United Rentals, Inc.
URI
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110.745USD
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UNITED RENTALS : DE Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in millions, except per share data, unless otherwise indicated) (form 10-Q)

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04/19/2017 | 10:26 pm


Executive Overview
We are the largest equipment rental company in the world, with an integrated
network of 895 rental locations in the United States and Canada. 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 $8.9 billion, and a national branch network that operates in 49 U.S.
states and every Canadian province, and serves 99 of the largest 100
metropolitan areas in the United States. In addition, our size 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 3,200 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 ended March 31, 2017.
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.
In 2017, we expect to continue our disciplined focus on increasing our
profitability and return on invested capital. In particular, our strategy calls
for:
• A consistently superior standard of service to customers, often provided
through a single point of contact;


• 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 are aligned with these objectives



to identify trends in equipment categories and define action plans that
can generate improved returns;



• The implementation of "Lean" management techniques, including kaizen



processes focused on continuous improvement. We have trained over 3,100



employees, over 70 percent of our district managers and over 60 percent



of our branch managers on the Lean kaizen process. We continue to



implement this program 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. We



achieved the anticipated run rate savings from the Lean initiatives in



2016 and expect to continue to generate savings from these initiatives;



• The implementation of Project XL, which is a set of eight specific work



streams focused on driving profitable growth through revenue
opportunities and generating incremental profitability through cost
savings across our business; and



• The continued expansion of our trench, power and pump footprint, as well



as our tools offering, and the cross-selling of these services throughout



our network. We believe that the expansion of our trench, power and pump



business, as well as our tools offering, will further position United



Rentals as a single source provider of total jobsite solutions through



our extensive product and service resources and technology offerings.





For the three months ended March 31, 2017, equipment rental revenue increased
4.4 percent as compared to the same period in 2016, primarily reflecting a 7.0
percent increase in the volume of OEC on rent partially offset by a 1.4 percent
rental rate decrease. Rental rate changes are calculated based on the
year-over-year variance in average contract rates, weighted by the prior period
revenue mix. The decreased rental rates reflected continued pressure from Canada
and the impact of recent industry fleet expansion. Although we experienced rate
pressures during the three months ended March 31, 2017, we also saw improving
demand in many of our core markets, as evidenced by the 7.0 percent increase in
the volume of OEC on rent. In particular, we saw improvement in our trench,
power and pump segment. The volume of OEC on rent increased 22.3 percent in our
trench, power and pump segment, primarily due to continued strength in our
Trench Safety and Power and HVAC regions, and improved performance in our Pump
Solutions region. The improvement in the Pump Solutions region primarily
reflected i) growth in revenue from upstream oil and gas customers, which have
experienced significant volatility in recent years, and ii) improvement in the
Pump Solutions region's revenue mix largely due to having a smaller portion of
revenue attributable to

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upstream oil and gas customers, which, as noted above, have experienced
significant volatility in recent years, and a larger portion of revenue
attributable to downstream oil and gas, construction, municipality and mining
customers.
Financial Overview
Since January 1, 2016, we have taken the following actions to improve our
financial flexibility and liquidity, and to position us to invest the necessary
capital in our business:
• Redeemed all of our 8 1/4 percent Senior Notes and 7 3/8 percent Senior Notes;



• Redeemed $850 principal amount of our 7 5/8 percent Senior Notes due 2022;



• Issued $1.0 billion principal amount of 5 7/8 percent Senior Notes due 2026;



• Issued $1.0 billion principal amount of 5 1/2 percent Senior Notes due 2027;



• Amended and extended our ABL facility; and



• Amended and extended our accounts receivable securitization facility.





As of March 31, 2017, we had available liquidity of $2.09 billion, including
cash and cash equivalents of $337. As discussed in note 6 to the condensed
consolidated financial statements, we used available cash and drawings on the
ABL facility to finance the NES acquisition upon its closing on April 3, 2017.
Net income. Net income and diluted earnings per share for the three months ended
March 31, 2017 and 2016 were as follows:
Three Months Ended
March 31,
2017 2016
Net income $ 109 $ 92
Diluted earnings per share $ 1.27 $ 1.01



Net income and diluted earnings per share for the three months ended March 31,
2017
and 2016 include the after-tax impacts of the items below. The tax rates
applied to the items below reflect the statutory rates in the applicable entity.


Three Months Ended March 31,



2017 2016
Tax rate applied to items below 38.5 % 38.3 %
Impact on Impact on
Contribution diluted earnings Contribution diluted earnings
to net income (after-tax) per share to net income (after-tax) per share
Merger related costs (1) $ (1 ) $ (0.02 ) $ - $ -
Merger related intangible asset amortization (2) (24 ) (0.28 ) (27 ) (0.30 )
Impact of the fair value mark-up of acquired RSC
fleet (3) (5 ) (0.06 ) (6 ) (0.06 )
Restructuring charge (4) - - (1 ) (0.01 )
Asset impairment charge (5) - - (2 ) (0.02 )




(1) This reflects transaction costs associated with the NES acquisition discussed



in note 1 to our condensed consolidated financial statements. Merger related



costs only include costs associated with major acquisitions that



significantly impact our operations. For additional information, see "Results



of Operations-Other costs/(income)-merger related costs" below.



(2) This reflects the amortization of the intangible assets acquired in the RSC



and National Pump acquisitions.



(3) This reflects additional costs recorded in cost of rental equipment sales



associated with the fair value mark-up of rental equipment acquired in the



RSC acquisition and subsequently sold.



(4) This reflects severance and branch closure charges associated with our



restructuring programs, all of which were closed as of March 31, 2017. For



additional information, see note 3 to our condensed consolidated financial



statements.



(5) This charge reflects write-offs of fixed assets in connection with our



restructuring programs.






In addition to the matters above, our performance for the three months ended
March 31, 2017 reflects an effective tax rate of 32.3 percent. For additional
information, see "Results of Operations-Other costs/(income)-effective tax rate"
below.

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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 merger related costs, restructuring charge, stock compensation
expense, net and the impact of the fair value mark-up of the acquired RSC 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 EBITDA and adjusted EBITDA margins represent EBITDA 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,
2017 2016
Net income $ 109 $ 92
Provision for income taxes 52 55
Interest expense, net 94 107
Depreciation of rental equipment 248


243



Non-rental depreciation and amortization 62 67
EBITDA $ 565 $ 564
Merger related costs (1) 2 -
Restructuring charge (2) - 2
Stock compensation expense, net (3) 16


9



Impact of the fair value mark-up of acquired RSC fleet (4) 8 9
Adjusted EBITDA $ 591 $ 584




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,
2017 2016
Net cash provided by operating activities $ 623 $ 604
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 (2 ) (2 )
Gain on sales of rental equipment 46


47



Gain on sales of non-rental equipment 1 1
Merger related costs (1) (2 ) -
Restructuring charge (2) - (2 )
Stock compensation expense, net (3) (16 ) (9 )
Excess tax benefits from share-based payment arrangements -


27



Changes in assets and liabilities (176 ) (118 )
Cash paid for interest 90


69



Cash paid (received) for income taxes, net 1 (53 )
EBITDA $ 565 $ 564
Add back:
Merger related costs (1) 2 -
Restructuring charge (2) - 2
Stock compensation expense, net (3) 16 9
Impact of the fair value mark-up of acquired RSC fleet (4) 8 9
Adjusted EBITDA $ 591 $ 584


___________________



(1) This reflects transaction costs associated with the NES acquisition discussed



in note 1 to our condensed consolidated financial statements. Merger related



costs only include costs associated with major acquisitions that



significantly impact our operations. For additional information, see "Results



of Operations-Other costs/(income)-merger related costs" below.



(2) This reflects severance and branch closure charges associated with our



restructuring programs, all of which were closed as of March 31, 2017. For



additional information, see note 3 to our condensed consolidated financial



statements.



(3) Represents non-cash, share-based payments associated with the granting of



equity instruments.



(4) This reflects additional costs recorded in cost of rental equipment sales



associated with the fair value mark-up of rental equipment acquired in the



RSC acquisition and subsequently sold.





For the three months ended March 31, 2017, EBITDA increased $1, or 0.2 percent,
and adjusted EBITDA increased $7, or 1.2 percent. For the three months ended
March 31, 2017, EBITDA margin decreased 140 basis points to 41.7 percent, and
adjusted EBITDA margin decreased 100 basis points to 43.6 percent. The decrease
in the EBITDA margin primarily reflects a slight decrease in the margins,
excluding depreciation, from equipment rentals and increased stock compensation
expense primarily due to increases in our stock price and in the volume of stock
awards. The decrease in the adjusted EBITDA margin primarily reflects a slight
decrease in the margins, excluding depreciation, from equipment rentals. The
decrease in the margins, excluding depreciation, from equipment rentals
primarily reflects a 1.4 percent rental rate decrease and increased delivery
costs. While equipment rental revenue increased 4.4 percent and the volume of
OEC on rent increased 7.0 percent for the three months ended March 31, 2017,
delivery costs increased 15.3 percent primarily due to the increased volume of
OEC on rent and increased transfers of equipment among locations in response to,
and in anticipation of, customer demand.

Results of Operations
As discussed in note 2 to our condensed consolidated financial statements, our
reportable segments are general rentals and trench, power and pump. 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.
The general rentals segment operates throughout the United States and Canada.
The trench, power and pump segment is comprised of i) the Trench Safety region,
which rents trench safety equipment such as trench shields, aluminum hydraulic
shoring systems, slide rails, crossing plates,

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construction lasers and line testing equipment for underground work, ii) the
Power and HVAC region, which rents power and HVAC equipment such as portable
diesel generators, electrical distribution equipment, and temperature control
equipment including heating and cooling equipment, and iii) the Pump Solutions
region, which rents pumps primarily used by municipalities, industrial plants,
and mining, construction, and agribusiness customers. The trench, power and pump
segment's customers include construction companies involved in infrastructure
projects, municipalities and industrial companies. The trench, power and pump
segment operates throughout the United States and in Canada.
As discussed in note 2 to our condensed consolidated financial statements, we
aggregate our nine geographic regions-Industrial (which serves the geographic
Gulf region and has a strong industrial presence), Mid-Atlantic, Midwest,
Northeast, Pacific West, South-Central, South, Southeast and Western Canada-into
our general rentals reporting segment. Historically, there have been variances
in the levels of equipment rentals gross margins achieved by these regions. For
the five year period ended March 31, 2017, one of our general rentals' regions
had an equipment rentals gross margin that varied by between 10 percent and 12
percent from the equipment rentals gross margins of the aggregated general
rentals' regions over the same period. The rental industry is cyclical, and
there historically have been regions with equipment rentals gross margins that
varied by greater than 10 percent from the equipment rentals gross margins of
the aggregated general rentals' regions, though the specific regions with margin
variances of over 10 percent have fluctuated. We expect margin convergence going
forward given the cyclical nature of the rental industry, and monitor the margin
variances and confirm the expectation of future convergence on a quarterly
basis.
We similarly monitor the margin variances for the regions in the trench, power
and pump segment. The Pump Solutions region is primarily comprised of locations
acquired in the April 2014 National Pump acquisition. As such, there isn't a
long history of the Pump Solutions region's rental margins included in the
trench, power and pump segment. When monitoring for margin convergence, we
include projected future results. We monitor the trench, power and pump segment
margin variances and confirm the expectation of future convergence on a
quarterly basis.
We believe that the regions that are aggregated into our segments have similar
economic characteristics, as each region 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 regions also
reflects the management structure that we use for making operating decisions and
assessing performance. Although we believe aggregating these regions 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 regions into separate reporting segments. Any such
disaggregation would have no impact on our consolidated results of operations.
These segments align our external segment reporting with how management
evaluates and allocates resources. We evaluate segment performance 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 Trench, power and pump


Total



Three Months Ended March 31, 2017
Equipment rentals $ 977 $ 189 $ 1,166
Sales of rental equipment 96 10 106
Sales of new equipment 35 4 39
Contractor supplies sales 14 4 18
Service and other revenues 24 3 27
Total revenue $ 1,146 $ 210 $ 1,356
Three Months Ended March 31, 2016
Equipment rentals $ 955 $ 162 $ 1,117
Sales of rental equipment 106 9 115
Sales of new equipment 26 4 30
Contractor supplies sales 16 3 19
Service and other revenues 26 3 29
Total revenue $ 1,129 $ 181 $ 1,310




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Equipment rentals. For the three months ended March 31, 2017, equipment rentals
of $1.166 billion increased $49, or 4.4 percent, as compared to the same period
in 2016, primarily reflecting a 7.0 percent increase in the volume of OEC on
rent partially offset by a 1.4 percent rental rate decrease. The decreased
rental rates reflected continued pressure from Canada and the impact of recent
industry fleet expansion. Although we experienced rate pressures during the
three months ended March 31, 2017, we also saw improving demand in many of our
core markets, as evidenced by the increase in the volume of OEC on rent.
Equipment rentals represented 86 percent of total revenues for the three months
ended March 31, 2017.

For the three months ended March 31, 2017, general rentals equipment rentals
increased $22, or 2.3 percent, as compared to the same period in 2016, primarily
reflecting a 6.0 percent increase in the volume of OEC on rent partially offset
by decreased rental rates. The decreased rental rates reflected continued
pressure from Canada and the impact of recent industry fleet expansion. Although
we experienced rate pressures during the three months ended March 31, 2017, we
also saw improving demand in many of our core markets, as evidenced by the
increase in the volume of OEC on rent. For the three months ended March 31,
2017
, equipment rentals represented 85 percent of total revenues for the general
rentals segment.

For the three months ended March 31, 2017, trench, power and pump equipment
rentals increased $27, or 16.7 percent, as compared to the same period in 2016,
primarily reflecting a 22.3 percent increase in the volume of OEC on rent.
Trench, power and pump average OEC for the three months ended March 31, 2017
increased 6.3 percent as compared to the same period in 2016. The increase in
the volume of OEC on rent significantly exceeded the increase in average OEC
primarily due to improved performance in our Pump Solutions region. The
improvement in the Pump Solutions region primarily reflects i) growth in revenue
from upstream oil and gas customers, which have experienced significant
volatility in recent years, and ii) improvement in the Pump Solutions region's
revenue mix largely due to having a smaller portion of revenue attributable to
upstream oil and gas customers, which, as noted above, have experienced
significant volatility in recent years, and a larger portion of revenue
attributable to downstream oil and gas, construction, municipality and mining
customers. For the three months ended March 31, 2017, equipment rentals
represented 90 percent of total revenues for the trench, power and pump segment.
Sales of rental equipment. For the three months ended March 31, 2017, sales of
rental equipment represented approximately 8 percent of our total revenues. Our
general rentals segment accounted for substantially all of these sales. For the
three months ended March 31, 2017, sales of rental equipment did not change
significantly from the same period in 2016.
Sales of new equipment. For the three months ended March 31, 2017, sales of new
equipment represented approximately 3 percent of our total revenues. Our general
rentals segment accounted for substantially all of these sales. For the three
months ended March 31, 2017, sales of new equipment increased 30.0 percent from
the same period in 2016, primarily reflecting increased volume.
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
ended March 31, 2017, contractor supplies sales represented approximately 1
percent of our total revenues. Our general rentals segment accounted for
substantially all of these sales. Contractor supplies sales for the three months
ended March 31, 2017 did not change significantly from the same period in 2016.
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 ended March 31, 2017,
service and other revenues represented approximately 2 percent of our total
revenues. Our general rentals segment accounted for substantially all of these
sales. For the three months ended March 31, 2017, service and other revenues did
not change significantly from the same period in 2016.
Segment Equipment Rentals Gross Profit
Segment equipment rentals gross profit and gross margin were as follows:
General
rentals Trench, power and pump


Total



Three Months Ended March 31, 2017
Equipment Rentals Gross Profit $ 360 $ 84 $ 444
Equipment Rentals Gross Margin 36.8 % 44.4 % 38.1 %
Three Months Ended March 31, 2016
Equipment Rentals Gross Profit $ 357 $ 68 $ 425
Equipment Rentals Gross Margin 37.4 % 42.0 % 38.0 %



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General rentals. For the three months ended March 31, 2017, equipment rentals
gross profit increased by $3 and equipment rentals gross margin decreased by 60
basis points from 2016. The gross margin decrease primarily reflects decreased
rental rates and increased delivery costs partially offset by a 150 basis point
increase in time utilization. The decreased rental rates reflected continued
pressure from Canada and the impact of recent industry fleet expansion. Although
we experienced rate pressures during the three months ended March 31, 2017, we
also saw improving demand in many of our core markets, as evidenced by the 6.0
percent increase in the volume of OEC on rent. While the volume of OEC on rent
increased 6.0 percent, delivery costs increased 16.5 percent due primarily to
the increased volume of OEC on rent and increased transfers of equipment among
locations in response to, and in anticipation of, customer demand. 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. For the three
months ended March 31, 2017 and 2016, time utilization was 67.2 percent and 65.7
percent, respectively.
Trench, power and pump. For the three months ended March 31, 2017, equipment
rentals gross profit increased by $16 and equipment rentals gross margin
increased by 240 basis points from 2016. The increase in equipment rentals gross
profit primarily reflects increased equipment rentals revenue on a larger fleet.
Year-over-year, trench, power and pump equipment rentals increased 16.7 percent,
average OEC increased 6.3 percent and the volume of OEC on rent increased 22.3
percent. The increase in the volume of OEC on rent significantly exceeded the
increase in average OEC primarily due to improved performance in our Pump
Solutions region. The improvement in the Pump Solutions region primarily
reflects i) growth in revenue from upstream oil and gas customers, which have
experienced significant volatility in recent years, and ii) improvement in the
Pump Solutions region's revenue mix largely due to having a smaller portion of
revenue attributable to upstream oil and gas customers, which, as noted above,
have experienced significant volatility in recent years, and a larger portion of
revenue attributable to downstream oil and gas, construction, municipality and
mining customers. The increase in equipment rentals gross margin reflects
decreased compensation, depreciation and property costs as a percentage of
revenue. As compared to the equipment rentals revenue increase of 16.7 percent,
compensation costs increased 9.9 percent due primarily to increased headcount
associated with higher rental volume, depreciation of rental equipment increased
10.7 percent and property costs increased 1.6 percent. Capitalizing on the
demand for the higher margin equipment rented by our trench, power and pump
segment has been a key component of our strategy in recent years.
Gross Margin. Gross margins by revenue classification were as follows:
Three Months Ended March 31,
2017 2016 Change


Total gross margin 37.9% 38.2% (30) bps
Equipment rentals


38.1% 38.0% 10 bps


Sales of rental equipment 43.4% 40.9% 250 bps
Sales of new equipment 12.8% 16.7% (390) bps
Contractor supplies sales 27.8% 31.6% (380) bps
Service and other revenues 51.9% 58.6% (670) bps






For the three months ended March 31, 2017, total gross margin decreased 30 basis
points as compared to the same period in 2016. Equipment rentals gross margin
increased 10 basis points, primarily reflecting a 190 basis point increase in
time utilization offset by a 1.4 percent rental rate decrease. For the three
months ended March 31, 2017 and 2016, time utilization was 66.0 percent and 64.1
percent, respectively. The decreased rental rates reflected continued pressure
from Canada and the impact of recent industry fleet expansion. Although we
experienced rate pressures during the three months ended March 31, 2017, we also
saw improving demand in many of our core markets, as evidenced by a 7.0 percent
increase in the volume of OEC on rent. Gross margin from sales of rental
equipment increased 250 basis points primarily due to increased pricing. Gross
margin from sales of new equipment decreased 390 basis points. Sales of new
equipment increased 30.0 percent, primarily reflecting increased volume, and
some of the increased volume was achieved at lower margins. Gross margin from
contractor supplies sales decreased 380 basis points, primarily due to higher
than normal margins in 2016. The 2017 margin is consistent with our historic
margins. Gross margin from service and other revenues decreased 670 basis
points. In 2017, we reviewed the cost structure associated with this line of
revenue and increased the allocation of labor to it to better match the labor
costs to the generated revenue. Such labor costs were formerly included in cost
of equipment rentals. We expect that the gross margin from service and other
revenues for 2017 will continue to be less than the historic margins due to the
new labor allocation methodology.
Other costs/(income)

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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
ended March 31, 2017 and 2016:
Three Months Ended


March 31,



2017 2016


Change



Selling, general and administrative ("SG&A") expense $193 $177



9.0%



SG&A expense as a percentage of revenue 14.2% 13.5% 70 bps
Merger related costs 2 - -%
Restructuring charge - 2 (100.0)%
Non-rental depreciation and amortization 62 67 (7.5)%
Interest expense, net 94 107 (12.1)%
Other expense, net 2 - -%
Provision for income taxes 52 55 (5.5)%
Effective tax rate 32.3% 37.4% (510) 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. The increases in SG&A expense and SG&A
expense as a percentage of revenue for the three months ended March 31, 2017
primarily reflect increased stock compensation costs largely due to increases in
our stock price and in the volume of stock awards.
The merger related costs reflect transaction costs associated with the NES
acquisition discussed in note 1 to our condensed consolidated financial
statements. We have made a number of acquisitions in the past and may continue
to make acquisitions in the future. Merger related costs only include costs
associated with major acquisitions that significantly impact our operations. The
historic acquisitions that have included merger related costs are RSC, which had
annual revenues of approximately $1.5 billion prior to the acquisition, and
National Pump, which had annual revenues of over $200 prior to the acquisition.
As discussed in note 1 to our condensed consolidated financial statements, NES
has annual revenues of approximately $369.
The restructuring charges reflect severance and branch closure charges
associated with our restructuring programs, all of which were closed as of
March 31, 2017. For additional information, see note 3 to our condensed
consolidated financial statements.
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 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 March 31, 2017 decreased
primarily due to lower average debt and a lower average cost of debt.
The difference between the 2017 effective tax rate and the U.S. federal
statutory income tax rate of 35 percent primarily reflects (i) a tax reduction
of $8 associated with excess tax benefits from share-based payment arrangements,
as discussed in note 1 to our condensed consolidated financial statements, (ii)
the geographical mix of income between foreign and domestic operations and (iii)
the impact of state and local taxes, and certain nondeductible charges. The
difference between the 2016 effective tax rate and the U.S. federal statutory
income tax rate of 35 percent primarily relates to the geographical mix of
income between foreign and domestic operations, as well as the impact of state
and local taxes, and certain nondeductible charges.
Balance sheet. Accounts payable increased by $139, or 57.2 percent, from
December 31, 2016 to March 31, 2017 primarily due to a seasonal increase in
capital expenditures and increased business activity prior to our revenues
seasonally increasing in the second quarter.
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 of recent capital
structure actions taken to improve our financial flexibility and liquidity.

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Since 2012, we have repurchased a total of $1.450 billion of Holdings' common
stock under three completed share repurchase programs. Additionally, in July
2015
, our Board authorized a new $1 billion share repurchase program which
commenced in November 2015. As of April 17, 2017, we have repurchased $627 of
Holdings' common stock under the $1 billion share repurchase program. In October
2016
, we paused repurchases under the program as we evaluated a number of
potential acquisition opportunities. As discussed in note 1 to the condensed
consolidated financial statements, on January 25, 2017, we entered into a
definitive merger agreement to acquire NES in an all cash transaction. We intend
to complete the share repurchase program; however, we will re-evaluate the
decision to do so as we integrate NES and assess other potential uses of
capital.
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 of March 31, 2017,
we had cash and cash equivalents of $337. Cash equivalents at March 31, 2017
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 ended March 31, 2017:
ABL facility:
Borrowing capacity, net of letters of credit (1) $ 1,736
Outstanding debt, net of debt issuance costs (1) 720
Interest rate at March 31, 2017 2.5 %
Average month-end debt outstanding (1) 1,041


Weighted-average interest rate on average debt outstanding 2.3 %
Maximum month-end debt outstanding (1)


1,539
Accounts receivable securitization facility:
Borrowing capacity 18
Outstanding debt, net of debt issuance costs 550
Interest rate at March 31, 2017 1.7 %
Average month-end debt outstanding 518


Weighted-average interest rate on average debt outstanding 1.6 %
Maximum month-end debt outstanding


551



_________________



(1) The average and maximum month-end debt outstanding under the ABL facility
exceeded the amount outstanding as of March 31, 2017 primarily due to the pay
down of borrowings under the ABL facility using the net proceeds from debt
issued in February 2017. Following the closing of the NES acquisition on April
3, 2017
, we used borrowings under the ABL facility to partially fund the NES
acquisition. For additional detail, see note 6 to the condensed consolidated
financial statements.
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 of April 17, 2017
were as follows:
Corporate Rating Outlook
Moody's Ba3 Positive
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.
Loan Covenants and Compliance. As of March 31, 2017, we were in compliance with
the covenants and other provisions of the ABL facility, the accounts receivable
securitization facility and the senior notes. Any failure to be in

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compliance with any material provision or covenant of these agreements could
have a material adverse effect on our liquidity and operations.
The only financial maintenance 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 of March 31, 2017, specified availability under the ABL facility
exceeded the required threshold and, as a result, this financial maintenance
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 facility
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 ended March 31, 2017, we
(i) generated cash from operating activities of $623 and (ii) generated cash
from the sale of rental and non-rental equipment of $108. We used cash during
this period principally to (i) purchase rental and non-rental equipment of $241,
(ii) make debt payments, net of proceeds, of $437 and (iii) purchase shares of
our common stock for $23. During the three months ended March 31, 2016, we
(i) generated cash from operating activities of $631 excluding the excess tax
benefits from share-base payment arrangements and (ii) generated cash from the
sale of rental and non-rental equipment of $119. We used cash during this period
principally to (i) purchase rental and non-rental equipment of $123, (ii) make
debt payments, net of proceeds, of $423 and (iii) purchase shares of our common
stock for $164.
Free Cash Flow GAAP Reconciliation. We define "free cash flow" as (i) net cash
provided by operating activities less (ii) purchases of rental and non-rental
equipment plus (iii) proceeds from sales of rental and non-rental equipment and
excess tax benefits from share-based payment arrangements. 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,
2017 2016
Net cash provided by operating activities $ 623 $ 604
Purchases of rental equipment (219 ) (100 )
Purchases of non-rental equipment (22 ) (23 )
Proceeds from sales of rental equipment 106 115
Proceeds from sales of non-rental equipment 2 4
Excess tax benefits from share-based payment arrangements (1) - 27
Free cash flow $ 490 $ 627



(1) As discussed in note 1 to our condensed consolidated financial statements, we



adopted accounting guidance in the first quarter of 2017 that changed the



cash flow presentation of excess tax benefits from share-based payment



arrangements. In the table above, the excess tax benefits from share-based



payment arrangements for 2017 are presented as a component of net cash



provided by operating activities, while, for 2016, they are presented as a



separate line item. Because we historically included the excess tax benefits



from share-based payment arrangements in the free cash flow calculation, the



adoption of this guidance did not change the calculation of free cash flow.






Free cash flow for the three months ended March 31, 2017 was $490, a decrease of
$137 as compared to $627 for the three months ended March 31, 2016. Free cash
flow decreased primarily due to increased purchases of rental equipment.
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:

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(i) senior management services; (ii) finance and tax-related services and
support; (iii) information technology systems and 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.

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