United Rentals, Inc. 2016 Form 10-K Summary
Business context and reporting period
United Rentals, Inc. is the world’s largest equipment rental company, operating 887 locations across the United States and Canada through United Rentals (North America), Inc. The filing covers the fiscal year ended December 31, 2016; fourth-quarter information is included but the filing is an annual report, not a quarterly filing. The company reports two segments: general rentals and trench, power and pump.
- Equipment fleet original equipment cost: $8.99 billion; approximately 440,000 units and 3,200 equipment classes.
- Equipment rental revenue represented 86% of total revenue.
- Construction and industrial customers represented the principal demand base; industrial and other non-construction rentals were approximately 51% of rental revenue, commercial construction 45%, and residential construction 4%.
Financial performance and key metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total revenue | $5,762 million | $5,817 million | (0.9%) |
| Equipment rental revenue | $4,941 million | $4,949 million | (0.2%) |
| Gross profit | $2,403 million | $2,480 million | (3.1%) |
| Gross margin | 41.7% | 42.6% | (90 bps) |
| Operating income | $1,415 million | $1,518 million | (6.8%) |
| Net income | $566 million | $585 million | (3.2%) |
| Diluted EPS | $6.45 | $6.07 | +6.3% |
| EBITDA | $2,665 million | $2,774 million | (3.9%) |
| Adjusted EBITDA | $2,759 million | $2,832 million | (2.6%) |
| Adjusted EBITDA margin | 47.9% | 48.7% | (80 bps) |
| Net cash from operating activities | $1,953 million | $1,995 million | (2.1%) |
| Free cash flow | $1,182 million | $919 million | +$263 million |
Rental rates declined 2.2% year over year, while the volume of equipment on rent increased 3.1%. Time utilization improved to 67.9% from 67.3%. Equipment rental gross margin declined to 42.3% from 43.4%, primarily because of rate pressure, including pressure from oil and gas markets, Canada and industry fleet expansion.
- General rentals revenue declined to $4,908 million from $5,032 million; equipment rental revenue declined 1.8% and gross margin declined 150 basis points to 41.4%.
- Trench, power and pump revenue increased to $854 million from $785 million; equipment rental revenue increased 9.5% and gross margin increased 70 basis points to 47.0%.
- Capital expenditures were $1,339 million, including $1,246 million for rental equipment. Net rental capital expenditures were approximately $750 million, down from $1.0 billion in 2015.
- Cash and cash equivalents were $312 million at year-end, compared with $179 million in 2015.
- Total debt declined to $7,790 million from $8,162 million. Stockholders’ equity increased to $1,648 million from $1,476 million.
Material changes versus the prior comparable period
- Revenue and operating income declined despite higher rental volume, as lower rental rates and lower used-rental-equipment sales pressured results.
- Free cash flow increased substantially because rental-equipment purchases declined.
- The company reduced debt through redemptions and refinancing activity. It redeemed all 7⅜% and 8¼% senior notes and $850 million principal amount of 7⅝% senior notes, while issuing new 2026 and 2027 notes.
- The ABL facility was amended and expanded to $2.5 billion, and the accounts receivable securitization facility was amended and expanded to $625 million.
- The 2015/2016 restructuring program was completed in the fourth quarter of 2016. Full-year restructuring charges were $14 million, including $6 million in the fourth quarter.
- Fourth-quarter 2016 results included a $65 million loss in interest expense from the partial redemption of the 7⅝% senior notes.
- Share repurchases were paused in October 2016 while potential acquisitions were evaluated. The company repurchased $528 million of stock during 2016.
Guidance, outlook, commentary, risks and unusual items
Management expected North American equipment rental industry revenue to increase approximately 4% in 2017, with similar constant-currency growth in the United States and Canada. The company planned to continue rate management, fleet optimization, Lean initiatives, Project XL, specialty-rental expansion and cross-selling, including at least 17 new specialty rental branches or tool hubs in 2017.
On January 25, 2017, after year-end, the company entered into an agreement to acquire NES Rentals for approximately $965 million in cash. The transaction was expected to be funded with available cash, drawings under existing debt facilities and new debt issuance, subject to antitrust clearance and other customary conditions. NES had 73 branches, approximately 1,100 employees, approximately $900 million of rental assets at original equipment cost and approximately $369 million of annual revenue as of the dates disclosed.
- Liquidity was reported as $1.18 billion, including $312 million of cash. Management stated that existing sources were expected to support operations for the next 12 months.
- Debt remains a major risk: total indebtedness was $7.8 billion, including $2.2 billion of variable-rate debt. A one-percentage-point increase in variable interest rates was estimated to reduce annual after-tax earnings by approximately $14 million.
- Debt agreements impose restrictions on additional debt, acquisitions, asset sales, dividends and share repurchases. The company was in compliance with applicable covenants at year-end, and the ABL fixed-charge coverage covenant was inapplicable because availability exceeded the triggering threshold.
- Business risks include cyclical construction and industrial demand, overcapacity, rental-rate pressure, oil and gas exposure, used-equipment residual values, customer credit losses, refinancing risk, cybersecurity, environmental and safety obligations, litigation, labor matters and foreign-currency movements.
- Goodwill was $3.26 billion. The Pump Solutions reporting unit had $312 million of goodwill and only a 15% estimated fair-value cushion over carrying value in the October 2016 test; management noted that adverse changes in forecasts or assumptions could result in future impairment.
- Ordinary-course claims and proceedings were not expected to have a material adverse effect based on the information available, although self-insurance, environmental, tax and legal exposures remain subject to estimates and contingencies.
Most important facts for investors to verify
- Whether rental-rate pressure moderates and whether utilization and rental volume can offset pricing declines.
- The financing, leverage and covenant effects of the proposed $965 million NES acquisition and any related debt issuance.
- The sustainability of the reported $1.18 billion of free cash flow after normal fleet replacement and growth investments.
- Refinancing requirements, interest-rate sensitivity and the availability of the ABL and receivables facilities.
- The carrying value and impairment sensitivity of Pump Solutions goodwill and other acquisition-related intangible assets.
- Whether Lean, Project XL and specialty-branch expansion deliver the expected savings, revenue growth and returns on invested capital.
- Exposure to oil and gas markets, Canadian currency movements, used-equipment resale prices and customer credit quality.