UNITED RENTALS, INC. COVID-19
As discussed in note 1 to our condensed consolidated financial statements, the COVID-19 pandemic has significantly disrupted supply chains and businesses around the world. Uncertainty remains regarding the ongoing impact of existing and emerging variant strains of COVID-19 on the operations and financial position ofUnited Rentals , and on the global economy. Uncertainty also remains regarding the length of time it will take for the COVID-19 pandemic to ultimately subside, which will be impacted by the effectiveness of vaccines against COVID-19 (including against emerging variant strains), and by measures that may in the future be implemented to protect public health. We began to experience a decline in revenues inMarch 2020 , which is when theWorld Health Organization characterized COVID-19 as a pandemic and when our rental volume first declined in response to shelter-in-place orders and other market restrictions. The volume declines were more pronounced in 2020 than 2021, and we have seen recent evidence of recovery across our construction and industrial markets, as well as encouraging gains in end-market indicators, as reflected in our 2022 forecast and performance throughMarch 31, 2022 . In earlyMarch 2020 , we initiated contingency planning ahead of the impact of COVID-19 on our end-markets. Our COVID-19 response plan is focused on five work-streams: 1) ensuring the safety and well-being of our employees and customers, 2) leveraging our competitive advantages to support the needs of customers, 3) aggressively managing capital expenditures, 4) controlling core operating expenses and 5) proactively managing the balance sheet with a focus on liquidity. We believe that this response plan has helped mitigate the impact of COVID-19 on our results. Our Annual Reports on Form 10-K for the years endedDecember 31, 2021 and 2020, and our Quarterly Reports on Form 10-Q filed in 2021 and 2020 include additional detailed COVID-19 disclosures. The impact of COVID-19 on our business is discussed throughout this "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Executive Overview
We are the largest equipment rental company in the world, with an integrated network of 1,360 rental locations. We primarily operate inthe United States andCanada , and have a limited presence inEurope ,Australia and New Zealand . Although the equipment rental industry is highly fragmented and diverse, we believe that we are well positioned to take advantage of this environment because, as a larger company, we have more extensive resources and certain competitive advantages. These include a fleet of rental equipment with a total original equipment cost ("OEC") of$16.0 billion , and a North American branch network that operates in 49 U.S. states and every Canadian province, and serves 99 of the 100 largest metropolitan areas in theU.S. Our size also gives us greater purchasing power, the ability to provide customers with a broader range of equipment and services, the ability to provide customers with equipment that is more consistently well-maintained and therefore more productive and reliable, and the ability to enhance the earning potential of our assets by transferring equipment among branches to satisfy customer needs. We offer approximately 4,300 classes of equipment for rent to a diverse customer base that includes construction and industrial companies, manufacturers, utilities, municipalities, homeowners and government entities. Our revenues are derived from the following sources: equipment rentals, sales of rental equipment, sales of new equipment, contractor supplies sales and service and other revenues. Equipment rentals represented 86 percent of total revenues for the three months endedMarch 31, 2022 . For the past several years, we have executed a strategy focused on improving the profitability of our core equipment rental business through revenue growth, margin expansion and operational efficiencies. In particular, we have focused on customer segmentation, customer service differentiation, rate management, fleet management and operational efficiency. We are continuing to manage the impact of COVID-19, which is discussed above. Our general strategy focuses on profitability and return on invested capital, and, in particular, calls for: •A consistently superior standard of service to customers, often provided through a single lead contactwho can coordinate the cross-selling of the various services we offer throughout our network. We utilize a proprietary software application, Total Control®, which provides our key customers with a single in-house software application that enables them to monitor and manage all their equipment needs. Total Control® is a unique customer offering that enables us to develop strong, long-term relationships with our larger customers. Our digital capabilities, including our Total Control® platform, allow our sales teams to provide contactless end-to-end customer service; •The further optimization of our customer mix and fleet mix, with a dual objective: to enhance our performance in serving our current customer base, and to focus on the accounts and customer types that are best suited to our strategy for profitable growth. We believe these efforts will lead to even better service of our target accounts, primarily large construction and industrial customers, as well as select local contractors. Our fleet team's analyses 24
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are aligned with these objectives to identify trends in equipment categories and define action plans that can generate improved returns;
•A continued focus on "Lean" management techniques, including kaizen processes focused on continuous improvement. We continue to implement Lean kaizen processes across our branch network, with the objectives of: reducing the cycle time associated with renting our equipment to customers; improving invoice accuracy and service quality; reducing the elapsed time for equipment pickup and delivery; and improving the effectiveness and efficiency of our repair and maintenance operations; •The continued expansion of our specialty footprint, as well as our tools and onsite services offerings, and the cross-selling of these services throughout our network. We believe that the expansion of our specialty business, as exhibited by our acquisition of General Finance discussed in note 3 to the condensed consolidated financial statements, as well as our tools and onsite services offerings, will further positionUnited Rentals as a single source provider of total jobsite solutions through our extensive product and service resources and technology offerings; and •The pursuit of strategic acquisitions to continue to expand our core equipment rental business. Strategic acquisitions allow us to invest our capital to expand our business, further driving our ability to accomplish our strategic goals.
Financial Overview
Prior to taking actions pertaining to our financial flexibility and liquidity, we consider the impact of COVID-19 on liquidity, and assess our available sources and anticipated uses of cash, including, with respect to sources, cash generated from operations and from the sale of rental equipment. SinceDecember 31, 2021 , total debt has decreased$197 , or 2.0 percent, primarily reflecting reduced borrowings under the ABL facility. As ofMarch 31, 2022 , we had available liquidity of$3.006 billion , comprised of cash and cash equivalents, and availability under the ABL and accounts receivable securitization facilities. As discussed in note 6 to the condensed consolidated financial statements, inMay 2022 , we expect to redeem$500 principal amount of our 5 1/2 percent Senior Notes, using cash and borrowings under the ABL facility.
Net income. Net income and diluted earnings per share for the three months ended
Three Months Ended
March 31,
2022 2021
Net income $ 367 $ 203
Diluted earnings per share $ 5.05 $ 2.80
Net income and diluted earnings per share for the three months ended March 31,
2022 and 2021 include the after-tax impacts of the items below. The tax rates
applied to the items below reflect the statutory rates in the applicable
entities.
Three Months Ended March 31,
2022 2021
Tax rate applied to items below 25.3 % 25.3 %
Contribution Impact on Impact on
to net income diluted earnings Contribution diluted earnings
(after-tax) per share to net income (after-tax) per share
Merger related intangible asset amortization (1) (37) (0.52) (36) (0.50)
Impact on depreciation related to acquired fleet and property and equipment (2)
(7) (0.10) (1) (0.02)
Impact of the fair value mark-up of acquired fleet (3) (5) (0.06) (9) (0.12)
Restructuring charge (4) - - (1) (0.01)
(1)This reflects the amortization of the intangible assets acquired in the major
acquisitions completed since 2012 that significantly impacted our operations
(the "major acquisitions," each of which had annual revenues of over $200 prior
to acquisition).
(2)This reflects the impact of extending the useful lives of equipment acquired
in certain major acquisitions, net of the impact of additional depreciation
associated with the fair value mark-up of such equipment.
(3)This reflects additional costs recorded in cost of rental equipment sales
associated with the fair value mark-up of rental equipment acquired in certain
major acquisitions that was subsequently sold.
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(4)This primarily reflects severance and branch closure charges associated with
our restructuring programs. For additional information, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations-Results
of Operations-Other costs/(income)-restructuring charges" below.
EBITDA GAAP Reconciliations. 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 restructuring charges, stock compensation expense, net and the
impact of the fair value mark-up of the 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
reconciliations, 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. However, EBITDA and adjusted EBITDA are not measures of
financial performance or liquidity under GAAP and, accordingly, should not be
considered as alternatives to net income or cash flow from operating activities
as indicators of operating performance or liquidity.
The table below provides a reconciliation between net income and EBITDA and
adjusted EBITDA:
Three Months Ended
March 31,
2022 2021
Net income $ 367 $ 203
Provision for income taxes 116 72
Interest expense, net 94 99
Depreciation of rental equipment 435 375
Non-rental depreciation and amortization 97 91
EBITDA $ 1,109 $ 840
Restructuring charge (1) - 1
Stock compensation expense, net (2) 24 21
Impact of the fair value mark-up of acquired fleet (3) 6 11
Adjusted EBITDA $ 1,139 $ 873
Net income margin 14.5 % 9.9 %
Adjusted EBITDA margin 45.1 % 42.4 %
The table below provides a reconciliation between net cash provided by operating activities and EBITDA and adjusted EBITDA:
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Three Months Ended
March 31,
2022 2021
Net cash provided by operating activities $ 886 $ 758 Adjustments for items included in net cash provided by operating activities but excluded from the calculation of EBITDA: Amortization of deferred financing costs and original issue discounts
(3) (3)
Gain on sales of rental equipment 116 103
Gain on sales of non-rental equipment 2 1
Insurance proceeds from damaged equipment 7 7
Restructuring charge (1) - (1)
Stock compensation expense, net (2) (24) (21)
Changes in assets and liabilities (34) (177)
Cash paid for interest 149 167
Cash paid for income taxes, net 10 6
EBITDA $ 1,109 $ 840
Add back:
Restructuring charge (1) - 1
Stock compensation expense, net (2) 24 21
Impact of the fair value mark-up of acquired fleet (3) 6 11
Adjusted EBITDA $ 1,139 $ 873
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(1)This primarily reflects severance and branch closure charges associated with
our restructuring programs. For additional information, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations-Results
of Operations-Other costs/(income)-restructuring charges" below.
(2)Represents non-cash, share-based payments associated with the granting of equity instruments.
(3)This reflects additional costs recorded in cost of rental equipment sales associated with the fair value mark-up of rental equipment acquired in certain major acquisitions that was subsequently sold. For the three months endedMarch 31, 2022 , net income increased$164 , or 80.8 percent, and net income margin increased 460 basis points to 14.5 percent. For the three months endedMarch 31, 2022 , adjusted EBITDA increased$266 , or 30.5 percent, and adjusted EBITDA margin increased 270 basis points to 45.1 percent. The year-over-year increase in net income margin primarily reflects improved gross margins from equipment rentals and sales of rental equipment, and decreased net interest expense, partially offset by an increase in income tax expense as a percentage of revenue. Equipment rentals gross margin increased year-over-year primarily due to better fixed cost absorption on higher revenue. Gross margin from sales of rental equipment increased year-over-year primarily due to improved pricing. Net interest expense decreased year-over-year primarily due to a reduction in the average cost of debt. While income tax expense increased$44 , or 61 percent, year-over-year, the effective income tax rate decreased by 220 basis points, primarily reflecting the impact of state apportionment charges. The increase in the adjusted EBITDA margin primarily reflects higher margins from equipment rentals (excluding depreciation) and sales of rental equipment. Gross margin from equipment rentals (excluding depreciation) increased 120 basis points primarily due to better fixed cost absorption on higher revenue. Gross margin from sales of rental equipment (excluding the adjustment reflected in the table above for the impact of the fair value mark-up of acquired fleet) increased 15.1 percentage points primarily due to improved pricing. Revenues are noted below. Fleet productivity is a comprehensive metric that provides greater insight into the decisions made by our managers in support of equipment rental growth and returns. Specifically, we seek to optimize the interplay of rental rates, time utilization and mix to drive 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 includes the components of the year-over-year change in rental revenue using the fleet productivity methodology. 27
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Three Months Ended
March 31,
2022 2021 Change
Equipment rentals* $ 2,175 $ 1,667 30.5 %
Sales of rental equipment 211 267 (21.0) %
Sales of new equipment 45 49 (8.2) %
Contractor supplies sales 29 24 20.8 %
Service and other revenues 64 50 28.0 %
Total revenues $ 2,524 $ 2,057 22.7 %
*Equipment rentals variance components:
Year-over-year change in average OEC 16.4 %
Assumed year-over-year inflation impact (1) (1.5) %
Fleet productivity (2) 13.0 %
Contribution from ancillary and re-rent revenue (3) 2.6 %
Total change in equipment rentals 30.5 %
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(1)Reflects the estimated impact of inflation on the revenue productivity of fleet based on OEC, which is recorded at cost.
(2)Reflects the combined impact of changes in rental rates, time utilization, and mix that contribute to the variance in owned equipment rental revenue. See note 2 to the condensed consolidated financial statements for a discussion of the different types of equipment rentals revenue. Rental rate changes are calculated based on the year-over-year variance in average contract rates, weighted by the prior period revenue mix. Time utilization is calculated by dividing the amount of time an asset is on rent by the amount of time the asset has been owned during the year. Mix includes the impact of changes in customer, fleet, geographic and segment mix.
(3)Reflects the combined impact of changes in the other types of equipment rentals revenue (see note 2 for further detail), excluding owned equipment rental revenue.
Equipment rentals include our revenues from renting equipment, as well as revenue related to the fees we charge customers: for equipment delivery and pick-up; to protect the customer against liability for damage to our equipment while on rent; for fuel; and for environmental and other miscellaneous costs and services. Sales of rental equipment represent our revenues from the sale of used rental equipment. Sales of new equipment represent our revenues from the sale of new equipment. Contractor supplies sales represent our sales of supplies utilized by contractors, which include construction consumables, tools, small equipment and safety supplies. Services and other revenues primarily represent our revenues earned from providing repair and maintenance services on our customers' fleet (including parts sales). See note 2 to the condensed consolidated financial statements for a discussion of our revenue recognition accounting. For the three months endedMarch 31, 2022 , total revenues of$2.524 billion increased 22.7 percent compared with 2021. Equipment rentals and sales of rental equipment are our largest revenue types (together, they accounted for 95 percent of total revenue for the three months endedMarch 31, 2022 ). Equipment rentals increased$508 , or 30.5 percent, primarily due to a 16.4 percent increase in average OEC and a 13.0 percent increase in fleet productivity, both of which include the more pronounced impact of COVID-19 during the three months endedMarch 31, 2021 . Beginning in 2021 and continuing throughMarch 31, 2022 , we have seen evidence of a continuing recovery of activity across our end-markets. The increase in average OEC includes the impact of the acquisition of General Finance that is discussed in note 3 to the condensed consolidated financial statements, as well as increased capital expenditures. As discussed above, disciplined management of capital expenditures and fleet capacity is a component of our COVID-19 response plan, which contributed to rental capital expenditures in 2020 that were significantly below historic levels. While capital expenditures were significantly reduced in 2020 due to COVID-19, capital expenditures in 2021 exceeded historic (pre-COVID-19) levels. Sales of rental equipment decreased 21.0 percent year-over-year as we held on to fleet to serve strong customer demand and to ensure greater fleet availability in the event industry supply chain challenges persist or worsen. While sales of rental equipment decreased year-over-year, pricing remained strong, as reflected in the 16.4 percentage point increase in gross margin from sales of rental equipment.
Results of Operations
As discussed in note 4 to our condensed consolidated financial statements, our
reportable segments are general rentals and specialty. The general rentals
segment includes the rental of construction, aerial, industrial and homeowner
equipment and related services and activities. The general rentals segment's
customers include construction and industrial companies, manufacturers,
utilities, municipalities, homeowners and government entities. This segment
operates throughout the United
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States andCanada . The specialty segment includes the rental of specialty construction products such as i) trench safety equipment, such as trench shields, aluminum hydraulic shoring systems, slide rails, crossing plates, construction lasers and line testing equipment for underground work, ii) power and HVAC equipment, such as portable diesel generators, electrical distribution equipment, and temperature control equipment, iii) fluid solutions equipment primarily used for fluid containment, transfer and treatment, and iv) mobile storage equipment and modular office space. The specialty segment's customers include construction companies involved in infrastructure projects, municipalities and industrial companies. This segment primarily operates inthe United States andCanada , and has a limited presence inEurope ,Australia and New Zealand . As discussed in note 4 to our condensed consolidated financial statements, we aggregate our four geographic divisions-Central, Northeast, Southeast and West-into our general rentals reporting segment. Historically, there have occasionally been variances in the levels of equipment rentals gross margins achieved by these divisions, though such variances have generally been small (close to or less than 10 percent, measured versus the equipment rentals gross margins of the aggregated general rentals' divisions). For the five year period endedMarch 31, 2022 , there was no general rentals' division with an equipment rentals gross margin that differed materially from the equipment rentals gross margin of the aggregated general rentals' divisions. The rental industry is cyclical, and there historically have occasionally been divisions with equipment rentals gross margins that varied by greater than 10 percent from the equipment rentals gross margins of the aggregated general rentals' divisions, though the specific divisions with margin variances of over 10 percent have fluctuated, and such variances have generally not exceeded 10 percent by a significant amount. We monitor the margin variances and confirm margin similarity between divisions on a quarterly basis. We believe that the divisions that are aggregated into our segments have similar economic characteristics, as each division is capital intensive, offers similar products to similar customers, uses similar methods to distribute its products, and is subject to similar competitive risks. The aggregation of our divisions also reflects the management structure that we use for making operating decisions and assessing performance. Although we believe aggregating these divisions into our reporting segments for segment reporting purposes is appropriate, to the extent that there are significant margin variances that do not converge, we may be required to disaggregate the divisions into separate reporting segments. Any such disaggregation would have no impact on our consolidated results of operations. These reporting segments align our external segment reporting with how management evaluates business performance and allocates resources. We evaluate segment performance primarily based on segment equipment rentals gross profit. Our revenues, operating results, and financial condition fluctuate from quarter to quarter reflecting the seasonal rental patterns of our customers, with rental activity tending to be lower in the winter.
Revenues by segment were as follows:
General
rentals Specialty Total
Three Months Ended March 31, 2022
Equipment rentals $ 1,593 $ 582 $ 2,175
Sales of rental equipment 184 27 211
Sales of new equipment 29 16 45
Contractor supplies sales 18 11 29
Service and other revenues 58 6 64
Total revenue $ 1,882 $ 642 $ 2,524
Three Months Ended March 31, 2021
Equipment rentals $ 1,273 $ 394 $ 1,667
Sales of rental equipment 247 20 267
Sales of new equipment 42 7 49
Contractor supplies sales 16 8 24
Service and other revenues 44 6 50
Total revenue $ 1,622 $ 435 $ 2,057
Equipment rentals. For the three months ended March 31, 2022 , equipment rentals
of $2.175 billion increased $508 , or 30.5 percent, as compared to the same
period in 2021, primarily due to a 16.4 percent increase in average OEC and a
13.0 percent increase in fleet productivity, both of which include the more
pronounced impact of COVID-19 during the three months ended March 31, 2021 .
Beginning in 2021 and continuing through March 31, 2022 , we have seen evidence
of a continuing recovery of activity across our end-markets. The increase in
average OEC includes the impact of the acquisition of General
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Finance that is discussed in note 3 to the condensed consolidated financial statements, as well as increased capital expenditures. As discussed above, disciplined management of capital expenditures and fleet capacity is a component of our COVID-19 response plan, which contributed to rental capital expenditures in 2020 that were significantly below historic levels. While capital expenditures were significantly reduced in 2020 due to COVID-19, capital expenditures in 2021 exceeded historic (pre-COVID-19) levels. Equipment rentals represented 86 percent of total revenues for the three months endedMarch 31, 2022 . For the three months endedMarch 31, 2022 , general rentals equipment rentals increased$320 , or 25.1 percent, as compared to the same period in 2021, primarily due to the continuing recovery of activity across our end-markets and increased average OEC. As noted above, the impact of COVID-19 was more pronounced in 2021 and the broad recovery we saw as 2021 progressed has continued throughMarch 31, 2022 . As discussed above, capital expenditures were significantly reduced in 2020 due to COVID-19 and then increased in 2021, which contributed to the year-over-year increase in average OEC. For the three months endedMarch 31, 2022 , equipment rentals represented 85 percent of total revenues for the general rentals segment. For the three months endedMarch 31, 2022 , specialty equipment rentals increased$188 , or 47.7 percent, as compared to the same period in 2021, including the impact of the General Finance acquisition. On a pro forma basis including the standalone, pre-acquisition revenues of General Finance, equipment rentals increased 29 percent. The increase in equipment rentals reflects the continuing recovery of activity across our end-markets, as well as increased average OEC, both of which are discussed above. For the three months endedMarch 31, 2022 , equipment rentals represented 91 percent of total revenues for the specialty segment. Sales of rental equipment. For the three months endedMarch 31, 2022 , sales of rental equipment represented approximately 8 percent of our total revenues. Our general rentals segment accounted for most of these sales. For the three months endedMarch 31, 2022 , sales of rental equipment decreased 21.0 percent year-over-year as we held on to fleet to serve strong customer demand and to ensure greater fleet availability in the event industry supply chain challenges persist or worsen. While sales of rental equipment decreased year-over-year, pricing remained strong, as reflected in the 16.4 percentage point increase in gross margin from sales of rental equipment. Sales of new equipment. For the three months endedMarch 31, 2022 , sales of new equipment represented approximately 2 percent of our total revenues. Our general rentals segment accounted for most of these sales. For the three months endedMarch 31, 2022 , sales of new equipment decreased slightly year-over-year. Contractor supplies sales. Contractor supplies sales represent our revenues associated with selling a variety of supplies, including construction consumables, tools, small equipment and safety supplies. For the three months endedMarch 31, 2022 , contractor supplies sales represented approximately 1 percent of our total revenues. Our general rentals segment accounted for most of these sales. For the three months endedMarch 31, 2022 , contractor supplies sales increased slightly year-over-year. Service and other revenues. Service and other revenues primarily represent our revenues earned from providing repair and maintenance services on our customers' fleet (including parts sales). For the three months endedMarch 31, 2022 , service and other revenues represented approximately 3 percent of our total revenues. Our general rentals segment accounted for most of these sales. For the three months endedMarch 31, 2022 , service and other revenues increased 28.0 percent year-over-year, primarily due to the more pronounced impact of COVID-19 in 2021.
Segment Equipment Rentals Gross Profit
Segment equipment rentals gross profit and gross margin were as follows:
General
rentals Specialty Total
Three Months Ended March 31, 2022
Equipment Rentals Gross Profit $ 575 $ 259 $ 834
Equipment Rentals Gross Margin 36.1 % 44.5 % 38.3 %
Three Months Ended March 31, 2021
Equipment Rentals Gross Profit $ 411 $ 166 $ 577
Equipment Rentals Gross Margin 32.3 % 42.1 % 34.6 %
General rentals. For the three months ended March 31, 2022 , equipment rentals
gross profit increased by $164 , and equipment rentals gross margin increased 380
basis points, from 2021, primarily due to better fixed cost absorption on higher
revenue. As discussed above, equipment rental revenue increased 25.1 percent
from 2021, primarily due to increased average OEC and the continuing recovery of
activity across our end-markets.
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Specialty. For the three months endedMarch 31, 2022 , equipment rentals gross profit increased by$93 , and equipment rentals gross margin increased by 240 basis points, from 2021. Gross margin increased primarily due to better fixed cost absorption on higher revenue, partially offset by a higher proportion of revenue from certain lower margin ancillary fees in 2022. As discussed above, equipment rental revenue increased 47.7 percent from 2021, including the impact of the General Finance acquisition, primarily due to increased average OEC and the continuing recovery of activity across our end-markets.
Gross Margin. Gross margins by revenue classification were as follows:
Three Months Ended March 31,
2022 2021 Change
Total gross margin 39.3% 34.7% 460 bps
Equipment rentals 38.3% 34.6% 370 bps
Sales of rental equipment 55.0% 38.6% 1,640 bps
Sales of new equipment 17.8% 14.3% 350 bps
Contractor supplies sales 31.0% 29.2% 180 bps
Service and other revenues 39.1% 40.0% (90) bps
For the three months endedMarch 31, 2022 , total gross margin increased 460 basis points from the same period in 2021. Equipment rentals gross margin increased 370 basis points from 2021, primarily due to better fixed cost absorption on higher revenue. As discussed above, equipment rentals increased 30.5 percent from 2021, primarily due to increased average OEC and the continuing recovery of activity across our end-markets. Gross margin from sales of rental equipment increased 16.4 percentage points from the same period in 2021 primarily due to improved pricing. The gross margin fluctuations from sales of new equipment, contractor supplies sales and service and other revenues generally reflect normal variability and the more pronounced impact of COVID-19 in 2021, and such revenue types did not account for a significant portion of total gross profit (gross profit for these revenue types represented 4 percent of total gross profit for the three months endedMarch 31, 2022 ).
Other costs/(income)
The table below includes the other costs/(income) in our condensed consolidated statements of income, as well as key associated metrics, for the three months endedMarch 31, 2022 and 2021:
Three Months Ended
2022 2021 Change
Selling, general and administrative ("SG&A") expense $323 $250 29.2%
SG&A expense as a percentage of revenue 12.8% 12.2% 60 bps
Restructuring charge - 1 (100.0)%
Non-rental depreciation and amortization 97 91 6.6%
Interest expense, net 94 99 (5.1)%
Other income, net (5) (2) 150.0%
Provision for income taxes 116 72 61.1%
Effective tax rate 24.0% 26.2% (220) bps
SG&A expense primarily includes sales force compensation, information technology
costs, third party professional fees, management salaries, bad debt expense and
clerical and administrative overhead. SG&A expense as a percentage of revenue
for the three months ended March 31, 2022 increased from the same period in 2021
primarily due to increases in certain discretionary expenses, including travel
and entertainment. Certain discretionary expenses were reduced significantly in
2020 and early 2021 due to COVID-19, and have increased more recently as rental
volume has increased (as noted above, the broad recovery we saw across our
end-markets as 2021 progressed has continued through March 31, 2022 ).
The restructuring charges primarily reflect severance and branch closure charges
associated with our restructuring programs. We incur severance costs and branch
closure charges in the ordinary course of our business. We only include such
costs that are part of a restructuring program as restructuring charges. Since
the first such program was initiated in 2008, we have completed six
restructuring programs and have incurred total restructuring charges of $352 . As
of March 31, 2022 , there were no open restructuring programs, and the total
liability associated with the closed restructuring programs was $9 .
Non-rental depreciation and amortization includes i) the amortization of other
intangible assets and ii) depreciation expense associated with equipment that is
not offered for rent (such as computers and office equipment) and amortization
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expense associated with leasehold improvements. Our other intangible assets consist of customer relationships, non-compete agreements and trade names and associated trademarks.
Interest expense, net for the three months ended
The differences between the 2022 and 2021 effective tax rates and the federal statutory rate of 21 percent primarily reflect the geographical mix of income between foreign and domestic operations, the impact of state and local taxes, stock compensation and other deductible and nondeductible charges. The year-over-year decrease in the effective income tax rate for the three months endedMarch 31, 2022 primarily reflects the impact of state apportionment changes. InMarch 2020 , the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") was enacted. The CARES Act, among other things, includes provisions relating to net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, technical corrections to tax depreciation methods for qualified improvement property and deferral of employer payroll taxes. The CARES Act did not materially impact our effective tax rate for 2021, and is not expected to impact our effective tax rate in 2022. As ofMarch 31, 2022 , we had deferred employer payroll taxes of$27 under the CARES Act, all of which is due in 2022. There were no material changes fromDecember 31, 2021 toMarch 31, 2022 in the assets and liabilities reflected on the balance sheet. See the condensed consolidated statements of cash flows for further information on changes in cash and cash equivalents, and the condensed consolidated statements of stockholders' equity for further information on changes in stockholders' equity. 32
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Liquidity and Capital Resources
We manage our liquidity using internal cash management practices, which are subject to (i) the policies and cooperation of the financial institutions we utilize to maintain and provide cash management services, (ii) the terms and other requirements of the agreements to which we are a party and (iii) the statutes, regulations and practices of each of the local jurisdictions in which we operate. See "Financial Overview" above for a summary addressing our financial flexibility and liquidity. OnJanuary 25, 2022 , our Board of Directors authorized a$1 billion share repurchase program, which commenced in the first quarter of 2022. As ofMarch 31, 2022 , we have repurchased$262 of Holdings' common stock under this program, which we intend to complete in 2022. Since 2012, we have repurchased a total of$4.219 billion of Holdings' common stock under our share repurchase programs (comprised of six programs that have ended and the current program). Our principal existing sources of cash are cash generated from operations and from the sale of rental equipment, and borrowings available under our ABL facility and accounts receivable securitization facility. As ofMarch 31, 2022 , we had cash and cash equivalents of$101 . Cash equivalents atMarch 31, 2022 consist of direct obligations of financial institutions rated A or better. We believe that our existing sources of cash will be sufficient to support our existing operations over the next 12 months. The table below presents financial information associated with our principal sources of cash as of and for the three months endedMarch 31, 2022 : ABL facility: Borrowing capacity, net of letters of credit (1)$ 2,905 Outstanding debt, net of debt issuance costs 776 Interest rate atMarch 31, 2022 1.9 % Average month-end principal amount of debt outstanding 815 Weighted-average interest rate on average debt outstanding 1.7 % Maximum month-end principal amount of debt outstanding 891 Accounts receivable securitization facility (2): Borrowing capacity - Outstanding debt, net of debt issuance costs (2) 900 Interest rate atMarch 31, 2022 1.2 % Average month-end principal amount of debt outstanding 874 Weighted-average interest rate on average debt outstanding 1.0 % Maximum month-end principal amount of debt outstanding 900
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(1)As discussed in note 6 to the condensed consolidated financial statements, in May 2022, we expect to redeem$500 principal amount of our 5 1/2 percent Senior Notes, using cash and borrowings under the ABL facility. (2)The accounts receivable securitization facility expires onJune 24, 2022 and may be further extended on a 364-day basis by mutual agreement with the purchasers under the facility. If the facility is not extended, we believe we have sufficient liquidity, which, as noted above, was$3.006 billion as ofMarch 31, 2022 , to repay the outstanding debt. We expect that our principal needs for cash relating to our operations over the next 12 months will be to fund (i) operating activities and working capital, (ii) the purchase of rental equipment and inventory items offered for sale, (iii) payments due under operating leases, (iv) debt service, (v) share repurchases and (vi) acquisitions. We plan to fund such cash requirements from our existing sources of cash. In addition, we may seek additional financing through the securitization of some of our real estate, the use of additional operating leases or other financing sources as market conditions permit. To access the capital markets, we rely on credit rating agencies to assign ratings to our securities as an indicator of credit quality. Lower credit ratings generally result in higher borrowing costs and reduced access to debt capital markets. Credit ratings also affect the costs of derivative transactions, including interest rate and foreign currency derivative transactions. As a result, negative changes in our credit ratings could adversely impact our costs of funding. Our credit ratings as ofApril 25, 2022 were as follows: Corporate Rating Outlook Moody's Ba1 Stable Standard & Poor's BB+ Stable A security rating is not a recommendation to buy, sell or hold securities. There is no assurance that any rating will remain in effect for a given period of time or that any rating will not be revised or withdrawn by a rating agency in the future. 33
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Loan Covenants and Compliance. As ofMarch 31, 2022 , we were in compliance with the covenants and other provisions of the ABL, accounts receivable securitization and term loan facilities and the senior notes. Any failure to be in compliance with any material provision or covenant of these agreements could have a material adverse effect on our liquidity and operations. The only financial covenant that currently exists under the ABL facility is the fixed charge coverage ratio. Subject to certain limited exceptions specified in the ABL facility, the fixed charge coverage ratio covenant under the ABL facility will only apply in the future if specified availability under the ABL facility falls below 10 percent of the maximum revolver amount under the ABL facility. When certain conditions are met, cash and cash equivalents and borrowing base collateral in excess of the ABL facility size may be included when calculating specified availability under the ABL facility. As ofMarch 31, 2022 , specified availability under the ABL facility exceeded the required threshold and, as a result, this financial covenant was inapplicable. Under our accounts receivable securitization facility, we are required, among other things, to maintain certain financial tests relating to: (i) the default ratio, (ii) the delinquency ratio, (iii) the dilution ratio and (iv) days sales outstanding. The accounts receivable securitization facility also requires us to comply with the fixed charge coverage ratio under the ABL facility, to the extent the ratio is applicable under the ABL facility.
URNA's payment capacity is restricted under the covenants in the ABL and term loan facilities and the indentures governing its outstanding indebtedness. Although this restricted capacity limits our ability to move operating cash flows to Holdings, because of certain intercompany arrangements, we do not expect any material adverse impact on Holdings' ability to meet its cash obligations.
Sources and Uses of Cash. During the three months endedMarch 31, 2022 , we (i) generated cash from operating activities of$886 and (ii) generated cash from the sale of rental and non-rental equipment of$216 . We used cash during this period principally to (i) purchase rental and non-rental equipment and intangible assets of$537 , (ii) purchase other companies for$77 , (iii) make debt payments, net of proceeds, of$217 and (iv) purchase shares of our common stock for$318 . During the three months endedMarch 31, 2021 , we (i) generated cash from operating activities of$758 and (ii) generated cash from the sale of rental and non-rental equipment of$274 . We used cash during this period principally to (i) purchase rental and non-rental equipment and intangible assets of$314 , (ii) make debt payments, net of proceeds, of$619 and (iii) purchase shares of our common stock for$30 . Free Cash Flow GAAP Reconciliation. We define "free cash flow" as net cash provided by operating activities less purchases of, and plus proceeds from, equipment and intangible assets. The equipment and intangible asset purchases and proceeds are included in cash flows from investing activities. Management believes that free cash flow provides useful additional information concerning cash flow available to meet future debt service obligations and working capital requirements. However, free cash flow is not a measure of financial performance or liquidity under GAAP. Accordingly, free cash flow should not be considered an alternative to net income or cash flow from operating activities as an indicator of operating performance or liquidity. The table below provides a reconciliation between net cash provided by operating activities and free cash flow. Three Months Ended March 31, 2022 2021 Net cash provided by operating activities$ 886 $ 758 Purchases of rental equipment (482)
(295)
Purchases of non-rental equipment and intangible assets (55)
(19)
Proceeds from sales of rental equipment 211
267
Proceeds from sales of non-rental equipment 5
7
Insurance proceeds from damaged equipment 7 7 Free cash flow$ 572 $ 725 Free cash flow for the three months endedMarch 31, 2022 was$572 , a decrease of$153 as compared to$725 for the three months endedMarch 31, 2021 . Free cash flow decreased primarily due to increased net rental capital expenditures (purchases of rental equipment less the proceeds from sales of rental equipment), partially offset by increased net cash provided by operating activities. Net rental capital expenditures increased$243 year-over-year. Relationship between Holdings and URNA. Holdings is principally a holding company and primarily conducts its operations through its wholly owned subsidiary, URNA, and subsidiaries of URNA. Holdings licenses its tradename and other intangibles and provides certain services to URNA in connection with its operations. These services principally include: (i) senior management services; (ii) finance and tax-related services and support; (iii) information technology systems and 34
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support; (iv) acquisition-related services; (v) legal services; and (vi) human resource support. In addition, Holdings leases certain equipment and real property that are made available for use by URNA and its subsidiaries.
Information Regarding Guarantors of URNA Indebtedness
URNA is 100 percent owned by Holdings and has certain outstanding indebtedness that is guaranteed by both Holdings and, with the exception of itsU.S. special purpose vehicle which holds receivable assets relating to the Company's accounts receivable securitization facility (the "SPV"), captive insurance subsidiary and immaterial subsidiaries acquired in connection with the General Finance acquisition, all of URNA'sU.S. subsidiaries (the "guarantor subsidiaries"). Other than the guarantee by our Canadian subsidiary of URNA's indebtedness under the ABL facility, none of URNA's indebtedness is guaranteed by URNA's foreign subsidiaries, the SPV, captive insurance subsidiary or immaterial subsidiaries acquired in connection with the General Finance acquisition (together, the "non-guarantor subsidiaries"). The receivable assets owned by the SPV have been sold or contributed by URNA to the SPV and are not available to satisfy the obligations of URNA or Holdings' other subsidiaries. Holdings consolidates each of URNA and the guarantor subsidiaries in its consolidated financial statements. URNA and the guarantor subsidiaries are all 100 percent-owned and controlled by Holdings. Holdings' guarantees of URNA's indebtedness are full and unconditional, except that the guarantees may be automatically released and relieved upon satisfaction of the requirements for legal defeasance or covenant defeasance under the applicable indenture being met. The Holdings guarantees are also subject to subordination provisions (to the same extent that the obligations of the issuer under the relevant notes are subordinated to other debt of the issuer) and to a standard limitation which provides that the maximum amount guaranteed by Holdings will not exceed the maximum amount that can be guaranteed without making the guarantee void under fraudulent conveyance laws. The guarantees of Holdings and the guarantor subsidiaries are made on a joint and several basis. The guarantees of the guarantor subsidiaries are not full and unconditional because a guarantor subsidiary can be automatically released and relieved of its obligations under certain circumstances, including sale of the guarantor subsidiary, the sale of all or substantially all of the guarantor subsidiary's assets, the requirements for legal defeasance or covenant defeasance under the applicable indenture being met, designating the guarantor subsidiary as an unrestricted subsidiary for purposes of the applicable covenants or the notes being rated investment grade by bothStandard & Poor's Ratings Services and Moody's Investors Service, Inc., or, in certain circumstances, another rating agency selected by URNA. Like the Holdings guarantees, the guarantees of the guarantor subsidiaries are subject to subordination provisions (to the same extent that the obligations of the issuer under the relevant notes are subordinated to other debt of the issuer) and to a standard limitation which provides that the maximum amount guaranteed by each guarantor will not exceed the maximum amount that can be guaranteed without making the guarantee void under fraudulent conveyance laws. All of the existing guarantees by Holdings and the guarantor subsidiaries rank equally in right of payment with all of the guarantors' existing and future senior indebtedness. The secured indebtedness of Holdings and the guarantor subsidiaries (including guarantees of URNA's existing and future secured indebtedness) will rank effectively senior to guarantees of any unsecured indebtedness to the extent of the value of the assets securing such indebtedness. Future guarantees of subordinated indebtedness will rank junior to any existing and future senior indebtedness of the guarantors. The guarantees of URNA's indebtedness are effectively junior to any indebtedness of our subsidiaries that are not guarantors, including our foreign subsidiaries. As ofMarch 31, 2022 , the indebtedness of our non-guarantors was comprised of (i)$900 of outstanding borrowings by the SPV in connection with the Company's accounts receivable securitization facility, (ii)$145 of outstanding borrowings under the ABL facility by non-guarantor subsidiaries and (iii)$11 of finance leases of our non-guarantor subsidiaries. Covenants in the ABL facility, accounts receivable securitization and term loan facilities, and the other agreements governing our debt, impose operating and financial restrictions on URNA, Holdings and the guarantor subsidiaries, including limitations on the ability to make share repurchases and dividend payments. As ofMarch 31, 2022 , the amount available for distribution under the most restrictive of these covenants was$1.491 billion . The Company's total available capacity for making share repurchases and dividend payments includes the intercompany receivable balance of Holdings. As ofMarch 31, 2022 , our total available capacity for making share repurchases and dividend payments, which includes URNA's capacity to make restricted payments and the intercompany receivable balance of Holdings, was$5.472 billion . Based on our understanding of Rule 3-10 of Regulation S-X ("Rule 3-10"), we believe that Holdings' guarantees of URNA indebtedness comply with the conditions set forth in Rule 3-10, which enable us to present summarized financial information for Holdings, URNA and the consolidated guarantor subsidiaries in accordance with Rule 13-01 of Regulation S-X. The summarized financial information excludes information regarding the non-guarantor subsidiaries. In accordance with Rule 3-10, separate financial statements of the guarantor subsidiaries have not been presented.
The summarized financial information of Holdings, URNA and the guarantor subsidiaries on a combined basis is as follows:
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March 31, 2022
Current assets $332
Long-term assets 18,344
Total assets 18,676
Current liabilities 1,522
Long-term liabilities 11,070
Total liabilities 12,592
Three Months Ended March 31, 2022
Total revenues $2,258
Gross profit 891
Net income 367
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