UNITED RENTALS, INC. annual report, FY2012

United Rentals, Inc. — Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2012; quarterly information includes the fourth quarter ended December 31, 2012. The filing was signed January 21, 2013 and audited by Ernst & Young LLP. United Rentals operates primarily through United Rentals (North America), Inc. and is a large North American equipment-rental company serving the United States and Canada.

Business Context

Operated 836 rental locations, offered approximately 3,300 equipment classes and had approximately 400,000 fleet units at year-end.
Rental fleet original equipment cost was $7.2 billion, compared with $4.0 billion in 2011.
Equipment rental revenue represented 84% of total revenue. Principal end markets were industrial/non-construction, commercial construction and residential construction.
Completed the acquisition of RSC Holdings on April 30, 2012 for total consideration of approximately $2.6 billion, including $1.2 billion of cash and $1.4 billion of United Rentals stock. RSC results were consolidated from the acquisition date.

Financial Performance and Key Metrics

Metric	2012	2011	Change
Total revenue	$4,117 million	$2,611 million	+57.7%
Equipment rental revenue	$3,455 million	$2,151 million	+60.6%
Gross profit	$1,587 million	$898 million	+76.7%
Gross margin	38.5%	34.4%	+4.1 percentage points
Operating income	$591 million	$396 million	+49.2%
Income from continuing operations	$75 million	$101 million	Down from prior year
Diluted EPS from continuing operations	$0.79	$1.38	Down from prior year
Net income	$75 million	$101 million	Down from prior year
Net cash from operating activities	$721 million	$612 million	+$109 million
Adjusted EBITDA	$1,772 million	$929 million	+90.7%
Adjusted EBITDA margin	43.0%	35.6%	+7.4 percentage points

Reported earnings were reduced by substantial acquisition, restructuring, amortization, fair-value and debt-extinguishment items. Interest expense increased to $512 million from $228 million, primarily because of acquisition-related debt and a $72 million loss on debt redemption and conversion. The effective tax rate was 14.8%, compared with 38.4% in 2011.

Fourth Quarter 2012

Revenue was $1,249 million, gross profit was $495 million and operating income was $236 million.
Income from continuing operations was $41 million, or diluted EPS of $0.40.
Quarterly results included $13 million of RSC merger costs, $6 million of restructuring charges, $2 million of asset impairment charges and a $72 million loss related to redemption of the 10 7/8% Senior Notes and conversion of the 1 7/8% Convertible Senior Subordinated Notes.
A $6 million benefit was recognized for self-insurance reserves. The filing also states that $8 million of merger-related costs were recorded in the fourth quarter that should have been recognized in the second and third quarters; there was no full-year operating-income impact.

Margins, Operations and Cash Flow

Total equipment-rental gross margin increased to 39.5% from 34.2%; general rentals margin increased to 38.9% from 32.9%.
Time utilization was 67.5%, compared with 67.2% in 2011. Pro forma rental rates increased 6.9%, and OEC on rent increased 63.2%, substantially reflecting the RSC acquisition.
SG&A increased to $588 million but declined to 14.3% of revenue from 15.6%.
Net rental capital expenditures were $873 million, compared with $566 million in 2011. Free cash flow was negative $223 million, compared with positive $23 million in 2011.
Cash used in investing activities was $2.1 billion, including $1.2 billion for acquisitions and $1.4 billion for rental and non-rental equipment purchases.

Debt and Liquidity

Total debt was $7.3 billion at December 31, 2012, compared with $3.0 billion at year-end 2011; total indebtedness including subordinated convertible debentures was approximately $7.4 billion.
Cash and cash equivalents were $106 million. Reported available liquidity was $782 million, consisting of cash and available borrowing capacity.
ABL facility availability was $654 million, net of letters of credit, and accounts receivable securitization availability was $22 million. Outstanding balances were $1.184 billion and $453 million, respectively.
Variable-rate debt was approximately $1.6 billion. Management estimated that a one-percentage-point increase in applicable variable rates would reduce annual after-tax earnings by approximately $12 million.
The company reported compliance with debt covenants at year-end. Certain ABL maintenance covenants were inapplicable because availability exceeded the relevant threshold, but restrictive covenants limit additional debt, acquisitions, dividends, repurchases and asset transfers.
Contractual obligations totaled $12.1 billion, including $7.3 billion of debt and capital leases, $3.4 billion of estimated interest, operating leases, service agreements and purchase obligations.

Material Changes Versus Prior Period

The RSC acquisition materially expanded revenue, fleet, locations, assets and debt. Goodwill and other intangible assets increased to $4.2 billion from $372 million, including approximately $2.7 billion of goodwill from RSC.
Total assets increased to $11.0 billion from $4.1 billion, while stockholders’ equity increased to $1.5 billion from $64 million, primarily because of stock consideration issued in the acquisition.
Revenue growth and improved rental rates, utilization and cost leverage increased operating income and adjusted EBITDA, but higher interest expense and acquisition-related items reduced net income and EPS.
The company issued $2.825 billion of merger-financing notes, increased the ABL facility to $1.9 billion, expanded the receivables facility to $475 million, issued $400 million of 6 1/8% Senior Notes due 2023, redeemed higher-cost 10 7/8% notes and converted all outstanding 1 7/8% convertible senior subordinated notes.

Guidance, Outlook and Management Commentary

Management expected most end markets to continue recovering in 2013 and forecast U.S. equipment-rental industry revenue growth in the mid- to high-single digits.
Management expected approximately $200 million of additional RSC-related cost savings in 2013, after $104 million of savings achieved subsequent to the acquisition.
Expected 2013 net rental capital expenditures were approximately $1.05 billion, with gross rental purchases of approximately $1.5 billion.
Management expected significant positive free cash flow in 2013 and intended to use it to reduce leverage.
The RSC-related restructuring program was expected to generate an additional $5 million to $10 million of charges and be substantially complete by June 30, 2013. Additional merger-related costs of approximately $15 million to $20 million were also expected.

Principal Risks and Unusual Items

High leverage exposes the company to refinancing, interest-rate, covenant, liquidity and economic-cycle risks. A substantial portion of cash flow is required for debt service.
Integration of RSC may be more costly, disruptive or slower than expected, and anticipated synergies may not be realized.
Demand, rental rates, utilization and used-equipment resale values are sensitive to construction and industrial activity, competition, weather, infrastructure spending and credit conditions.
Goodwill was approximately $3.0 billion, and impairment charges could materially affect future results if operating performance or valuation assumptions deteriorate. The 2012 impairment test indicated that reporting-unit fair values exceeded carrying values by at least 15%.
Credit losses, self-insurance claims, litigation, environmental remediation, labor disputes, supplier concentration, information-technology disruptions and Canadian currency movements could adversely affect results.
The company carries significant operating and capital lease obligations and has material purchase commitments, although many purchase orders may be cancelled with notice.

Investor Verification Checklist

Verify the final purchase-price allocation for RSC, including goodwill, intangible assets, deferred taxes and assumed debt, because the filing described the allocation as preliminary.
Reconcile reported net income and EPS to adjusted EBITDA by separately evaluating merger costs, restructuring, intangible amortization, fair-value step-ups and debt-extinguishment losses.
Assess whether projected 2013 rental-rate growth, utilization, cost savings and positive free cash flow were achieved and whether leverage declined.
Review debt maturities, the September 2013 receivables-facility expiration, ABL borrowing-base availability and covenant headroom.
Monitor goodwill and other intangible assets, used-equipment resale values, maintenance costs and impairment sensitivity.
Evaluate the impact of the 4% Convertible Senior Notes, including potential cash settlement and share dilution if converted.
Review legal, tax, environmental and self-insurance contingencies, including $17 million of unrecognized tax benefits and $97 million of self-insurance reserves at year-end.