United Rentals, Inc. — Q1 2020 Form 10-Q Summary
Business context and reporting period
United Rentals, Inc. and United Rentals (North America), Inc. reported unaudited results for the three months ended March 31, 2020. The company rents construction and industrial equipment and operates 1,181 locations across the United States, Canada and Europe. Equipment rentals represented 84% of total revenue.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $2,125 million | $2,117 million | 0.4% |
| Equipment rentals | $1,783 million | $1,795 million | (0.7%) |
| Operating income | $358 million | $368 million | (2.7%) |
| Net income | $173 million | $175 million | (1.1%) |
| Diluted EPS | $2.33 | $2.19 | 6.4% |
| Gross margin | 34.2% | 35.9% | (170 bps) |
| Operating margin | 16.8% | 17.4% | (60 bps) |
| Adjusted EBITDA | $915 million | $921 million | (0.7%) |
| Adjusted EBITDA margin | 43.1% | 43.5% | (40 bps) |
| Cash flow from operations | $644 million | $667 million | (3.4%) |
| Free cash flow | $606 million | $575 million | 5.4% |
At March 31, 2020, cash and cash equivalents were $513 million, total debt was $11.597 billion, and total liquidity was $3.083 billion. Long-term debt was $10.743 billion, with no long-term debt maturities until 2025. Total assets were $18.868 billion and stockholders’ equity was $3.635 billion.
Material changes versus the prior comparable period
- COVID-19 began affecting operations in March. Equipment rentals were slightly higher through February but declined year over year in March as shelter-in-place orders and end-market restrictions reduced rental volume.
- Rental equipment sales increased 8.3% for the quarter, primarily reflecting higher volume before the COVID-19 impact in March.
- General rentals revenue declined 0.9%, while trench, power and fluid solutions revenue increased 5.9%. Trench, power and fluid solutions equipment rentals increased 4.6%.
- Equipment rentals gross profit declined to $610 million from $658 million, and equipment rentals gross margin fell to 34.2% from 36.7%. The decline reflected COVID-19-related operating deleverage and higher depreciation, including a $26 million asset impairment charge unrelated to COVID-19.
- SG&A expense decreased 4.6% to $267 million, reflecting lower professional fees and bonus expenses. Net interest expense decreased 9.9% to $136 million.
- Basic weighted-average shares declined to 74.0 million from 79.4 million, primarily supporting the increase in diluted EPS despite lower net income.
- Cash from operations decreased $23 million, while free cash flow increased $31 million because of lower net rental capital expenditures.
Guidance, outlook, commentary and risks
- The company withdrew its full-year 2020 guidance because the duration and economic effects of COVID-19 were uncertain.
- All U.S. and Canadian branches remained open as essential businesses, and most European branches were operating. The company implemented distancing, disinfecting, protective-equipment and contactless-service measures.
- Management expected 2020 capital expenditures to be significantly lower year over year and reduced overtime, temporary labor, third-party services and other discretionary spending.
- The $500 million share repurchase program was paused on March 18, 2020 after $257 million of repurchases. Management could not estimate when, or whether, the program would restart.
- In February 2020, the company issued $750 million of 4% senior notes due 2030. Management deferred a decision on redeeming $800 million of 5.5% senior notes due 2025 until the second half of 2020 because of liquidity uncertainty.
- The accounts receivable securitization facility, carrying $795 million of borrowings at quarter-end, expires June 26, 2020. An April 2020 amendment adjusted financial tests to facilitate compliance, and management expected to renew the facility in the second quarter.
- The company was in compliance with its debt covenants at March 31, 2020. However, significant indebtedness, refinancing needs, variable interest rates, potential customer credit losses, fleet overcapacity and reduced demand remain material risks.
- Outstanding purchase orders were reduced from approximately $1.552 billion at December 31, 2019 to $890 million at April 27, 2020, primarily due to COVID-19-related cancellations.
- Management stated that existing cash sources were expected to support operations for the next 12 months, but noted that the pandemic could materially affect demand, liquidity, employee availability, collections and capital-market access.
Important facts for investors to verify
- Subsequent-quarter rental demand, fleet utilization, pricing and customer payment trends following the March 2020 decline.
- Renewal of the accounts receivable securitization facility before its June 26, 2020 expiration and continued covenant compliance.
- Whether the company redeems the 5.5% senior notes due 2025 and the resulting effect on liquidity and interest expense.
- The timing and amount of capital expenditures, fleet disposals and used-equipment sale prices as market conditions develop.
- Whether the paused share repurchase program resumes and how future repurchases affect share count and EPS.
- Potential additional impairment, restructuring, credit-loss or litigation charges related to the pandemic and broader economic slowdown.