United Rentals, Inc. 2017 Form 10-K Summary
Business context and reporting period
United Rentals is a North American equipment-rental company operating in the United States and Canada through United Rentals (North America), Inc. The filing covers the fiscal year ended December 31, 2017, with quarterly information including the fourth quarter. The company operated 997 rental locations, employed approximately 14,800 people and had a fleet with original equipment cost of approximately $11.5 billion.
United Rentals has two reportable segments: general rentals and trench, power and pump. Equipment rentals represented 86% of total revenue. The company completed the acquisitions of NES Rentals in April 2017 and Neff Corporation in October 2017.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenue | $6.641 billion | $5.762 billion | 15.3% increase |
| Equipment rental revenue | $5.715 billion | $4.941 billion | 15.7% increase |
| Gross profit | $2.769 billion | $2.403 billion | 15.2% increase |
| Gross margin | 41.7% | 41.7% | Flat |
| Operating income | $1.507 billion | $1.415 billion | 6.5% increase |
| Net income | $1.346 billion | $566 million | 137.8% increase |
| Diluted EPS | $15.73 | $6.45 | 144.0% increase |
| Adjusted EBITDA | $3.164 billion | $2.759 billion | 14.7% increase |
| Adjusted EBITDA margin | 47.6% | 47.9% | 30 basis-point decrease |
| Cash flow from operations | $2.230 billion | $1.953 billion | 14.2% increase |
| Free cash flow | $907 million | $1.182 billion | 23.3% decrease |
Rental rates decreased 0.2%, while the volume of equipment on rent increased 18.2%. Time utilization reached a record 69.5%, compared with 67.9% in 2016. On a pro forma basis including NES and Neff for the full comparable period, equipment rental revenue increased 7.6%, rental rates increased 0.4% and equipment-on-rent volume increased 7.1%.
At December 31, 2017, cash and cash equivalents were $352 million, total debt was $9.440 billion and stockholders’ equity was $3.106 billion. Available liquidity was approximately $1.71 billion, including cash. The company reported $1.282 billion of availability under its ABL facility and $80 million under its accounts receivable securitization facility.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by acquisitions, fleet expansion and stronger demand. Rental equipment net increased 26.4% to $7.824 billion.
- General rentals equipment rental revenue increased 13.5%, while trench, power and pump revenue increased 27.5%; the latter benefited from improved Pump Solutions performance and stronger demand from oil and gas, construction and mining customers.
- Equipment rental gross margin improved 40 basis points to 42.7%, helped by higher utilization, but total gross margin remained flat because margins declined in used-equipment sales, new-equipment sales and service revenue.
- SG&A increased 25.6% to $903 million, or 13.6% of revenue, reflecting acquisition-related compensation, higher stock compensation and increased operating scale.
- Merger-related costs were $50 million and restructuring charges were $50 million, compared with none and $14 million, respectively, in 2016.
- Interest expense declined to $464 million from $511 million despite higher debt, principally because the average cost of debt was lower. The 2017 amount included $54 million of losses related to debt redemptions and ABL amendments.
- Free cash flow declined because rental-equipment purchases increased substantially. Net rental capital expenditures were $1.22 billion, compared with $750 million in 2016.
- The company issued substantial debt to finance acquisitions and refinanced or redeemed higher-cost debt. Total debt increased from $7.790 billion to $9.440 billion.
Fourth-quarter results and unusual items
Fourth-quarter revenue was $1.922 billion, compared with $1.523 billion in the fourth quarter of 2016. Fourth-quarter net income was $897 million, compared with $153 million in the prior-year quarter. The 2017 fourth-quarter result included a $689 million estimated income-tax benefit, or $8.03 per diluted share, primarily from revaluing deferred tax liabilities following the Tax Cuts and Jobs Act.
The fourth quarter also included $18 million of merger-related costs, $22 million of restructuring charges, an $11 million loss on redeeming the remaining $225 million of 7 5/8% Senior Notes due 2022 and an $11 million year-over-year increase in stock compensation expense. Consequently, reported quarterly earnings are not representative of underlying operating performance.
Guidance, outlook, management commentary and risks
- Management expected North American equipment-rental industry revenue to grow approximately 4% in 2018 and planned to open at least 18 specialty rental branches or tool hubs.
- Management projected 2018 free cash flow of approximately $1.3 billion to $1.4 billion and expected to use cash generation and available financing for operations, fleet investment, debt service, share repurchases and acquisitions.
- Management expected the Tax Cuts and Jobs Act to provide a meaningful future cash-flow benefit through the lower federal tax rate and full expensing of capital spending, partly offset by the repeal of like-kind-exchange deferrals on used-equipment sales.
- The NES/Neff/Project XL restructuring program was expected to be completed in the first half of 2018. Total expected costs were not yet estimable, and additional Neff-related restructuring charges were expected.
- Principal risks include the cyclical nature of construction and industrial activity, rental-rate pressure, fleet overcapacity, residual-value risk, acquisition integration, significant indebtedness, refinancing and covenant compliance, variable interest rates, customer credit losses, litigation and insurance exposure, environmental obligations, cybersecurity, labor matters and oil-and-gas market volatility.
- Approximately $2.4 billion of debt carried variable interest rates. Management estimated that a one-percentage-point increase in applicable rates would reduce annual after-tax earnings by approximately $14 million.
- The company had $723 million of debt and current maturities due in 2018 and $1.683 billion due in 2021. Its accounts receivable securitization facility was scheduled to mature on August 28, 2018, subject to possible extensions.
- The company was in compliance with its debt covenants at year-end, and the ABL fixed-charge coverage covenant was not applicable because required availability thresholds were exceeded.
- The company had $4.082 billion of goodwill. All reporting units exceeded carrying value in the October 1, 2017 impairment test by at least 45%, but future impairment remains sensitive to operating performance, growth assumptions and discount rates.
Most important facts for an investor to verify
- Whether the strong 2017 growth is sustained on a pro forma basis after separating acquisition contributions from organic rental demand.
- Whether rental rates, utilization and equipment-on-rent volume support management’s 2018 free-cash-flow outlook.
- The integration progress, realized synergies and remaining restructuring costs for NES and Neff, including the finalization of Neff purchase-accounting values.
- Debt maturity, refinancing and interest-rate exposure, including the 2018 receivables-facility maturity and the substantial 2021 maturity.
- The sustainability of reported earnings excluding the $689 million Tax Cuts and Jobs Act benefit and other acquisition, restructuring and debt-redemption items.
- Whether increased fleet age, maintenance costs and used-equipment residual values could pressure margins and cash flow.
- The effect of the 2018 adoption of revenue-recognition guidance and the expected 2019 adoption of lease accounting, including the potentially significant balance-sheet impact of recognizing operating lease assets and liabilities.