United Rentals, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2014; filed July 16, 2014. The filing covers United Rentals, Inc. and wholly owned United Rentals (North America), Inc. Results are unaudited and should be read with the 2013 Form 10-K.
Business Context
United Rentals is a North American equipment-rental company serving construction, industrial, infrastructure, energy, government and other customers through 883 rental locations in the United States and Canada. The company offers approximately 3,400 equipment classes. Reportable segments are general rentals and trench safety, power and HVAC, and pump solutions.
Equipment rentals represented 84% of second-quarter revenue and 85% of first-half revenue. The company’s fleet had original equipment cost of approximately $8.4 billion at June 30, 2014.
Key Financial Metrics
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $1,399 million | $1,206 million | $2,577 million | $2,306 million |
| Equipment-rental revenue | $1,179 million | $1,009 million | $2,184 million | $1,925 million |
| Gross profit | $589 million | $471 million | $1,037 million | $856 million |
| Operating income | $325 million | $250 million | $543 million | $399 million |
| Net income | $94 million | $83 million | $154 million | $104 million |
| Diluted EPS | $0.90 | $0.78 | $1.46 | $0.98 |
| EBITDA | $628 million | $520 million | $1,124 million | $936 million |
| Adjusted EBITDA | $663 million | $549 million | $1,182 million | $1,000 million |
| Adjusted EBITDA margin | 47.4% | 45.5%* | 45.9% | 43.4%* |
| Operating cash flow | Not separately provided | Not separately provided | $1,054 million | $878 million |
| Free cash flow | Not separately provided | Not separately provided | $240 million | $77 million |
*Prior-period margins are derived from reported EBITDA and adjusted EBITDA figures; management specifically reported 2014 margin increases of 1.8 and 1.9 percentage points for the quarter and 3.0 and 2.5 percentage points for the six months, respectively.
- Q2 total revenue increased 16.0%; first-half revenue increased 11.8%.
- Q2 net income increased 13.3%; first-half net income increased 48.1%.
- Q2 EBITDA increased 20.8%; first-half EBITDA increased 20.1%.
- Total gross margin was 42.1% in Q2 and 40.2% for the first six months, compared with 39.1% and 37.1%, respectively, in the prior-year periods.
- Equipment-rental gross margin was 42.7% in Q2 and 40.4% for the first six months, versus 39.8% and 37.6% in the comparable periods.
Cash Flow, Debt and Liquidity
- Cash and cash equivalents were $170 million at June 30, 2014, compared with $175 million at December 31, 2013.
- Total debt was $8.015 billion, including $621 million of short-term debt and $7.394 billion of long-term debt, compared with total debt of $7.173 billion at year-end 2013.
- Available liquidity was approximately $1.2 billion, consisting of $170 million of cash, $1.0 billion available under the ABL facility, net of letters of credit, and $38 million available under the accounts-receivable securitization facility.
- Six-month capital expenditures were $1.080 billion, including $1.028 billion for rental equipment. Net rental capital expenditures were $780 million.
- Management expects approximately $1.7 billion of gross and $1.2 billion of net rental capital expenditures for full-year 2014.
- The company was in compliance with its debt covenants at June 30, 2014. ABL maintenance covenants were not applicable because availability exceeded the required threshold.
Material Changes Versus Prior Comparable Period
- Rental rates increased 4.9% in Q2 and 4.6% for the first six months; volume of original equipment cost on rent increased 10.3% and 9.0%, respectively.
- General-rentals equipment-rental revenue increased 10.3% in Q2 and 9.3% year to date. Specialty-segment rental revenue increased 96.1% and 66.9%, respectively.
- Specialty results benefited substantially from the April 2014 acquisition of National Pump, whose operations generated $67 million of Q2 revenue and $14 million of pretax income after acquisition.
- National Pump was acquired for total purchase consideration of $853 million, including $777 million of cash consideration and $76 million of contingent consideration. The preliminary allocation included $324 million of goodwill and $289 million of acquired intangible assets.
- SG&A increased to $187 million in Q2 and $355 million for the first six months, from $152 million and $312 million, respectively. SG&A as a percentage of revenue increased modestly, primarily because of higher bonus and incentive compensation.
- Interest expense increased to $187 million in Q2 and $312 million year to date, including $64 million and $75 million, respectively, of losses associated with debt redemptions and repurchases.
- The company issued $525 million of 6⅛% Senior Notes and $850 million of 5¾% Senior Notes, redeemed its 10¼% Senior Notes and 9¼% Senior Notes, and redeemed $59 million principal amount of its 4% Convertible Senior Notes.
- Share repurchases totaled $247 million during the first six months. As of July 14, 2014, $261 million had been repurchased under the $500 million authorization, which management intended to complete by April 2015.
Guidance, Outlook, Risks and Unusual Items
- Management expects 2014 free cash flow of $450 million to $500 million and intends to use it primarily for share repurchases.
- Management believes existing cash sources will fund operations for at least the next 12 months, including working capital, fleet purchases, debt service, acquisitions and repurchases.
- Management is expanding specialty rentals and implementing “Operation United 2” lean-management initiatives focused on rental cycle times, invoice accuracy, delivery, service quality, and repair and maintenance efficiency.
- Unusual items included $8 million of Q2 and $9 million of first-half merger-related costs, primarily associated with National Pump and prior RSC transactions; Q2 restructuring income was $1 million and there was no first-half restructuring charge.
- First-half cash flow included a $75 million loss on extinguishment of debt securities. Debt redemptions also increased reported interest expense.
- National Pump contingent consideration had a fair value of $78 million at June 30, 2014, creating future cash-payment exposure tied to performance targets.
- Principal risks include the cyclical and construction-sensitive nature of rental demand, significant leverage and refinancing requirements, covenant compliance, integration of acquisitions, equipment residual values, rental rates and utilization, credit losses, litigation and regulatory matters, insurance coverage, labor and supplier risks, information-technology disruptions, and environmental and safety compliance.
- Variable-rate debt totaled approximately $1.7 billion; management estimated that a one-percentage-point increase in applicable rates would reduce annual after-tax earnings by approximately $10 million. A 10% change in the Canadian-dollar exchange rate was estimated to affect annual after-tax earnings by approximately $11 million.
Investor Verification Checklist
- Verify the preliminary purchase-price allocation, earn-out assumptions and integration performance for National Pump.
- Monitor total debt, scheduled maturities, interest expense, refinancing access and ABL availability.
- Compare actual 2014 rental rates, utilization, specialty growth, capital expenditures and free cash flow with management’s stated expectations.
- Assess whether margin expansion can offset higher SG&A, depreciation, maintenance and delivery costs.
- Review the effect of share repurchases and potential conversion or redemption of the remaining 4% Convertible Senior Notes, including possible equity dilution.
- Evaluate the sustainability of equipment-sale gains and rental-equipment residual values.
- Review outstanding legal, regulatory, insurance, contingent-consideration and covenant exposures.