United Rentals, Inc. — 2015 Q3 Form 10-Q Summary
Business context and reporting period
United Rentals, Inc. and wholly owned United Rentals (North America), Inc. filed a combined unaudited Form 10-Q for the quarter and nine months ended September 30, 2015. The company operates approximately 900 rental locations across the United States and Canada, offering approximately 3,300 equipment classes. Equipment rentals represented 85% of nine-month revenue.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Total revenue | $1,550 million | $1,544 million | $4,294 million | $4,121 million |
| Equipment rental revenue | $1,326 million | $1,315 million | $3,671 million | $3,499 million |
| Gross profit | $690 million | $688 million | $1,832 million | $1,725 million |
| Operating income | $446 million | $422 million | $1,121 million | $965 million |
| Net income | $215 million | $192 million | $416 million | $346 million |
| Diluted EPS | $2.25 | $1.84 | $4.27 | $3.29 |
| Net cash from operating activities | Not separately provided | Not separately provided | $1,557 million | $1,466 million |
| Free cash flow | Not separately provided | Not separately provided | $508 million | $312 million |
Calculated Q3 margins were approximately 44.5% gross, 28.8% operating and 13.9% net. Nine-month margins were approximately 42.7% gross, 26.1% operating and 9.7% net. Management reported nine-month EBITDA of $2,057 million and adjusted EBITDA of $2,088 million; adjusted EBITDA margin was 48.6%, compared with 47.1% in the prior-year period.
- Q3 revenue increased 0.4%, while nine-month revenue increased 4.2% year over year.
- Q3 equipment rental revenue increased 0.8%; nine-month equipment rental revenue increased 4.9%, driven by a 4.2% increase in volume of original equipment cost on rent and a 1.3% rental-rate increase, partly offset by currency effects.
- Nine-month equipment rental gross margin increased to 43.3% from 42.3%. General rentals margin increased to 42.6% from 41.1%, while trench, power and pump margin declined to 47.2% from 51.2%.
- SG&A declined to $178 million in Q3 and $534 million for nine months, representing 11.5% and 12.4% of revenue, respectively, versus 12.6% and 13.3% in the comparable periods.
- Total debt was $8,515 million at September 30, 2015, including $639 million of current debt and $7,876 million of long-term debt. Cash was $171 million.
- Available liquidity was $814 million, consisting of cash, $622 million available under the ABL facility and $21 million available under the accounts receivable securitization facility.
Material changes versus the prior comparable period
- Operating income increased 5.7% in Q3 and 16.2% for nine months, while net income increased 12.0% and 20.2%, respectively.
- Diluted EPS increased 22.3% in Q3 and 29.8% for nine months, aided by lower weighted-average shares following repurchases and the partial redemption of convertible notes.
- Operating cash flow increased $91 million, or 6.2%, for nine months. Free cash flow increased $196 million, or 62.8%, primarily due to higher operating cash flow and lower rental-equipment purchases.
- Capital expenditures decreased to $1,501 million from $1,568 million. Net rental capital expenditures were $1,044 million versus $1,096 million.
- The company issued $1.0 billion of 4.625% senior secured notes and $800 million of 5.5% senior notes, redeemed higher-cost debt, amended and expanded its ABL facility to $2.5 billion, and increased its receivables facility to $625 million.
- Interest expense for nine months increased to $460 million from $436 million, including $123 million of losses on debt redemptions and the ABL amendment. Excluding those losses, interest expense decreased year over year.
- United Rentals repurchased $667 million of common stock during the first nine months. As of October 19, 2015, $740 million had been repurchased under the existing $750 million authorization, and a new $1 billion authorization was scheduled to begin afterward.
Guidance, outlook, risks and unusual items
- Management expected approximately $1.1 billion of net rental capital expenditures for full-year 2015, based on approximately $1.6 billion of gross purchases.
- Management expected 2015 free cash flow of $725 million to $775 million and believed existing cash sources were sufficient to support operations over the following 12 months.
- Management expected solid industry growth in 2016 but warned that recent fleet expansion and continuing softness in upstream oil and gas could pressure rental volume and pricing.
- National Pump operations experienced volume and pricing pressure from upstream oil and gas customers. The acquisition contributed $170 million of revenue but a $2 million pretax loss for the first nine months of 2015.
- The nine-month results included a $26 million reduction in merger-related costs from a decline in the fair value of National Pump contingent consideration, reflecting lower-than-expected performance. The contingent consideration was paid in June 2015, and no further liability remained.
- Restructuring programs were substantially complete, with $14 million of branch-closure reserves remaining at September 30, 2015. The company did not expect significant additional charges.
- Material risks include the cyclical nature of construction and industrial markets, energy-sector weakness, substantial indebtedness, refinancing and covenant risk, equipment residual-value declines, pricing and utilization pressure, integration risks, foreign currency exposure, cybersecurity, litigation, regulatory matters and dependence on access to capital.
- The company was in compliance with its debt covenants. The ABL fixed-charge coverage covenant was inapplicable because specified availability exceeded the required threshold.
- The $8 million principal balance of 4% Convertible Senior Notes was due November 15, 2015. Based on the September 30 stock price, management estimated total settlement cost of approximately $41 million, including approximately $33 million payable in shares for conversion value above principal.
Important facts for investors to verify
- Reconcile reported liquidity of $814 million to actual borrowing capacity, letters of credit, receivables collateral and upcoming maturities.
- Assess leverage and debt-service capacity, including $8.5 billion of debt, the 2016 maturities and the scheduled redemption or settlement of the convertible notes.
- Monitor trench, power and pump utilization and margins, particularly the Pump Solutions business exposed to upstream oil and gas.
- Compare the projected 2015 free cash flow of $725 million to $775 million with subsequent reported results and determine how much is available after share repurchases and debt service.
- Evaluate whether the reported earnings and EBITDA improvements rely materially on nonrecurring debt-redemption, merger-related, restructuring or acquisition-accounting items.
- Review the sustainability of rental-rate increases, fleet utilization, equipment residual values and the planned level of fleet investment.
- Confirm the effect of the 8% retroactive royalty rate charged by Holdings to URNA on intercompany balances, restricted-payment capacity and cash transfers.