United Rentals, Inc. — Q2 2021 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 quarter and six months ended June 30, 2021. The company rents construction, industrial, specialty, mobile storage and modular office equipment, primarily in the United States and Canada, with limited operations in Europe, Australia and New Zealand. Equipment rentals represented 83% of six-month revenue.
United Rentals completed its $1.032 billion acquisition of General Finance Corporation on May 25, 2021. The transaction added mobile storage and modular office operations and expanded the company into Australia and New Zealand.
Financial Performance and Key Metrics
| Metric | Q2 2021 | Q2 2020 | Six Months 2021 | Six Months 2020 |
|---|---|---|---|---|
| Total revenue | $2.287 billion | $1.939 billion | $4.344 billion | $4.064 billion |
| Equipment rental revenue | $1.951 billion | $1.642 billion | $3.618 billion | $3.425 billion |
| Gross profit | $875 million | $701 million | $1.589 billion | $1.428 billion |
| Gross margin | 38.3% | 36.2% | 36.6% | 35.1% |
| Operating income | $481 million | $381 million | $853 million | $739 million |
| Net income | $293 million | $212 million | $496 million | $385 million |
| Diluted EPS | $4.02 | $2.93 | $6.82 | $5.25 |
| Adjusted EBITDA | $999 million | $899 million | $1.872 billion | $1.814 billion |
| Adjusted EBITDA margin | 43.7% | 46.4% | 43.1% | 44.6% |
Q2 revenue increased 17.9%, while six-month revenue increased 6.9%. Net income increased 38.2% in Q2 and 28.8% for the six-month period. Net income margins were 12.8% and 11.4%, respectively, compared with 10.9% and 9.5% in the prior-year periods.
Equipment rental gross margin improved to 38.5% in Q2 and 36.7% for the six months, compared with 36.5% and 35.3%, respectively. Management attributed the improvement primarily to lower depreciation expense, partly offset by higher bonus accruals and delivery costs. Adjusted EBITDA margin declined because of lower rental margins excluding depreciation, higher SG&A, and acquisition-related costs.
Cash Flow, Debt and Liquidity
- Net cash provided by operating activities was $1.934 billion for the six months ended June 30, 2021, compared with $1.461 billion in 2020.
- Free cash flow, as defined by management, was $1.162 billion, down from $1.423 billion, primarily because net rental capital expenditures increased by $778 million.
- Rental equipment purchases were $1.208 billion, compared with $353 million in the prior-year period; proceeds from rental equipment sales were $461 million.
- Cash used for acquisitions was $1.435 billion, principally reflecting the General Finance transaction.
- Total debt was $10.160 billion at June 30, 2021, up from $9.682 billion at December 31, 2020. Long-term debt was $9.308 billion and short-term debt and current maturities were $852 million.
- Cash and cash equivalents were $336 million, compared with $202 million at year-end 2020. Management reported total liquidity of $2.826 billion, including cash and availability under the ABL and accounts receivable securitization facilities.
- The company had no senior note maturities until 2026 and was in compliance with its debt covenants at June 30, 2021. The ABL fixed-charge coverage covenant was not applicable because specified availability exceeded the required threshold.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected recovery from the more pronounced COVID-19-related rental decline in 2020. Q2 equipment rental growth was also supported by an 18.8% increase in fleet productivity; six-month fleet productivity increased 8.2%.
- The General Finance acquisition contributed $41 million of revenue and $7 million of pretax income in the post-acquisition period. It also added $552 million of preliminary goodwill to the specialty segment.
- SG&A increased 35.6% in Q2 and 12.7% for the six months, primarily due to higher bonus and stock compensation expense and $8 million of one-time acquisition-related costs.
- Net interest expense declined 23.1% in Q2 and 25.2% for the six months, reflecting lower average debt and borrowing costs.
- The effective tax rate increased to 22.3% in Q2 and 23.9% for the six months, primarily because the 2020 periods benefited from a foreign tax credit valuation allowance release.
- Share repurchases under the $500 million program remained paused after March 18, 2020. Shares withheld for employee tax obligations totaled approximately $2 million during Q2 and were not part of the repurchase program.
Guidance, Outlook, Commentary and Risks
Management expected 2021 net rental capital expenditures to return to historic, pre-COVID-19 levels and stated that existing cash sources were sufficient to support operations over the following 12 months. The filing does not provide a specific full-year revenue, earnings or EBITDA guidance range.
Management reported recovery across construction and industrial markets and encouraging end-market indicators. Strategic priorities included rate and fleet management, operational efficiency, specialty expansion, cross-selling and additional strategic acquisitions.
- COVID-19 variants, renewed restrictions, supply-chain disruption and uncertain economic recovery could reduce rental demand and affect customers, suppliers and employee availability.
- The business is cyclical and highly sensitive to North American construction and industrial activity; lower utilization or rental rates could pressure profitability because many costs are fixed.
- Significant indebtedness may constrain flexibility, require substantial cash for debt service and create 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 $23 million.
- The preliminary purchase accounting for General Finance was incomplete. Asset, liability, goodwill and intangible-asset valuations could change materially.
- Other risks include competition, equipment residual values, maintenance and replacement costs, credit losses, cybersecurity, climate regulation, labor issues, litigation, regulatory matters, foreign currency exposure and integration of acquisitions.
- Ordinary-course legal claims and proceedings were not expected to have a material adverse effect on consolidated financial condition, results of operations or cash flows.
Important Facts for Investors to Verify
- Confirm the final purchase-price allocation and intangible-asset valuations for General Finance, including any resulting changes to goodwill and amortization.
- Monitor whether rental rates, time utilization and fleet productivity remain strong after the favorable comparison with COVID-19-affected 2020 results.
- Assess the effect of substantially higher rental-equipment capital expenditures on free cash flow and leverage.
- Track total debt, ABL and receivables-securitization availability, covenant headroom and refinancing requirements beginning in 2026.
- Determine whether the paused share-repurchase program resumes and how repurchases would affect liquidity and leverage.
- Evaluate the impact of higher SG&A, bonus expense, acquisition costs and effective tax rates on future margins.
- Review subsequent filings for COVID-19 developments, supply-chain constraints, acquisition integration, litigation and changes in market demand.