United Rentals, Inc. 2019 Q3 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 nine months ended September 30, 2019. The company operates an equipment rental business serving construction, industrial, utilities, municipalities, government and other customers in the United States, Canada and Europe. It reported 1,183 rental locations, approximately 4,000 equipment classes and rental fleet original equipment cost of $15.0 billion.
Reportable segments are general rentals and trench, power and fluid solutions. Equipment rentals represented 86% of total revenue for the nine-month period.
Financial Performance and Key Metrics
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $2,488 million | $2,116 million | $6,895 million | $5,741 million |
| Gross profit | $1,033 million | $938 million | $2,705 million | $2,366 million |
| Operating income | $656 million | $578 million | $1,553 million | $1,388 million |
| Net income | $391 million | $333 million | $836 million | $786 million |
| Diluted EPS | $5.08 | $4.01 | $10.66 | $9.34 |
| Adjusted EBITDA | $1,207 million | $1,059 million | $3,201 million | $2,746 million |
| Adjusted EBITDA margin | 48.5% | 50.0% | 46.4% | 47.8% |
| Operating cash flow | Not separately provided | Not separately provided | $2,582 million | $2,123 million |
| Free cash flow | Not separately provided | Not separately provided | $1,082 million | $536 million |
Total gross margin was 41.5% in Q3 and 39.2% for the nine-month period, compared with 44.3% and 41.2%, respectively, in the prior-year periods. Equipment-rental gross margin was 42.7% in Q3 and 40.1% year to date, versus 45.5% and 42.0% in 2018.
- Q3 equipment-rental revenue increased 15.4% to $2,147 million; nine-month revenue increased 19.2% to $5,902 million.
- Average original equipment cost increased 18.1% in Q3 and 21.5% year to date, substantially reflecting the BakerCorp and BlueLine acquisitions.
- On a pro forma basis, including pre-acquisition results, equipment-rental revenue increased 4.2% in Q3 and 5.3% year to date.
- Q3 EBITDA increased 18.1% and adjusted EBITDA increased 14.0%; nine-month EBITDA increased 18.9% and adjusted EBITDA increased 16.6%.
- Accounts receivable were $1,595 million and the allowance for doubtful accounts was $103 million at September 30, 2019.
Liquidity, Capital Expenditures and Debt
- Cash and cash equivalents were $60 million at September 30, 2019, compared with $43 million at December 31, 2018.
- Available liquidity was $2.161 billion, including cash.
- Total debt was $11.664 billion, consisting of $973 million of current debt and $10.691 billion of long-term debt.
- Debt decreased from $11.747 billion at year-end 2018, despite continued substantial borrowing needs.
- Operating cash flow was $2.582 billion. Equipment purchases totaled $2.131 billion, equipment-sale proceeds totaled $613 million and acquisitions used $247 million.
- Net debt payments were $144 million and share repurchases used $664 million during the nine months.
- The ABL facility was expanded to $3.75 billion and extended to 2024. ABL borrowing capacity, net of letters of credit, was $2.051 billion, with $1.630 billion outstanding.
- The accounts receivable securitization facility had $50 million of remaining borrowing capacity and $925 million outstanding; its maturity was extended to June 2020.
- The company issued $750 million of 5.25% senior notes due 2030 and redeemed all 5.75% senior notes, recognizing a $32 million loss in interest expense.
- The company stated that it was in compliance with applicable debt covenants and that the ABL fixed-charge coverage covenant was not applicable because availability exceeded the threshold.
Material Changes Versus the Prior Comparable Period
- Revenue, operating income, net income and diluted EPS increased year over year, supported by fleet expansion, acquisitions and higher equipment-sale volumes.
- Profitability was pressured by lower rental utilization in certain locations, acquisition-related mix effects, increased repairs and maintenance, delivery expenses and higher depreciation.
- Adjusted EBITDA margin declined 150 basis points in Q3 and 140 basis points for the nine-month period.
- Interest expense increased 24.6% in Q3 and 41.0% year to date, primarily due to higher average debt; the year-to-date comparison also included the $32 million debt redemption loss.
- SG&A as a percentage of revenue improved to 11.0% in Q3 and 12.0% year to date, compared with 12.5% and 12.8% in 2018.
- The adoption of ASC Topic 842 on January 1, 2019 added $650 million of operating lease right-of-use assets and $522 million of long-term operating lease liabilities, with no material income-statement or cash-flow effect.
- United Rentals repurchased $664 million of common stock during the first nine months. The $1.25 billion program had approximately $200 million remaining at September 30, 2019.
Outlook, Management Commentary, Risks and Unusual Items
Management described the business as cyclical and highly sensitive to North American construction and industrial activity. Its strategy emphasizes rate management, customer and fleet optimization, Lean operating processes, Project XL cost and growth initiatives, expansion of trench, power and fluid solutions, cross-selling and strategic acquisitions.
Management stated that existing cash sources were expected to support operations for the next 12 months. It intended to complete the existing share-repurchase program in 2019 and expected the BakerCorp/BlueLine restructuring program to be completed in 2019 without significant additional expense.
- BakerCorp was acquired in July 2018 for approximately $720 million; BlueLine was acquired in October 2018 for approximately $2.069 billion. Integration, synergy realization, acquired-fleet margins and preliminary purchase accounting remain important considerations.
- Q3 restructuring charges were $2 million and nine-month charges were $16 million. Q3 included a $2 million asset impairment charge in management’s adjusted-EPS presentation.
- Legal claims and proceedings arise in the ordinary course, including personal injury, property, employment, contract and self-insurance matters. Management believed any resulting liabilities would not be materially adverse based on information available at filing.
- Principal risks include economic cyclicality, fleet overcapacity, utilization and pricing pressure, significant leverage, refinancing and covenant risk, acquisition integration, equipment residual values, used-equipment sales, competition, credit losses, cybersecurity, regulatory and environmental compliance, labor issues, foreign currency and interest-rate exposure.
- The company had approximately $3.5 billion of variable-rate debt; management estimated that a one-percentage-point increase in applicable rates would reduce annual after-tax earnings by approximately $27 million.
Important Facts for Investors to Verify
- Whether pro forma organic rental growth and fleet productivity offset the reported margin declines after the BakerCorp and BlueLine acquisitions are fully integrated.
- Progress in restoring rental gross margins, particularly in general rentals and the acquired BakerCorp operations.
- Debt maturities, refinancing needs, variable-rate exposure and continued covenant headroom.
- Whether operating cash flow and free cash flow remain sufficient to fund fleet investment, debt service, acquisitions and share repurchases.
- The completion and remaining cost of the BakerCorp/BlueLine restructuring program.
- The sustainability of used-equipment sale prices and residual values supporting free cash flow.
- The impact of ASC Topic 842 and the forthcoming expected-credit-loss standard on future balance sheets, revenue and credit-loss provisions.