United Rentals, Inc. — 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 six months ended June 30, 2019. The company operates equipment-rental businesses across the United States, Canada and Europe, with 1,175 rental locations, approximately 4,000 equipment classes and fleet original equipment cost of $14.6 billion. Principal reportable segments are general rentals and trench, power and fluid solutions.
Key financial metrics
| Metric | Three months ended June 30, 2019 | Three months ended June 30, 2018 | Six months ended June 30, 2019 | Six months ended June 30, 2018 |
|---|---|---|---|---|
| Total revenue | $2,290 million | $1,891 million | $4,407 million | $3,625 million |
| Equipment-rental revenue | $1,960 million | $1,631 million | $3,755 million | $3,090 million |
| Gross profit | $911 million | $782 million | $1,672 million | $1,428 million |
| Operating income | $529 million | $470 million | $897 million | $810 million |
| Net income | $270 million | $270 million | $445 million | $453 million |
| Diluted EPS | $3.44 | $3.20 | $5.62 | $5.34 |
| Adjusted EBITDA | $1,073 million | $907 million | $1,994 million | $1,687 million |
| Adjusted EBITDA margin | 46.9% | 48.0% | 45.2% | 46.5% |
Total gross margin was 39.8% in the second quarter and 37.9% for the six-month period, down 160 basis points and 150 basis points, respectively. Equipment-rental gross margin was 40.4% for the quarter and 38.6% year to date. Management attributed margin pressure primarily to the BakerCorp and BlueLine acquisitions, cold starts, changes in fleet mix and the accounting treatment of doubtful accounts.
Six-month operating cash flow was $1,590 million, compared with $1,649 million in the prior-year period. Free cash flow increased to $780 million from $703 million, principally because rental-equipment purchases decreased. Capital expenditures totaled $1,226 million, including $1,129 million for rental equipment. Cash proceeds from rental and non-rental equipment sales totaled $404 million.
At June 30, 2019, cash and cash equivalents were $75 million, total debt was $11.695 billion, and available liquidity was $2.151 billion. The company was in compliance with its debt covenants, and the ABL fixed-charge coverage covenant was not applicable because borrowing availability exceeded the required threshold. Operating lease right-of-use assets of $619 million and operating lease liabilities of $497 million were recorded following adoption of the new lease standard.
Material changes versus the prior comparable period
- Revenue increased 21.1% in the second quarter and 21.6% for the first six months. Equipment-rental revenue increased 20.2% and 21.5%, respectively.
- Reported growth was substantially affected by the July 2018 BakerCorp acquisition and October 2018 BlueLine acquisition. On a pro forma basis, equipment-rental revenue increased 4.8% in the quarter and 5.9% year to date.
- Average original equipment cost increased 23.2% in the quarter and 23.4% year to date, including the acquisitions. Pro forma average OEC increased 5.5% and 5.6%, respectively.
- Operating income increased despite higher interest expense, but six-month net income declined 1.8% because interest expense increased 49.8% to $331 million.
- Interest expense included a $32 million loss associated with redeeming the 5.75% Senior Notes. The company issued $750 million of 5.25% Senior Notes due 2030 and redeemed the 5.75% notes.
- SG&A increased 17.0% year to date but declined to 12.5% of revenue from 13.0%. Restructuring charges increased to $14 million from $6 million, primarily in connection with the BakerCorp and BlueLine integration program.
- The company repurchased $454 million of common stock during the first six months. As of June 30, $410 million remained under the $1.25 billion repurchase authorization.
Guidance, outlook, commentary and risks
Management stated that its 2019 strategy focused on profitable growth, rate management, fleet optimization, Lean operating initiatives, Project XL cost savings, expansion of specialty solutions and selective acquisitions. Management expected to complete the BakerCorp/BlueLine restructuring program in 2019, but total remaining costs were not estimable.
The company believed existing cash sources would support operations for the next 12 months. Principal expected cash uses included working capital, rental-equipment purchases, lease payments, debt service, share repurchases and acquisitions.
Key risks include the cyclical sensitivity of demand to construction and industrial activity, significant indebtedness and refinancing needs, interest-rate exposure, fleet overcapacity and residual-value declines, acquisition integration and undiscovered liabilities, equipment utilization and rental-rate pressure, credit losses, competition, litigation and regulatory matters, cybersecurity and information-technology disruption, labor issues, environmental and foreign-operational risks, currency fluctuations and tax-law changes. Legal claims arising in the ordinary course were not expected to have a material adverse effect based on information available at filing.
Investor verification checklist
- Verify whether acquisition-driven revenue growth translates into sustained pro forma fleet productivity and margin improvement.
- Monitor total debt, variable-rate exposure of approximately $3.6 billion, interest costs and refinancing requirements.
- Review liquidity, borrowing-base availability and compliance with ABL, securitization, term-loan and senior-note covenants.
- Assess free cash flow after rental-fleet purchases, equipment-sale proceeds, acquisitions and share repurchases.
- Track integration costs, restructuring liabilities and the unresolved estimate of remaining BakerCorp/BlueLine restructuring costs.
- Evaluate declining rental and total gross margins, utilization trends and the effect of doubtful-account accounting changes.
- Reconcile reported results with pro forma results to distinguish organic performance from the BakerCorp and BlueLine acquisitions.