United Rentals, Inc. — Q1 2018 Form 10-Q Summary
Business context and reporting period
United Rentals, Inc. and wholly owned United Rentals (North America), Inc. filed a combined unaudited Form 10-Q for the three months ended March 31, 2018. The company operates approximately 1,002 rental locations in the United States and Canada, with an equipment fleet of approximately $11.4 billion of original equipment cost. Its principal activities are equipment rentals, sales of used and new equipment, contractor supplies, and service activities.
Equipment rentals represented 84% of total revenue. Results are seasonal, with rental activity generally lower during the winter. The 2018 period includes the acquisitions of NES Rentals, completed in April 2017, and Neff Corporation, completed in October 2017.
Financial highlights
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $1,734 million | $1,356 million | +27.9% |
| Equipment rental revenue | $1,459 million | $1,166 million | +25.1% |
| Gross profit | $646 million | $514 million | +25.7% |
| Operating income | $340 million | $257 million | +32.3% |
| Net income | $183 million | $109 million | +67.9% |
| Diluted EPS | $2.15 | $1.27 | +69.3% |
| Net cash from operating activities | $642 million | $622 million | +$20 million |
| Free cash flow | $516 million | $490 million | +$26 million |
| Adjusted EBITDA | $780 million | $591 million | +32.0% |
Total gross margin was 37.3%, compared with 37.9% in the prior-year quarter. Equipment rental gross margin was 37.4%, down from 38.1%. Adjusted EBITDA margin increased to 45.0% from approximately 43.6%, while EBITDA margin increased to 42.3% from approximately 41.7%.
General rentals revenue increased to $1,453 million from $1,146 million, and trench, power and pump revenue increased to $281 million from $210 million. Equipment rentals gross profit increased to $545 million from $444 million, although total equipment rental gross margin declined to 37.4% from 38.1%.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $278 million at March 31, 2018, compared with $352 million at December 31, 2017.
- Total debt was $9.138 billion, down from $9.440 billion at year-end 2017; approximately $2.1 billion was variable-rate debt and $7.1 billion was fixed-rate debt.
- Available liquidity was approximately $1.94 billion, including cash, with $1.590 billion available under the ABL facility and $67 million available under the accounts receivable securitization facility.
- The company generated $642 million of operating cash flow and used $313 million for rental and non-rental equipment purchases. Net rental capital expenditures were $99 million.
- Financing activities used $532 million, including $307 million of net debt repayment and $226 million of share repurchases.
- 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.
Material changes versus the prior comparable period
- Revenue and operating income benefited materially from the NES and Neff acquisitions, increased rental volume and improving demand in several core markets.
- Equipment rental revenue growth reflected a 26.1% increase in volume of original equipment cost on rent and a 1.9% rental rate increase. On a pro forma basis for NES and Neff, equipment rental revenue increased 9.9%, with a 6.8% volume increase and a 2.7% rate increase.
- Time utilization declined. Consolidated equipment rental time utilization was 65.2%, compared with 66.0% in the prior-year quarter; general rentals utilization was 66.0%, compared with 67.2%.
- Sales of rental equipment increased 70.8%, partly due to the early recognition of certain sales under the newly adopted revenue standard and partly due to the larger fleet and strong used-equipment market.
- SG&A increased 20.2% in absolute terms but declined to 13.4% of revenue from 14.2%. Interest expense increased 16.0% to $109 million due primarily to higher average debt.
- The effective tax rate declined to 21.1% from 32.3%, principally reflecting the Tax Cuts and Jobs Act and the lower U.S. federal corporate tax rate. Management estimated that the tax law contributed approximately $0.37 to Q1 diluted EPS.
- ASC Topic 606 was adopted on January 1, 2018 using the modified retrospective method. The filing states that adoption did not materially change historical revenue accounting, although certain rental-equipment sales were recognized earlier.
Guidance, outlook, commentary and risks
Management expects to continue focusing on rate management, customer and fleet optimization, Lean initiatives, Project XL, expansion of the trench, power and pump and tools businesses, and strategic acquisitions. Management stated that existing cash sources should be sufficient to support operations over the following 12 months and expected the NES/Neff/Project XL restructuring program to be completed in the first half of 2018 without significant additional expense.
The board authorized a new $1.25 billion share repurchase program in April 2018, to begin after completion of the existing $1 billion program. Management intended to complete the new program by the end of 2019.
- The business is cyclical and highly sensitive to North American construction and industrial activity. Lower demand, overcapacity or weaker rental rates and utilization could reduce profitability because many costs are fixed.
- Significant indebtedness creates debt-service, refinancing, covenant and interest-rate risks. A one-percentage-point increase in variable borrowing rates was estimated to reduce annual after-tax earnings by approximately $15 million.
- Integration of NES and Neff may involve undiscovered liabilities, execution costs, restructuring expenses, or failure to realize expected synergies.
- Fleet residual values, maintenance and replacement costs, the ability to sell used equipment, credit losses, competition and oil and natural gas trends may affect results.
- Other disclosed risks include litigation and regulatory matters, insurance limitations, cybersecurity and information-technology disruptions, labor issues, environmental compliance, foreign currency exposure and changes in tax law.
The company reported no legal proceedings expected to have a material adverse effect on consolidated financial condition, results of operations or cash flows. Disclosure controls and procedures were deemed effective as of March 31, 2018.
Important facts for investors to verify
- Separate the underlying organic performance from the acquisition-driven increases in revenue, fleet size, utilization and EBITDA.
- Monitor whether rental rates and demand growth offset lower time utilization and higher depreciation expense.
- Assess debt reduction, refinancing needs, variable-rate exposure and the availability of the ABL and receivables facilities.
- Evaluate the sustainability of the lower effective tax rate and the still-provisional accounting effects of the Tax Cuts and Jobs Act.
- Review the timing, funding and effect of the new $1.25 billion share repurchase authorization relative to leverage and capital expenditures.
- Confirm the completion and remaining costs of the NES/Neff/Project XL restructuring program and the realization of acquisition synergies.
- Consider the effect of ASC Topic 842 lease adoption expected January 1, 2019; the filing states that the balance-sheet impact is expected to be significant but was not yet estimable.