Business Context and Reporting Period
United Rentals, Inc. and wholly owned United Rentals (North America), Inc. filed this unaudited combined Form 10-Q for the quarter and six months ended June 30, 2018. United Rentals is an equipment rental provider operating approximately 1,008 locations in the United States and Canada, with a fleet having original equipment cost of approximately $12.0 billion. Its principal activities are equipment rentals, sales of rental and new equipment, contractor supplies, and service revenues.
Equipment rentals represented 86% of second-quarter revenue and 85% of revenue for the first six months. Reportable segments are general rentals and trench, power and pump.
Financial Performance and Key Metrics
| Metric | Three months ended June 30, 2018 | Three months ended June 30, 2017 | Six months ended June 30, 2018 | Six months ended June 30, 2017 |
|---|---|---|---|---|
| Total revenue | $1,891 million | $1,597 million | $3,625 million | $2,953 million |
| Equipment rental revenue | $1,631 million | $1,367 million | $3,090 million | $2,533 million |
| Gross profit | $782 million | $655 million | $1,428 million | $1,169 million |
| Operating income | $470 million | $340 million | $810 million | $597 million |
| Net income | $270 million | $141 million | $453 million | $250 million |
| Diluted EPS | $3.20 | $1.65 | $5.34 | $2.92 |
| Adjusted EBITDA | $907 million | $747 million | $1,687 million | $1,338 million |
- Revenue increased 18.4% in the quarter and 22.7% year to date. Equipment rental revenue increased 19.3% and 22.0%, respectively.
- Reported total gross margin was 41.4% in the quarter versus 41.0% and 39.4% year to date versus 39.6%. Approximate operating margins were 24.9% and 22.3% in 2018, compared with 21.3% and 20.2% in the comparable periods.
- Adjusted EBITDA margin was 48.0% in the quarter and 46.5% year to date, up 120 basis points in each comparison. Management attributed the improvement primarily to lower SG&A as a percentage of revenue and reduced merger and restructuring costs.
- Rental volume, measured by original equipment cost on rent, increased 15.9% in the quarter and 20.6% year to date. Rental rates increased 2.8% and 2.4%, respectively. On a pro forma basis including acquired businesses before acquisition, equipment rental revenue increased 11.4% in the quarter and 10.7% year to date.
- Time utilization was 69.2% in the quarter and 67.2% year to date, compared with 69.4% and 67.8% in 2017. The year-to-date equipment rental gross margin declined to 39.9% from 40.3%, primarily because of lower utilization and higher rental-equipment depreciation.
- The trench, power and pump segment was particularly strong: equipment rental revenue increased 33.5% in the quarter and 34.9% year to date, with year-to-date rental volume up 37.1%.
Cash Flow, Debt and Liquidity
- Cash provided by operating activities was $1,649 million for the first six months, compared with $1,329 million in 2017.
- Free cash flow was $703 million, up from $614 million. Rental and non-rental equipment purchases totaled $1,306 million, while equipment-sale and insurance proceeds totaled $360 million.
- Net cash used in investing activities was $1,005 million, including $58 million for acquisitions. Net cash used in financing activities was $870 million, including $395 million of share repurchases and $476 million of net debt repayments.
- Cash and cash equivalents declined to $117 million at June 30, 2018, from $352 million at December 31, 2017.
- Total debt was $8,986 million, including $900 million of current debt and $8,086 million of long-term debt, compared with $9,440 million at year-end. Management also describes total indebtedness as approximately $9.0 billion.
- Available liquidity was $2,045 million, consisting of cash and available capacity under the ABL facility and accounts receivable securitization facility. ABL availability was $1,923 million; accounts receivable securitization availability was $5 million.
- The company was in compliance with its debt covenants at June 30, 2018. The ABL fixed-charge coverage covenant was not applicable because specified availability exceeded the trigger threshold.
Material Changes Versus the Prior Comparable Period
- Results benefited from the 2017 acquisitions of NES Rentals and Neff Corporation. The acquisitions increased fleet scale and rental volume but also increased depreciation, amortization and integration-related costs.
- SG&A increased to $239 million in the quarter and $471 million year to date, but declined as a percentage of revenue to 12.6% and 13.0%, respectively, from 13.7% and 13.9%.
- Merger-related costs declined to $2 million in the quarter and $3 million year to date, from $14 million and $16 million. Restructuring charges declined to $4 million and $6 million, from $19 million in each comparable period.
- The effective tax rate declined to 24.8% in the quarter and 23.4% year to date, from 38.4% and 35.9%, primarily reflecting the Tax Cuts and Jobs Act. Management estimated that the lower tax rate contributed approximately $0.58 and $0.95 to 2018 diluted EPS for the quarter and six months, respectively.
- The company adopted ASC Topic 606 in 2018 using the modified retrospective method. The adoption did not materially change historical revenue accounting, but accelerated recognition of certain rental-equipment sales within the year.
- Accounts payable increased by approximately $450 million from year-end, primarily because of seasonal capital expenditures. Rental equipment, net, increased to $8,213 million from $7,824 million.
Guidance, Outlook, Commentary and Risks
Management did not provide specific quantitative full-year revenue or earnings guidance in the filing. It expects existing cash sources to support operations over the next 12 months and intends to continue focusing on rental-rate management, fleet and customer optimization, Lean initiatives, Project XL cost savings, expansion of trench, power and pump offerings, and strategic acquisitions.
The company entered into an agreement in June 2018 to acquire BakerCorp for approximately $715 million in cash, funded with available cash and debt facilities. BakerCorp had approximately $295 million of annual revenue, approximately 950 employees and 57 locations. Closing was expected in early third-quarter 2018. A new $1.25 billion share-repurchase program began in July 2018 following completion of the prior $1 billion program; management intended to complete the new program by the end of 2019.
The company expects to complete the NES/Neff/Project XL restructuring program in the second half of 2018 and does not expect significant additional expenses. It expects to adopt lease accounting Topic 842 on January 1, 2019; the resulting recognition of operating-lease assets and liabilities is expected to have a significant, but not yet estimable, balance-sheet impact.
- Principal risks include cyclical exposure to construction and industrial activity, possible fleet overcapacity, rental-rate and utilization pressure, equipment residual-value risk, and volatility in oil and natural gas markets.
- Approximately $9.0 billion of debt creates refinancing, covenant, interest-rate and financial-flexibility risks. A one-percentage-point increase in variable borrowing rates was estimated to reduce annual after-tax earnings by approximately $14 million.
- Acquisition risks include undiscovered liabilities, integration challenges, management strain and failure to achieve expected synergies, particularly regarding BakerCorp.
- Other risks include credit losses, litigation and regulatory matters, cybersecurity disruptions, environmental and safety compliance, labor issues, foreign-currency exposure and changes in tax law.
- Pending legal matters arise primarily in the ordinary course; management believes they will not have a material adverse effect, individually or in the aggregate, based on currently available information.
Important Facts for Investors to Verify
- Whether rental demand, rental rates and utilization remain strong after the acquisition-related fleet expansion.
- The sustainability of the improved SG&A leverage and adjusted EBITDA margin after merger and restructuring costs normalize.
- Debt maturities, refinancing needs, variable-rate exposure and continued covenant compliance.
- The closing, financing, integration costs and realized synergies of the BakerCorp acquisition.
- The effect of Topic 842 lease adoption on reported assets, liabilities, leverage and covenants.
- The extent to which 2018 earnings growth reflects the lower Tax Act-related tax rate rather than operating performance.
- Progress on the $1.25 billion share-repurchase program and its effect on liquidity and leverage.
- Whether equipment resale values, utilization and margins remain resilient if construction, industrial or oil and gas activity weakens.