United Rentals Inc.

United Rentals Earnings Double in Third Quarter

United Rentals' third-quarter net income nearly doubled and the company's board approved a share repurchase program of up to $500 million, according to the company's third-quarter financial report.

Shares of the world's largest equipment rental company shot up 7 percent to a life-high of $61.43 before easing back to close at $59.79 on the New York Stock Exchange.

"This was a strong quarter for us, capped by a record 49% adjusted EBITDA margin," said Michael Kneeland, chief executive officer of United Rentals. "We leveraged increasing demand for our services to put more equipment on rent at higher utilization, and with sequential monthly rate improvements throughout the quarter. This is the environment we anticipated when we set our full year financial targets, and we expect that nonresidential construction will continue to trend upward in 2014. As we plan for the coming year, our operations are in a strong position to drive margin expansion through further rate improvement and business process efficiencies."

Kneeland continued, "The $500-million share repurchase program we announced today reflects our confidence in achieving our multi-year free cash flow generation goals, while pursuing a balanced and disciplined capital allocation strategy that includes organic growth and acquisitions.”

Reports said total revenue for the company was $1.311 billion and rental revenue was $1.138 billion, compared with $1.219 billion and $1.051 billion, respectively, for the same period last year. On a GAAP basis, the company reported third quarter net income of $143 million, or $1.35 per diluted share, compared with $73 million, or $0.70 per diluted share, for the same period last year.

Adjusted EPS[1] for the quarter was $1.63 per diluted share, compared with $1.35 per diluted share for the same period last year. Adjusted EBITDA[2] was $642 million and adjusted EBITDA margin was a company record 49.0% for the quarter.

Share Repurchase Authorization

The company’s board of directors has approved a share repurchase program authorizing up to $500 million in share repurchases. The company’s current intention is to complete the repurchases within 18 months.

Third Quarter 2013 Highlights[3]

  • Rental revenue (which includes owned equipment rental revenue, re-rent revenue and ancillary items) increased 8.3% year-over-year. Within rental revenue, owned equipment rental revenue increased 8.0%, reflecting year-over-year increases of 8.2% in the volume of equipment on rent and 3.2% in rental rates. The company has reaffirmed its outlook for a full-year increase in rental rates of at least 4%.
  • Adjusted EBITDA was $642 million and adjusted EBITDA margin was a company record 49.0%, an increase of $72 million and 220 basis points, respectively, from the same period last year. The company has reaffirmed its outlook for full year adjusted EBITDA in a range of $2.25 billion to $2.35 billion.
  • Time utilization increased 100 basis points year-over-year to 70.8%. The company has reaffirmed its outlook for full year time utilization of approximately 68.0%.
  • The company generated $102 million of proceeds from used equipment sales at an adjusted gross margin of 48.0%, compared with $101 million of proceeds at an adjusted gross margin of 40.3% for the same period last year. 4
  • The company realized cost synergies of $64 million in the quarter from the integration of RSC, and reaffirmed its goal of $230 million to $250 million of annual cost synergies in 2014.
  • Flow-through, which represents the year-over-year change in adjusted EBITDA divided by the year-over-year change in total revenue, was 78.3%.

Nine Months 2013 Results

On a pro-forma basis (that is, assuming the combination of United Rentals results and RSC results for the entire nine months ended September 30, 2012), the company reported the following:

  • Total revenue was $3.617 billion and rental revenue was $3.063 billion, compared with $3.415 billion and $2.884 billion, respectively, for the same period last year.
  • Rental revenue increased 6.2%. Within rental revenue, owned equipment rental revenue increased 7.2%, reflecting year-over-year increases of 6.4% in the volume of equipment on rent and 4.2% in rental rates.
  • Adjusted EBITDA was $1.642 billion and adjusted EBITDA margin was 45.4%, an increase of $207 million and 340 basis points, respectively, from the same period last year.
  • Time utilization increased 60 basis points year-over-year to 67.7%.
  • The company generated $356 million of proceeds from used equipment sales at an adjusted gross margin of 44.4%, compared with $322 million of proceeds at an adjusted gross margin of 39.9% for the same period last year.
  • Flow-through was 102.5%.

Free Cash Flow and Fleet Size

For the first nine months of 2013, free cash usage (negative flow) was $84 million, after total rental and non-rental capital expenditures of $1.570 billion. By comparison, free cash usage for the first nine months of 2012 was $410 million after total rental and non-rental capital expenditures of $1.185 billion. Free cash usage for the nine months ended September 30, 2013 and 2012 includes aggregate merger and restructuring related payments of $33 million and $119 million, respectively.

The company has reaffirmed its outlook for full year 2013 free cash flow in the range of $400 million to $500 million, after net rental capital expenditures of approximately $1.1 billion and gross purchases of approximately $1.6 billion.

The size of the rental fleet was $7.96 billion of original equipment cost at September 30, 2013, compared with $7.23 billion at December 31, 2012. The age of the rental fleet was 44.0 months on an OEC-weighted basis at September 30, 2013, compared with 47.2 months at December 31, 2012.  

Return on Invested Capital (ROIC)          

Return on invested capital on an as-reported basis was 7.1% for the 12 months ended September 30, 2013, a decrease of 0.3 percentage points from the same period last year. The company’s ROIC metric uses after-tax operating income for the trailing 12 months divided by the averages of stockholders’ equity (deficit), debt and deferred taxes, net of average cash. To mitigate the volatility related to fluctuations in the company’s tax rate from period to period, the federal statutory tax rate of 35% is used to calculate after-tax operating income.5

Conference Call                              

United Rentals will hold a conference call tomorrow, Thursday, October 17, 2013, at 11:00 a.m. Eastern Time. The conference call number is 866-238-1422.  The conference call will also be available live by audio webcast at ur.com, where it will be archived until the next earnings call. The replay number for the call is 703-925-2533, passcode is 1624325.

Non-GAAP Measures                                                                                 

Free cash (usage) flow, earnings before interest, taxes, depreciation and amortization (EBITDA), adjusted EBITDA, and adjusted earnings per share (adjusted EPS) are non-GAAP financial measures as defined under the rules of the SEC. Free cash flow (usage) represents net cash provided by operating activities, less purchases of rental and non-rental equipment plus proceeds from sales of rental and non-rental equipment and excess tax benefits from share-based payment arrangements, net. EBITDA represents the sum of net income, provision for income taxes, interest expense, net, interest expense-subordinated convertible debentures, depreciation of rental equipment and non-rental depreciation and amortization. Adjusted EBITDA represents EBITDA plus the sum of RSC merger related costs, restructuring charge, stock compensation expense, net, the impact of the fair value mark-up of acquired RSC fleet and inventory, and the gain on sale of software subsidiary. Adjusted EPS represents EPS plus the sum of the RSC merger related costs, restructuring charge, asset impairment charge, pre-close RSC merger related interest expense, the impact on interest expense related to the fair value adjustment of acquired RSC indebtedness, the impact on depreciation related to acquired RSC fleet and property and equipment, the impact of the fair value mark-up of acquired RSC fleet and inventory, RSC merger related intangible asset amortization, the loss on repurchase/redemption of debt securities and retirement of subordinated convertible debentures and the gain on sale of software subsidiary. The company believes that: (i) free cash (usage) flow provides useful additional information concerning cash flow available to meet future debt service obligations and working capital requirements; (ii) EBITDA and adjusted EBITDA provide useful information about operating performance and period-over-period growth; and (iii) adjusted EPS provides useful information concerning future profitability. However, none of these measures should be considered as alternatives to net income, cash flows from operating activities or earnings per share under GAAP as indicators of operating performance or liquidity. Information reconciling forward-looking free cash flow and Adjusted EBITDA to GAAP financial measures is unavailable to the company without unreasonable effort.

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