United Rentals, Inc. — Q3 2012 Form 10-Q Summary
Business context and reporting period
United Rentals, Inc. and United Rentals (North America), Inc. filed a combined unaudited Form 10-Q for the quarter and nine months ended September 30, 2012. The company rents and sells equipment, supplies and related services across the United States and Canada through 848 rental locations. Equipment rentals represented 84% of revenue for the nine-month period.
Results include RSC Holdings, Inc. from the April 30, 2012 acquisition date. The acquisition had estimated consideration of $2.586 billion, including $1.161 billion of cash, $1.396 billion of stock and $2.651 billion of preliminary goodwill.
Financial results and key metrics
| Metric | Three months ended September 30 | Nine months ended September 30 | ||
|---|---|---|---|---|
| 2012 | 2011 | 2012 | 2011 | |
| Total revenue | $1,219 million | $713 million | $2,868 million | $1,865 million |
| Equipment rentals revenue | $1,051 million | $604 million | $2,419 million | $1,562 million |
| Gross profit | $505 million | $274 million | $1,092 million | $623 million |
| Operating income | $222 million | $156 million | $355 million | $281 million |
| Net income | $73 million | $65 million | $34 million | $72 million |
| Diluted EPS | $0.70 | $0.91 | $0.37 | $0.99 |
| Total gross margin | 41.4% | 38.4% | 38.1% | 33.4% |
| Adjusted EBITDA | $570 million | $282 million | $1,219 million | $648 million |
| Adjusted EBITDA margin | 46.8% | 39.6% | 42.5% | 34.7% |
Reported nine-month earnings were reduced by $98 million of RSC merger-related costs, $93 million of restructuring charges, increased amortization of acquired intangibles and higher interest expense. The third quarter also included a $4 million benefit from settlement of a Canadian tax matter.
Cash flow, debt and liquidity
- Operating cash flow was $495 million for the nine months, compared with $453 million in the prior-year period.
- Capital purchases were $1.185 billion, including $1.109 billion of rental equipment. Proceeds from equipment sales were $284 million.
- Free cash usage was $410 million, compared with $76 million in the prior-year period.
- Cash and cash equivalents were $68 million at September 30, 2012, compared with $36 million at December 31, 2011.
- Total debt was $7.375 billion, including $651 million classified as short-term and $6.724 billion classified as long-term. Total debt was $2.987 billion at December 31, 2011, primarily reflecting the RSC transaction and related financing.
- The $1.9 billion ABL facility had $1.137 billion outstanding and $683 million of availability after letters of credit. The accounts receivable securitization facility had $475 million outstanding and no remaining availability.
- Management stated that existing sources of cash were expected to support operations for the following 12 months. The company was in compliance with its material debt covenants at September 30, 2012.
Material changes versus the prior comparable period
- Revenue increased 71.1% in the third quarter and 53.8% for the nine months, largely due to the RSC acquisition, higher rental rates and greater equipment volume.
- Equipment rental revenue increased 74.0% in the third quarter and 54.9% for the nine months. Pro forma rental rates increased 7.5% and 7.3%, respectively, while volume of original equipment cost on rent increased 79.7% and 56.9%.
- Equipment-rental gross margin improved to 43.0% from 38.6% in the third quarter and to 38.7% from 32.7% for the nine months. General rentals margin benefited from pricing and cost improvements, while trench safety, power and HVAC margin declined due primarily to higher depreciation.
- Interest expense increased to $127 million from $57 million in the third quarter and to $316 million from $170 million for the nine months because of acquisition-related debt and assumed RSC debt.
- Non-rental depreciation and amortization increased to $71 million from $13 million in the third quarter and to $134 million from $39 million for the nine months, primarily due to acquired RSC assets and intangible amortization.
- The rental fleet’s original equipment cost increased to $7.4 billion from $4.0 billion at December 31, 2011, and the branch network increased from 529 locations at December 31, 2011 to 848 locations.
Guidance, outlook, risks and unusual items
- Management expected 2012 gross rental capital expenditures of $1.3 billion to $1.4 billion and net rental capital expenditures of $925 million to $975 million.
- An additional $10 million to $30 million of RSC-related merger costs and $10 million to $30 million of restructuring charges were expected after September 30, 2012, with the restructuring substantially complete by March 31, 2013. Purchase price allocations for RSC remained preliminary.
- The company authorized a $200 million stock repurchase program and had repurchased $112 million as of October 12, 2012; management intended to complete the program within 18 months of the RSC closing.
- Key risks include the highly leveraged capital structure, debt-service requirements, restrictive covenants, refinancing and capital-market access, cyclical construction and industrial demand, integration of RSC, credit and collection risk, fleet residual values, maintenance costs, impairment charges, litigation and regulatory matters, insurance exposure, labor issues, competition and information-technology disruptions.
- The company’s business is seasonal, with rental activity generally lower in winter. Management stated that the recent market recovery and rental growth might not continue.
- The company settled a putative RSC stockholder class action relating to the merger; the settlement was approved on September 28, 2012. Other ordinary-course claims and proceedings were not expected by management to have a material adverse effect.
Most important facts for an investor to verify
- Whether RSC integration synergies and cost savings offset the substantial increase in leverage, interest expense and acquired-asset amortization.
- Actual rental rates, time utilization, fleet productivity and equipment-rental margins after the acquisition-related effects subside.
- Compliance with ABL and receivables-facility covenants, availability under those facilities and the September 2013 receivables-facility expiration.
- Progress against the $925 million to $975 million net rental capital-expenditure outlook and the company’s ability to fund negative free cash flow.
- Final purchase price allocations for RSC, goodwill and intangible-asset impairment exposure.
- Completion and total cost of the announced restructuring and stock repurchase programs.
- Near-term maturities, including redeemable convertible notes, and sensitivity to interest rates, construction demand and equipment residual values.