UNITED RENTALS, INC. quarterly report, Q2 FY2022

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, 2022. The company is the world’s largest equipment rental provider, operating approximately 1,390 locations primarily in the United States and Canada, with limited operations in Europe, Australia, and New Zealand. Its reportable segments are general rentals and specialty rentals.

Equipment rentals represented 88% of revenue for the six months ended June 30, 2022. Management reported continuing recovery across construction and industrial end markets following the more pronounced effects of COVID-19 in 2020 and 2021.

Financial results and key metrics

Metric	Q2 2022	Q2 2021	Six months 2022	Six months 2021
Total revenue	$2.771 billion	$2.287 billion	$5.295 billion	$4.344 billion
Equipment rental revenue	$2.462 billion	$1.951 billion	$4.637 billion	$3.618 billion
Gross profit	$1.150 billion	$875 million	$2.142 billion	$1.589 billion
Operating income	$715 million	$481 million	$1.287 billion	$853 million
Net income	$493 million	$293 million	$860 million	$496 million
Diluted EPS	$6.90	$4.02	$11.93	$6.82
Adjusted EBITDA	$1.311 billion	$999 million	$2.450 billion	$1.872 billion
Adjusted EBITDA margin	47.3%	43.7%	46.3%	43.1%

Total revenue increased 21.2% in Q2 and 21.9% for the six-month period. Equipment rental revenue increased 26.2% and 28.2%, respectively.
Net income increased 68.3% in Q2 and 73.4% for the six months. Net income margins were 17.8% and 16.2%, compared with 12.8% and 11.4% in the prior-year periods.
Total gross margin increased to 41.5% in Q2 from 38.3%, and to 40.5% for the six months from 36.6%. Rental-equipment gross margin increased to 40.7% and 39.6%, respectively.
Rental-equipment gross profit increased to $1.003 billion in Q2 and $1.837 billion for the six months. General rentals gross margin improved, while specialty Q2 margin declined modestly due partly to a $10 million purchase-accounting depreciation adjustment related to General Finance.
Operating cash flow was $2.040 billion for the six months, compared with $1.934 billion in 2021. Reported free cash flow was $964 million, down from $1.162 billion, primarily because of higher net rental capital expenditures.
Rental-equipment purchases were $1.354 billion, compared with $1.208 billion in the prior-year period. Total capital expenditures, including non-rental equipment and intangible assets, were $1.477 billion.
Cash and cash equivalents were $68 million at June 30, 2022, versus $144 million at December 31, 2021. Total assets were $20.820 billion and stockholders’ equity was $6.046 billion.

Debt, liquidity, and capital allocation

Total debt was $9.821 billion at June 30, 2022, including $9.761 billion of long-term debt, compared with $9.685 billion at December 31, 2021.
Available liquidity was $2.830 billion, consisting of cash and availability under the ABL and accounts receivable securitization facilities.
The ABL facility was amended and increased to $4.25 billion, with a June 2027 maturity. The accounts receivable securitization facility was increased to $1.1 billion and extended to June 2024.
The company entered into an uncommitted repurchase facility allowing up to $100 million of short-term financing; there were no borrowings under it at June 30, 2022.
United Rentals redeemed $500 million principal amount of 5.5% Senior Notes in May 2022 and recognized a $17 million debt redemption loss in interest expense.
The company repurchased $819 million of common stock during the six months and had repurchased $762 million under a new $1 billion authorization as of June 30, 2022. Management expected to complete the program in the third quarter of 2022.
The company stated that existing cash sources and borrowing capacity should be sufficient to support operations over the next 12 months. It was in compliance with its debt covenants at June 30, 2022.

Material changes versus the prior comparable period

Growth was driven by higher average original equipment cost, improved fleet productivity, end-market recovery, and the General Finance acquisition. For Q2, average OEC increased 13.6% and fleet productivity increased 11.3%; for the six months, the increases were 15.0% and 12.0%.
Rental-equipment sales declined 15.5% in Q2 and 18.7% for the six months because the company retained fleet to meet strong demand and preserve availability amid supply-chain constraints. Pricing improved substantially, increasing rental-equipment sales gross margin by 15.8 and 16.2 percentage points, respectively.
Sales of new equipment declined 33.3% in Q2 and 21.7% for the six months, primarily due to supply-chain constraints.
Specialty rental revenue increased 39.2% in Q2 and 43.0% for the six months, including the General Finance acquisition; on a pro forma basis, specialty equipment rentals increased 29% in both periods.
SG&A increased in dollars but declined as a percentage of revenue in Q2 to 12.4% from 13.2%. Six-month SG&A remained broadly stable as a percentage of revenue at 12.6% versus 12.7%.
The effective tax rate declined to 18.9% in Q2 and 21.2% for the six months, principally due to a legal-entity restructuring in Australia and New Zealand that generated a $39 million tax depreciation benefit.

Guidance, outlook, risks, and unusual items

Management expected full-year 2022 capital expenditures to approximate 2021 levels; the filing does not provide a clear full-year revenue or earnings guidance figure.
Management cited continuing recovery in construction and industrial markets, strong customer demand, favorable rental pricing, and opportunities from specialty rentals and infrastructure-related activity.
Key risks include cyclical exposure to construction and industrial activity, inflation, supply-chain constraints, labor shortages, rising interest rates, refinancing and capital-market access, significant indebtedness, covenant compliance, COVID-19 developments, competition, fleet residual values, cybersecurity, climate-related matters, litigation, and foreign-currency exposure.
Variable-rate debt totaled approximately $3.5 billion. Management estimated that a one-percentage-point increase in applicable variable interest rates would reduce annual after-tax earnings by approximately $26 million.
The company recorded a $17 million debt redemption loss, a $1 million restructuring charge for the six months, and acquisition-related amortization and depreciation adjustments associated with prior acquisitions. No open restructuring programs remained at June 30, 2022.
Ordinary-course legal claims and proceedings were not expected to have a material adverse effect on consolidated financial condition, results of operations, or cash flows.
Management concluded that disclosure controls and procedures were effective as of June 30, 2022, with no material changes in internal control over financial reporting during the quarter.

Important facts for investors to verify

Whether rental demand, pricing, time utilization, and fleet productivity remain strong as construction activity and economic conditions change.
Whether supply-chain constraints continue to limit new-equipment sales and equipment purchases, and whether fleet availability supports expected rental growth.
The effect of higher interest rates on approximately $3.5 billion of variable-rate debt and on refinancing costs.
Progress and final cost of the $1 billion share-repurchase program, including its effect on cash balances and leverage.
Whether full-year capital expenditures approximate 2021 levels and how elevated capital spending affects free cash flow.
The sustainability of the lower effective tax rate, including the benefit from the Australia and New Zealand legal-entity restructuring.
Potential changes in COVID-19 impacts, supply-chain disruptions, inflation, labor availability, credit losses, and other risks incorporated by reference from the 2021 Form 10-K.