Business Context and Reporting Period
United Rentals, Inc. and United Rentals (North America), Inc. filed this unaudited combined Form 10-Q for the quarter and nine months ended September 30, 2023. United Rentals is principally an equipment rental business serving construction, industrial, utility, municipal, government and residential customers, primarily in the United States and Canada. Reportable segments are general rentals and specialty.
The company operated 1,557 rental locations and reported a rental fleet with approximately $21.0 billion of original equipment cost. The December 2022 acquisition of Ahern Rentals materially affected 2023 results, fleet size, depreciation, repairs and maintenance, debt, amortization and restructuring costs.
Key Financial Metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Total revenue | $3.765 billion | $3.051 billion | $10.604 billion | $8.346 billion |
| Equipment rentals revenue | $3.224 billion | $2.732 billion | $8.945 billion | $7.369 billion |
| Net income | $703 million | $606 million | $1.745 billion | $1.466 billion |
| Diluted EPS | $10.29 | $8.66 | $25.30 | $20.56 |
| Operating income | $1.099 billion | $921 million | $2.764 billion | $2.208 billion |
| Net income margin | 18.7% | 19.9% | 16.5% | 17.6% |
| Adjusted EBITDA | $1.850 billion | $1.521 billion | $5.048 billion | $3.971 billion |
| Adjusted EBITDA margin | 49.1% | 49.9% | 47.6% | 47.6% |
| Operating cash flow | Not separately provided | Not separately provided | $3.290 billion | $3.182 billion |
| Free cash flow | Not separately provided | Not separately provided | $1.157 billion | $1.140 billion |
Q3 total revenue increased 23.4%, net income increased 16.0%, diluted EPS increased 18.8% and adjusted EBITDA increased 21.6% year over year. For the nine months, revenue increased 27.1%, net income increased 19.0%, diluted EPS increased 23.1% and adjusted EBITDA increased 27.1%.
Margins, Revenue Drivers and Segment Results
- Total gross margin declined to 42.1% in Q3 from 44.8% and to 40.1% for the nine months from 42.0%.
- Equipment rental gross margin declined to 41.9% in Q3 from 44.3% and to 39.4% for the nine months from 41.3%. Management attributed the decline primarily to higher depreciation, repairs and maintenance costs on Ahern Rentals equipment.
- Sales of rental equipment increased 102.2% in Q3 and 104.3% for the nine months, reflecting normalized disposal volumes after the company held back sales in 2022 and the sale of Ahern Rentals equipment. Associated gross margin declined materially because of channel mix and fair-value step-ups on acquired fleet.
- General rentals generated Q3 equipment rental gross profit of $872 million at a 37.8% margin; specialty generated $478 million at a 52.1% margin. Nine-month margins were 35.7% and 49.5%, respectively.
- Equipment rental revenue growth reflected higher average original equipment cost, including Ahern Rentals and increased capital expenditures. Reported fleet productivity declined 2.2% in Q3 and 1.0% for the nine months; on a pro forma basis, fleet productivity increased 1.5% and 3.0%, respectively.
Balance Sheet, Debt and Liquidity
| Metric | September 30, 2023 | December 31, 2022 |
|---|---|---|
| Cash and cash equivalents | $284 million | $106 million |
| Total assets | $25.832 billion | $24.183 billion |
| Total debt | $12.028 billion | $11.370 billion |
| Current debt and maturities | $1.448 billion | $161 million |
| Long-term debt | $10.580 billion | $11.209 billion |
| Stockholders’ equity | $7.756 billion | $7.062 billion |
Available liquidity was $2.685 billion, consisting of cash and availability under the ABL and accounts receivable securitization facilities. The ABL had $2.385 billion of borrowing capacity net of letters of credit, while the accounts receivable securitization facility had $16 million of borrowing capacity. Variable-rate debt totaled approximately $4.1 billion, and management estimated that a one-percentage-point increase in applicable rates would reduce annual after-tax earnings by approximately $31 million.
Interest expense increased 53.8% in Q3 and 51.4% for the nine months, primarily because of higher average debt, including acquisition financing, and higher variable interest rates. The company was in compliance with its debt covenants as of September 30, 2023, and stated that the ABL fixed-charge coverage covenant was not applicable at that date.
Cash Flow and Capital Allocation
- Operating cash flow was $3.290 billion for the nine months, compared with $3.182 billion in the prior-year period.
- Rental equipment purchases were $3.078 billion; non-rental equipment and intangible asset purchases were $267 million.
- Proceeds from rental equipment sales were $1.136 billion, compared with $556 million in the prior-year period.
- Free cash flow was $1.157 billion, up modestly from $1.140 billion.
- The company paid $305 million of dividends during the nine months, reflecting its first quarterly dividend program, and declared a further $1.48-per-share dividend payable November 22, 2023.
- The company repurchased $750 million of common stock under its $1.25 billion authorization through September 30, 2023, and expected approximately $1.0 billion of repurchases for full-year 2023.
Material Changes, Outlook and Unusual Items
- Ahern Rentals integration drove higher depreciation, repairs and maintenance, intangible amortization, interest expense and restructuring charges. The company paid $1.988 billion for the acquisition and financed it partly with $1.5 billion of 6% senior secured notes and ABL borrowings.
- The company recorded $24 million of restructuring charges for the nine months, primarily for severance and branch closures, and expected approximately $5 million of additional charges during the remainder of 2023. The liability associated with open and closed restructuring programs was $20 million at September 30.
- Management reported broad-based demand strength across end markets through September 30, 2023, with continued strong pricing on rental equipment sales. It also stated that inflation and higher interest rates may remain significant.
- Management expected existing cash sources to support operations for the next 12 months. Expected cash needs include operating activities, fleet and inventory purchases, lease payments, debt service, share repurchases, dividends and acquisitions.
- Accounts receivable securitization capacity was increased from $1.1 billion to $1.3 billion, and the repurchase facility was extended to June 2024, subject to mutual extension rights.
Risks and Contingencies
Principal risks include cyclical construction and industrial demand, lower rental rates or utilization, excess industry fleet, inflation, interest rates, supply chain constraints, competition, significant indebtedness and refinancing risk, covenant compliance, acquisition integration and impairment risk, equipment residual values and disposal prices, credit losses, labor constraints, cybersecurity, climate-related requirements, foreign currency exposure, litigation, regulatory matters and changes in tax law.
The company reported ordinary-course claims and proceedings, including liability, employee, contract, insurance and other matters, but stated that expected liabilities would not have a material adverse effect individually or in the aggregate based on available information. The filing text does not identify a separately quantified material legal contingency.
Important Facts for Investors to Verify
- Whether Ahern Rentals equipment productivity, depreciation and repair costs improve as integration progresses and whether the expected synergies materialize.
- The sustainability of rental rates, utilization, fleet productivity and used-equipment pricing if construction or industrial activity weakens.
- Debt maturities, refinancing requirements, variable-rate exposure and the effect of higher interest rates on earnings and cash flow.
- Whether the company can maintain approximately $2.685 billion of stated liquidity while funding fleet investment, dividends, repurchases and potential acquisitions.
- Actual full-year 2023 share repurchases, additional restructuring charges and the continuation of the quarterly dividend program.
- Final purchase-price accounting for Ahern Rentals, including acquired intangible assets and goodwill, which remained subject to measurement-period adjustments.
- Compliance with debt covenants and the availability of borrowing capacity, particularly as the accounts receivable securitization and repurchase facilities approach their June 2024 maturities.