United Rentals, Inc. — Q1 2021 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 ended March 31, 2021. United Rentals is a large equipment-rental provider operating through 1,167 locations in the United States, Canada and Europe, with approximately 4,000 equipment classes and an original equipment cost of approximately $13.5 billion. Reportable segments are general rentals and trench, power and fluid solutions.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $2,057 million | $2,125 million | Down 3.2% |
| Equipment-rental revenue | $1,667 million | $1,783 million | Down 6.5% |
| Gross profit | $714 million | $727 million | Down 1.8% |
| Operating income | $372 million | $358 million | Up 3.9% |
| Net income | $203 million | $173 million | Up 17.3% |
| Diluted EPS | $2.80 | $2.33 | Up $0.47 |
| Net cash from operations | $758 million | $644 million | Up $114 million |
| Free cash flow | $725 million | $606 million | Up $119 million |
| Adjusted EBITDA | $873 million | $915 million | Down 4.6% |
Total gross margin was 34.7%, compared with 34.2% in the prior-year quarter. Net income margin increased to 9.9% from 8.1%, while adjusted EBITDA margin declined to 42.4% from 43.1%. Excluding the $26 million asset impairment charge recorded in Q1 2020, the improvement in net income margin was approximately 50 basis points.
- Sales of rental equipment increased 28.4% to $267 million, supported by strong used-equipment demand, but related gross margin declined because of pricing pressure.
- Average original equipment cost declined 5.7%, contributing to lower equipment-rental revenue.
- SG&A declined 6.4% to $250 million, reflecting lower professional fees, travel, entertainment, bad-debt expense and other discretionary costs, partly offset by higher bonus and stock-compensation expense.
- Net interest expense declined 27.2% to $99 million because of lower average debt and borrowing costs.
- The effective tax rate increased to 26.2% from 23.5%, primarily because of state apportionment changes.
At March 31, 2021, cash and cash equivalents were $278 million. Total debt was $9.082 billion, down $600 million from December 31, 2020, primarily because operating cash was used to reduce ABL borrowings. Reported total liquidity was $3.745 billion, including cash and availability under the ABL and accounts-receivable securitization facilities. The company reported compliance with its debt covenants, and no note maturities are scheduled until 2026.
Cash uses in the quarter included $314 million of equipment purchases, $619 million of net debt repayment and $30 million of share repurchases. The existing $500 million repurchase program remained paused; first-quarter share purchases were limited to $30 million of employee tax-withholding share settlements and were not made under the program.
Material changes versus the prior comparable period
- Revenue declined modestly, primarily because of lower equipment-rental volume and a smaller average fleet following COVID-19-related capital-expenditure reductions in 2020.
- General rentals equipment-rental revenue decreased 8.7%, while trench, power and fluid solutions rental revenue was not materially changed.
- Equipment-rental gross margin was 34.6%, up from 34.2%; however, excluding the prior-year impairment charge, underlying rental margin declined because of higher bonus accruals and operating expenses.
- Operating income and net income improved despite lower revenue, driven mainly by lower SG&A, depreciation and interest expense and the absence of the prior-year impairment charge.
- Operating cash flow and free cash flow increased substantially, enabling significant debt reduction.
- The company adopted new income-tax accounting guidance in the first quarter of 2021; the impact was not material.
Guidance, outlook, commentary and risks
Management expects 2021 rental capital expenditures to return to historic, pre-COVID-19 levels. Management stated that existing cash sources are expected to support operations for the next 12 months. The company continues to focus on fleet and customer optimization, Lean operating initiatives, expansion of specialty rental offerings, cost control and strategic acquisitions.
On April 15, 2021, United Rentals agreed to acquire General Finance Corporation in an all-cash transaction valued at approximately $996 million of enterprise value, including assumed net debt of $400 million. The transaction is expected to close in the second quarter of 2021, subject to customary conditions and regulatory approvals, and is expected to be funded with available cash and ABL borrowings.
- COVID-19 remains a material uncertainty affecting demand, supply chains, labor availability, customer credit and equipment utilization.
- The business is cyclical and sensitive to North American construction, industrial activity, infrastructure spending and oil and gas trends.
- Significant indebtedness increases debt-service requirements, refinancing risk, covenant risk and sensitivity to interest rates. A one-percentage-point increase in applicable variable rates was estimated to reduce annual after-tax earnings by approximately $15 million.
- Fleet oversupply, rental-rate or utilization declines, equipment maintenance costs, residual-value changes and used-equipment pricing could pressure results.
- Other disclosed risks include competition, acquisitions and integration, cybersecurity, climate-related regulation, litigation, labor disruptions, foreign currency exposure and changes in tax law.
- Ordinary-course legal proceedings were not expected to have a material adverse effect, individually or in the aggregate, based on the information available to management.
Important facts for investors to verify
- Whether equipment utilization, rental rates and fleet productivity recover as capital expenditures increase in 2021.
- The sustainability of used-equipment pricing and the margin impact of increased rental-equipment sales.
- The effect of returning to historic capital-expenditure levels on free cash flow and leverage.
- Funding, closing conditions, integration costs and expected synergies associated with the General Finance acquisition.
- Progress in reducing total debt and maintaining $3.745 billion of reported liquidity and compliance with applicable covenants.
- Whether the paused $500 million share-repurchase program resumes and how any repurchases affect liquidity and leverage.
- The continuing effects of COVID-19, supply-chain constraints, inflation, interest rates and construction and industrial activity.