United Rentals, Inc. — FY2015 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2015. The filing also provides unaudited fourth-quarter information. United Rentals is a North American equipment-rental company operating through United Rentals (North America), Inc., with two reportable segments: general rentals and trench, power and pump.
Business Context
- United Rentals operated 897 rental locations, served the United States and Canada, employed approximately 12,700 people, and maintained approximately 430,000 equipment units with fleet original equipment cost of $8.73 billion.
- Equipment rentals represented 85% of total revenue. End-market exposure was approximately 51% industrial and other non-construction, 45% commercial construction, and 4% residential construction.
- The company estimated North American equipment-rental industry revenue growth of approximately 6% in 2015, compared with United Rentals equipment-rental revenue growth of 2.7%.
Financial Metrics
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Total revenue | $5,817 million | $5,685 million | 2.3% |
| Equipment-rental revenue | $4,949 million | $4,819 million | 2.7% |
| Gross profit | $2,480 million | $2,432 million | 2.0% |
| Gross margin | 42.6% | 42.8% | Down 20 bps |
| Operating income | $1,518 million | $1,391 million | 9.1% |
| Net income | $585 million | $540 million | 8.3% |
| Diluted EPS | $6.07 | $5.15 | 17.9% |
| Net cash from operating activities | $1,995 million | $1,801 million | 10.8% |
| Free cash flow | $919 million | $557 million | 65.0% |
| Adjusted EBITDA | $2,832 million | $2,718 million | 4.2% |
| Adjusted EBITDA margin | 48.7% | 47.8% | Up 90 bps |
Time utilization declined to 67.3% from 68.8%, while rental rates increased 0.5% and the volume of equipment on rent increased 3.2%. Equipment-rental gross margin was 43.4%, unchanged from 2014. SG&A declined to $714 million from $758 million, and SG&A as a percentage of revenue improved to 12.3% from 13.3%.
Liquidity, Debt and Capital Allocation
- Cash and cash equivalents were $179 million at December 31, 2015.
- Total debt was $8.162 billion, compared with $7.962 billion at year-end 2014. Long-term debt was $7.555 billion and current debt and maturities were $607 million.
- Available liquidity was approximately $1.10 billion, including cash. ABL facility availability was $873 million, and accounts-receivable securitization availability was $48 million.
- Operating cash flow funded $1.636 billion of capital-equipment purchases and $555 million of proceeds from equipment sales. Net rental capital expenditures were approximately $1.00 billion, compared with $1.16 billion in 2014.
- The company repurchased $789 million of common stock during 2015. A new $1 billion repurchase program began in November 2015; $889.5 million remained available at December 31, 2015.
- Management stated that existing cash sources were sufficient to support operations over the following 12 months. The company was in compliance with its debt covenants at year-end, and the ABL fixed-charge coverage covenant was not applicable because availability exceeded the required threshold.
Material Changes Versus the Prior Comparable Period
- Revenue growth slowed materially from 14.7% in 2014 to 2.3% in 2015, and equipment-rental growth slowed from 14.8% to 2.7%.
- Rental-rate growth declined from 4.5% to 0.5%, equipment volume growth declined from 9.6% to 3.2%, and time utilization decreased by 150 basis points.
- General-rentals equipment-rental gross margin improved 50 basis points to 42.9%, but trench, power and pump gross margin fell 430 basis points to 46.3%, primarily because of weakness in the Pump Solutions business.
- Upstream oil and gas exposure caused volume and pricing pressure in Pump Solutions. National Pump generated $225 million of revenue in 2015 but recorded a pretax loss of $6 million, compared with $42 million of pretax income in 2014.
- The company issued $1.0 billion of 4.625% senior secured notes and $800 million of 5.5% senior notes, increased its ABL facility to $2.5 billion, and redeemed or repurchased higher-cost debt. These actions improved flexibility but total debt increased year over year.
- Foreign-currency translation produced a $174 million other comprehensive loss in 2015, compared with a $90 million loss in 2014.
Fourth-Quarter Items, Outlook and Unusual Matters
- Fourth-quarter 2015 revenue was $1.523 billion, operating income was $397 million, net income was $169 million, and diluted EPS was $1.81.
- The company initiated a cost-savings restructuring program in the fourth quarter in response to volume and pricing pressure and lower-than-expected Lean savings. It recorded $4 million of restructuring costs and expected most remaining costs to be recognized in 2016; total program costs were not yet estimable.
- A $5 million property-tax settlement reduced fourth-quarter equipment-rental costs. Fourth-quarter income taxes included a $5 million increase in valuation allowances related to Connecticut net operating-loss limitations.
- Management expected approximately 6% growth in North American industry equipment-rental revenue in 2016, reflecting estimated growth of approximately 7% in the United States and 1% in Canada on a constant-currency basis. The company planned to open at least 14 specialty-rental branches or tool hubs.
- The Pump Solutions reporting unit had $311 million of goodwill. Its estimated fair value exceeded carrying value by only 1% at November 30, 2015; sensitivity testing failed the first step of the impairment test under modestly adverse assumptions. No impairment was recorded, but management stated that future underperformance could result in a goodwill impairment charge.
- Key risks include the cyclical construction and industrial markets, fleet overcapacity, oil and gas exposure, significant leverage, refinancing and covenant risk, interest-rate and currency risk, residual values of used equipment, customer credit losses, litigation and self-insurance claims, environmental obligations, cybersecurity, and integration or impairment risks related to acquisitions.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2015.
Important Facts for Investors to Verify
- Whether Pump Solutions' operating recovery assumptions are achieved and whether the narrow goodwill headroom results in a future impairment.
- Whether utilization, rental rates and general-rental volumes improve sufficiently to support the 2016 outlook and restructuring savings.
- The company's ability to refinance or repay the $607 million of debt due in 2016 and the $2.343 billion due in 2020 while continuing fleet investment and share repurchases.
- Availability and renewal terms of the $625 million accounts-receivable securitization facility, which expires August 30, 2016 unless extended.
- The impact of variable-rate debt, currency movements, and oil and natural-gas prices on earnings and liquidity.
- The extent and timing of remaining restructuring costs, contingent obligations, legal claims, environmental remediation, and self-insurance reserves.
- The sustainability of reported free cash flow, including the effects of fleet purchases, equipment-sale proceeds, tax benefits and share repurchases.