transfers. The business is seasonal and cyclical, with sensitivity to North American construction and industrial activity.
Principal risks include substantial indebtedness and refinancing or covenant risk, integration and undiscovered-liability risks related to acquisitions, fleet overcapacity, rental-rate and utilization pressure, equipment residual-value declines, credit and collection risk, impairment charges, oil and natural-gas exposure, competition, cybersecurity and information-technology disruptions, regulatory and litigation matters, labor issues, supplier dependence, and foreign-currency exposure. The company reported no legal matters expected to have a material adverse effect, individually or in the aggregate.
Facts investors should verify
- Post-acquisition debt, interest expense, leverage and liquidity following the April 3, 2017 NES closing.
- NES integration results, planned restructuring charges, synergies and any purchase-accounting adjustments.
- Whether rental-rate pressure persists and whether utilization gains offset pricing and delivery-cost increases.
- Capital-expenditure requirements, fleet growth, used-equipment sale prices and the resulting free-cash-flow trajectory.
- Continuation or resumption of the share-repurchase program after acquisition integration.
- Compliance with debt covenants and the availability of the ABL and receivables-securitization facilities.