United Rentals, Inc. — Form 10-Q Summary
Business context and reporting period
United Rentals, Inc. and United Rentals (North America), Inc. filed a combined unaudited Form 10-Q for the quarter and nine months ended September 30, 2020. United Rentals is an equipment rental company operating 1,181 locations across the United States, Canada and Europe, with approximately 4,000 equipment classes. Its reportable segments are general rentals and trench, power and fluid solutions.
COVID-19 materially affected rental volume beginning in March 2020. Management implemented cost controls, reduced capital expenditures, paused share repurchases and focused on liquidity and employee and customer safety.
Financial performance and key metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Total revenue | $2,187 million | $2,488 million | $6,251 million | $6,895 million |
| Equipment rental revenue | $1,861 million | $2,147 million | $5,286 million | $5,902 million |
| Operating income | $551 million | $656 million | $1,290 million | $1,553 million |
| Net income | $208 million | $391 million | $593 million | $836 million |
| Diluted EPS | $2.87 | $5.08 | $8.12 | $10.66 |
| Adjusted EBITDA | $1,081 million | $1,207 million | $2,895 million | $3,201 million |
| Adjusted EBITDA margin | 49.4% | 48.5% | 46.3% | 46.4% |
Total revenue declined 12.1% in the third quarter and 9.3% for the nine-month period. Equipment rental revenue declined 13.3% and 10.4%, respectively. Fleet productivity declined 8.0% year over year in both periods, although third-quarter fleet absorption improved sequentially.
Q3 total gross margin was 40.5%, down 100 basis points year over year; nine-month gross margin was 37.0%, down 220 basis points. Equipment rentals gross margin was 41.8% in Q3 and 37.6% for the nine-month period, compared with 42.7% and 40.1%, respectively, in the prior-year periods.
Net income margin declined to 9.5% in both the quarter and nine-month period, from 15.7% and 12.1%, respectively. SG&A expense declined 15.0% in Q3 and 12.5% for the nine-month period, while SG&A as a percentage of revenue improved to 10.6% and 11.5%, respectively.
Cash flow, debt and liquidity
- Cash flow from operating activities was $2,288 million for the first nine months of 2020, compared with $2,582 million in 2019.
- Reported free cash flow was $2,006 million, up from $1,082 million, primarily because rental equipment purchases declined substantially.
- Capital expenditures were $930 million, compared with $2,131 million in the prior-year period.
- Total debt was $10,051 million at September 30, 2020, down $1,377 million, or 12.0%, from December 31, 2019. Long-term debt was $9,351 million and short-term debt was $700 million.
- Cash and cash equivalents were $174 million, compared with $52 million at year-end 2019.
- Management reported total liquidity of $3,430 million, consisting of cash and availability under the ABL and accounts receivable securitization facilities.
- ABL borrowing capacity, net of letters of credit, was $3,091 million, with $598 million outstanding. The accounts receivable securitization facility had $165 million of available capacity and $634 million outstanding.
- The company was in compliance with its debt covenants as of September 30, 2020, and the ABL fixed-charge coverage covenant was not applicable because specified availability exceeded the required threshold.
Material changes versus the prior comparable period
- COVID-19 reduced rental demand, utilization and fleet productivity, particularly after March 2020.
- Average original equipment cost declined 4.6% year over year, reflecting disciplined fleet and capital expenditure management.
- General rentals equipment rental revenue declined 15.3% in Q3 and 12.0% for the nine-month period. Trench, power and fluid solutions declined 6.9% and 4.9%, respectively.
- Interest expense increased substantially in Q3 because of $159 million of losses associated with debt redemptions. Excluding redemption losses, interest expense declined year over year because of lower average debt and borrowing costs.
- The company recorded $10 million of asset impairment charges in Q3 and $36 million for the nine-month period, primarily related to discontinued equipment programs and not COVID-19.
- In 2020, the company issued $750 million of 4% senior notes due 2030 and $1.1 billion of 3.875% senior notes due 2031, and redeemed $800 million of 5.5% notes due 2025 and $1.1 billion of 6.5% notes. In October 2020, it also redeemed $750 million of 4.625% notes due 2025 using ABL borrowings.
- The $500 million share repurchase program was paused on March 18, 2020. The company repurchased $257 million under the program before it was paused; no purchases were made under the program during the third quarter.
Guidance, outlook, commentary and risks
Management withdrew 2020 guidance in April, reintroduced full-year guidance in July and stated that it raised full-year 2020 guidance in October after reporting third-quarter results. The filing text provided does not include the specific revised guidance ranges.
Management expects 2020 capital expenditures to be significantly below the prior year and believes existing cash sources will support operations for the next 12 months. Cost initiatives include reductions in overtime, temporary labor, professional fees, travel and entertainment, third-party delivery and repair services, and other discretionary spending.
Key risks include the uncertain duration and economic impact of COVID-19; cyclical exposure to construction and industrial activity; potential overcapacity and lower rental rates or utilization; significant indebtedness and refinancing risk; debt covenant compliance; credit and collection risk; equipment residual values and maintenance costs; competition; acquisitions and integration; oil and natural gas trends; cybersecurity and information technology disruption; foreign currency, regulatory and environmental exposure; litigation and self-insurance claims; and changes in tax law.
Self-insurance reserves were $121 million at September 30, 2020. Management stated that pending legal and regulatory matters were not expected to have a material adverse effect individually or in the aggregate, based on available information and accrued amounts.
Investor verification points
- Verify the specific full-year 2020 guidance ranges that management reportedly raised in October 2020.
- Assess whether rental demand, fleet productivity and utilization recovered sustainably after the third quarter or remained constrained by COVID-19.
- Reconcile reported free cash flow with sharply reduced capital expenditures and evaluate the sustainability of that cash generation.
- Review the effect of the October 2020 debt redemption and related ABL borrowings on interest expense, maturities and liquidity.
- Monitor covenant headroom, accounts receivable securitization tests and the June 2021 facility maturity.
- Evaluate the effect of $159 million of debt redemption losses and $36 million of asset impairments on recurring earnings.
- Determine when, or whether, the paused $500 million share repurchase program will resume.
- Review COVID-19 assumptions, customer credit quality, equipment residual values and potential overcapacity in the rental fleet.