United Rentals, Inc. 2019 Form 10-K Summary
Business context and reporting period
United Rentals, Inc. is the world's largest equipment rental company, operating primarily in the United States and Canada with a limited European presence. The filing covers the fiscal year ended December 31, 2019, with quarterly information including the fourth quarter. Operations are reported through two segments: general rentals and trench, power and fluid solutions.
- 1,175 rental locations, approximately 665,000 equipment units and $14.63 billion of fleet original equipment cost at year-end.
- 2019 revenue mix: approximately 50% industrial and other non-construction, 46% commercial construction and 4% residential.
- Acquisitions of BakerCorp and BlueLine, completed in 2018, materially affected 2019 comparisons and added scale, specialty capabilities and European locations.
Financial results and key metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $9,351 million | $8,047 million | 16.2% |
| Equipment rental revenue | $7,964 million | $6,940 million | 14.8% |
| Gross profit | $3,670 million | $3,364 million | 9.1% |
| Gross margin | 39.2% | 41.8% | Down 260 bps |
| Operating income | $2,152 million | $1,951 million | 10.3% |
| Net income | $1,174 million | $1,096 million | 7.1% |
| Diluted EPS | $15.11 | $13.12 | 15.2% |
| Net cash from operating activities | $3,024 million | $2,853 million | 6.0% |
| Free cash flow | $1,566 million | $1,271 million | 23.2% |
| Adjusted EBITDA | $4,355 million | $3,863 million | 12.7% |
| Adjusted EBITDA margin | 46.6% | 48.0% | Down 140 bps |
Equipment rental revenue represented 85% of total revenue. On a pro forma basis, including pre-acquisition BakerCorp and BlueLine results, equipment rental revenue increased 4.1%. Average fleet OEC increased 17.7% on an actual basis and 4.9% pro forma. Pro forma fleet productivity increased 0.6%, while reported fleet productivity declined 2.2% due primarily to acquisition effects.
Equipment rental gross margin decreased to 40.3% from 42.7%. Management attributed the decline primarily to acquired fleets, higher depreciation, repair and repositioning initiatives, and increased operating costs. SG&A expense declined to 11.7% of revenue from 12.9%.
Balance sheet, debt and liquidity
- Total assets were $18.970 billion and stockholders' equity was $3.830 billion at December 31, 2019.
- Total debt was $11.428 billion, compared with $11.747 billion at December 31, 2018. Debt included $3.5 billion of variable-rate borrowings and $7.9 billion of fixed-rate borrowings.
- Cash and cash equivalents were $52 million. Reported available liquidity was $2.143 billion, including cash.
- The amended ABL facility increased from $3.0 billion to $3.75 billion and had $2.045 billion of borrowing capacity, net of letters of credit, at year-end.
- The accounts receivable securitization facility had $46 million of borrowing capacity and $929 million outstanding; its amended maturity was June 26, 2020.
- Net rental capital expenditures were $1.30 billion, down 10% from 2018. Total purchases of rental and non-rental equipment were $2.35 billion.
- The company was in compliance with its debt covenants. The ABL fixed-charge coverage covenant was inapplicable because specified availability exceeded the required threshold.
Material changes versus the prior comparable period
- Revenue and operating income increased, but gross and adjusted EBITDA margins contracted as the acquired BakerCorp and BlueLine fleets carried lower margins and higher depreciation and operating costs.
- Free cash flow increased by $295 million, while net rental capital expenditures decreased by $141 million.
- Interest expense increased 34.7% to $648 million, reflecting higher average debt and $61 million of losses related to debt redemptions and ABL amendments. The fourth quarter included a $29 million loss on redemption of senior secured notes.
- United Rentals issued $750 million of 5.25% Senior Notes due 2030 and $750 million of 3.875% Senior Secured Notes due 2027. It redeemed $850 million of 5.75% Senior Notes and $1.0 billion of 4.625% Senior Secured Notes.
- The $1.25 billion share repurchase program was completed in 2019. The company repurchased $870 million of common stock during the year and authorized a new $500 million program in January 2020.
- The company adopted the new lease accounting standard, recognizing $669 million of operating lease right-of-use assets and $711 million of present-value operating lease liabilities. The adoption materially affected the balance sheet but did not materially affect the income statement or cash flow statement.
- Goodwill increased to $5.154 billion. Annual testing indicated that all reporting units remained above carrying value, although Fluid Solutions Europe had a relatively narrow 12% excess fair value cushion.
Fourth-quarter results and unusual items
| Metric | Fourth quarter 2019 | Fourth quarter 2018 |
|---|---|---|
| Total revenue | $2,456 million | $2,306 million |
| Gross profit | $965 million | $998 million |
| Operating income | $599 million | $563 million |
| Net income | $338 million | $310 million |
| Diluted EPS | $4.49 | $3.80 |
Fourth-quarter 2019 included the $29 million debt redemption loss. Fourth-quarter 2018 included $22 million of merger-related costs and $16 million of restructuring charges related primarily to the BakerCorp and BlueLine acquisitions.
Guidance, outlook, commentary and risks
- Management expected North American equipment rental industry revenue to grow approximately 3% in 2020, with similar growth in the United States and Canada.
- The 2020 strategy emphasized rate management, customer and fleet optimization, Lean operating initiatives, Project XL cost savings, specialty rental expansion and selective acquisitions.
- The company planned to open at least 25 specialty rental branches, tool hubs or onsite-services locations in 2020.
- Management expected existing cash sources to support operations over the following 12 months, but identified debt service, fleet investment, operating leases, share repurchases and acquisitions as significant cash requirements.
- Primary risks include the cyclical nature of construction and industrial demand, fleet overcapacity, rental-rate and utilization pressure, significant indebtedness and refinancing risk, variable interest rates, residual values of used equipment, acquisition integration, credit losses, cybersecurity, environmental and safety compliance, litigation and self-insurance claims, labor relations, fuel costs and foreign exchange.
- Self-insurance reserves were $121 million at year-end. Ordinary-course claims and proceedings were not expected by management to have a material adverse effect, although ultimate outcomes may differ.
- The company had $5.2 billion of goodwill and identified goodwill valuation as the critical audit matter, making results sensitive to discount rates, growth assumptions, margins, capital expenditures and market multiples.
Most important facts for investors to verify
- Whether pro forma rental growth and fleet productivity improve without continued acquisition-driven revenue expansion.
- Whether acquired-fleet margins converge with legacy operations and whether repair, maintenance and repositioning costs normalize.
- The company's ability to reduce leverage while funding fleet replacement, specialty expansion, acquisitions and share repurchases.
- Refinancing plans for the $997 million of debt and finance lease obligations due in 2020 and the accounts receivable securitization facility maturing in June 2020.
- The sensitivity of earnings and cash flow to interest rates, construction and industrial activity, used-equipment resale values and rental utilization.
- The valuation cushion supporting the $5.154 billion goodwill balance, particularly for Fluid Solutions Europe.
- Execution and total cost of the 2020-2021 restructuring and shared-services consolidation program, whose total expected costs were not yet estimable.