United Rentals announces Record Fourth Quarter and full-year 2023 results

Posted on Jan 25, 2024 in Nuts & Bolts

United Rentals, Inc. has announced the financial results for the fourth quarter of 2023 and reported its full-year results on Form 10-K. The company also announced its full-year 2024 guidance and an enhanced capital allocation strategy focused on balancing growth and returns to drive shareholder value that includes a lower targeted full-cycle leverage range, its intention to repurchase $1.5 billion of common stock in 2024 and a 10% increase in its dividend per share.

Fourth Quarter 2023Highlights

Total revenue of $3.728 billion, including rental revenue² of $3.119 billion.
Net income of $679 million, at a margin³ of 18.2%. GAAP diluted earnings per share of $10.01, and adjusted EPS⁴ of $11.26.
Adjusted EBITDA⁴ of $1.809 billion, at a margin³of 48.5%.
Year-over-year, fleet productivity⁵ increased 0.3% as reported and 2.4% on a pro forma⁵ basis.
Full-year net cash provided by operating activities of $4.704 billion; free cash flow⁴ of $2.306 billion, including gross payments for purchases of rental equipment of $3.714 billion.
Full-year gross rental capital expenditures of $3.508 billion.
Returned $1.406 billion to shareholders for the full-year, comprised of $1.000 billion via share repurchases and $406 million via dividends paid.
Year-end net leverage ratio⁶ of 1.6x, with total liquidity⁶ of $3.330 billion.

CEO Comment

Matthew Flannery

Matthew Flannery, chief executive officer of United Rentals, said, “We entered 2023 with the goal of raising the bar and I’m incredibly pleased with the team’s performance. Our fourth quarter results capped a year of new records across revenue, profits, and returns driven by a relentless commitment to serving our customers while staying laser-focused on safety and operational excellence.”

Flannery continued, “We are now excited to deliver on the growth we expect in 2024, supported by our strength on large projects. Our guidance reflects the opportunities we see across our business as we leverage our competitive advantages to support our customers and outpace the market. We continue to execute on our long-held strategy to deliver profitable growth, strong free cash flow and exceptional returns. Our new leverage targets and 2024 capital allocation plans are further evidence of our commitment to driving shareholder value.”

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1.		A discussion of the company’s full-year 2023 results of operations is included in its Annual Report on Form 10-K filed with the SEC.
2.		Rental revenue includes owned equipment rental revenue, re-rent revenue and ancillary revenue.
3.		Net income margin and adjusted EBITDA margin represent net income or adjusted EBITDA divided by total revenue.
4.		Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization), adjusted EPS (earnings per share) and free cash flow are non-GAAP measures as defined in the tables below. See the tables below for reconciliations to the most comparable GAAP measures.
5.		Fleet productivity reflects the combined impact of changes in rental rates, time utilization and mix on owned equipment rental revenue. The company acquired Ahern Rentals, Inc. (“Ahern Rentals”) in December 2022. Pro forma results reflect the combination of United Rentals and Ahern Rentals for all periods presented. See the table below for more information.
6.		The net leverage ratio reflects net debt (total debt less cash and cash equivalents) divided by adjusted EBITDA for the trailing 12 months. Total liquidity reflects cash and cash equivalents plus availability under the asset-based revolving credit facility (“ABL facility”) and the accounts receivable securitization facility.

2024 Outlook

The company provided the following outlook for 2024.

	2024 Outlook	2023 Actual
Total revenue	$14.650 billion to $15.150 billion	$14.332 billion
Adjusted EBITDA⁷	$6.900 billion to $7.150 billion	$6.857 billion
Net rental capital expenditures after gross purchases	$1.900 billion to $2.200 billion, after gross purchases of $3.400 billion to $3.700 billion	$1.934 billion net, $3.508 billion gross
Net cash provided by operating activities	$4.150 billion to $4.750 billion	$4.704 billion
Free cash flow excluding merger and restructuring related payments⁸	$2.000 billion to $2.200 billion	$2.314 billion

Summary of Fourth Quarter 2023 Financial Results

Rental revenue for the quarter increased 13.5% year-over-year to a fourth quarter record of $3.119 billion, reflecting broad-based strength of demand across the company’s end-markets and the impact of the Ahern Rentals acquisition. Fleet productivity increased 0.3% year-over-year, while average original equipment at cost (“OEC”) increased 15.1%. On a pro forma basis, rental revenue increased 7.6% year-over-year, supported by a 6.9% increase in average OEC and a 2.4% increase in fleet productivity.
Used equipment sales in the quarter increased 7.1% year-over-year. Used equipment sales generated $438 million of proceeds at a GAAP gross margin of 50.0% and an adjusted gross margin⁹ of 55.3%, compared to $409 million at a GAAP gross margin of 58.9% and an adjusted gross margin of 61.6% for the same period last year. The year-over-year declines in the GAAP and adjusted gross margins primarily reflect the expected normalization of the used equipment market and the impact of sales of equipment acquired in the Ahern Rentals acquisition. Average fleet age was 52.4 months as of December 31, 2023.
Net income for the quarter increased 6.3% year-over-year to $679 million, while net income margin decreased 120 basis points to 18.2%. Net income was a fourth quarter record excluding the fourth quarter of 2017, which included a one-time net income benefit associated with the enactment of the Tax Cuts and Jobs Act of 2017. On a pro forma basis, fourth quarter net income margin declined 40 basis points. The decrease in the company’s reported net income margin was primarily driven by the impact of the Ahern Rentals acquisition on rental and used equipment gross margins, and higher interest expense, partially offset by reductions in selling, general and administrative (“SG&A”) and income tax expenses as a percentage of revenue. While the effective income tax rate of 24.7% for the quarter decreased 390 basis points year-over-year, primarily due to the settlement in the fourth quarter 2022 of non-recurring prior year tax adjustments, the full-year effective income tax rate was largely flat year-over-year at 24.5%.

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7.		Information reconciling forward-looking adjusted EBITDA to the comparable GAAP financial measures is unavailable to the company without unreasonable effort, as discussed below.
8.		Free cash flow excludes merger and restructuring related payments, which cannot be reasonably predicted for the 2024 outlook. Merger and restructuring related payments were $8 million in 2023.
9.		Used equipment sales adjusted gross margin is a non-GAAP financial measure that excludes the impact ($23 million and $11 million for the three months ended December 31, 2023 and 2022, respectively) of the fair value mark-up of fleet acquired in certain major acquisitions that was subsequently sold. This adjustment is explained further in the tables below, and represents the only difference between the GAAP gross margin and the adjusted gross margin.

Adjusted EBITDA for the quarter increased 9.8% year-over-year to a fourth quarter record of $1.809 billion, while adjusted EBITDA margin decreased 150 basis points to 48.5%. On a pro forma basis, fourth quarter adjusted EBITDA margin decreased 90 basis points year-over-year, including the impact of used equipment sales and ongoing integration costs. The decrease in the company’s reported adjusted EBITDA margin primarily reflected the impact of Ahern Rentals on gross margin from rental revenue (excluding depreciation and stock compensation expense) and adjusted gross margin from used equipment sales, partially offset by reduced SG&A expense as a percentage of revenue.
General rentals segment rental revenue increased 13.1% year-over-year, including the impact of the Ahern Rentals acquisition, to a fourth quarter record of $2.289 billion. On a pro forma basis, fourth quarter rental revenue for general rentals increased 5.2% year-over-year. Rental gross margin decreased by 250 basis points year-over-year to 39.1%, including the impact of the Ahern Rentals acquisition. On a pro forma basis, fourth quarter rental gross margin declined 140 basis points year-over-year due, on net, to the impact of higher depreciation expense related to the Ahern Rentals acquisition.
Specialty rentals segment rental revenue increased 14.6% year-over-year to a fourth quarter record of $830 million. Rental gross margin decreased by 210 basis points year-over-year to 47.2%, primarily due to a higher proportion of revenue from certain lower margin ancillary revenues, and increases in certain operating expenses, in 2023. For the full year, rental gross margin increased by 50 basis points year-over-year to 48.9%.
Cash flow from operating activities increased 6.1% year-over-year to $4.704 billion for the full-year, and free cash flow, including merger and restructuring related payments, increased 30.7%, from $1.764 billion to $2.306 billion. The increase in free cash flow was mainly due to lower payments for net rental capital expenditures, which decreased $331 million year-over-year, and increased cash flow from operating activities.
Capital management. The company’s net leverage ratio was 1.6x at December 31, 2023, as compared to 2.0x at December 31, 2022. As part of its enhanced capital allocation strategy, as described more fully below, the company has lowered its targeted full-cycle leverage range to 1.5x-2.5x, from 2.0x-3.0x. In 2023, the company repurchased $1.00 billion¹⁰ of common stock under its existing $1.25 billion¹⁰ share repurchase program and paid dividends totaling $406 million. The company expects to complete the existing $1.25 billion share repurchase program in the first quarter of 2024 and then commence the new $1.5 billion¹⁰ share repurchase program discussed below. Together, these authorizations will support the company’s plan to repurchase a total of $1.5 billion of common stock in 2024. Additionally, the company’s Board of Directors is increasing the company’s quarterly dividend by 10% and has declared a quarterly dividend of $1.63 per share, payable on February 28, 2024 to stockholders of record on February 14, 2024.
Total liquidity was $3.330 billion as of December 31, 2023, including $363 million of cash and cash equivalents.
Return on invested capital (ROIC)¹¹ increased 90 basis points year-over-year, and decreased 10 basis points sequentially, to 13.6% for the 12 months ended December 31, 2023.

Share Repurchase Program

On January 24, 2024, the company’s Board of Directors authorized a new $1.5 billion share repurchase program that is expected to be completed by the end of the first quarter of 2025. The company plans to begin repurchases under the program during the first quarter of 2024, following completion of its existing $1.25 billion share repurchase program. In total, the company intends to complete $1.5 billion of share repurchases in 2024, with the remaining $250 million of the new authorization carried into 2025.

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10.		A 1% excise tax is imposed on “net repurchases” (certain purchases minus certain issuances) of common stock. The repurchases noted above (as well as the total program sizes) do not include the excise tax, which totaled $8 million for the year ended December 31, 2023.
11.		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 rate of 21% was used to calculate after-tax operating income.

Enhanced Capital Allocation Strategy

In January 2024, the company’s Board of Directors approved an enhanced capital allocation strategy that remains focused on balancing growth and returns. The company’s new balance sheet strategy includes lowering its targeted full-cycle leverage range to 1.5x-2.5x from the range of 2.0x-3.0x adopted in 2019. The company’s net leverage ratio was 1.6x as of December 31, 2023.

Matthew Flannery, chief executive officer of United Rentals, said, “After thorough evaluation over the last year, including cost-benefit analysis of the balance sheet strategy we introduced in 2019, we are very pleased to be introducing our updated strategy that we expect will serve both our company and our investors well. This change remains consistent with other actions we’ve taken to deploy our capital with a balanced approach to growing our business, while also improving our financial strength and flexibility with the ultimate goal of driving shareholder value.”