United Rentals Announces Third Quarter 2020 Results and Raises Full-Year Guidance

United Rentals, Inc. URI today 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, 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."

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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 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 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 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, 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 less 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 at September 30, 2020, as compared to 2.6x at 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 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.

About United Rentals

United Rentals, Inc. is the largest equipment rental company in the world. The company has an integrated network of 1,170 rental locations in North America and 11 in Europe. In North America, the company operates in 49 states and every Canadian province. The company's approximately 18,400 employees serve construction and industrial customers, utilities, municipalities, homeowners and others. The company offers approximately 4,000 classes of equipment for rent with a total original cost of $14.16 billion. United Rentals is a member of the Standard & Poor's 500 Index, the Barron's 400 Index and the Russell 3000 Index® and is headquartered in Stamford, Conn. Additional information about United Rentals is available at unitedrentals.com.

Forward-Looking Statements

This press release contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, known as the PSLRA. These statements can generally be identified by the use of forward-looking terminology such as "believe," "expect," "may," "will," "should," "seek," "on-track," "plan," "project," "forecast," "intend" or "anticipate," or the negative thereof or comparable terminology, or by discussions of vision, strategy or outlook. These statements are based on current plans, estimates and projections, and, therefore, you should not place undue reliance on them. No forward-looking statement can be guaranteed, and actual results may differ materially from those projected. Factors that could cause actual results to differ materially from those projected include, but are not limited to, the following: (1) uncertainty regarding the length of time it will take for the United States and the rest of the world to slow the spread of the novel strain of coronavirus (COVID-19) to the point where applicable governmental authorities are comfortable easing current "social distancing" policies, which have required closing many businesses deemed "non-essential"; such restrictions are designed to protect public health but also have the effect of significantly reducing demand for equipment rentals; (2) the extent to which businesses in and associated with the construction industry, including equipment rental service providers such as us, continue to be deemed "essential" for the purposes of "social distancing" policies in the regions in which we operate; (3) the impact of global economic conditions (including potential trade wars) and public health crises and epidemics, such as COVID-19, on us, our customers and our suppliers, in the United States and the rest of the world; (4) the possibility that companies that we have acquired or may acquire, including BakerCorp and BlueLine, could have undiscovered liabilities or involve other unexpected costs, may strain our management capabilities or may be difficult to integrate; (5) the cyclical nature of our business, which is highly sensitive to North American construction and industrial activities; if construction or industrial activity decline, our revenues and, because many of our costs are fixed, our profitability may be adversely affected; (6) our significant indebtedness, which requires us to use a substantial portion of our cash flow for debt service and can constrain our flexibility in responding to unanticipated or adverse business conditions; (7) the inability to refinance our indebtedness on terms that are favorable to us (including as a result of current volatility and uncertainty in capital markets due to COVID-19), or at all; (8) the incurrence of additional debt, which could exacerbate the risks associated with our current level of indebtedness; (9) noncompliance with financial or other covenants in our debt agreements, which could result in our lenders terminating the agreements and requiring us to repay outstanding borrowings; (10) restrictive covenants and amount of borrowings permitted in our debt instruments, which can limit our financial and operational flexibility; (11) overcapacity of fleet in the equipment rental industry, including as a result of reduced demand for fleet due to the impacts of COVID-19 on our customers; (12) inability to benefit from government spending, including spending associated with infrastructure projects; (13) fluctuations in the price of our common stock and inability to complete stock repurchases in the time frame and/or on the terms anticipated (for example, due to COVID-19); (14) rates we charge and time utilization we achieve being less than anticipated (including as a result of COVID-19); (15) inability to manage credit risk adequately or to collect on contracts with a large number of customers; (16) inability to access the capital that our businesses or growth plans may require (including as a result of uncertainty in capital or other financial markets due to COVID-19); (17) the incurrence of impairment charges; (18) trends in oil and natural gas could adversely affect the demand for our services and products; (19) the fact that our holding company structure requires us to depend in part on distributions from subsidiaries and such distributions could be limited by contractual or legal restrictions; (20) increases in our loss reserves to address business operations or other claims and any claims that exceed our established levels of reserves; (21) incurrence of additional expenses (including indemnification obligations) and other costs in connection with litigation, regulatory and investigatory matters; (22) the outcome or other potential consequences of regulatory matters and commercial litigation; (23) shortfalls in our insurance coverage; (24) our charter provisions as well as provisions of certain debt agreements and our significant indebtedness may have the effect of making more difficult or otherwise discouraging, delaying or deterring a takeover or other change of control of us; (25) turnover in our management team and inability to attract and retain key personnel, as well as loss, absenteeism or the inability of employees to work or perform key functions in light of public health crises or epidemics (including COVID-19); (26) costs we incur being more than anticipated and the inability to realize expected savings in the amounts or time frames planned; (27) our dependence on key suppliers to obtain equipment and other supplies for our business on acceptable terms; (28) inability to sell our new or used fleet in the amounts, or at the prices, we expect; (29) competition from existing and new competitors; (30) risks related to security breaches, cybersecurity attacks, failure to protect personal information, compliance with data protection laws and other significant disruptions in our information technology systems; (31) the costs of complying with environmental, safety and foreign laws and regulations, as well as other risks associated with non-U.S. operations, including currency exchange risk (including as a result of Brexit), and tariffs; (32) labor disputes, work stoppages or other labor difficulties, which may impact our productivity, and potential enactment of new legislation or other changes in law affecting our labor relations and operations generally; (33) increases in our maintenance and replacement costs and/or decreases in the residual value of our equipment; and (34) the effect of changes in tax law. For a more complete description of these and other possible risks and uncertainties, please refer to our Annual Report on Form 10-K for the year ended December 31, 2019 and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, as well as to our subsequent filings with the SEC. The forward-looking statements contained herein speak only as of the date hereof, and we make no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances or changes in expectations. 

UNITED RENTALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In millions, except per share amounts)

UNITED RENTALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In millions)

UNITED RENTALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In millions)

UNITED RENTALS, INC.
RENTAL REVENUE

Fleet productivity is a comprehensive metric that provides greater insight into the decisions made by our managers in support of growth and returns. Specifically, we seek to optimize the interplay of rental rates, time utilization and mix in driving rental revenue. Fleet productivity aggregates, in one metric, the impact of changes in rates, utilization and mix on owned equipment rental revenue.

We believe that this metric is useful in assessing the effectiveness of our decisions on rates, time utilization and mix, particularly as they support the creation of shareholder value. The table below shows the components of the year-over-year change in rental revenue using the fleet productivity methodology:

Please refer to our Third Quarter 2020 Investor Presentation for additional detail on fleet productivity.

UNITED RENTALS, INC.
SEGMENT PERFORMANCE
($ in millions)

UNITED RENTALS, INC.
DILUTED EARNINGS PER SHARE CALCULATION
(In millions, except per share data)

UNITED RENTALS, INC.
ADJUSTED EARNINGS PER SHARE GAAP RECONCILIATION

We define "earnings per share – adjusted" as the sum of earnings per share – GAAP, as-reported plus the impact of the following special items: merger related costs, merger related intangible asset amortization, impact on depreciation related to acquired fleet and property and equipment, impact of the fair value mark-up of acquired fleet, restructuring charge, asset impairment charge and loss on repurchase/redemption of debt securities and amendment of ABL facility. Management believes that earnings per share - adjusted provides useful information concerning future profitability. However, earnings per share - adjusted is not a measure of financial performance under GAAP. Accordingly, earnings per share - adjusted should not be considered an alternative to GAAP earnings per share. The table below provides a reconciliation between earnings per share – GAAP, as-reported, and earnings per share – adjusted.

UNITED RENTALS, INC.
EBITDA AND ADJUSTED EBITDA GAAP RECONCILIATIONS
(In millions)

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. These items are excluded from adjusted EBITDA internally when evaluating our operating performance and for strategic planning and forecasting purposes, and allow investors to make a more meaningful comparison between our core business operating results over different periods of time, as well as with those of other similar companies. The net income and adjusted EBITDA margins represent net income or adjusted EBITDA divided by total revenue. Management believes that EBITDA and adjusted EBITDA, when viewed with the Company's results under GAAP and the accompanying reconciliation, provide useful information about operating performance and period-over-period growth, and provide additional information that is useful for evaluating the operating performance of our core business without regard to potential distortions. Additionally, management believes that EBITDA and adjusted EBITDA 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.

The table below provides a reconciliation between net income and EBITDA and adjusted EBITDA.

UNITED RENTALS, INC.
EBITDA AND ADJUSTED EBITDA GAAP RECONCILIATIONS (continued)
(In millions)

The table below provides a reconciliation between net cash provided by operating activities and EBITDA and adjusted EBITDA.

UNITED RENTALS, INC.
FREE CASH FLOW GAAP RECONCILIATION
(In millions)

We define "free cash flow" as net cash provided by operating activities less purchases of, and plus proceeds from, equipment. The equipment purchases and proceeds are included in cash flows from investing activities. Management believes that free cash flow provides useful additional information concerning cash flow available to meet future debt service obligations and working capital requirements. However, free cash flow is not a measure of financial performance or liquidity under GAAP. Accordingly, free cash flow should not be considered an alternative to net income or cash flow from operating activities as an indicator of operating performance or liquidity. The table below provides a reconciliation between net cash provided by operating activities and free cash flow.

The table below provides a reconciliation between 2020 forecasted net cash provided by operating activities and free cash flow.

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