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 six months ended June 30, 2023. United Rentals is a large equipment rental provider serving construction, industrial, utility, municipal, government and consumer customers, primarily in the United States and Canada. Its reportable segments are general rentals and specialty.
The company operated 1,543 rental locations and had rental fleet original equipment cost of approximately $20.6 billion. The December 2022 acquisition of Ahern Rentals materially affected 2023 results, including revenue, fleet size, depreciation, amortization, restructuring costs and debt.
Financial Performance and Key Metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $3.554 billion, up 28.3% | $6.839 billion, up 29.2% |
| Equipment rental revenue | $2.981 billion, up 21.1% | $5.721 billion, up 23.4% |
| Gross profit | $1.425 billion | $2.666 billion |
| Gross margin | 40.1%, down 140 basis points | 39.0%, down 150 basis points |
| Operating income | $925 million | $1.665 billion |
| Net income | $591 million, up 19.9% | $1.042 billion, up 21.2% |
| Diluted EPS | $8.58, versus $6.90 | $15.04, versus $11.93 |
| Adjusted EBITDA | $1.695 billion, up 29.3% | $3.198 billion, up 30.5% |
| Adjusted EBITDA margin | 47.7%, versus 47.3% | 46.8%, versus 46.3% |
| Net cash from operating activities | Not separately provided | $2.228 billion, versus $2.040 billion |
| Free cash flow | Not separately provided | $818 million, versus $964 million |
Equipment rentals represented 84% of total revenue for the six-month period. Rental revenue growth primarily reflected a 25.5% increase in average original equipment cost, including Ahern Rentals and increased capital expenditures. On a pro forma basis including Ahern’s pre-acquisition results, rental revenue increased 14.4% for the six-month period, driven by a 12.4% increase in average fleet cost and 3.8% fleet productivity growth.
Cash Flow, Debt and Liquidity
- Cash and cash equivalents were $227 million at June 30, 2023, compared with $106 million at December 31, 2022.
- Total debt was $11.937 billion, compared with $11.370 billion at year-end; long-term debt was $10.493 billion and short-term debt and current maturities were $1.444 billion.
- Available liquidity was approximately $2.706 billion, consisting of cash and availability under the ABL and accounts receivable securitization facilities.
- The ABL facility had $2.453 billion of borrowing capacity net of letters of credit and $1.723 billion outstanding. The accounts receivable securitization facility had $26 million of available borrowing capacity and $1.273 billion outstanding.
- Capital expenditures for rental and non-rental equipment and intangible assets totaled $2.227 billion, versus $1.477 billion in the prior-year period.
- Cash used for acquisitions was $418 million, compared with $312 million in the prior-year period.
- The company repurchased $500 million of common stock under its program through June 30 and paid $205 million of dividends. It expects to repurchase $1.0 billion of stock during 2023 under a $1.25 billion authorization.
- Management stated that existing cash sources are expected to support operations over the next 12 months.
Material Changes Versus the Prior Comparable Period
- Revenue and earnings increased substantially, aided by the Ahern Rentals acquisition, higher fleet investment and continued broad-based demand.
- Sales of rental equipment increased 132.9% in the quarter and 105.3% year to date. Management attributed the increase partly to normalization after intentionally limiting equipment sales in 2022 and to sales of Ahern-acquired equipment.
- Total gross margin declined 140 basis points in the quarter and 150 basis points year to date. Rental margin was pressured by higher depreciation and repairs and maintenance costs on acquired Ahern equipment.
- Rental equipment sales margin fell 780 basis points in the quarter and 670 basis points year to date, reflecting a normalized sales-channel mix, increased wholesale activity and lower margins on equipment acquired from Ahern.
- SG&A expense increased in dollars but declined as a percentage of revenue to 10.6% in the quarter and 11.1% year to date, reflecting operating leverage.
- Net interest expense increased 42.5% in the quarter and 50.2% year to date, primarily from higher average debt and higher variable interest rates. The weighted-average rate on variable debt was 6.3% in the quarter and 6.1% year to date, versus 2.4% and 2.0%, respectively, in 2022.
- Free cash flow declined $146 million year to date, primarily because higher rental capital expenditures more than offset the increase in operating cash flow.
Guidance, Outlook, Risks and Unusual Items
Management reported continued broad-based demand across end-markets through June 30 and cited infrastructure-related activity, fleet expansion, customer and fleet optimization, operating efficiencies, specialty offerings and strategic acquisitions as growth priorities. The filing does not provide comprehensive full-year revenue or earnings guidance, but management expects to repurchase $1.0 billion of stock in 2023 and complete the Ahern-related restructuring program during 2023, with approximately $10 million of additional restructuring expense expected.
- Ahern Rentals purchase accounting remains preliminary. Valuations of acquired working capital, rental equipment, intangible assets, lease assets and liabilities, and related taxes may change materially. Goodwill was reduced by $208 million during the first six months primarily from measurement-period adjustments.
- The company recorded $19 million of restructuring charges year to date, including branch closures and severance related principally to Ahern integration. The open and closed restructuring liability totaled $20 million at June 30.
- Inflation, labor costs, repairs and maintenance, supply-chain constraints and higher interest rates may continue to pressure costs and profitability.
- The company had approximately $4.0 billion of variable-rate debt; management estimates that a one-percentage-point increase in applicable rates would reduce annual after-tax earnings by approximately $30 million.
- Key risks include cyclicality and potential declines in construction or industrial activity, lower rental rates or utilization, excess industry fleet, competition, residual-value declines, credit losses, refinancing risk, covenant compliance, acquisition integration, cybersecurity, climate-related matters, labor disruptions, litigation and regulatory matters.
- The company was in compliance with debt covenants at June 30, 2023, and the ABL fixed-charge coverage covenant was not applicable because specified availability exceeded its threshold.
- Ordinary-course legal claims and proceedings were not expected by management to have a material adverse effect, individually or in the aggregate.
Most Important Facts for Investors to Verify
- Whether rental demand, utilization, pricing and fleet productivity remain strong after adjusting for the Ahern Rentals acquisition and the 25.5% increase in average fleet cost.
- Whether Ahern integration produces expected synergies without further restructuring, impairment, maintenance or purchase-accounting charges.
- Whether rental and equipment-sales margins recover from the year-over-year declines, particularly as wholesale sales and acquired fleet dispositions continue.
- The sustainability of free cash flow after substantially higher capital expenditures, acquisitions, dividends and planned share repurchases.
- Exposure to higher interest rates, upcoming 2024 facility maturities and the company’s ability to refinance or maintain adequate liquidity.
- The final Ahern purchase-price allocation and any resulting changes to goodwill, intangible assets, depreciation, amortization, taxes or future earnings.
- Whether the planned $1.0 billion of 2023 repurchases and quarterly dividend program remain consistent with debt levels, covenant capacity and operating needs.