United Rentals, Inc. — 2013 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2013, filed January 22, 2014. United Rentals is a North American equipment rental company operating through 832 locations in the United States and Canada, with approximately 410,000 rental units and $7.7 billion of original equipment cost. The company reports general rentals and trench safety, power and HVAC segments. The 2013 results include the ongoing effects of the April 2012 acquisition of RSC Holdings.
Equipment rentals represented 85% of 2013 revenue. End-market exposure was approximately 50% industrial and other non-construction, 46% commercial construction and 4% residential construction.
Key financial metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Total revenue | $4,955 million | $4,117 million | +20.4% |
| Equipment rental revenue | $4,196 million | $3,455 million | +21.4% |
| Gross profit | $1,987 million | $1,587 million | +25.2% |
| Gross margin | 40.1% | 38.5% | +1.6 points |
| Operating income | $1,078 million | $591 million | +82.1% |
| Net income | $387 million | $75 million | +416% |
| Diluted EPS | $3.64 | $0.79 | +361% |
| Net cash from operations | $1,551 million | $721 million | +115% |
| Free cash flow | $383 million | $(223) million | +$606 million |
| Adjusted EBITDA | $2,293 million | $1,772 million | +29.4% |
| Adjusted EBITDA margin | 46.3% | 43.0% | +3.3 points |
Time utilization increased to 68.2% from 67.5%, while pro forma rental rates increased 4.2% and the volume of original equipment cost on rent increased 22.1%. Equipment rental gross margin improved to 40.8% from 39.5%.
At December 31, 2013, cash and cash equivalents were $175 million, total debt was $7.173 billion, total assets were $11.231 billion and stockholders’ equity was $1.828 billion. Available liquidity was approximately $1.37 billion, comprising cash and unused borrowing capacity. Net rental capital expenditures were $1.09 billion, compared with $873 million in 2012.
Fourth-quarter information
Fourth-quarter 2013 revenue was $1,338 million, gross profit was $567 million, operating income was $342 million, net income was $140 million and diluted EPS was $1.31. The quarter benefited from a $17 million reduction in bad-debt expense compared with the fourth quarter of 2012 and a $3 million benefit related to self-insurance reserves.
Material changes versus the prior comparable period
- Revenue growth reflected the RSC acquisition, increased fleet investment and productivity, stronger rental rates and continued penetration of rental services versus equipment ownership.
- SG&A increased to $642 million from $588 million, but declined to 13.0% of revenue from 14.3%, reflecting operating leverage, lower bad-debt expense and RSC synergies.
- Estimated RSC-related synergies reached $236 million in 2013, including approximately $110 million in SG&A and $126 million in cost of equipment rentals.
- RSC merger-related costs declined to $9 million from $111 million, and restructuring charges declined to $12 million from $99 million. The RSC-related restructuring program was complete as of June 30, 2013, and significant additional charges were not expected.
- Interest expense declined to $475 million from $512 million, despite the increased debt base, partly because 2012 included a $72 million loss on debt redemption and conversion.
- The company retired all subordinated convertible debentures during 2013. It also increased the ABL facility to $2.3 billion and renewed its accounts receivable securitization facility at $550 million.
- Rental equipment, net increased to $5.374 billion from $4.966 billion, while fleet age improved to 45.2 months from 47.2 months.
Guidance, outlook, risks and unusual items
Management expected 2014 North American construction activity and equipment rental revenue to increase approximately 8%. Planned initiatives included customer and fleet mix optimization, the rollout of “Operation United 2” lean-management practices, at least 10 specialty rental branches and three tool hubs. Management expected 2014 net rental capital expenditures of approximately $1.15 billion, gross rental purchases of approximately $1.65 billion and free cash flow of $400 million to $450 million, with intended uses including leverage reduction and share repurchases.
- The business is cyclical and sensitive to construction, industrial activity, infrastructure spending, interest rates, weather and credit conditions.
- Debt totaled $7.2 billion; approximately $1.536 billion was variable-rate debt. Management estimated that a one-percentage-point increase in variable rates would reduce annual after-tax earnings by approximately $9 million.
- Debt agreements contain restrictive covenants, limitations on distributions and change-of-control provisions. The company was in compliance at December 31, 2013, and ABL maintenance covenants were inapplicable because availability exceeded the required threshold.
- The accounts receivable securitization facility expires September 18, 2014, subject to potential 364-day extensions by mutual agreement.
- Scheduled debt maturities totaled $7.137 billion, including $468 million in 2014, $189 million in 2015 and $1.328 billion in 2016. Interest obligations were estimated at $2.814 billion.
- Goodwill was $2.953 billion. The 2013 impairment testing found reporting-unit fair values above carrying values; no goodwill impairment was recorded.
- The company maintains significant self-insurance retentions and is exposed to personal injury, property damage, workers’ compensation, environmental, litigation and regulatory claims. Management did not believe currently known ordinary-course claims would materially affect consolidated results.
- The Board authorized a $500 million share-repurchase program in October 2013. Approximately $15 million had been repurchased under that program as of January 20, 2014; the company repurchased $85 million under a prior RSC-related program during 2013.
- The $200 million principal amount of 10.25% Senior Notes was redeemed in January 2014 using ABL borrowings. Holders had also submitted redemption notices for $56 million of the 4% Convertible Senior Notes expected to be redeemed in the first quarter of 2014.
Investor verification points
- Verify whether 2014 rental-rate, utilization, revenue and free-cash-flow expectations were achieved and how much growth was organic versus attributable to RSC.
- Reconcile adjusted EBITDA and free cash flow to GAAP measures and assess the recurring nature of RSC synergies and other adjustments.
- Review debt maturities, refinancing requirements, ABL borrowing-base availability and the September 2014 receivables-facility expiration.
- Assess the effect of fleet investment, depreciation assumptions, residual values and used-equipment pricing on future margins and cash flow.
- Monitor construction and industrial activity, rental rates, time utilization, customer credit quality and competitive pricing pressure.
- Evaluate potential dilution or cash requirements from the 4% Convertible Senior Notes and the effects of share repurchases on liquidity.
- Review goodwill, intangible-asset amortization, self-insurance reserves, environmental matters and unrecognized tax benefits for potential future charges.