United Rentals, Inc. 2018 Third-Quarter Form 10-Q Summary
Business Context and Reporting Period
United Rentals, Inc. and United Rentals (North America), Inc. filed a combined unaudited Form 10-Q for the quarter and nine months ended September 30, 2018. United Rentals is an equipment-rental company serving construction, industrial, utility, municipal, government and residential customers in the United States, Canada and Europe. Equipment rentals represented 86% of revenue for the nine-month period.
The company operated 1,086 rental locations and had rental fleet original equipment cost of approximately $12.9 billion. Reportable segments were general rentals and trench, power and fluid solutions.
Financial Performance and Key Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Total revenue | $2,116 million, up 19.8% | $5,741 million, up 21.7% |
| Equipment-rental revenue | $1,861 million, up 21.2% | $4,951 million, up 21.7% |
| Gross profit | $938 million | $2,366 million |
| Gross margin | 44.3%, up 50 basis points | 41.2%, flat |
| Operating income | $578 million | $1,388 million |
| Operating margin | Approximately 27.3% | Approximately 24.2% |
| Net income | $333 million, versus $199 million | $786 million, versus $449 million |
| Diluted EPS | $4.01, versus $2.33 | $9.34, versus $5.26 |
| Adjusted EBITDA | $1,059 million; 50.0% margin | $2,746 million; 47.8% margin |
| Net cash from operating activities | $2,123 million for the nine months | |
| Free cash flow | $536 million, versus $582 million |
Rental volume, measured by original equipment cost on rent, increased 17.8% in the quarter and 19.6% for the nine months. Rental rates increased 2.1% and 2.3%, respectively. On a pro forma basis including acquired businesses, equipment-rental revenue increased 10.9% in the quarter and 11.0% for the nine months.
General-rentals equipment-rental gross margin was 43.6% in the quarter and 40.2% for the nine months. Trench, power and fluid solutions gross margin was 52.3% in the quarter and 49.5% for the nine months. The latter segment margin declined year over year, partly because BakerCorp equipment initially generated lower revenue and margins.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $65 million at September 30, 2018, compared with $352 million at December 31, 2017.
- Total debt was $10.078 billion, including $896 million of short-term debt and current maturities, versus $9.440 billion at year-end 2017.
- Long-term debt was $9.182 billion, compared with $8.717 billion at December 31, 2017.
- Rental equipment, net increased to $8.910 billion from $7.824 billion, primarily reflecting acquisitions and higher capital expenditures.
- Available liquidity was approximately $910 million, including cash. This comprised $836 million available under the ABL facility and $9 million under the accounts receivable securitization facility, plus cash.
- The company was in compliance with applicable debt covenants. The ABL fixed-charge coverage covenant was not applicable because specified availability exceeded the required threshold.
- Variable-rate debt totaled approximately $3.0 billion. Management estimated that a one-percentage-point increase in applicable variable interest rates would reduce annual after-tax earnings by approximately $22 million.
Material Changes Versus the Prior Comparable Period
- Revenue, operating income, net income and diluted EPS increased substantially, supported by stronger rental demand, acquisitions and improved operating leverage.
- SG&A increased in absolute dollars but declined to 12.5% of quarterly revenue and 12.8% of nine-month revenue from 13.4% and 13.7%, respectively.
- Merger-related costs declined to $11 million from $16 million in the quarter and to $14 million from $32 million for the nine months.
- Restructuring charges declined to $15 million for the nine months from $28 million in the prior-year period, although a new BakerCorp restructuring program began in the third quarter.
- Operating cash flow increased $367 million year over year, but free cash flow declined $46 million because rental and non-rental equipment purchases increased to $2.096 billion.
- Interest expense was broadly stable for the nine months, but debt balances increased to fund acquisitions and capital expenditures.
- The effective tax rate declined to 27.6% from 38.2% in the quarter and to 25.2% from 36.9% for the nine months, primarily reflecting the Tax Cuts and Jobs Act. Management estimated that the Tax Act contributed approximately $0.73 and $1.68 to quarterly and nine-month diluted EPS, respectively.
Acquisitions, Outlook, Risks and Unusual Items
- In July 2018, United Rentals completed the approximately $724 million BakerCorp acquisition. BakerCorp added tank, pump, filtration and trench-shoring capabilities, 57 locations, including 11 in Europe, and approximately $295 million of annual revenue. Purchase-price allocations remained preliminary.
- United Rentals entered into an agreement in September 2018 to acquire BlueLine for approximately $2.1 billion. The transaction was expected to close in the fourth quarter of 2018, subject to regulatory clearance and other customary conditions, and was expected to be funded with a new $1 billion term loan and other debt issuances.
- The company initiated a BakerCorp restructuring program expected to continue through 2019. Total costs were not estimable at the filing date.
- Management expected existing cash sources and borrowing capacity to support operations for the next 12 months, but anticipated significant requirements for fleet purchases, working capital, debt service, share repurchases and acquisitions.
- The company expected to pause share repurchases after completion of the BlueLine acquisition. It had repurchased $210 million under a new $1.25 billion authorization by September 30, 2018.
- Principal risks include cyclical construction and industrial demand, fleet overcapacity, rental-rate and time-utilization pressure, integration and undiscovered-liability risks from acquisitions, substantial indebtedness, refinancing and covenant risks, residual values of equipment, customer credit risk, litigation and regulatory matters, cybersecurity, labor issues, foreign-currency exposure and oil-and-gas market volatility.
- United Rentals expected to adopt the new lease standard, Topic 842, on January 1, 2019. The company expected a significant increase in recognized lease assets and liabilities, although the amount was not yet estimable.
- The Tax Act accounting remained provisional, including an additional $6 million of estimated transition-tax expense recorded in 2018. The company expected to complete its accounting during the fourth quarter of 2018.
- No material adverse impact was expected from ordinary-course legal proceedings based on information available at the filing date.
Important Facts for Investors to Verify
- Whether the BlueLine acquisition closed on the expected terms and the resulting debt, integration costs and synergy realization.
- The final BakerCorp purchase-price allocation and the amount and timing of remaining restructuring charges.
- Whether rental demand, pricing and time utilization remain strong as acquired fleet is integrated.
- The effect of increased leverage and variable-rate exposure on interest expense, liquidity and covenant headroom.
- The sustainability of free cash flow after elevated fleet purchases and acquisition spending.
- The final tax accounting under the Tax Act and the effect of Topic 842 adoption on reported assets, liabilities and leverage metrics.
- Changes in used-equipment residual values, fleet utilization and margins in the trench, power and fluid solutions segment.