United Rentals, Inc. — Q2 2020 Form 10-Q Summary
Business context and reporting period
United Rentals, Inc. and its wholly owned subsidiary, United Rentals (North America), Inc., filed a combined unaudited Form 10-Q for the quarter and six months ended June 30, 2020. The company rents construction, industrial, specialty and related equipment in the United States, Canada and Europe through approximately 1,180 locations. Reportable segments are general rentals and trench, power and fluid solutions.
Results were materially affected by the COVID-19 pandemic beginning in March 2020. U.S. and Canadian branches remained open as essential businesses, and most European branches continued operating.
Financial performance and key metrics
| Metric | Q2 2020 | Q2 2019 | Change |
|---|---|---|---|
| Total revenue | $1.939 billion | $2.290 billion | Down 15.3% |
| Equipment rentals | $1.642 billion | $1.960 billion | Down 16.2% |
| Gross profit | $701 million | $911 million | Down 23.0% |
| Gross margin | 36.2% | 39.8% | Down 360 bps |
| Operating income | $381 million | $529 million | Down 28.0% |
| Net income | $212 million | $270 million | Down 21.5% |
| Diluted EPS | $2.93 | $3.44 | Down 14.8% |
| Adjusted EBITDA | $899 million | $1.073 billion | Down 16.2% |
| Adjusted EBITDA margin | 46.4% | 46.9% | Down 50 bps |
For the six months ended June 30, 2020, revenue was $4.064 billion, down 7.8%; net income was $385 million, down 13.5%; diluted EPS was $5.25 versus $5.62; and adjusted EBITDA was $1.814 billion, down 9.0%. The six-month adjusted EBITDA margin was 44.6%, versus 45.2% in 2019.
Q2 equipment-rental gross margin was 36.5%, down 390 basis points. The general rentals segment margin declined to 33.4% from 38.8%, while the trench, power and fluid solutions margin increased to 46.8% from 46.0%. The six-month consolidated equipment-rental gross margin was 35.3%, down 330 basis points.
Cash flow, balance sheet, debt and liquidity
- Six-month cash flow from operating activities was $1.461 billion, compared with $1.590 billion in 2019.
- Management-defined free cash flow was $1.423 billion, compared with $780 million in 2019, primarily because rental-equipment purchases declined substantially.
- Rental-equipment purchases were $353 million, down from $1.129 billion; total equipment purchases were $455 million versus $1.226 billion.
- Cash and cash equivalents were $127 million at June 30, 2020, versus $52 million at December 31, 2019.
- Total debt was $10.405 billion, down from $11.428 billion at year-end 2019. Long-term debt was $9.599 billion and current debt was $806 million.
- Total reported liquidity was $3.823 billion, including cash and available borrowing capacity.
- ABL availability, net of letters of credit, was $3.640 billion, with $47 million outstanding. The accounts receivable securitization facility had $56 million of borrowing capacity and $743 million outstanding.
- The company stated that it was in compliance with applicable debt covenants at June 30, 2020 and believed existing cash sources would support operations for the following 12 months.
Material changes versus the prior comparable period
- COVID-19 reduced rental volume following shelter-in-place orders and other market restrictions. Fleet productivity declined 13.6% in Q2 and 7.7% for the first six months.
- Rental volume improved from the April trough; management reported that volume at the end of June was almost 14% above the April low point.
- SG&A expense declined 18.1% in Q2 and 11.3% for the six-month period, reflecting lower professional fees, travel and entertainment expenses, and other cost controls.
- Interest expense declined because of lower average debt and borrowing costs, as well as the absence of the $32 million debt-redemption loss recorded in 2019.
- The company recorded $26 million of asset impairment charges during the first six months, primarily related to discontinued equipment programs and not related to COVID-19.
- Capital spending and equipment purchase commitments were reduced significantly. Outstanding purchase orders were $521 million at June 30, 2020, compared with $1.552 billion at December 31, 2019; the company canceled a significant portion of orders due primarily to COVID-19.
- The $500 million share-repurchase program was paused on March 18, 2020 after $257 million of repurchases. Management could not estimate when, or if, the program would restart.
Guidance, outlook, commentary and risks
The company withdrew full-year 2020 guidance in April and reintroduced guidance in July 2020 based on improved visibility into near-term indicators. The filing text provided here does not include the specific quantitative guidance ranges.
Management emphasized disciplined capital expenditures, variable-cost reductions, reduced overtime and temporary labor, use of internal delivery and repair capacity, digital and contactless customer service, and balance-sheet management focused on liquidity. Management expected 2020 capital expenditures to be significantly below 2019 levels.
In July 2020, the company issued notice to redeem the remaining $800 million principal amount of its 5.5% Senior Notes due 2025, with redemption expected in August 2020. The company expected to recognize an approximately $27 million loss in interest expense upon redemption.
In June 2020, the accounts receivable securitization facility was amended to extend its maturity to June 25, 2021, reduce its size from $975 million to $800 million, and revise financial tests. The company also issued $750 million of 4% Senior Notes due 2030 in February 2020.
Principal risks include the duration and severity of COVID-19, reduced construction and industrial activity, fleet overcapacity, lower rental rates and utilization, credit and collection risk, refinancing and covenant risk, significant indebtedness, equipment residual values, acquisitions and integration, litigation and self-insurance claims, cybersecurity, foreign-exchange exposure, and regulatory or tax changes. Self-insurance reserves were $122 million at June 30, 2020.
Legal proceedings were described as arising in the ordinary course of business, and management did not expect resulting liabilities to have a material adverse effect on consolidated financial condition, results of operations or cash flows.
Important facts for investors to verify
- Verify the specific full-year 2020 guidance ranges reintroduced in July 2020, which are not included in the provided filing text.
- Monitor COVID-19 effects on rental volume, fleet productivity, utilization, pricing and equipment-rental margins.
- Confirm completion and funding of the planned $800 million senior-note redemption and the resulting debt mix and interest expense.
- Review availability and covenant compliance under the ABL and accounts receivable securitization facilities, including the revised financial tests and June 2021 maturity.
- Assess whether reduced capital expenditures and fleet sales are sustainable without impairing future rental capacity or revenue growth.
- Track the timing and potential restart of the paused $500 million share-repurchase program.
- Evaluate the effect of the $26 million asset impairment charge, restructuring program costs and any additional unusual items.
- Review credit losses, accounts receivable collectibility, self-insurance reserves and other contingencies as economic conditions evolve.