United Rentals, Inc. 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 six months ended June 30, 2013. The company rents construction, industrial, specialty and other equipment throughout the United States and Canada and also sells used and new equipment, contractor supplies, and related services. The network included 824 rental locations, an approximately $7.7 billion original-equipment-cost fleet and more than 3,200 equipment classes.
Results include RSC Holdings Inc. from its April 30, 2012 acquisition date. Comparisons with reported 2012 results are therefore affected by partial-period inclusion of RSC; management also provides pro forma 2012 revenue comparisons.
Financial performance and key metrics
| Metric | Three months ended June 30, 2013 | Three months ended June 30, 2012 | Six months ended June 30, 2013 | Six months ended June 30, 2012 |
|---|---|---|---|---|
| Total revenue | $1,206 million | $993 million | $2,306 million | $1,649 million |
| Equipment-rental revenue | $1,009 million | $845 million | $1,925 million | $1,368 million |
| Gross profit | $471 million | $374 million | $856 million | $587 million |
| Operating income | $250 million | $46 million | $399 million | $133 million |
| Net income (loss) | $83 million | $(52) million | $104 million | $(39) million |
| Diluted EPS | $0.78 | $(0.63) | $0.98 | $(0.53) |
| Adjusted EBITDA | $549 million | $418 million | $1,000 million | $649 million |
Reported total revenue increased 21.5% in the second quarter and 39.8% for the six-month period. On a pro forma basis including RSC in both periods, revenue increased from $1,132 million to $1,206 million for the quarter and from $2,196 million to $2,306 million for the six months.
- Six-month equipment-rental revenue increased 40.7%, reflecting a 43.0% increase in original equipment cost on rent and a 4.8% rental-rate increase.
- Total gross margin was 39.1% in the quarter and 37.1% for the six months, compared with 37.7% and 35.6%, respectively, in the prior-year periods.
- Equipment-rental gross margin improved to 39.8% in the quarter and 37.6% for the six months, compared with 38.2% and 35.5%.
- Six-month general-rentals gross margin increased 2.2 percentage points to 37.0%; time utilization increased to 66.8% from 65.9%.
- SG&A increased to $152 million for the quarter and $312 million for the six months, but declined as a percentage of revenue to 12.6% and 13.5% from 14.7% and 15.0%.
- EBITDA margin was 43.1% for the quarter and 40.6% for the six months. Adjusted EBITDA margin was 45.5% and 43.4%, respectively.
Cash flow, debt and liquidity
| Metric | June 30, 2013 | December 31, 2012 |
|---|---|---|
| Cash and cash equivalents | $133 million | $106 million |
| Total debt | $7,356 million | $7,309 million |
| Long-term debt | $6,732 million | $6,679 million |
| Total assets | $11,326 million | $11,026 million |
| Stockholders’ equity | $1,583 million | $1,543 million |
- Six-month operating cash flow was $878 million, compared with $342 million in 2012.
- Capital expenditures were $1,066 million, including $1,025 million of rental-equipment purchases. Proceeds from equipment sales were $265 million.
- Management-defined free cash flow was $77 million, compared with free cash usage of $388 million in 2012.
- At June 30, the company had $591 million of availability under its ABL facility, net of letters of credit, $12 million available under its accounts-receivable securitization facility, and $133 million of cash.
- Borrowings were $1,250 million under the ABL facility and $448 million under the receivables facility. Applicable interest rates were 2.3% and 0.8%, respectively.
- The company reported compliance with its debt covenants. ABL maintenance covenants were not applicable because availability exceeded the required threshold.
Material changes versus the prior comparable period
- Profitability improved substantially as revenue and rental margins increased while RSC merger-related and restructuring costs declined. RSC merger-related costs fell to $2 million in the quarter and $8 million year to date from $80 million and $90 million.
- Restructuring charges declined to $5 million in the quarter and $11 million year to date from $53 million in each prior-year period. Management considered the restructuring program substantially complete at June 30 and did not expect significant additional charges.
- Interest expense increased 25% year to date to $236 million, primarily reflecting debt issued or assumed in connection with the RSC acquisition; quarterly interest expense declined 2% to $118 million.
- The company retired $55 million of subordinated convertible debentures during the six months, leaving none outstanding.
- Accounts payable increased $320 million from year-end, primarily due to capital expenditures and seasonal activity. Rental equipment, net, increased to $5,380 million from $4,966 million.
- The company repurchased $84 million of common stock during the six months and had repurchased $194 million under its authorized $200 million buyback as of July 12, 2013.
Guidance, outlook, commentary and risks
- Management described the operating environment as modestly improved and cited a secular shift from equipment ownership toward rental. It cautioned that the trend may not continue.
- For full-year 2013, management expected approximately $1.5 billion of gross rental capital expenditures and approximately $1.05 billion of net rental capital expenditures.
- Management believed existing cash, operating cash flow, equipment-sale proceeds and available borrowing capacity would support operations over the following 12 months.
- The company’s principal risks include its highly leveraged capital structure, debt-service requirements, restrictive covenants, refinancing and capital-market access, cyclical construction and industrial demand, equipment utilization and rental-rate pressure, residual-value and equipment-sale risk, maintenance costs, acquisition integration, litigation and regulatory matters, credit and collection risk, labor issues, information-technology disruption, environmental and safety compliance, and insurance limitations.
- The company had $1,698 million of variable-rate debt at quarter-end; management estimated that a one-percentage-point rate increase would reduce annual after-tax earnings by approximately $10 million. Canadian currency exposure could change annual after-tax earnings by approximately $10 million for a 10% exchange-rate movement.
- Holders could redeem the 4% Convertible Senior Notes during the third quarter at a conversion price of $11.11 per share. The company had received notices covering $12 million of principal expected to be redeemed in July 2013.
- Ordinary-course claims and proceedings were not expected to have a material adverse effect, based on management’s assessment and legal advice.
- Following an insider-trading matter involving a former KPMG partner who had been associated with the RSC audit practice, KPMG concluded that the conduct did not affect the reliability of RSC’s 2011 audit. United Rentals agreed and continued incorporating RSC financial statements in SEC filings.
Important facts for investors to verify
- Separate the effect of the RSC acquisition from underlying organic rental growth when analyzing revenue, utilization, rates and margins.
- Reconcile adjusted EBITDA and free cash flow to GAAP results and assess the recurring nature of merger, restructuring, fair-value and other adjustments.
- Review total leverage, maturities, variable-rate exposure, covenant headroom and the limited availability under the receivables facility.
- Assess whether planned capital expenditures and fleet growth can be funded without increasing leverage materially.
- Monitor rental rates, time utilization, used-equipment pricing, residual values and seasonal or cyclical changes in construction and industrial demand.
- Track conversion or redemption of the convertible notes and the resulting cash requirements and potential equity dilution.
- Confirm the resolution and potential consequences of litigation, regulatory matters and the RSC audit-independence issue.