United Rentals, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results for the quarter ended March 31, 2019. United Rentals rents construction, industrial and specialty equipment and also sells used and new equipment, contractor supplies, and related services across the United States, Canada and Europe. The company operated 1,176 rental locations, with fleet original equipment cost of approximately $14.1 billion.
Results include the acquisitions of BakerCorp, completed in July 2018, and BlueLine, completed in October 2018. Management cautions that first-quarter results are seasonal and are not necessarily indicative of full-year results.
Financial performance and key metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $2,117 million | $1,734 million | 22.1% |
| Equipment rental revenue | $1,795 million | $1,459 million | 23.0% |
| Gross profit | $761 million | $646 million | 17.8% |
| Gross margin | 35.9% | 37.3% | Down 140 bps |
| Operating income | $368 million | $340 million | 8.2% |
| Operating margin | 17.4% | 19.6% | Down approximately 220 bps |
| Net income | $175 million | $183 million | Down 4.4% |
| Diluted EPS | $2.19 | $2.15 | 1.9% |
| Adjusted EBITDA | $921 million | $780 million | 18.1% |
| Adjusted EBITDA margin | 43.5% | 45.0% | Down 150 bps |
| Cash flow from operations | $667 million | $642 million | 3.9% |
| Free cash flow | $575 million | $516 million | 11.4% |
Equipment rental revenue growth reflected a 23.7% increase in average original equipment cost, largely from acquisitions. On a pro forma basis including acquired-company results, equipment rental revenue increased 7.2%, supported by a 5.7% increase in average original equipment cost and 2.2% fleet productivity growth.
Equipment rental gross profit increased to $658 million from $545 million, while equipment rental gross margin declined to 36.7% from 37.4%. General rentals gross margin was 35.2%, compared with 35.5%; trench, power and fluid solutions gross margin was 42.2%, compared with 46.1%.
Interest expense increased to $151 million from $109 million, primarily because of higher average debt associated with the BakerCorp and BlueLine acquisitions. The effective tax rate was 20.5%, compared with 21.1%.
Balance sheet, debt and liquidity
- Total assets were $18.586 billion at March 31, 2019, compared with $18.133 billion at December 31, 2018.
- Cash and cash equivalents were $52 million, compared with $43 million at year-end.
- Total debt was $11.606 billion, compared with $11.747 billion at year-end; debt included $930 million of current maturities and $10.676 billion of long-term debt.
- Operating lease right-of-use assets of $622 million and operating lease liabilities of $497 million were recognized following adoption of the new lease standard.
- Available liquidity was $2.251 billion, including cash. ABL borrowing capacity net of letters of credit was $2.176 billion, while accounts receivable securitization capacity was $23 million.
- The company was in compliance with its debt covenants. The ABL fixed-charge coverage covenant was not applicable because specified availability exceeded the required threshold.
- Approximately $3.4 billion of debt carried variable interest rates. Management estimated that a one-percentage-point increase in applicable rates would reduce annual after-tax earnings by approximately $25 million.
Material changes versus the prior comparable period
- Revenue increased substantially because of the BakerCorp and BlueLine acquisitions, broader demand and fleet expansion. Pro forma growth was materially lower than reported growth.
- Profitability weakened despite higher revenue: gross, operating and adjusted EBITDA margins declined because of acquisition mix, cold starts, lower-margin re-rent activity, restructuring costs and the accounting treatment of doubtful accounts under the new lease standard.
- Net income declined $8 million, although diluted EPS increased because the weighted-average share count fell to approximately 80.0 million from 85.2 million, reflecting share repurchases.
- Operating cash flow increased modestly, while free cash flow increased to $575 million. Rental equipment purchases declined to $257 million from $280 million, and net rental capital expenditures decreased 34%.
- The company repurchased $243 million of common stock during the quarter. Approximately $620 million remained available under the $1.25 billion repurchase authorization at March 31, 2019.
- The ABL facility was amended in February 2019, increasing its size to $3.75 billion, extending maturity to February 2024 and permitting certain European borrowings in British pounds and euros.
Guidance, outlook, commentary and risks
Management did not provide specific numerical full-year guidance in the filing. It expects to continue pursuing profitable growth, rate and fleet management, Lean operating initiatives, Project XL cost and revenue opportunities, expansion of trench, power and fluid solutions, cross-selling, and strategic acquisitions. Management stated that existing cash sources should support operations over the next 12 months.
The BakerCorp/BlueLine restructuring program is expected to be completed in 2019, but total remaining costs were not estimable. The company recognized $8 million of restructuring charges in the quarter and had a related reserve of $15 million at March 31, 2019. Acquisition purchase-price allocations also remained preliminary, and future changes could affect earnings.
Key risks include the cyclical nature of construction and industrial activity, fleet overcapacity, rental-rate and utilization pressure, acquisition integration and undiscovered liabilities, substantial indebtedness and refinancing requirements, interest-rate exposure, covenant compliance, residual values and maintenance costs of equipment, credit losses, litigation and regulatory matters, cybersecurity, labor issues, foreign exchange and tariffs.
Routine legal claims and proceedings were not expected by management to have a material adverse effect individually or in the aggregate. Disclosure controls and procedures were assessed as effective as of March 31, 2019.
Important facts for investors to verify
- Separate the reported 23.0% equipment rental growth from the 7.2% pro forma growth to assess underlying demand.
- Track whether acquired BakerCorp and BlueLine locations achieve expected margin improvement and synergies.
- Monitor leverage, interest expense, variable-rate debt and the company’s $2.251 billion liquidity position.
- Confirm the timing and ultimate cost of the acquisition-related restructuring program.
- Evaluate the sustainability of share repurchases relative to debt reduction, capital expenditures and acquisition spending.
- Assess the effects of the new lease accounting standard, including recognized right-of-use assets and lease liabilities.
- Review future allowance-for-doubtful-account changes, used-equipment pricing and fleet utilization, which may affect margins and cash generation.