Business Context and Reporting Period
United Rentals, Inc. filed its Form 10-K for the fiscal year ended December 31, 2020. The company is the world’s largest equipment rental provider, operating 1,165 locations across the United States, Canada and Europe through United Rentals (North America), Inc. Its two reportable segments are general rentals and trench, power and fluid solutions.
Operations were materially affected by the COVID-19 pandemic beginning in March 2020, particularly through reduced rental volumes following shelter-in-place orders and other market restrictions. Equipment rental revenue represented 84% of total revenue, and the company’s estimated North American market share was approximately 13%.
Key Financial Metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total revenue | $8.530 billion | $9.351 billion | Down 8.8% |
| Equipment rental revenue | $7.140 billion | $7.964 billion | Down 10.3% |
| Gross profit | $3.183 billion | $3.670 billion | Down 13.3% |
| Operating income | $1.800 billion | $2.152 billion | Down 16.4% |
| Net income | $890 million | $1.174 billion | Down 24.2% |
| Diluted EPS | $12.20 | $15.11 | Down 19.3% |
| Adjusted EBITDA | $3.932 billion | $4.355 billion | Down 9.7% |
| Net income margin | 10.4% | 12.6% | Down 220 bps |
| Adjusted EBITDA margin | 46.1% | 46.6% | Down 50 bps |
| Operating cash flow | $2.658 billion | $3.024 billion | Down 12.1% |
| Free cash flow | $2.440 billion | $1.566 billion | Up $874 million |
Gross margin declined to 37.3% from 39.2%. Equipment-rental gross margin declined to 38.1% from 40.3%, primarily because revenue declined faster than depreciation and other fleet-related costs. A $36 million asset impairment charge, primarily related to discontinued equipment programs, was not COVID-19 related.
At December 31, 2020, cash and cash equivalents were $202 million, total assets were $17.868 billion, total debt was $9.682 billion and stockholders’ equity was $4.545 billion. Total liquidity was $3.073 billion, including cash and availability under the ABL and accounts receivable securitization facilities.
Material Changes Versus the Prior Comparable Period
- Average original equipment cost declined 2.2%, fleet productivity declined 6.9%, and the rental fleet decreased to approximately 615,000 units from 665,000 units.
- Rental locations declined to 1,165 from 1,175, and total employees declined to approximately 18,250 from 19,100.
- Net rental capital expenditures fell to $103 million from $1.301 billion, reflecting disciplined capital spending and fleet reductions during the pandemic.
- Cash flow from operations declined by $366 million, but free cash flow increased because equipment purchases fell substantially.
- SG&A expense declined 10.3% to $979 million, supported by lower professional fees, travel and entertainment costs, and other cost-control actions.
- Total debt declined $1.746 billion, or 15.3%, year over year.
- The company issued $750 million of 4% senior notes due 2030 and $1.1 billion of 3.875% senior notes due 2031. It redeemed $2.65 billion of notes due 2025 and 2026 and recognized aggregate debt redemption losses of $183 million.
- Share repurchases under the new $500 million program were paused on March 18, 2020. The company had repurchased $257 million under the program before the pause; no shares were purchased under the program in the fourth quarter.
Fourth-Quarter Items
Fourth-quarter 2020 revenue was $2.279 billion, gross profit was $869 million, operating income was $510 million and net income was $297 million, compared with fourth-quarter 2019 revenue of $2.456 billion, gross profit of $965 million, operating income of $599 million and net income of $338 million.
In the fourth quarter, the company redeemed its remaining 4.625% senior notes due 2025 and recorded a $24 million loss in interest expense. Fourth-quarter diluted EPS was $4.09 versus $4.49 in the prior-year quarter.
Guidance, Outlook, Commentary and Risks
Management expected modest industry recovery in 2021, with North American equipment rental industry revenue projected to increase approximately 2%, and stronger growth expected in Canada than in the United States. The filing does not provide specific 2021 company revenue, earnings or cash-flow guidance.
- Management’s response to COVID-19 emphasized employee and customer safety, contactless digital transactions, reduced capital expenditures, lower overtime and temporary labor, and preservation of liquidity.
- The company stated that existing cash sources were expected to support operations over the following 12 months and that no note maturities were due until 2026; however, the accounts receivable securitization facility was scheduled to expire on June 25, 2021 unless extended.
- Principal risks include the cyclical nature of construction and industrial markets, prolonged COVID-19 effects, rental-rate and utilization pressure, excess fleet, competition, used-equipment residual values, supplier dependence, cybersecurity, environmental regulation and foreign-currency exposure.
- Variable-rate debt totaled approximately $2.6 billion, or 27% of total indebtedness. Management estimated that a one-percentage-point increase in applicable interest rates would reduce annual after-tax earnings by approximately $20 million.
- Goodwill totaled $5.168 billion. The October 2020 impairment test found that reporting-unit fair values exceeded carrying values, but the test depended on assumptions regarding discount rates, growth, EBITDA margins, capital expenditures and market multiples.
- The company had $14.880 billion of disclosed contractual obligations, including $9.755 billion of debt and finance-lease principal, $2.678 billion of estimated debt interest and $1.569 billion of purchase obligations.
- The company was in compliance with its debt covenants at year-end, and the ABL fixed-charge coverage covenant was inapplicable because specified availability exceeded the required threshold.
- Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Valuation of goodwill was identified as the critical audit matter.
Important Facts for Investors to Verify
- Confirm the company’s ability to sustain rental demand, utilization and pricing as pandemic-related restrictions and construction activity evolve.
- Review the maturity, refinancing and covenant provisions for the accounts receivable securitization facility, ABL facility and 2025-2026 debt maturities.
- Assess whether reduced 2020 capital expenditures are sustainable or represent deferred fleet-replacement requirements, particularly given the fleet’s average age of 54.5 months.
- Evaluate the sensitivity of the $5.168 billion goodwill balance and other asset values to changes in market recovery assumptions.
- Monitor the resumption, suspension or cancellation of the $500 million share repurchase program and the restrictions imposed by debt agreements.
- Reconcile non-GAAP adjusted EBITDA and free cash flow to GAAP results, including the effects of debt redemption losses, restructuring, stock compensation, impairment and acquisition-related items.