United Rentals revenues increased 20% in fourth quarter

Posted on Jan 24, 2019 in Nuts & Bolts

United Rentals

5 Greenwich Office Park
Greenwitch, CT 06830
Phone: 203-622-3131
Fax: 203-622-6080

United Rentals, Inc. released their financial results for the fourth quarter and full year 2018¹.

For the fourth quarter of 2018, total revenue increased 20.0% to $2.306 billion and rental revenue increased 20.8% to $1.989 billion. On a GAAP basis, the company reported fourth quarter net income of $310 million, or $3.80 per diluted share (“EPS”), compared with $897 million, or $10.45 per diluted share, for the same period in 2017. Adjusted EPS² for the quarter was $4.85 per diluted share, compared with $11.37 for the same period in 2017. The fourth quarter of 2017 included a net income benefit estimated at $689 million, or $8.03 per diluted share, associated with the enacted tax reform discussed below. Excluding this benefit, EPS and adjusted EPS for the fourth quarter of 2017 would have been $2.42 and $3.34, respectively. The reduction in the tax rate discussed below contributed an estimated $0.68 and $0.86 to EPS and adjusted EPS, respectively, for the fourth quarter of 2018³.

For the quarter, year-over-year, adjusted EBITDA² increased 18.0% to a company record $1.117 billion and adjusted EBITDA margin decreased 90 basis point to 48.4%. The decline in adjusted EBITDA margin primarily reflected the impact of the acquisitions completed in 2018.

For the year, Return on Invested Capital (ROIC) increased to a company record of 11.0%, while net cash provided by operating activities was $2.853 billion and free cash flow, excluding merger and restructuring related payments, set a company record at $1.334 billion.

Fourth Quarter Highlights

Rental revenue⁴ increased 20.8% year-over-year. Owned equipment rental revenue increased 18.8%, reflecting increases of 16.8% in the volume of equipment on rent and 2.2% in rental rates.
Pro forma¹ rental revenue increased 8.5% year-over-year, reflecting growth of 4.3% in the volume of equipment on rent and a 2.4% increase in rental rates.

Time utilization decreased 120 basis points year-over-year to 68.8%, primarily reflecting the impact of the BakerCorp and BlueLine acquisitions. On a pro forma basis, time utilization decreased 60 basis points year-over-year to 69.0%.

The company completed the acquisitions of NES Rentals Holdings II, Inc. (“NES ”), Neff Corporation (“Neff”), BakerCorp International Holdings, Inc. (“BakerCorp”) and Vander Holding Corporation and its subsidiaries (“BlueLine”) in April 2017, October 2017, July 2018 and October 2018, respectively. NES, Neff, BakerCorp and BlueLine are included in the company’s results subsequent to the acquisition dates. Pro forma results reflect the combination of United Rentals, NES, Neff, BakerCorp and BlueLine for all periods presented. The acquired BakerCorp locations are reflected in the Trench, Power and Fluid Solutions specialty segment.
Adjusted EPS (earnings per share), adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) and free cash flow are non-GAAP measures as defined in the tables below. See the tables below for amounts and reconciliations to the most comparable GAAP measures. Adjusted EBITDA margin represents adjusted EBITDA divided by total revenue.
The estimated contribution of the enacted tax reform was calculated by applying the percentage point tax rate reduction to U.S. pretax income and the pretax adjustments reflected in adjusted EPS.
Rental revenue includes owned equipment rental revenue, re-rent revenue and ancillary revenue.

Total gross margin of 43.3% increased 30 basis points year-over-year, while SG&A expense as a percentage of revenue declined 20 basis points to 13.1%. The company’s pre-tax margin increased 90 basis points to 18.4%.
For the company’s specialty segment, Trench, Power and Fluid Solutions, rental revenue increased by 50.7% year-over-year, including an 18.8% increase on a same store basis. Rental gross margin decreased by 230 basis points to 45.2%. The decrease in rental gross margin was primarily due to the impact of the BakerCorp acquisition and an increase in lower-margin fuel and re-rent revenues primarily within the Power and HVAC region.
The company generated $186 million of proceeds from used equipment sales at a GAAP gross margin of 44.1% and an adjusted gross margin of 51.1%, compared with $172 million of proceeds at a GAAP gross margin of 39.0% and an adjusted gross margin of 57.6% for the prior year. The year-over-year decrease in adjusted gross margin was primarily due to the impact of selling more fully depreciated fleet acquired in the NES acquisition in the fourth quarter 2017⁵.

Full Year 2018

For the full year 2018, total revenue increased 21.2% to $8.047 billion and rental revenue increased 21.4% to $6.940 billion, both of which were company records. On a GAAP basis, the company reported full year net income of $1.096 billion, or $13.12 per diluted share, compared with $1.346 billion, or $15.73 per diluted share, in 2017. Adjusted EPS for the full year was $16.26 per diluted share, compared with $18.64 in 2017. 2017 included a net income benefit estimated at $689 million, or $8.05 per diluted share, associated with the enacted tax reform discussed below. Excluding this benefit, EPS and adjusted EPS for 2017 would have been $7.68 and $10.59, respectively. The reduction in the tax rate discussed below contributed an estimated $2.36 and $2.92 to EPS and adjusted EPS, respectively, in 2018.

Year-over-year, adjusted EBITDA increased 22.1% to $3.863 billion and adjusted EBITDA margin increased 40 basis point to 48.0%.

Full Year Highlights

Rental revenue increased 21.4% year-over-year. Owned equipment rental revenue increased 20.7%, reflecting increases of 18.8% in the volume of equipment on rent and2.2% in rental rates.
Pro forma rental revenue increased 10.5% year-over-year, reflecting growth of 6.9% in the volume of equipment on rent and a 2.6% increase in rental rates.
Time utilization decreased 90 basis points year-over-year to 68.6%, primarily reflecting the impact of the NES, Neff, BakerCorp and BlueLine acquisitions. On a pro forma basis, time utilization increased 20 basis points year-over-year to 68.4%.
Total gross margin of 41.8% increased 10 basis points year-over-year, while SG&A expense as a percentage of revenue declined 70 basis points to 12.9%. The company’s pre-tax margin increased 250 basis points to 18.3%.
For the company’s specialty segment, Trench, Power and Fluid Solutions, rental revenue increased by 40.7% year-over-year, including a 19.0% increase on a same store basis. Rental gross margin decreased by 140 basis points to 48.2%. The decrease in rental gross margin was primarily due to the impact of the BakerCorp acquisition.

The company generated $664 million of proceeds from used equipment sales at a GAAP gross margin of 41.9% and an adjusted gross margin of 51.8%, compared with $550 million of proceeds at a GAAP gross margin of 40.0% and an adjusted gross margin of 54.9% for the prior year. The year-over-year increase in used equipment sales primarily reflects increased volume, driven by a significantly larger fleet size, in a strong used equipment market. The year-over-year decrease in adjusted gross margin was primarily due to the impact of selling more fully depreciated fleet acquired in the NES acquisition in 2017.

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Used equipment sales adjusted gross margin excludes the impact of the fair value mark-up of acquired RSC, NES, Neff and BlueLine fleet that was sold.

The company generated $2.853 billion of net cash provided by operating activities and $1.271 billion of free cash flow⁶, compared with $2.209 billion and $907 million, respectively, for the prior year. Net rental capital expenditures were $1.442 billion, compared with $1.219 billion for the prior year.

CEO Comments

Michael Kneeland, chief executive officer of United Rentals, said, “We delivered strong fourth quarter results, including broad volume growth and rental rate improvement, in a year that leveraged our numerous competitive advantages. Our integration of major acquisitions expanded our service offering, and we gained traction from investments in fleet and technology. For the full year, we grew pro forma rental revenue by 10.5%, improved our adjusted EBITDA margin, and increased ROIC to a record 11%.”

Kneeland continued, “Our momentum in the quarter gave us a strong start to 2019, when we expect to once again outpace the industry. By reaffirming our guidance, we’re underscoring our confidence in the cycle and our differentiation in the marketplace. Customer feedback, as well as key internal and external indicators, continue to point to healthy end-market activity. We remain focused on balancing growth, margins, returns and free cash flow to maximize shareholder value.”

2019 Outlook

The company reaffirmed the following outlook for the full year 2019.

EARNINGS 1

Impact of U.S. Tax Reform

In 2018, we completed the accounting for the enactment of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). We expect that we will continue to meaningfully benefit from the legislation. In particular, the combination of the lowering of the U.S. federal tax rate from 35% to 21% and the full expensing of capital spending will materially exceed the impact of the repeal of Like-Kind Exchange provisions, which had allowed for the deferral of taxable gains on the sale of used equipment.

Earnings per diluted share for 2018 was $13.12. The reduction in the tax rate discussed above contributed an estimated $2.36 to diluted earnings per share for 2018. The Tax Act impacted our 2017 results primarily due to (i) a one-time non-cash tax benefit estimated at $746 million, reflecting the revaluation of our net deferred tax liability using a U.S. federal tax rate of 21% and (ii) a one-time transition tax estimated at $57 million on our unremitted foreign earnings and profits. Earnings per diluted share for 2017 was $15.73, and the estimated per share benefit of the above items was $8.05.

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Free cash flow is a non-GAAP measure. See the table below for amounts and a reconciliation to the most comparable GAAP measure. Free cash flow included aggregate merger and restructuring related payments of $63 million and $76 million for the full years 2018 and 2017, respectively.
Information reconciling forward-looking adjusted EBITDA to the comparable GAAP financial measures is unavailable to the company without unreasonable effort, as discussed below

Free Cash Flow and Fleet Size

For the full year 2018, net cash provided by operating activities was $2.853 billion, and free cash flow was $1.271 billion after total rental and non-rental gross capital expenditures of $2.291 billion. For the full year 2017, net cash provided by operating activities was $2.209 billion, and free cash flow was $907 million after total rental and non-rental gross capital expenditures of $1.889 billion. Free cash flow for the full years 2018 and 2017 included aggregate merger and restructuring related payments of $63 million and $76 million, respectively.

The size of the rental fleet was $14.18 billion of original equipment cost at December 31, 2018, compared with $11.51 billion at December 31, 2017. The age of the rental fleet was 47.9 months on an OEC-weighted basis at December 31, 2018, compared with 47.0 months at December 31, 2017.

Return on Invested Capital (ROIC)

ROIC was 11.0% for the year ended December 31, 2018, compared with 8.8% for the year ended December 31, 2017. The company’s ROIC metric uses after-tax operating income for the trailing 12 months divided by average stockholders’ equity, debt and deferred taxes, net of average cash. To mitigate the volatility related to fluctuations in the company’s tax rate from period to period, the U.S. federal corporate statutory tax rates of 21% and 35% for 2018 and 2017, respectively, were used to calculate after-tax operating income.

ROIC materially increased due to the reduced tax rates following the enactment of the Tax Act. If the 21% U.S. federal corporate statutory tax rate following the enactment of the Tax Act was applied to ROIC for all historic periods, the company estimates that ROIC would have been 10.8% and 10.6% for the years ended December 31, 2018 and 2017, respectively.