United Rentals, Inc. — Q3 2013 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, 2013. The company rents construction, industrial, infrastructure, power, HVAC, trench-safety and related equipment in the United States and Canada, and also sells used and new equipment, contractor supplies and services. The company operated 822 rental locations, with an equipment fleet having original equipment cost of approximately $8.0 billion. Results include RSC Holdings operations since the April 30, 2012 acquisition.
Financial performance and key metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Total revenue | $1,311 million | $1,219 million | $3,617 million | $2,868 million |
| Equipment-rental revenue | $1,138 million | $1,051 million | $3,063 million | $2,419 million |
| Gross profit | $564 million | $505 million | $1,420 million | $1,092 million |
| Operating income | $337 million | $222 million | $736 million | $355 million |
| Net income | $143 million | $73 million | $247 million | $34 million |
| Diluted EPS | $1.35 | $0.70 | $2.33 | $0.37 |
| Net cash from operating activities | Not provided for the quarter | Not provided for the quarter | $1,115 million | $495 million |
| Adjusted EBITDA | $642 million | $570 million | $1,642 million | $1,219 million |
Q3 total gross margin was 43.0%, compared with 41.4% in the prior-year quarter; nine-month gross margin was 39.3%, compared with 38.1%. Operating margin was approximately 25.7% in Q3 and 20.3% for nine months, compared with approximately 18.2% and 12.4%, respectively, in the comparable periods. Adjusted EBITDA margin was 49.0% in Q3 and 45.4% for nine months, compared with 46.8% and 42.5%.
- Q3 equipment-rental revenue increased 8.3%, reflecting an 8.2% increase in the volume of original equipment cost on rent and a 3.2% rental-rate increase.
- Nine-month equipment-rental revenue increased 26.6%, reflecting a 28.0% increase in equipment volume on rent and a 4.2% rental-rate increase.
- Nine-month general-rentals equipment-rental gross margin increased to 39.2% from 38.0%; trench safety, power and HVAC gross margin increased to 47.7% from 46.9%.
- Time utilization improved to 70.8% from 69.8% in Q3 and to 67.7% from 67.0% for nine months.
- SG&A was $167 million in Q3 and $479 million for nine months. SG&A as a percentage of revenue declined to 12.7% and 13.2%, respectively, from 13.5% and 14.4%.
- Free cash usage was $84 million for nine months, an improvement from $410 million of free cash usage in the prior-year period.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $125 million at September 30, 2013, compared with $106 million at December 31, 2012.
- Total debt was $7.582 billion, including $630 million classified as short-term debt and $6.952 billion of long-term debt. Total debt was $7.309 billion at December 31, 2012.
- Debt consisted principally of $1.478 billion outstanding under the ABL facility, $462 million under the accounts-receivable securitization facility, and various senior and senior subordinated notes. The company retired all $55 million of subordinated convertible debentures during the nine-month period.
- Available borrowing capacity at September 30, 2013 was $370 million under the ABL facility, net of $52 million of letters of credit, and $29 million under the accounts-receivable securitization facility.
- Rental equipment, net increased to $5.599 billion from $4.966 billion at year-end 2012. Nine-month rental capital expenditures were $1.499 billion, partly offset by $356 million of rental-equipment sale proceeds.
- Management stated that existing cash sources were sufficient to support operations over the next 12 months. The company was in compliance with applicable debt covenants at September 30, 2013.
Material changes versus the prior comparable period
- Revenue, operating income, net income and diluted EPS rose materially, aided by the RSC acquisition, higher rental volume and rates, improved utilization and cost leverage.
- Q3 and nine-month net income increased 96% and 627%, respectively. The nine-month comparison is affected by $98 million of RSC merger-related costs and $93 million of restructuring charges recorded in 2012, versus $8 million and $12 million, respectively, in 2013.
- Adjusted EBITDA increased 12.6% in Q3 and 34.7% for nine months. Management attributed the improvement primarily to stronger rental and used-equipment sales profitability and lower merger-related and restructuring costs.
- Interest expense increased 13% for nine months to $357 million because of higher average debt associated with the RSC acquisition, although Q3 interest expense declined 5% year over year.
- Accounts receivable increased modestly from year-end, while the allowance for doubtful accounts declined to $53 million from $64 million, reflecting improved receivable aging according to management.
- The RSC-related restructuring program was completed as of June 30, 2013, and management did not expect significant additional related charges.
Guidance, outlook, commentary, risks and unusual items
- For full-year 2013, management expected net rental capital expenditures of approximately $1.1 billion, based on gross rental-equipment purchases of approximately $1.6 billion.
- Management cited modest improvement in operating conditions and a continuing shift from equipment ownership to rental, but cautioned that rental activity is cyclical and sensitive to construction and industrial activity.
- On October 15, 2013, the board authorized a $500 million share-repurchase program, which the company intended to complete within 18 months. The company repurchased $99 million of common stock during the first nine months of 2013.
- Unusual items included RSC merger-related costs, restructuring charges, RSC-related amortization and fair-value adjustments, asset impairments, and a $2 million loss on retirement of subordinated convertible debentures. These items affect comparability with the prior year.
- Key risks include the highly leveraged capital structure, debt-service requirements, restrictive covenants, refinancing and capital-market access, construction-market cyclicality, equipment residual values, maintenance costs, utilization and rental-rate pressure, customer credit risk, acquisition integration, litigation and regulatory matters, labor and technology disruptions, and potential dilution from convertible notes.
- The company had $1.940 billion of variable-rate debt at quarter-end. Management estimated that a one-percentage-point increase in applicable rates would reduce annual after-tax earnings by approximately $12 million.
- The company had outstanding diesel swaps covering 7.3 million gallons through 2013 and 2014. Legal proceedings were described as arising primarily in the ordinary course of business, with no material adverse effect currently expected.
Important facts for investors to verify
- Reconcile reported growth with pro forma comparisons that include RSC, particularly the 28.0% increase in equipment volume on rent and 4.2% rental-rate increase for nine months.
- Assess sustainability of rental rates, utilization, gross-margin expansion and used-equipment resale prices as construction and industrial markets change.
- Review debt maturities, availability under the ABL and receivables facilities, covenant thresholds and the company’s ability to fund substantial fleet investment.
- Separate recurring operating performance from RSC acquisition amortization, restructuring, merger costs, impairments and other unusual items.
- Evaluate the impact of the $500 million repurchase authorization on leverage, liquidity and available capital for fleet investment or acquisitions.
- Review the potential cash, stock and dilution consequences of the 4% Convertible Senior Notes, including the reported conversion sensitivity.
- Confirm subsequent-period developments, including any changes in credit ratings, debt availability, covenant compliance, litigation exposure and market demand.