United Rentals revenues falls in the third quarter and raises full-year guidance

Posted on Oct 29, 2020 in Nuts & Bolts

United Rentals posted $1.861 billion in 3rd quarter 2020 rental income compared to $2.147 billion in 3rd quarter 2019.  This represents a 13.3% decline in rental revenue.

United Rentals, Inc., has announced financial results for the third quarter of 2020 and raised its full-year 2020 guidance.

Third Quarter 2020 Highlights

• Total revenue of $2.187 billion, including rental revenue¹ of $1.861 billion.
• Fleet productivity² decreased 8.0% year-over-year, reflecting the impact of COVID-19 on volumes; fleet productivity improved sequentially by 560 basis points, primarily due to better fleet absorption.
• Net income³ of $208 million, implying a net income margin³ of 9.5%. GAAP diluted earnings per share³ of $2.87, and adjusted EPS³ of $5.40.
• Adjusted EBITDA³ of $1.081 billion, implying an adjusted EBITDA margin³ of 49.4%.
• $827 million of net cash from operating activities; free cash flow⁴ of $583 million, including gross rental capital spending of $432 million.
• Total liquidity⁵ at September 30, 2020 of $3.430 billion.

CEO Comment

Matthew Flannery

Matthew Flannery, chief executive officer of United Rentals, said, “We’re pleased with our third-quarter results, particularly our cost performance and the quarter-over-quarter improvement in fleet absorption. I am incredibly proud of our team as they continue to provide outstanding support to our customers while maintaining a strong focus on safety and disciplined execution.”

Flannery continued, “The recovery that we’ve seen since the spring has been evident in most of our markets with demand tracking to normal seasonal patterns. We expect current trends to continue and have raised our full-year 2020 outlook for revenue, profitability, and free cash flow. While the pace of the recovery remains uncertain, we are encouraged by the steady improvements we are seeing. Most importantly, we remain confident in our ability to execute well under any market conditions.”

2020 Outlook

The company has issued the following new full-year guidance:

Summary of Third Quarter 2020 Financial Results

• Rental revenue for the quarter was $1.861 billion, reflecting a decrease of 13.3% year-over-year. Rental volumes improved sequentially in each month in the quarter, consistent with normal seasonality.
• Fleet productivity for the quarter decreased by 8.0% year-over-year, mainly due to lower rental volumes. Fleet productivity improved by 560 basis points sequentially, primarily reflecting better fleet absorption.
• Used equipment sales in the quarter generated $199 million of proceeds at a GAAP gross margin of 38.2% and an adjusted gross margin⁷ of 44.2%; this compares with $198 million at a GAAP gross margin of 38.4% and an adjusted gross margin of 46.0% for the same period last year. Used equipment proceeds in the quarter were approximately 51.4% of original equipment cost (“OEC”), compared to 53.2% in the year-ago period.
• Net income for the quarter decreased 46.8% year-over-year to $208 million, while the net income margin decreased 620 basis points to 9.5%. Net interest expense increased $131 million year-over-year primarily due to a loss of $159 million associated with the note redemptions made by the company during the quarter, partially offset by decreases in average debt and the average cost of debt. Gross margin from equipment rentals decreased 90 basis points year-over-year, with 180 basis points of the margin decline due to depreciation expense, which increased as a percentage of revenue. The 90 basis point increase in rental gross margin excluding the depreciation impact was primarily due to actions the company took to manage operating costs and a majority of approximately $20 million of non-recurring benefits in the third quarter of 2020, notably benefits from certain insurance recoveries. The impact of interest and depreciation expense on net income margin was partially offset by lower income tax expense. Year-over-year, the effective income tax rate was largely flat, but income tax expense decreased as a percentage of revenue.

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• Adjusted EBITDA for the quarter decreased 10.4% year-over-year to $1.081 billion, while adjusted EBITDA margin increased 90 basis points to 49.4%. The increase in adjusted EBITDA margin included a 90 basis point increase in the rental margin (excluding depreciation), which reflects the combined impact of actions the company has taken to manage costs and the majority of the non-recurring benefits discussed above. Adjusted EBITDA margin also benefited from a decrease in selling, general, and administrative (“SG&A”) expense as a percentage of revenue. Excluding the non-recurring benefits, the adjusted EBITDA margin for the third quarter was flat year-over-year.
• General rentals segment had a 15.3% year-over-year decrease in rental revenue to $1.391 billion for the quarter. Rental gross margin decreased by 190 basis points to 39.0%, with 220 basis points of the margin decline due to depreciation expense, which increased as a percentage of revenue. The 30 basis point increase in rental gross margin excluding the depreciation impact was primarily due to the combined impact of actions the company has taken to manage operating costs, and the one-time benefits discussed above.
• Specialty rentals segment, or Trench, Power and Fluid Solutions, rental revenue decreased 6.9% year-over-year to $470 million for the quarter. Rental gross margin increased by 110 basis points to 49.8%, mainly due to decreases in certain operating costs, including repairs and overtime labor, partially offset by increases in depreciation expense and certain fixed expenses, such as facility costs, as a percentage of revenue.
• Cash flow from operating activities decreased 11.4% to $2.288 billion for the first nine months of 2020, and free cash flow, including aggregated merger and restructuring payments, increased 85.4% to $2.006 billion. The increase in free cash flow was predominantly due to decreased net rental capital expenditures (purchases of rental equipment fewer proceeds from sales of rental equipment), partially offset by lower net cash from operating activities. Net rental capital expenditures decreased $1.185 billion year-over-year, primarily reflecting reduced purchases of rental equipment.
• Capital management includes the company’s targeted net leverage ratio range of 2.0x-3.0x. The net leverage ratio was 2.4x on September 30, 2020, as compared to 2.6x on December 31, 2019. Year-to-date, the company has reduced its total net debt by $1.499 billion. On January 28, 2020, the company’s Board of Directors authorized a new $500 million share repurchase program. Through March 18, 2020, when the program was paused due to the pandemic, the company repurchased $257 million of common stock, reducing the diluted share count by 2.6%.
• Total liquidity was $3.430 billion as of September 30, 2020, including $174 million of cash and cash equivalents, an increase of $1.287 billion from December 31, 2019. In October 2020, the company redeemed all $750 million principal amount of its 4 ⁵/₈ percent Senior Notes due 2025. Notably, following the redemption of the 4 ⁵/₈ percent Senior Notes, the company has no note maturities until 2026.
• Return on invested capital (ROIC)⁸ was 9.2% for the 12 months ended September 30, 2020, compared with 10.7% for the 12 months ended September 30, 2019. ROIC exceeded the company’s current weighted average cost of capital of approximately 7.0%.

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Conference Call

United Rentals will hold a conference call tomorrow, Thursday, October 29, 2020, at 11:00 a.m. Eastern Time. The conference call number is 855-458-4217 (international: 574-990-3618). The conference call will also be available live by audio webcast at unitedrentals.com, where it will be archived until the next earnings call. The replay number for the call is 404-537-3406, passcode is 7638219.

Non-GAAP Measures

Free cash flow, earnings before interest, taxes, depreciation, and amortization (EBITDA), adjusted EBITDA, and adjusted earnings per share (adjusted EPS) are non-GAAP financial measures as defined under the rules of the SEC. Free cash flow represents net cash provided by operating activities less purchases of, and plus proceeds from, equipment. The equipment purchases and proceeds represent cash flows from investing activities. EBITDA represents the sum of net income, provision for income taxes, interest expense, net, depreciation of rental equipment, and non-rental depreciation and amortization. Adjusted EBITDA represents EBITDA plus the sum of the merger-related costs, restructuring charge, stock compensation expense, net, and the impact of the fair value mark-up of acquired fleet. Adjusted EPS represents EPS plus the sum of the merger-related costs, restructuring charge, the impact on depreciation related to acquired fleet and property and equipment, the impact of the fair value mark-up of the acquired fleet, merger-related intangible asset amortization, asset impairment charge, and loss on repurchase/redemption of debt securities and amendment of ABL facility. The company believes that: (i) free cash flow provides useful additional information concerning cash flow available to meet future debt service obligations and working capital requirements; (ii) EBITDA and adjusted EBITDA provide useful information about operating performance and period-over-period growth, and help investors gain an understanding of the factors and trends affecting our ongoing cash earnings, from which capital investments are made and debt is serviced; and (iii) adjusted EPS provides useful information concerning future profitability. However, none of these measures should be considered as alternatives to net income, cash flows from operating activities, or earnings per share under GAAP as indicators of operating performance or liquidity.

Information reconciling forward-looking adjusted EBITDA to GAAP financial measures is unavailable to the company without unreasonable effort. The company is not able to provide reconciliations of adjusted EBITDA to GAAP financial measures because certain items required for such reconciliations are outside of the company’s control and/or cannot be reasonably predicted, such as the provision for income taxes. Preparation of such reconciliations would require a forward-looking balance sheet, statement of income, and statement of cash flow, prepared in accordance with GAAP, and such forward-looking financial statements are unavailable to the company without unreasonable effort. The company provides a range for its adjusted EBITDA forecast that it believes will be achieved, however, it cannot accurately predict all the components of the adjusted EBITDA calculation. The company provides an adjusted EBITDA forecast because it believes that adjusted EBITDA, when viewed with the company’s results under GAAP, provides useful information for the reasons noted above. However, adjusted EBITDA is not a measure of financial performance or liquidity under GAAP and, accordingly, should not be considered as an alternative to net income or cash flow from operating activities as an indicator of operating performance or liquidity.

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