10-K 1 uri-2012123110k.htm 10-K URI-2012.12.31 10K
 

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________________________________________________________________________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2012
Commission File Number 1-14387
United Rentals, Inc.
Commission File Number 1-13663
United Rentals (North America), Inc.
(Exact Names of Registrants as Specified in Their Charters)
 
__________________________________________________________________________________________
 
Delaware
Delaware
06-1522496
86-0933835
(States of Incorporation)
(I.R.S. Employer Identification Nos.)
 
 
Five Greenwich Office Park,
Greenwich, Connecticut
06831
(Address of Principal Executive Offices)
(Zip Code)
Registrants’ Telephone Number, Including Area Code: (203) 622-3131
Securities registered pursuant to Section 12(b) of the Act:
 
Title of Each Class
Name of Each Exchange on
Which Registered
 
Common Stock, $.01 par value, of United Rentals, Inc.
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:    None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  þ   No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  o     No þ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  þ  No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ   
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):  
Large Accelerated Filer þ
Accelerated Filer o
Non-Accelerated Filer o
Smaller Reporting Company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).       Yes  o     No þ
As of June 30, 2012 there were 92,675,165 shares of United Rentals, Inc. common stock outstanding. The aggregate market value of common stock held by non-affiliates (defined as other than directors, executive officers and 10 percent beneficial owners) at June 30, 2012 was approximately $2.92 billion, calculated by using the closing price of the common stock on such date on the New York Stock Exchange of $34.04.
As of January 21, 2013, there were 93,013,431 shares of United Rentals, Inc. common stock outstanding. There is no market for the common stock of United Rentals (North America), Inc., all outstanding shares of which are owned by United Rentals, Inc.
This Form 10-K is separately filed by (i) United Rentals, Inc. and (ii) United Rentals (North America), Inc. (which is a wholly owned subsidiary of United Rentals, Inc.). United Rentals (North America), Inc. meets the conditions set forth in General Instruction (I)(1)(a) and (b) of Form 10-K and is therefore filing this form with the reduced disclosure format permitted by such instruction.
Documents incorporated by reference: Portions of United Rentals, Inc.’s Proxy Statement related to the 2013 Annual Meeting of Stockholders, which is expected to be filed with the Securities and Exchange Commission on or before April 30, 2013, are incorporated by reference into Part III of this annual report.
 



FORM 10-K REPORT INDEX
 
10-K Part
and Item No.
 
Page No.
PART I
 
 
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
 
 
 
PART II
 
 
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
 
 
 
PART III
 
 
Item 10
Item 11
Item 12
Item 13
Item 14
 
 
 
PART IV
 
 
Item 15




CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K contains forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Such statements can be identified by the use of forward-looking terminology such as “believe,” “expect,” “may,” “will,” “should,” “seek,” “on-track,” “plan,” “project,” “forecast,” “intend” or “anticipate,” or the negative thereof or comparable terminology, or by discussions of strategy or outlook. You are cautioned that our business and operations are subject to a variety of risks and uncertainties, many of which are beyond our control, and, consequently, our actual results may differ materially from those projected.
Factors that could cause actual results to differ materially from those projected include, but are not limited to, the following:

the possibility that RSC Holdings Inc. ("RSC") or other companies that we have acquired or may acquire could have undiscovered liabilities or involve other unexpected costs, may strain our management capabilities or may be difficult to integrate;
our highly leveraged capital structure requires us to use a substantial portion of our cash flow for debt service and can constrain our flexibility in responding to unanticipated or adverse business conditions;
a change in the pace of the recovery in our end markets which began late in the first quarter of 2010. Our business is cyclical and highly sensitive to North American construction and industrial activities. Although we have recently experienced an upturn in rental activity, there is no certainty this trend will continue. If the pace of the recovery slows or construction activity declines, our revenues and, because many of our costs are fixed, our profitability, may be adversely affected;
inability to benefit from government spending, including spending associated with infrastructure projects;
restrictive covenants in our debt instruments, which can limit our financial and operational flexibility;
noncompliance with financial or other covenants in our debt agreements, which could result in our lenders terminating our credit facilities and requiring us to repay outstanding borrowings;
inability to access the capital that our businesses or growth plans may require;
inability to manage credit risk adequately or to collect on contracts with a large number of customers;
incurrence of impairment charges;
the outcome or other potential consequences of regulatory matters and commercial litigation;
increases in our loss reserves to address business operations or other claims and any claims that exceed our established levels of reserves;
incurrence of additional expenses (including indemnification obligations) and other costs in connection with litigation, regulatory and investigatory matters;
increases in our maintenance and replacement costs and decreases in the residual value of our equipment;
inability to sell our new or used fleet in the amounts, or at the prices, we expect;
turnover in our management team and inability to attract and retain key personnel;
rates we can charge and time utilization we can achieve being less than anticipated;
costs we incur being more than anticipated, and the inability to realize expected savings in the amounts or time frames planned;
dependence on key suppliers to obtain equipment and other supplies for our business on acceptable terms;
competition from existing and new competitors;
disruptions in our information technology systems;
the costs of complying with environmental and safety regulations;
labor disputes, work stoppages or other labor difficulties, which may impact our productivity, and potential enactment of new legislation or other changes in law affecting our labor relations or operations generally;
shortfalls in our insurance coverage; and
other factors discussed under Item 1A-Risk Factors, and elsewhere in this annual report.
We make no commitment to revise or update any forward-looking statements in order to reflect events or circumstances after the date any such statement is made.


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PART I
United Rentals, Inc., incorporated in Delaware in 1997, is principally a holding company. We primarily conduct our operations through our wholly owned subsidiary, United Rentals (North America), Inc., and its subsidiaries. As used in this report, the term “Holdings” refers to United Rentals, Inc., the term “URNA” refers to United Rentals (North America), Inc., and the terms the “Company,” “United Rentals,” “we,” “us,” and “our” refer to United Rentals, Inc. and its subsidiaries, in each case unless otherwise indicated.
Unless otherwise indicated, the information under Items 1, 1A and 2 is as of January 1, 2013.

Item 1.    Business
General
United Rentals is the largest equipment rental company in the world. Our customer service network consists of 836 rental locations in the United States and Canada as well as centralized call centers and online capabilities. We offer approximately 3,300 classes of equipment for rent to customers that include construction and industrial companies, manufacturers, utilities, municipalities, homeowners, and government entities. In 2012, we generated total revenues of $4.1 billion, including $3.5 billion of equipment rental revenue.
As of December 31, 2012, our fleet of rental equipment included approximately 400,000 units. The total original equipment cost of our fleet (“OEC”), based on the initial consideration paid, was $7.2 billion at December 31, 2012, compared with $4.0 billion at December 31, 2011. Our fleet at December 31, 2012 includes fleet acquired in the acquisition of RSC Holdings Inc. (“RSC”) discussed below. The fleet includes:
General construction and industrial equipment, such as backhoes, skid-steer loaders, forklifts, earthmoving equipment and material handling equipment, which accounted for approximately 45 percent, 41 percent and 41 percent of 2012, 2011 and 2010 equipment rental revenue, respectively;
Aerial work platforms, such as boom lifts and scissor lifts, which accounted for approximately 36 percent, 39 percent and 40 percent of 2012, 2011 and 2010 equipment rental revenue, respectively;
General tools and light equipment, such as pressure washers, water pumps and power tools, which accounted for approximately 9 percent, 8 percent and 9 percent of 2012, 2011 and 2010 equipment rental revenue, respectively;
Power and HVAC (“heating, ventilating and air conditioning”) equipment, such as portable diesel generators, electrical distribution equipment, and temperature control equipment including heating and cooling equipment, which accounted for approximately 6 percent, 6 percent and 5 percent of 2012, 2011 and 2010 equipment rental revenue, respectively; and
Trench safety equipment, such as trench shields, aluminum hydraulic shoring systems, slide rails, crossing plates, construction lasers and line testing equipment for underground work, which accounted for approximately 4 percent, 6 percent and 5 percent of 2012, 2011 and 2010 equipment rental revenue, respectively.
In addition to renting equipment, we sell new and used equipment as well as related parts and service, and contractor supplies.
Acquisition of RSC
On April 30, 2012, we acquired 100 percent of the outstanding common shares and voting interest (“the acquisition”) of RSC. The results of RSC's operations have been included in our consolidated financial statements since that date. RSC, which had total revenues of $1.5 billion in 2011, was one of the largest equipment rental providers in North America, and as of December 31, 2011 had a network of 440 rental locations in 43 U.S. states and three Canadian provinces. The acquisition has created a leading North American equipment rental company with a more attractive business mix, greater scale and enhanced growth prospects, and we believe that the acquisition will provide us with financial benefits including reduced operating expenses and additional revenue opportunities going forward. For additional information concerning the RSC acquisition, see note 3 to our consolidated financial statements.
Strategy
For the past several years, we have focused on optimizing the profitability of our core rental business through revenue growth and margin expansion. To achieve this objective, we have developed a strategy focused on customer service differentiation, customer segmentation, rate management, fleet management and disciplined cost control. This strategy calls for a consistently superior standard of service to customers, often provided through a single point of contact; an increasing

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proportion of revenues derived from larger accounts; a targeted presence in industrial and specialty markets; and the profitable deployment of our rental assets for optimal return on investment.
In 2012, we adopted the American Rental Association criteria for rental rates, time utilization and OEC; comparisons to prior years are based on a recast of these metrics on the same basis.
Although uncertainty in the economic environment continued to present challenges for both our Company and the North American equipment rental industry in 2012, we succeeded in realizing a number of achievements related to our strategy. For the full year 2012, compared with 2011, these achievements included:
A 6.9 percent increase in rental rates on a pro forma basis (that is, assuming United Rentals and RSC were combined for full year 2012 and 2011);
A 63.2 percent increase in the volume of OEC on rent, which significantly benefited from the impact of the RSC acquisition;
Achieved strong time utilization on a significantly larger fleet. Time utilization was 67.5 percent and 67.2 percent for the years ended December 31, 2012 and 2011, respectively;
A significant increase in the proportion of equipment rental revenues derived from National Account customers, from 35 percent in 2011 to 42 percent in 2012. 2012 is only available on a pro forma basis. National Accounts are generally defined as customers with potential annual equipment rental spend of at least $500,000 or customers doing business in multiple locations;
Continued improvement in customer service management, including a significant increase in the proportion of equipment rental revenues derived from accounts that are managed by a single point of contact ("key accounts"), from 55 percent in 2011 to 60 percent in 2012. 2012 is only available on a pro forma basis. Establishing a single point of contact for our key accounts helps us to provide customer service management that is more consistent and satisfactory;
The continued optimization of our network of rental locations, including an increase in 2012 of 15, or 16 percent, in the number of rental locations in our trench safety, power and HVAC segment; and
A 1.3 percentage point improvement in selling, general and administrative expenses as a percentage of revenue.
In 2013, we will continue to focus on optimizing our core business through diligent management of the rental process, enhanced customer service capabilities and sustained cost efficiencies. In particular, we will focus on:
Enhancing our value proposition by improving customer service levels;
Further increasing the proportion of our revenues derived from National Accounts and other large customers. To the extent that we are successful, we believe that we can improve our equipment rental gross margin and overall profitability over time, as large accounts tend to rent more equipment for longer periods and can be serviced more cost effectively than short-term transactional customers;
Accelerating our pursuit of opportunities in the industrial marketplace, where we believe that our depth of resources, industrial expertise and branch footprint give us a competitive advantage. Additionally, industrial equipment demand is subject to different cyclical pressures than construction demand, making our aggregate end markets less volatile;
Further capitalizing on the demand for the higher-margin power and climate control equipment offered by our trench safety, power and HVAC segment;
Leveraging technology and training to optimize the transportation of our rental equipment to and from customer jobsites; and
Maximizing equipment utilization by reducing the average number of equipment units unavailable for rent and the average time a unit is unavailable for rent.
Industry Overview and Economic Outlook
We serve three principal end markets for equipment rental in North America: industrial/non-construction; commercial (or private non-residential) construction; and residential. In 2012, based on an analysis of our charge customers’ Standard Industrial Classification (“SIC”) codes:
Industrial/non-construction rentals to manufacturers, chemical companies, paper mills, railroads, shipbuilders, utilities, retail and other industries (including infrastructure) represented approximately 50 percent of our rental revenues;

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Commercial (or private non-residential) construction rentals related to the construction and remodeling of office, lodging, healthcare and other commercial facilities represented approximately 46 percent of our rental revenues; and
Residential rentals for the construction and renovation of homes represented approximately four percent of our rental revenues.
We believe that overall U.S. construction activity in 2012 was relatively strong, but was still well below historic levels. We estimate that overall U.S. construction activity in 2012 grew approximately 10 percent on a year-over-year basis. In this environment, compared with the prior year, our rental rates increased 6.9 percent on a pro forma basis and our volume of OEC on rent, which significantly benefited from the impact of the RSC acquisition, increased 63.2 percent. We believe that these two metrics reflect, in addition to the impact of the RSC acquisition, a combination of positive factors: a relatively strong improvement in our operating environment; a secular shift from customer ownership to the rental of construction equipment; and the benefit of our strategy, particularly our increased focus on National Accounts and other large customers. Although there is no certainty that these trends will continue, we believe that our strategy has already put us in a position to capitalize on our industry leadership and customer service differentiation in a continuing recovery.
In 2013, based on our analysis of leading industry forecasts and broader economic indicators, we expect most of our end markets to continue to recover. Specifically, in 2013, we expect that the U.S. equipment rental industry will achieve year-over-year revenue growth in the mid to high single digits.
Competitive Advantages
We believe that we benefit from the following competitive advantages:
Large and Diverse Rental Fleet. Our large and diverse fleet allows us to serve large customers that require substantial quantities and/or wide varieties of equipment. We believe our ability to serve such customers should allow us to improve our performance and enhance our market leadership position.
We manage our rental fleet, which is the largest and most comprehensive in the industry, utilizing a life-cycle approach that focuses on satisfying customer demand and optimizing utilization levels. As part of this life-cycle approach, we closely monitor repairs and maintenance expense and can anticipate, based on our extensive experience with a large and diverse fleet, the optimum time to dispose of an asset. Our fleet age, which is calculated on an OEC-weighted basis, was 47.2 months at December 31, 2012 compared with 50.3 months at December 31, 2011. At December 31, 2012, 91 percent of our fleet was current on its manufacturer's recommended maintenance.
Significant Purchasing Power. We purchase large amounts of equipment, contractor supplies and other items, which enables us to negotiate favorable pricing, warranty and other terms with our vendors.
National Account Program. Our National Account sales force is dedicated to establishing and expanding relationships with large companies, particularly those with a national or multi-regional presence. We offer our National Account customers the benefits of a consistent level of service across North America, a wide selection of equipment and a single point of contact for all their equipment needs. Establishing a single point of contact for our key accounts helps us to provide customer service management that is more consistent and satisfactory. During the years ended December 31, 2012 and 2011, 60 percent and 55 percent, respectively, of our equipment rental revenues were derived from accounts, including National Accounts and other key accounts, that are managed by a single point of contact. 2012 National Account revenues are only available on a pro forma basis (that is, assuming United Rentals and RSC were combined for the full year).
Operating Efficiencies. We benefit from the following operating efficiencies:
Equipment Sharing Among Branches. We generally group our branches into districts of five to 10 locations that are in the same geographic area. Our districts are generally grouped into regions of six to seven districts. Each branch within a region can access equipment located elsewhere in the region. This sharing increases equipment utilization because equipment that is idle at one branch can be marketed and rented through other branches. Additionally, fleet sharing allows us to be more disciplined with our capital spend.
Customer Care Center. We have a Customer Care Center ("CCC") with locations in Tampa, Florida and Charlotte, North Carolina that handles all 1-800-UR-RENTS telephone calls. The CCC handles many of the 1-800-UR-RENTS telephone calls without having to route them to individual branches, and allows us to provide a more uniform quality experience to customers, manage fleet sharing more effectively and free up branch employee time.
Consolidation of Common Functions. We reduce costs through the consolidation of functions that are common to our branches, such as accounts payable, payroll, benefits and risk management, information technology and credit and collection.

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Information Technology Systems. We have a wide variety of information technology systems, some proprietary and some licensed, that supports our operations. This information technology infrastructure facilitates our ability to make rapid and informed decisions, respond quickly to changing market conditions and share rental equipment among branches. We have an in-house team of information technology specialists that supports our systems.
Strong Brand Recognition. As the largest equipment rental company in the world, we have strong brand recognition, which helps us to attract new customers and build customer loyalty.
Geographic and Customer Diversity. We have 836 rental locations in 49 states and 10 Canadian provinces and serve customers that range from Fortune 500 companies to small businesses and homeowners. We believe that our geographic and customer diversity provides us with many advantages including:
enabling us to better serve National Account customers with multiple locations;
helping us achieve favorable resale prices by allowing us to access used equipment resale markets across North America; and
reducing our dependence on any particular customer.
 Our operations in Canada are subject to the risks normally associated with international operations. These include (i) the need to convert currencies, which could result in a gain or loss depending on fluctuations in exchange rates and (ii) the need to comply with foreign laws and regulations, as well as U.S. laws and regulations applicable to our operations in foreign jurisdictions. For additional financial information regarding our geographic diversity, see note 4 to our consolidated financial statements.
Strong and Motivated Branch Management. Each of our full-service branches has a branch manager who is supervised by a district manager. We believe that our managers are among the most knowledgeable and experienced in the industry, and we empower them, within budgetary guidelines, to make day-to-day decisions concerning branch matters. Each regional office has a management team that monitors branch, district and regional performance with extensive systems and controls, including performance benchmarks and detailed monthly operating reviews.
Employee Training Programs. We are dedicated to providing training and development opportunities to our employees. In 2012, our employees enhanced their skills through over 300,000 hours of training, including safety training, sales and leadership training, equipment-related training from our suppliers and online courses covering a variety of relevant subjects. The hours include the training time of legacy RSC employees beginning July 1, 2012.
Risk Management and Safety Programs. Our risk management department is staffed by experienced professionals directing the procurement of insurance, managing claims made against the Company, and developing loss prevention programs to address workplace safety, driver safety and customer safety. The department’s primary focus is on the protection of our employees and assets, as well as protecting the Company from liability for accidental loss.
Segment Information
We have two reportable segments–general rentals and trench safety, power and HVAC. Segment financial information is presented in note 4 to our consolidated financial statements. The general rentals segment includes the rental of construction, aerial and industrial equipment, general tools and light equipment, and related services and activities. The general rentals segment’s customers include construction and industrial companies, manufacturers, utilities, municipalities and homeowners. The general rentals segment comprises 12 geographic regions–Eastern Canada, Gulf South, Industrial (which serves the geographic Gulf region and has a strong industrial presence), Mid-Atlantic, Mid-Central, Midwest, Mountain West, Northeast, Northwest, South, Southeast and Southwest–and operates throughout the United States and Canada. The trench safety, power and HVAC segment includes the rental of specialty construction products and related services. The trench safety, power and HVAC segment’s customers include construction companies involved in infrastructure projects, municipalities and industrial companies. This segment operates throughout the United States and in Canada.
Products and Services
Our principal products and services are described below.
Equipment Rental. We offer for rent approximately 3,300 classes of rental equipment on an hourly, daily, weekly or monthly basis. The types of equipment that we offer include general construction and industrial equipment; aerial work platforms; trench safety equipment; power and HVAC equipment; and general tools and light equipment. The age of our fleet was 47.2 months at December 31, 2012, compared to 50.3 months at December 31, 2011.

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Sales of Rental Equipment. We routinely sell used rental equipment and invest in new equipment in order to manage repairs and maintenance costs, as well as the composition and size of our fleet. We also sell used equipment in response to customer demand for the equipment. Consistent with the life-cycle approach we use to manage our fleet, the rate at which we replace used equipment with new equipment depends on a number of factors, including changing general economic conditions, growth opportunities, the market for used equipment, the age of our fleet and the need to adjust fleet composition to meet customer demand.
We utilize many channels to sell used equipment: through our national sales force, which can access many resale markets across North America; at auction; through brokers; and directly to manufacturers. We also sell used equipment through our website, which includes an online database of used equipment available for sale.
Sales of New Equipment. We sell equipment for many leading equipment manufacturers. The manufacturers that we represent and the brands that we carry include: Genie, JLG and Skyjack (aerial lifts); Multiquip, Wacker and Honda USA (compaction equipment, generators and pumps); Sullair (compressors); Skytrak and JLG (rough terrain reach forklifts); Takeuchi (skid-steer loaders); Terex (telehandlers); and DeWalt (generators). The type of new equipment that we sell varies by location.
Contractor Supplies Sales. We sell a variety of contractor supplies including construction consumables, tools, small equipment and safety supplies. Our target customers for contractor supplies are our existing rental customers.
Service and Other Revenues. We also offer repair, maintenance and rental protection services and sell parts for equipment that is owned by our customers. Our target customers for these types of ancillary services are our current rental customers as well as those who purchase both new and used equipment from our branches.
Customers
Our customer base is highly diversified and ranges from Fortune 500 companies to small businesses and homeowners. In 2012, our largest customer accounted for approximately one percent of our revenues on a pro forma basis (that is, assuming United Rentals and RSC were combined for the full year) and our top 10 customers in the aggregate accounted for approximately five percent of our pro forma revenues.
Our customer base varies by branch and is determined by several factors, including the equipment mix and marketing focus of the particular branch as well as the business composition of the local economy, including construction opportunities with different customers. Our customers include:
construction companies that use equipment for constructing and renovating commercial buildings, warehouses, industrial and manufacturing plants, office parks, airports, residential developments and other facilities;
industrial companies—such as manufacturers, chemical companies, paper mills, railroads, ship builders and utilities—that use equipment for plant maintenance, upgrades, expansion and construction;
municipalities that require equipment for a variety of purposes; and
homeowners and other individuals that use equipment for projects that range from simple repairs to major renovations.
Our business is seasonal, with demand for our rental equipment tending to be lower in the winter months.
Sales and Marketing
We market our products and services through multiple channels as described below.
Sales Force. Our sales representatives work in our branches and at our customer care center, and are responsible for calling on existing and potential customers as well as assisting our customers in planning for their equipment needs. We have ongoing programs for training our employees in sales and service skills and on strategies for maximizing the value of each transaction.
National Account Program. Our National Account sales force is dedicated to establishing and expanding relationships with large customers, particularly those with a national or multi-regional presence. Our National Account team closely coordinates its efforts with the local sales force in each area.
E-Rentals. Our customers can rent or buy equipment online 24 hours a day, seven days a week, at our E-Rentals portal, which can be found at http://www.ur.com. Our customers can also use our UR data application to access real-time reports on their business activity with us.

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Advertising. We promote our business through local and national advertising in various media, including trade publications, yellow pages, the Internet, radio and direct mail. We also regularly participate in industry trade shows and conferences and sponsor a variety of local promotional events.
Total Control®. We also 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 rental equipment. This software can be integrated into the customers' enterprise resource planning system. Total Control® is a unique customer service tool that enables us to develop strong, long-term relationships with our larger customers.
Suppliers
Our strategic approach with respect to our suppliers is to maintain the minimum number of suppliers per category of equipment that can satisfy our anticipated volume and business requirements. This approach is designed to ensure that the terms we negotiate are competitive and that there is sufficient product available to meet anticipated customer demand. We utilize a comprehensive selection process to determine our equipment vendors. We consider product capabilities and industry position, the terms being offered, product liability history, customer acceptance and financial strength. We estimate that our largest supplier accounted for approximately 27 percent of our 2012 purchases of equipment, measured on a dollar basis, and that our 10 largest suppliers in the aggregate accounted for approximately 68 percent of such purchases. We believe we have sufficient alternative sources of supply available for each of our major equipment categories.
Information Technology Systems
In support of our rental business, we have information technology systems which facilitate rapid and informed decision-making and enable us to respond quickly to changing market conditions. Leveraging information technology to achieve greater efficiencies and improve customer service is a critical element of our strategy. Each branch is equipped with one or more workstations that are electronically linked to our other locations and to our IBM System i™ system located at our data center. Rental transactions can be entered at these workstations and processed on a real-time basis. Management, branch and call center personnel can access these systems 24 hours a day.
These systems:
enable branch personnel to (i) determine equipment availability, (ii) access all equipment within a geographic region and arrange for equipment to be delivered from anywhere in the region directly to the customer, (iii) monitor business activity on a real-time basis and (iv) obtain customized reports on a wide range of operating and financial data, including equipment utilization, rental rate trends, maintenance histories and customer transaction histories;
permit customers to access their accounts online; and
allow management to obtain a wide range of operational and financial data.
Our information technology systems and website are supported by our in-house group of information technology specialists working in conjunction with our strategic technology partners and service providers. This group trains our branch personnel; upgrades and customizes our systems; provides hardware and technology support; operates a support desk to assist branch and other personnel in the day-to-day use of the systems; extends the systems to newly acquired locations; and manages our website.
We have a fully functional back-up facility designed to enable business continuity for our core rental and financial business systems in the event that our main computer facility becomes inoperative. This back-up facility also allows us to perform system upgrades and maintenance without interfering with the normal ongoing operation of our information technology systems.
Competition
The U.S. equipment rental industry is highly fragmented and competitive. As the largest equipment rental company in the industry, we estimate that we have an approximate 12 percent market share based on 2012 equipment rental revenues from construction and industrial equipment as measured by the American Rental Association (“ARA”). Our competitors primarily include small, independent businesses with one or two rental locations; regional competitors that operate in one or more states; public companies or divisions of public companies that operate nationally or internationally; and equipment vendors and dealers who both sell and rent equipment directly to customers. We believe we are well positioned to take advantage of this environment because, as a larger company, we have more resources and certain competitive advantages over our smaller competitors. These advantages include greater purchasing power, the ability to provide customers with a broader range of equipment and services, and greater flexibility to transfer equipment among locations in response to, and in anticipation of,

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customer demand. The fragmented nature of the industry and our relatively small market share, however, may adversely impact our ability to mitigate rate pressure.
Environmental and Safety Regulations
Our operations are subject to numerous laws governing environmental protection and occupational health and safety matters. These laws regulate issues such as wastewater, stormwater, solid and hazardous wastes and materials, and air quality. Our operations generally do not raise significant environmental risks, but we use and store hazardous materials as part of maintaining our rental equipment fleet and the overall operations of our business, dispose of solid and hazardous waste and wastewater from equipment washing, and store and dispense petroleum products from above-ground storage tanks located at certain of our locations. Under environmental and safety laws, we may be liable for, among other things, (i) the costs of investigating and remediating contamination at our sites as well as sites to which we sent hazardous wastes for disposal or treatment, regardless of fault, and (ii) fines and penalties for non-compliance. We incur ongoing expenses associated with the performance of appropriate investigation and remediation activities at certain of our locations.
Employees
We have approximately 11,300 employees. Of these, approximately 3,500 are salaried personnel and approximately 7,800 are hourly personnel. Collective bargaining agreements relating to approximately 80 separate locations cover approximately 800 of our employees. We monitor employee satisfaction through ongoing surveys and consider our relationship with our employees to be good.
Available Information
We make our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports, as well as our other SEC filings, available on our website, free of charge, as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. Our website address is http://www.ur.com. The information contained on our website is not incorporated by reference in this document.

Item  1A.    Risk Factors
Our business, results of operations and financial condition are subject to numerous risks and uncertainties. In connection with any investment decision with respect to our securities, you should carefully consider the following risk factors, as well as the other information contained in this report and our other filings with the SEC. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. Should any of these risks materialize, our business, results of operations, financial condition and future prospects could be negatively impacted, which in turn could affect the trading value of our securities.
Combining our business with RSC's business may be more difficult, costly or time consuming than expected, which may adversely affect our results and negatively affect the value of our stock.
The success of the RSC acquisition will depend, in part, on our ability to realize the anticipated benefits and cost savings from combining our business and RSC's business. If we are unable to achieve these objectives within the anticipated time frame, or at all, the anticipated benefits and cost savings of the transaction may not be realized fully, or at all, or may take longer to realize than expected, and the value of our common stock may be affected adversely. It is possible that the integration process could result in the loss of key employees, the disruption of our ongoing business or inconsistencies in standards, controls, procedures and policies that could adversely affect our ability to maintain relationships with customers, employees and suppliers or to achieve the anticipated benefits of the acquisition.
Issues that must be addressed in integrating the operations of RSC into our operations in order to realize the anticipated benefits of the acquisition include, among other things:
integrating and optimizing the utilization of our and RSC's rental equipment;
integrating our and RSC's marketing, information technology and other systems;
maintenance of the combined company's rental equipment portfolio;
conforming standards, controls, procedures and policies, business cultures and compensation structures;
consolidating the equipment purchasing, maintenance and resale operations;
consolidating corporate and administrative functions;

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consolidating branch locations;
consolidating sales and marketing operations;
identifying and eliminating redundant and underperforming operations and assets;
the retention of key employees;
minimizing the diversion of management's attention from ongoing business concerns; and
the possibility of tax costs or inefficiencies associated with the integration of RSC.

The actual integration may result in additional and unforeseen expenses, and the anticipated benefits of the integration plan may not be realized. Actual synergies, if achieved at all, may be lower than what we expect and may take longer to achieve than anticipated. If we are not able to adequately address these challenges, we may be unable to successfully integrate RSC's operations into ours, or to fully realize the anticipated benefits of the integration of RSC, which could have an adverse effect on our revenues, level of expenses and operating results which may adversely affect the value of our common stock.
The recent economic downturn, and resulting decreases in North American construction and industrial activities, adversely affected our revenues and operating results by decreasing the demand for our equipment and the prices that we could charge. A slowdown in the economic recovery or a decrease in general economic activity could have adverse effects on our revenues and operating results.
Our rental equipment is used significantly in private non-residential construction, which is cyclical in nature. Trench safety, power and HVAC equipment is principally used in connection with construction and industrial activities. Over the past several years, our industry has experienced a decline in construction and industrial activity, although in 2012 we saw modest improvements in the pace of the recovery that began late in the first quarter of 2010. The weakness in our end markets led to a decrease in the demand for our equipment and in the rates we realized, and could lead to further decreases. Such decreases adversely affect our operating results by causing our revenues to decline and, because certain of our costs are fixed, our operating margins to be reduced. While many areas of the global economy are improving, a slowdown in the economic recovery or worsening of economic conditions, in particular with respect to North American construction and industrial activities, could cause weakness in our end markets and adversely affect our revenues and operating results.
The following factors, among others, may cause weakness in our end markets, either temporarily or long-term:
a decrease in expected levels of infrastructure spending;
a lack of availability of credit;
an increase in the cost of construction materials;
an increase in interest rates;
adverse weather conditions, which may temporarily affect a particular region; or
terrorism or hostilities involving the United States or Canada.
If we are unable to collect on contracts with customers, our operating results would be adversely affected.
One of the reasons some of our customers find it more attractive to rent equipment than own that equipment is the need to deploy their capital elsewhere. This has been particularly true in industries with high growth rates such as the construction industry. However, some of our customers may have liquidity issues and ultimately may not be able to fulfill the terms of their rental agreements with us. If we are unable to manage credit risk issues adequately, or if a large number of customers should have financial difficulties at the same time, our credit losses could increase above historical levels and our operating results would be adversely affected. Further, delinquencies and credit losses generally would be expected to increase if there was a slowdown in the economic recovery or worsening of economic conditions.
Our operating results may fluctuate, which could affect the trading value of our securities.
Our revenues and operating results may fluctuate from quarter to quarter or over the longer term due to a number of factors, which could adversely affect the trading value of our securities. These factors, in addition to general economic conditions and the factors discussed above under “Cautionary Statement Regarding Forward-Looking Statements”, include, but are not limited to:
seasonal rental patterns of our customers, with rental activity tending to be lower in the winter;
changes in the size of our rental fleet and/or in the rate at which we sell our used equipment;

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changes in private non-residential construction spending or government funding for infrastructure and other construction projects;
changes in demand for, or utilization of, our equipment or in the prices we charge due to changes in economic conditions, competition or other factors;  
commodity price pressures and the resultant increase in the cost of fuel and steel to our equipment suppliers, which can result in increased equipment costs for us;
other cost fluctuations, such as costs for employee-related compensation and healthcare benefits;
labor shortages, work stoppages or other labor difficulties;
potential enactment of new legislation affecting our operations or labor relations;
completion of acquisitions, divestitures or recapitalizations;
increases in interest rates and related increases in our interest expense and our debt service obligations;
the possible need, from time to time, to record goodwill impairment charges or other write-offs or charges due to a variety of occurrences, such as the adoption of new accounting standards, the impairment of assets, rental location divestitures, dislocation in the equity and/or credit markets, consolidations or closings, restructurings, the refinancing of existing indebtedness or the buy-out of equipment leases; and
currency risks and other risks of international operations.
Our common stock price has fluctuated significantly and may continue to do so in the future.
Our common stock price has fluctuated significantly and may continue to do so in the future for a number of reasons, including:
announcements of developments related to our business;
market perceptions of any proposed merger or acquisition and the likelihood of our involvement in other merger and acquisition activity;
variations in our revenues, gross margins, earnings or other financial results from investors’ expectations;
departure of key personnel;
purchases or sales of large blocks of our stock by institutional investors or transactions by insiders;
fluctuations in the results of our operations and general conditions in the economy, our market, and the markets served by our customers;
investor perceptions of the equipment rental industry in general and our Company in particular; and
the operating and stock performance of comparable companies or related industries.
In addition, prices in the stock market have been volatile over the past few years. In many cases, the fluctuations have been unrelated to the operating performance of the affected companies. As a result, the price of our common stock could fluctuate in the future without regard to our operating performance.
Our current level of indebtedness exposes us to various risks.
At December 31, 2012, our total indebtedness was $7.4 billion, including $55 million of subordinated convertible debentures. Our substantial indebtedness has the potential to affect us adversely in a number of ways. For example, it will or could:
increase our vulnerability to adverse economic, industry or competitive developments;
make it more difficult to pay or refinance our debts as they become due during periods of adverse economic, financial market or industry conditions;
require us to devote a substantial portion of our cash flow to debt service, reducing the funds available for other purposes or otherwise constraining our financial flexibility;
restrict our ability to move operating cash flows to Holdings. As of December 31, 2012, primarily due to losses sustained in prior years, URNA had limited restricted payment capacity under the most restrictive restricted payment covenants in the indentures governing its outstanding indebtedness;  
affect our ability to obtain additional financing, particularly since substantially all of our assets are subject to security interests relating to existing indebtedness;

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decrease our profitability or cash flow;
cause us to be less able to take advantage of significant business opportunities, such as acquisition opportunities, and to react to changes in market or industry conditions;
cause us to be disadvantaged compared to competitors with less leverage;
result in a downgrade in our credit rating or the credit ratings of any of the indebtedness of our subsidiaries which could increase the cost of further borrowings; and
limit our ability to borrow additional monies in the future to fund working capital, capital expenditures and other general corporate purposes.
We depend on cash on hand and cash flows from operations to make scheduled debt payments. If we are unable to service our indebtedness and fund our operations, we will be forced to adopt an alternative strategy that may include:
reducing or delaying capital expenditures;
limiting our growth;
seeking additional capital;
selling assets; or
restructuring or refinancing our indebtedness.
Even if we adopt an alternative strategy, the strategy may not be successful and we may continue to be unable to service our indebtedness and fund our operations.
A portion of our indebtedness bears interest at variable rates that are linked to changing market interest rates. As a result, an increase in market interest rates would increase our interest expense and our debt service obligations. At December 31, 2012, we had $1.6 billion of indebtedness that bears interest at variable rates. Our variable rate indebtedness currently represents 22 percent of our total indebtedness, including our subordinated convertible debentures. See Item 7A—Quantitative and Qualitative Disclosures About Market Risk for additional information related to interest rate risk.
We may be able to incur substantially more debt and take other actions that could diminish our ability to make payments on our indebtedness when due, which could further exacerbate the risks associated with our level of indebtedness.
Despite our indebtedness level, we may be able to incur substantially more indebtedness in the future. We are not fully restricted under the terms of the indentures or agreements governing our indebtedness from incurring additional debt, securing existing or future debt, recapitalizing our debt or taking a number of other actions, any of which could diminish our ability to make payments on our indebtedness when due and further exacerbate the risks associated with our level of indebtedness. If new debt is added to our or any of our existing and future subsidiaries' current debt, the related risks that we now face could intensify.
If we are unable to satisfy the financial and other covenants in certain of our debt agreements, our lenders could elect to terminate the agreements and require us to repay the outstanding borrowings, or we could face other substantial costs.
Under the agreement governing our senior secured asset-based revolving credit facility (“ABL facility”), we are required, among other things, to satisfy certain financial tests relating to: (i) the fixed charge coverage ratio and (ii) the ratio of senior secured debt to adjusted EBITDA (as such ratios are described in the agreement governing our ABL facility). As discussed in note 12 to our consolidated financial statements, in October 2011, we amended the ABL facility. Subject to certain limited exceptions specified in the ABL facility, these covenants will only apply in the future if availability under the ABL facility falls below the greater of 10 percent of the maximum revolver amount under the ABL facility and $150 million. Since the October 2011 amendment of our ABL facility and through December 31, 2012, availability under the ABL facility has exceeded the required threshold and, as a result, these maintenance covenants have been 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 (as such ratios and tests are described in the agreement governing our accounts receivable securitization facility). If we are unable to satisfy these or any other of the relevant covenants, the lenders could elect to terminate the ABL facility and/or the accounts receivable securitization facility and require us to repay outstanding borrowings. In such event, unless we are able to refinance the indebtedness coming due and replace the ABL facility, accounts receivable securitization facility and/or the other agreements governing our debt, we would likely not have sufficient liquidity for our business needs and would be forced to adopt an alternative strategy as described above. Even if we adopt an alternative strategy, the strategy may not be successful and we may not have sufficient liquidity to service our debt and fund our operations.

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Restrictive covenants in certain of the agreements and instruments governing our indebtedness may adversely affect our financial and operational flexibility.
In addition to financial covenants, various other covenants in the ABL facility, accounts receivable securitization facility and the other agreements governing our debt impose significant operating and financial restrictions on us and our restricted subsidiaries. Such covenants include, among other things, limitations on: (1) liens; (2) sale-leaseback transactions; (3) indebtedness; (4) mergers, consolidations and acquisitions; (5) sales, transfers and other dispositions of assets; (6) loans and other investments; (7) dividends and other distributions, stock repurchases and redemptions and other restricted payments; (8) dividends, other payments and other matters affecting subsidiaries; (9) transactions with affiliates; and (10) issuances of disqualified capital stock. Future debt agreements we enter into may include similar provisions.
              These restrictions may also make more difficult or discourage a takeover of us, whether favored or opposed by our management and/or our Board of Directors.
              Our ability to comply with these covenants may be affected by events beyond our control, and any material deviations from our forecasts could require us to seek waivers or amendments of covenants or alternative sources of financing, or to reduce expenditures. We cannot assure you that such waivers, amendments or alternative financing could be obtained or, if obtained, would be on terms acceptable to us.
              A breach of any of the covenants or restrictions contained in these agreements could result in an event of default. Such a default could allow our debt holders to accelerate repayment of the related debt, as well as any other debt to which a cross-acceleration or cross-default provision applies, and/or to declare all borrowings outstanding thereunder to be due and payable. If our debt is accelerated, our assets may not be sufficient to repay such debt.
The amount of borrowings permitted under our ABL facility may fluctuate significantly, which may adversely affect our liquidity, results of operations and financial position.
The amount of borrowings permitted at any time under our ABL facility is limited to a periodic borrowing base valuation of the collateral thereunder. As a result, our access to credit under our ABL facility is potentially subject to significant fluctuations depending on the value of the borrowing base of eligible assets as of any measurement date, as well as certain discretionary rights of the agents in respect of the calculation of such borrowing base value. The inability to borrow under our ABL facility may adversely affect our liquidity, results of operations and financial position.
We rely on available borrowings under the ABL facility and the accounts receivable securitization facility for cash to operate our business, which subjects us to market and counterparty risk, some of which is beyond our control.
In addition to cash we generate from our business, our principal existing sources of cash are borrowings available under the ABL facility and the accounts receivable securitization facility. If our access to such financing was unavailable or reduced, or if such financing were to become significantly more expensive for any reason, we may not be able to fund daily operations, which would cause material harm to our business or could affect our ability to operate our business as a going concern. In addition, if certain of our lenders experience difficulties that render them unable to fund future draws on the facilities, we may not be able to access all or a portion of these funds, which could have similar adverse consequences.
If we are unable to obtain additional capital as required, we may be unable to fund the capital outlays required for the success of our business.
If the cash that we generate from our business, together with cash that we may borrow under the ABL facility and accounts receivable securitization facility, is not sufficient to fund our capital requirements, we will require additional debt and/or equity financing. However, we may not succeed in obtaining the requisite additional financing or such financing may include terms that are not satisfactory to us. We may not be able to obtain additional debt financing as a result of prevailing interest rates or other factors, including the presence of covenants or other restrictions under the ABL facility and/or other agreements governing our debt. In the event we seek to obtain equity financing, our stockholders may experience dilution as a result of the issuance of additional equity securities. This dilution may be significant depending upon the amount of equity securities that we issue and the prices at which we issue such securities. If we are unable to obtain sufficient additional capital in the future, we may be unable to fund the capital outlays required for the success of our business, including those relating to purchasing equipment, growth plans and refinancing existing indebtedness.
If we determine that our goodwill has become impaired, we may incur impairment charges, which would negatively impact our operating results.
At December 31, 2012, we had $3.0 billion of goodwill on our consolidated balance sheet. Goodwill represents the excess of cost over the fair value of net assets acquired in business combinations. We assess potential impairment of our

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goodwill at least annually. Impairment may result from significant changes in the manner of use of the acquired assets, negative industry or economic trends and/or significant underperformance relative to historic or projected operating results.
We have a holding company structure and depend in part on distributions from our subsidiaries to pay amounts due on our indebtedness. Certain provisions of law or contractual restrictions could limit distributions from our subsidiaries.
We derive substantially all of our operating income from, and hold substantially all of our assets through, our subsidiaries. The effect of this structure is that we depend in part on the earnings of our subsidiaries, and the payment or other distribution to us of these earnings, to meet our obligations under our outstanding debt. Provisions of law, such as those requiring that dividends be paid only from surplus, could limit the ability of our subsidiaries to make payments or other distributions to us. Furthermore, these subsidiaries could in certain circumstances agree to contractual restrictions on their ability to make distributions.
We are exposed to a variety of claims relating to our business, and our insurance may not fully cover them.
We are in the ordinary course exposed to a variety of claims relating to our business. These claims include those relating to (i) personal injury or property damage involving equipment rented or sold by us, (ii) motor vehicle accidents involving our vehicles and our employees and (iii) employment-related claims. Currently, we carry a broad range of insurance for the protection of our assets and operations. However, such insurance may not fully cover these claims for a number of reasons, including:
our insurance policies, reflecting a program structure that we believe reflects market conditions for companies our size, are often subject to significant deductibles or self-insured retentions: $2 million per occurrence for each general liability or automobile liability claim, and $1 million per occurrence for each workers’ compensation claim;
our director and officer liability insurance policy has no deductible for individual non-indemnifiable loss coverage, but is subject to a $2.5 million deductible for company reimbursement coverage and all director and officer coverage is subject to certain exclusions;
we do not maintain stand-alone coverage for environmental liability (other than legally required coverage), since we believe the cost for such coverage is high relative to the benefit it provides; and
certain types of claims, such as claims for punitive damages or for damages arising from intentional misconduct, which are often alleged in third party lawsuits, might not be covered by our insurance.
We establish and regularly evaluate our loss reserves to address business operations claims, or portions thereof, not covered by our insurance policies. To the extent that we are found liable for any significant claim or claims that exceed our established levels of reserves, or that are not otherwise covered by insurance, we could have to significantly increase our reserves, and our liquidity and operating results could be materially and adversely affected. For instance, during the fourth quarter of 2010, we recognized a charge of $24 million related to our provision for self-insurance reserves. The charge in particular reflected adverse experience in our portfolio of automobile and general liability claims, as well as workers' compensation claims. It is also possible that some or all of the insurance that is currently available to us will not be available in the future on economically reasonable terms or at all.
We have made acquisitions in the past, which entail certain risks, as do any growth initiatives, including additional acquisitions, that we may pursue in the future.
We have historically achieved a portion of our growth through acquisitions, and we will continue to consider potential acquisitions on a selective basis. From time-to-time we have also approached, or have been approached, to explore consolidation opportunities with other public companies or large privately-held companies.
Whether historical or in the future, it is possible that we will not realize the expected benefits from our acquisitions or that our existing operations will be adversely affected as a result of acquisitions. Acquisitions entail certain risks, including:
unrecorded liabilities of acquired companies that we fail to discover during our due diligence investigations or that are not subject to indemnification or reimbursement by the seller;
difficulty in assimilating the operations and personnel of the acquired company within our existing operations or in maintaining uniform standards;
loss of key employees of the acquired company;
failure to achieve anticipated synergies; and
strains on management and other personnel time and resources to evaluate, negotiate and integrate acquisitions.

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We would expect to pay for any future acquisitions using cash, capital stock, notes and/or assumption of indebtedness. To the extent that our existing sources of cash are not sufficient, we would expect to need additional debt or equity financing, which involves its own risks, such as the dilutive effect on shares held by our stockholders if we financed acquisitions by issuing convertible debt or equity securities.
We have also spent resources and efforts, apart from acquisitions, in attempting to enhance our rental business over the past few years. These efforts place strains on our management and other personnel time and resources, and require timely and continued investment in facilities, personnel and financial and management systems and controls. We may not be successful in implementing all of the processes that are necessary to support any of our growth initiatives, which could result in our expenses increasing disproportionately to our incremental revenues, causing our operating margins and profitability to be adversely affected.
Our charter provisions, as well as other factors, may affect the likelihood of a takeover or change of control of the Company.
Although our Board elected not to extend our stockholders’ rights plan upon its expiration in September 2011, we still have in place certain charter provisions, such as the inability for stockholders to act by written consent, that may have the effect of deterring hostile takeovers or delaying or preventing changes in control or management of the Company that are not approved by our board, including transactions in which our stockholders might otherwise receive a premium for their shares over then-current market prices. We are also subject to Section 203 of the Delaware General Corporation Law which, under certain circumstances, restricts the ability of a publicly held Delaware corporation to engage in a business combination, such as a merger or sale of assets, with any stockholder that, together with affiliates, owns 15 percent or more of the corporation’s outstanding voting stock, which similarly could prohibit or delay the accomplishment of a change of control transaction. In addition, under the ABL facility, a change of control (as defined in the credit agreement) constitutes an event of default, entitling our lenders to terminate the ABL facility and require us to repay outstanding borrowings. A change of control (as defined in the applicable agreement) is also a termination event under our accounts receivable securitization facility and generally would require us to offer to repurchase our outstanding senior and senior subordinated notes. As a result, the provisions of the agreements governing our debt also may affect the likelihood of a takeover or other change of control.
Turnover of members of our management and our ability to attract and retain key personnel may affect our ability to efficiently manage our business and execute our strategy.
Our success is dependent, in part, on the experience and skills of our management team, and competition in our industry and the business world for top management talent is generally significant. Although we believe we generally have competitive pay packages, we can provide no assurance that our efforts to attract and retain senior management staff will be successful. Moreover, given the volatility in our stock price, it may be more difficult and expensive to recruit and retain employees, particularly senior management, through grants of stock or stock options. This in turn could place greater pressure on the Company to increase the cash component of its compensation packages, which may adversely affect our operating results. If we are unable to fill and keep filled all of our senior management positions, or if we lose the services of any key member of our senior management team and are unable to find a suitable replacement in a timely fashion, we may be challenged to effectively manage our business and execute our strategy.
Our operational and cost reduction strategies may not generate the improvements and efficiencies we expect.
We have been pursuing a strategy of optimizing our field operations in order to improve sales force effectiveness, and to focus our sales force’s efforts on increasing revenues from our National Account and other large customers. We are also continuing to pursue our overall cost reduction program, which resulted in substantial cost savings in the past. The extent to which these strategies will achieve our desired efficiencies and goals in 2013 and beyond is uncertain, as their success depends on a number of factors, some of which are beyond our control. Even if we carry out these strategies in the manner we currently expect, we may not achieve the efficiencies or savings we anticipate, or on the timetable we anticipate, and there may be unforeseen productivity, revenue or other consequences resulting from our strategies that may adversely affect us. Therefore, there can be no guarantee that our strategies will prove effective in achieving the desired level of profitability, margins or returns to stockholders.
We are dependent on our relationships with key suppliers to obtain equipment and other supplies for our business on acceptable terms.
We have achieved significant cost savings through our centralization of equipment and non-equipment purchases. However, as a result, we depend on and are exposed to the credit risk of a group of key suppliers. While we make every effort to evaluate our counterparties prior to entering into long-term and other significant procurement contracts, we cannot predict the impact on our suppliers of the current economic environment and other developments in their respective businesses.

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Insolvency, financial difficulties or other factors may result in our suppliers not being able to fulfill the terms of their agreements with us. Further, such factors may render suppliers unwilling to extend contracts that provide favorable terms to us, or may force them to seek to renegotiate existing contracts with us. Although we believe we have alternative sources of supply for the equipment and other supplies used in our business, termination of our relationship with any of our key suppliers could have a material adverse effect on our business, financial condition or results of operations in the unlikely event that we were unable to obtain adequate equipment or supplies from other sources in a timely manner or at all.
If our rental fleet ages, our operating costs may increase, we may be unable to pass along such costs, and our earnings may decrease. The costs of new equipment we use in our fleet may increase, requiring us to spend more for replacement equipment or preventing us from procuring equipment on a timely basis.
If our rental equipment ages, the costs of maintaining such equipment, if not replaced within a certain period of time, will likely increase. The costs of maintenance may materially increase in the future and could lead to material adverse effects on our results of operations.
The cost of new equipment for use in our rental fleet could also increase due to increased material costs for our suppliers or other factors beyond our control. Such increases could materially adversely impact our financial condition and results of operations in future periods. Furthermore, changes in customer demand could cause certain of our existing equipment to become obsolete and require us to purchase new equipment at increased costs.
Our industry is highly competitive, and competitive pressures could lead to a decrease in our market share or in the prices that we can charge.
The equipment rental industry is highly fragmented and competitive. Our competitors include small, independent businesses with one or two rental locations, regional competitors that operate in one or more states, public companies or divisions of public companies, and equipment vendors and dealers who both sell and rent equipment directly to customers. We may in the future encounter increased competition from our existing competitors or from new competitors. Competitive pressures could adversely affect our revenues and operating results by, among other things, decreasing our rental volumes, depressing the prices that we can charge or increasing our costs to retain employees.
Disruptions in our information technology systems could adversely affect our operating results by limiting our capacity to effectively monitor and control our operations.
Our information technology systems facilitate our ability to monitor and control our operations and adjust to changing market conditions. Any disruptions in these systems or the failure of these systems to operate as expected could, depending on the magnitude of the problem, adversely affect our operating results by limiting our capacity to effectively monitor and control our operations and adjust to changing market conditions. In addition, because our systems sometimes contain information about individuals and businesses, our failure to appropriately maintain the security of the data we hold, whether as a result of our own error or the malfeasance or errors of others, could harm our reputation or give rise to legal liabilities leading to lower revenues, increased costs and other material adverse effects on our results of operations.
We are subject to numerous environmental and safety regulations. If we are required to incur compliance or remediation costs that are not currently anticipated, our liquidity and operating results could be materially and adversely affected.
Our operations are subject to numerous laws and regulations governing environmental protection and occupational health and safety matters. These laws regulate issues such as wastewater, stormwater, solid and hazardous waste and materials, and air quality. Under these laws, we may be liable for, among other things, (i) the costs of investigating and remediating any contamination at our sites as well as sites to which we send hazardous waste for disposal or treatment, regardless of fault, and (ii) fines and penalties for non-compliance. Our operations generally do not raise significant environmental risks, but we use hazardous materials to clean and maintain equipment, dispose of solid and hazardous waste and wastewater from equipment washing, and store and dispense petroleum products from above-ground storage tanks located at certain of our locations.
Based on conditions currently known to us, we do not believe that any pending or likely remediation and/or compliance effort will have a material adverse effect on our business. We cannot be certain, however, as to the potential financial impact on our business if new adverse environmental conditions are discovered or environmental and safety requirements become more stringent. If we are required to incur environmental compliance or remediation costs that are not currently anticipated, our liquidity and operating results could be materially and adversely affected, depending on the magnitude of such costs.

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We have operations throughout the United States, which exposes us to multiple state and local regulations, in addition to federal law and requirements as a government contractor. Changes in applicable law, regulations or requirements, or our material failure to comply with any of them, can increase our costs and have other negative impacts on our business.
Our 724 branch locations in the United States are located in 49 states, which exposes us to a host of different state and local regulations, in addition to federal law and regulatory and contractual requirements we face as a government contractor. These laws and requirements address multiple aspects of our operations, such as worker safety, consumer rights, privacy, employee benefits and more, and there are often different requirements in different jurisdictions. Changes in these requirements, or any material failure by our branches to comply with them, can increase our costs, affect our reputation, limit our business, drain management time and attention and otherwise impact our operations in adverse ways.
Our collective bargaining agreements and our relationship with our union-represented employees could disrupt our ability to serve our customers, lead to higher labor costs or the payment of withdrawal liability.
We currently have approximately 800 employees who are represented by unions and covered by collective bargaining agreements and approximately 10,500 employees who are not represented by unions. Various unions occasionally seek to organize certain of our nonunion employees. Union organizing efforts or collective bargaining negotiations could potentially lead to work stoppages and/or slowdowns or strikes by certain of our employees, which could adversely affect our ability to serve our customers. Further, settlement of actual or threatened labor disputes or an increase in the number of our employees covered by collective bargaining agreements can have unknown effects on our labor costs, productivity and flexibility.
Under the collective bargaining agreements that we have signed, we are obligated to contribute to several multiemployer pension plans on behalf of some of our unionized employees. A multiemployer pension plan is a plan that covers the union-represented workers of various unrelated companies. Under the Employee Retirement Income Security Act, a contributing employer to an underfunded multiemployer plan is liable, generally upon withdrawal from a plan, for its proportionate share of the plan's unfunded vested liability. We currently have no intention of withdrawing from any multiemployer plan. However, there can be no assurance that we will not withdraw from one or more multiemployer plans in the future and be required to pay material amounts of withdrawal liability if one or more of those plans are underfunded at the time of withdrawal.
Fluctuations in fuel costs or reduced supplies of fuel could harm our business.
We believe that one of our competitive advantages is the mobility of our fleet. Accordingly, we could be adversely affected by limitations on fuel supplies or significant increases in fuel prices that result in higher costs to us for transporting equipment from one branch to another branch. Although we have used, and may continue to use, futures contracts to hedge against fluctuations in fuel prices, a significant or protracted price fluctuation or disruption of fuel supplies could have a material adverse effect on our financial condition and results of operations.
Our rental fleet is subject to residual value risk upon disposition, and may not sell at the prices or in the quantities we expect.
The market value of any given piece of rental equipment could be less than its depreciated value at the time it is sold. The market value of used rental equipment depends on several factors, including:
the market price for new equipment of a like kind;
wear and tear on the equipment relative to its age and the performance of preventive maintenance;
the time of year that it is sold;
the supply of used equipment on the market;
the existence and capacities of different sales outlets;
the age of the equipment at the time it is sold;
worldwide and domestic demand for used equipment; and
general economic conditions.
We include in income from operations the difference between the sales price and the depreciated value of an item of equipment sold. Changes in our assumptions regarding depreciation could change our depreciation expense, as well as the gain or loss realized upon disposal of equipment. Sales of our used rental equipment at prices that fall significantly below our projections and/or in lesser quantities than we anticipate will have a negative impact on our results of operations and cash flows.

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We have operations outside the United States. As a result, we may incur losses from currency conversions and have higher costs than we otherwise would have due to the need to comply with foreign laws.
Our operations in Canada are subject to the risks normally associated with international operations. These include (i) the need to convert currencies, which could result in a gain or loss depending on fluctuations in exchange rates and (ii) the need to comply with foreign laws and regulations, as well as U.S. laws and regulations applicable to our operations in foreign jurisdictions. See Item 7A—Quantitative and Qualitative Disclosures About Market Risk for additional information related to currency exchange risk.

Item  1B.
Unresolved Staff Comments
None.

Item 2.
Properties
As of January 1, 2013, we operated 836 rental locations. 724 of these locations are in the United States and 112 are in Canada. The number of locations in each state or province is shown in the table below, as well as the number of locations that are in our general rentals (GR) and trench safety, power and HVAC (TPH) segments.

16


 
United States
 
 
 
 
Ÿ
Alabama (GR 20)
Ÿ
Maine (GR 2)
Ÿ
Ohio (GR 15, TPH 3)
Ÿ
Alaska (GR 2)
Ÿ
Maryland (GR 9, TPH 3)
Ÿ
Oklahoma (GR 19, TPH 1)
Ÿ
Arizona (GR 17, TPH 2)
Ÿ
Massachusetts (GR 6, TPH 2)
Ÿ
Oregon (GR 11, TPH 1)
Ÿ
Arkansas (GR 11)
Ÿ
Michigan (GR 4)
Ÿ
Pennsylvania (GR 17)
Ÿ
California (GR 60, TPH 12)
Ÿ
Minnesota (GR 10, TPH 1)
Ÿ
Rhode Island (GR 1)
Ÿ
Colorado (GR 11, TPH 2)
Ÿ
Mississippi (GR 10)
Ÿ
South Carolina (GR 12, TPH 2)
Ÿ
Connecticut (GR 6, TPH 1)
Ÿ
Missouri (GR 12, TPH 3)
Ÿ
South Dakota (GR 2)
Ÿ
Delaware (GR 2)
Ÿ
Montana (GR 1)
Ÿ
Tennessee (GR 19, TPH 3)
Ÿ
Florida (GR 24, TPH 8)
Ÿ
Nebraska (GR 4, TPH 1)
Ÿ
Texas (GR 90, TPH 11)
Ÿ
Georgia (GR 26, TPH 3)
Ÿ
Nevada (GR 5, TPH 3)
Ÿ
Utah (GR 1, TPH 1)
Ÿ
Idaho (GR 2)
Ÿ
New Hampshire (GR 2, TPH 1)
Ÿ
Vermont (GR 1)
Ÿ
Illinois (GR 15, TPH 2)
Ÿ
New Jersey (GR 9, TPH 4)
Ÿ
Virginia (GR 19, TPH 3)
Ÿ
Indiana (GR 13, TPH 1)
Ÿ
New Mexico (GR 10)
Ÿ
Washington (GR 18, TPH 5)
Ÿ
Iowa (GR 11, TPH 1)
Ÿ
New York (GR 14)
Ÿ
West Virginia (GR 5)
Ÿ
Kansas (GR 9)
Ÿ
North Carolina (GR 20, TPH 4)
Ÿ
Wisconsin (GR 9, TPH 1)
Ÿ
Kentucky (GR 10)
Ÿ
North Dakota (GR 7, TPH 1)
Ÿ
Wyoming (GR 5)
Ÿ
Louisiana (GR 27, TPH 3)
 
 
 
 
 
 
 
 
 
 
 
Canada
 
 
 
 
Ÿ
Alberta (GR 20, TPH 2)
 
 
 
 
Ÿ
British Columbia (GR 16, TPH 1)
 
 
 
 
Ÿ
Manitoba (GR 4)
 
 
 
 
Ÿ
New Brunswick (GR 7)
 
 
 
 
Ÿ
Newfoundland (GR 6)
 
 
 
 
Ÿ
Nova Scotia (GR 4)
 
 
 
 
Ÿ
Ontario (GR 29, TPH 3)
 
 
 
 
Ÿ
Prince Edward Island (GR 1)
 
 
 
 
Ÿ
Quebec (GR 8, TPH 1)
 
 
 
 
Ÿ
Saskatchewan (GR 10)
 
 
 
 

Our branch locations generally include facilities for displaying equipment and, depending on the location, may include separate areas for equipment service, storage and displaying contractor supplies. We own 107 of our branch locations and lease the other branch locations. We also lease or own other premises used for purposes such as district and regional offices and service centers.
We have a fleet of approximately 7,600 vehicles. These vehicles are used for delivery, maintenance, management and sales functions. Approximately 64 percent of this fleet is leased and the balance is owned.
Our corporate headquarters are currently located in Greenwich, Connecticut, where we occupy approximately 41,000 square feet under a lease that expires in 2013. We have entered into a sublease for approximately 47,000 square feet in an office building located in Stamford, Connecticut. We intend to relocate our corporate headquarters during 2013. Additionally, we maintain a facility in Shelton, Connecticut, where we occupy approximately 32,000 square feet under a lease that expires in 2016. Further, we maintain shared-service facilities in Tampa, Florida, where we occupy approximately 31,000 square feet

17


under a lease that expires in 2015, and Charlotte, North Carolina, where we occupy approximately 40,000 square feet under a lease that expires in 2015.

Item  3.
Legal Proceedings
A description of legal proceedings can be found in note 15 to our consolidated financial statements, included in this report at Item 8—Financial Statements and Supplementary Data, and is incorporated by reference into this Item 3.

Item  4.
(Removed and Reserved)

PART II

Item 5.
Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Price Range of Common Stock
Holdings’ common stock trades on the New York Stock Exchange under the symbol “URI.” The following table sets forth, for the periods indicated, the intra-day high and low sale prices for our common stock, as reported by the New York Stock Exchange.
 
 
 
High
 
Low
2012:
 
 
 
 
First Quarter
 
$
44.12

 
$
27.88

Second Quarter
 
47.98

 
29.07

Third Quarter
 
38.87

 
26.88

Fourth Quarter
 
45.83

 
31.47

2011:
 
 
 
 
First Quarter
 
$
33.63

 
$
22.66

Second Quarter
 
34.78

 
22.13

Third Quarter
 
27.21

 
12.81

Fourth Quarter
 
30.73

 
15.14


As of January 1, 2013, there were approximately 90 holders of record of our common stock. The number of beneficial owners is substantially greater than the number of record holders because a large portion of our common stock is held of record in broker “street names.”
Dividend Policy
Holdings has not paid dividends on its common stock since inception. The payment of any future dividends or the authorization of stock repurchases or other recapitalizations will be determined by our board of directors in light of conditions then existing, including earnings, financial condition and capital requirements, financing agreements, business conditions, stock price and other factors. The terms of certain agreements governing our outstanding indebtedness contain certain limitations on our ability to move operating cash flows to Holdings and/or to pay dividends on, or effect repurchases of, our common stock. In addition, under Delaware law, dividends may only be paid out of surplus or current or prior year’s net profits.
 Purchases of Equity Securities by the Issuer
The following table provides information about acquisitions of Holdings’ common stock by Holdings during the fourth quarter of 2012:
 

18


Period
Total Number of
Shares Purchased
 
Average Price
Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)
 
Maximum Dollar Amount of Shares That May Yet Be Purchased Under the Program (2)
October 1, 2012 to October 31, 2012
1,050

(1)
$
36.32

 

 

November 1, 2012 to November 30, 2012
5,917

(1)
$
42.19

 

 

December 1, 2012 to December 31, 2012
64,276

(1)
$
39.61

 
58,700

 

Total
71,243

 
$
39.77

 
58,700

 
$
85,195,074


(1)
In October 2012, November 2012 and December 2012, 1,050, 5,917 and 5,576 shares, respectively, were withheld by Holdings to satisfy tax withholding obligations upon the vesting of restricted stock unit awards. These shares were not acquired pursuant to any repurchase plan or program.
(2)
In December 2011, in connection with the RSC acquisition, our Board announced its intention to authorize a stock buyback of up to $200 million of Holdings' common stock, which we intend to complete within 18 months after the April 30, 2012 closing of the RSC acquisition. Our Board announced its authorization of the stock buyback in April 2012.
Equity Compensation Plans
For information regarding equity compensation plans, see Item 12 of this annual report on Form 10-K.

Item 6.
Selected Financial Data
The following selected financial data reflects the results of operations and balance sheet data as of and for the years ended December 31, 2008 to 2012. The data below should be read in conjunction with, and is qualified by reference to, our Management’s Discussion and Analysis and our consolidated financial statements and notes thereto contained elsewhere in this report. In December 2006, we entered into a definitive agreement to sell our traffic control business and, as a result, the operations of our traffic control business are reflected as a discontinued operation for all periods presented. The financial information presented may not be indicative of our future performance.
 

19


 
Year Ended December 31,  
2012
 
2011
 
2010
 
2009
 
2008
(in millions, except per share data)
Income statement data:
 
 
 
 
 
 
 
 
 
Total revenues
$
4,117

 
$
2,611

 
$
2,237

 
$
2,358

 
$
3,267

Total cost of revenues
2,530

 
1,713

 
1,579

 
1,748

 
2,149

Gross profit
1,587

 
898

 
658

 
610

 
1,118

Selling, general and administrative expenses
588

 
407

 
367

 
408

 
509

RSC merger related costs
111

 
19

 

 

 

Restructuring charge
99

 
19

 
34

 
31

 
20

Charge related to settlement of SEC inquiry

 

 

 

 
14

Goodwill impairment charge

 

 

 

 
1,147

Non-rental depreciation and amortization
198

 
57

 
60

 
57

 
58

Operating income (loss)
591

 
396

 
197

 
114

 
(630
)
Interest expense, net
512

 
228

 
255

 
226

 
174

Interest expense-subordinated convertible debentures, net
4

 
7

 
8

 
(4
)
 
9

Other income, net
(13
)
 
(3
)
 
(3
)
 
(1
)
 

Income (loss) from continuing operations before provision (benefit) for income taxes
88

 
164

 
(63
)
 
(107
)
 
(813
)
Provision (benefit) for income taxes
13

 
63

 
(41
)
 
(47
)
 
(109
)
Income (loss) from continuing operations
75

 
101

 
(22
)
 
(60
)
 
(704
)
Loss from discontinued operation, net of taxes

 

 
(4
)
 
(2
)
 

Net income (loss)
75

 
101

 
(26
)
 
(62
)
 
(704
)
Preferred stock redemption charge

 

 

 

 
(239
)
Net income (loss) available to common stockholders
75

 
101

 
(26
)
 
(62
)
 
(943
)
Basic earnings (loss) per share:
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations (inclusive of preferred stock redemption charge)
$
0.91

 
$
1.62

 
$
(0.38
)
 
$
(0.98
)
 
$
(12.62
)
Loss from discontinued operation

 

 
(0.06
)
 
(0.04
)
 

Net income (loss)
$
0.91

 
$
1.62

 
$
(0.44
)
 
$
(1.02
)
 
$
(12.62
)
Diluted earnings (loss) per share:
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations (inclusive of preferred stock redemption charge)
$
0.79

 
$
1.38

 
$
(0.38
)
 
$
(0.98
)
 
$
(12.62
)
Loss from discontinued operation

 

 
(0.06
)
 
(0.04
)
 

Net income (loss)
$
0.79

 
$
1.38

 
$
(0.44
)
 
$
(1.02
)
 
$
(12.62
)
    
 
December 31, 
 
2012
 
2011
 
2010
 
2009
 
2008
 
(in millions)
Balance sheet data:
 
 
 
 
 
 
 
 
 
Total assets
$
11,026

 
$
4,143

 
$
3,693

 
$
3,859

 
$
4,191

Total debt
7,309

 
2,987

 
2,805

 
2,951

 
3,199

Subordinated convertible debentures
55

 
55

 
124

 
124

 
146

Stockholders’ equity (deficit)
1,543

 
64

 
(20
)
 
(19
)
 
(29
)


20


Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in millions, except per share data and unless otherwise indicated)
Executive Overview
United Rentals is the largest equipment rental company in the world. Our customer service network consists of 836 rental locations in the United States and Canada as well as centralized call centers and online capabilities. 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 compelling competitive advantages. These include a fleet of rental equipment with a total original equipment cost (“OEC”), based on the initial consideration paid, of $7.2 billion, and a national branch network that operates in 49 U.S. states and every Canadian province, and serves 99 of the 100 largest 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 3,300 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. In 2012, equipment rental revenues represented 84 percent of our total revenues.
For the past several years, we have focused on optimizing the profitability of our core rental business through revenue growth and margin expansion. To achieve this objective, we have developed a strategy focused on customer service differentiation, customer segmentation, rate management, fleet management and disciplined cost control. This strategy calls for a superior standard of service to customers, often provided through a single point of contact; an increasing proportion of revenues derived from larger accounts; a targeted presence in industrial and specialty markets; and the profitable deployment of our rental assets for optimal return on investment.
On April 30, 2012, we acquired 100 percent of the outstanding common shares and voting interest (“the acquisition”) of RSC Holdings Inc. (“RSC”). The results of RSC's operations have been included in our consolidated financial statements since that date. RSC, which had total revenues of $1.5 billion in 2011, was one of the largest equipment rental providers in North America, and as of December 31, 2011 had a network of 440 rental locations in 43 U.S. states and three Canadian provinces. The acquisition has created a leading North American equipment rental company with a more attractive business mix, greater scale and enhanced growth prospects, and we believe that the acquisition will provide us with financial benefits including reduced operating expenses and additional revenue opportunities going forward. Since the acquisition date, significant amounts of fleet have been moved between United Rentals locations and the acquired RSC locations, and it is not practicable to reasonably estimate the amounts of revenue and earnings of RSC since the acquisition date. The impact of the RSC acquisition on our equipment rentals revenue is primarily reflected in the 63.2 percent increase in the volume of OEC on rent in 2012. For additional information concerning the RSC acquisition, see note 3 to our consolidated financial statements.
In 2012, we adopted the American Rental Association criteria for rental rates, time utilization and OEC; comparisons to prior years are based on a recast of these metrics on the same basis.
Although uncertainty in the economic environment continued to present challenges for both our Company and the North American equipment rental industry in 2012, we succeeded in realizing a number of achievements related to our strategy. For the full year 2012, compared with 2011, these achievements included:
A 6.9 percent increase in rental rates on a pro forma basis (that is, assuming United Rentals and RSC were combined for full year 2012 and 2011). Rental rate changes for 2012 are only available on a pro forma basis;
A 63.2 percent increase in the volume of OEC on rent, which significantly benefited from the impact of the RSC acquisition;
Achieved strong time utilization on a significantly larger fleet. Time utilization was 67.5 percent and 67.2 percent for the years ended December 31, 2012 and 2011, respectively;
A significant increase in the proportion of equipment rental revenues derived from National Account customers, from 35 percent in 2011 to 42 percent in 2012. 2012 is only available on a pro forma basis. National Accounts are generally defined as customers with potential annual equipment rental spend of at least $500,000 or customers doing business in multiple locations;
Continued improvement in customer service management, including a significant increase in the proportion of equipment rental revenues derived from accounts that are managed by a single point of contact ("key accounts") from 55 percent in 2011 to 60 percent in 2012. 2012 is only available on a pro forma basis. Establishing a single

21


point of contact for our key accounts helps us to provide customer service management that is more consistent and satisfactory;
The continued optimization of our network of rental locations, including an increase in 2012 of 15, or 16 percent, in the number of rental locations in our trench safety, power and HVAC segment; and
A 1.3 percentage point improvement in selling, general and administrative expenses as a percentage of revenue.
In 2013, we will continue to focus on optimizing our core business through diligent management of the rental process, enhanced customer service capabilities, and sustained cost efficiencies. In particular, we will focus on:
Enhancing our value proposition by improving customer service levels;
Further increasing the proportion of our revenues derived from National Accounts and other large customers. To the extent that we are successful, we believe that we can improve our equipment rental gross margin and overall profitability over time, as large accounts tend to rent more equipment for longer periods and can be serviced more cost effectively than short-term transactional customers;
Accelerating our pursuit of opportunities in the industrial marketplace, where we believe that our depth of resources, industrial expertise and branch footprint give us a competitive advantage. Additionally, industrial equipment demand is subject to different cyclical pressures than construction demand, making our aggregate end markets less volatile;
Further capitalizing on the demand for the higher-margin power and climate control equipment offered by our trench safety, power and HVAC segment;
Leveraging technology and training to optimize the transportation of our rental equipment to and from customer jobsites; and
Maximizing equipment utilization by reducing the average number of equipment units unavailable for rent and the average time a unit is unavailable for rent.
In 2013, based on our analysis of leading industry forecasts and broader economic indicators, we expect most of our end markets to continue to recover. Specifically, in 2013, we expect that the U.S. equipment rental industry will achieve year-over-year revenue growth in the mid to high single digits.
Financial Overview
Despite the challenges posed by recent economic and credit market conditions, and as discussed elsewhere in this report, we succeeded in taking a number of positive actions in 2012 and 2011 related to our capital structure, and have significantly improved our financial flexibility and liquidity. These actions, which are discussed in note 12 to our consolidated financial statements, include:
In March 2012, in connection with the RSC acquisition, we issued $750 aggregate principal amount of 5 3/4 percent Senior Secured Notes due 2018, $750 aggregate principal amount of 7 3/8 percent Senior Notes due 2020 and $1,325 aggregate principal amount of 7 5/8 percent Senior Notes due 2022.
In March 2012, we increased the size of the ABL facility from $1.8 billion to $1.9 billion.
In September 2012, we amended our accounts receivable securitization facility. The amended facility expires on September 23, 2013, includes an increase in the facility size from $300 to $475, and may be extended on a 364-day basis by mutual agreement of the Company and the purchasers under the facility.
In October 2012, we issued $400 aggregate principal amount of 6 1/8 percent Senior Notes due 2023.
In October 2012, we redeemed our 10 7/8 percent Senior Notes.
In December 2012, all of our outstanding 1 7/8 percent Convertible Senior Subordinated Notes were converted.
These actions have improved our financial flexibility and liquidity and positioned us to invest the necessary capital in our business to take advantage of opportunities in the economic recovery. As of December 31, 2012, we had available liquidity of $782, including cash of $106.
Income (loss) from continuing operations. Income (loss) from continuing operations and diluted earnings (loss) per share from continuing operations for each of the three years in the period ended December 31, 2012 were as follows:
 

22


 
Year Ended December 31,  
 
2012
 
2011
 
2010
Income (loss) from continuing operations
$
75

 
$
101

 
$
(22
)
Diluted earnings (loss) per share from continuing operations
$
0.79

 
$
1.38

 
$
(0.38
)

Income (loss) from continuing operations and diluted earnings (loss) per share from continuing operations for each of the three years in the period ended December 31, 2012 include the impacts of the following special items (amounts presented on an after-tax basis):
 
 
Year Ended December 31,  
 
2012
 
2011
 
2010
 
Contribution to income from
continuing
operations (after-tax)
 
Impact on diluted earnings per share from continuing operations
 
Contribution to income from
continuing
operations (after-tax)
 
Impact on diluted earnings per share from continuing operations
 
Contribution to loss from continuing
operations (after-tax)
 
Impact on diluted loss per share from continuing operations 
RSC merger related costs (1)
$
(68
)
 
$
(0.72
)
 
$
(18
)
 
$
(0.25
)
 
$

 
$

RSC merger related intangible asset amortization (2)
(70
)
 
(0.74
)
 

 

 

 

Impact on depreciation related to acquired RSC fleet and property and equipment (3)
3

 
0.03

 

 

 

 

Impact of the fair value mark-up of acquired RSC fleet and inventory (4)
(22
)
 
(0.24
)
 

 

 

 

Pre-close RSC merger related interest expense (5)
(18
)
 
(0.19
)
 

 

 

 

Impact on interest expense related to fair value adjustment of acquired RSC indebtedness (6)
3

 
0.03

 

 

 

 

Restructuring charge (7)
(61
)
 
(0.64
)
 
(12
)
 
(0.16
)
 
(21
)
 
(0.34
)
Asset impairment charge (8)
(9
)
 
(0.10
)
 
(3
)
 
(0.04
)
 
(6
)
 
(0.09
)
Loss on extinguishment of debt securities, including subordinated convertible debentures, and ABL amendment (9)
(44
)
 
(0.45
)
 
(3
)
 
(0.04
)
 
(17
)
 
(0.28
)
Gain on sale of software subsidiary (10)
5

 
0.05

 

 

 

 

 

(1)
This reflects transaction costs associated with the RSC acquisition discussed in note 3 to our consolidated financial statements.
(2)
This reflects the amortization of the intangible assets acquired in the RSC acquisition.
(3)
This reflects the impact of extending the useful lives of equipment acquired in the RSC acquisition, net of the impact of additional depreciation associated with the fair value mark-up of such equipment.
(4)
This reflects additional costs recorded in cost of rental equipment sales, cost of equipment rentals, excluding depreciation, and cost of contractor supplies sales associated with the fair value mark-up of rental equipment and inventory acquired in the RSC acquisition. The costs relate to equipment and inventory acquired in the RSC acquisition and subsequently sold.
(5)
As discussed in note 12 to our consolidated financial statements, in March 2012, we issued $2,825 of debt in connection with the RSC acquisition. The pre-close RSC merger related interest expense reflects the interest expense recorded on this debt prior to the acquisition date.
(6)
This reflects a reduction of interest expense associated with the fair value mark-up of debt acquired in the RSC acquisition. See note 12 to our consolidated financial statements for additional detail on the acquired debt.
(7)
As discussed in note 5 to our consolidated financial statements, this reflects severance costs and branch closure charges associated with the RSC acquisition and our closed restructuring program.
(8)
As discussed in note 5 to our consolidated financial statements, this charge primarily reflects write-offs of leasehold improvements and other fixed assets in connection with the RSC acquisition and our closed restructuring program.
(9)
This reflects losses on the extinguishment of certain debt securities, including subordinated convertible debentures, and write-offs of debt issuance costs associated with the October 2011 amendment of our ABL facility.
(10)
This reflects a gain recognized upon the sale of a former subsidiary that developed and marketed software.

23


In addition to the matters discussed above, our 2012 performance reflects increased gross profit from equipment rentals and sales of rental equipment. As discussed below (see “Results of Operations- Income taxes”), our results for 2012 reflect a tax provision of $13, which equates to an effective tax rate of 14.8 percent, and our results for 2010 include a tax benefit of $41, which equates to an effective tax rate of 65.1 percent.
EBITDA GAAP Reconciliations. EBITDA represents the sum of net income (loss), loss from discontinued operation, net of taxes, provision (benefit) for income taxes, interest expense, net, interest expense-subordinated convertible debentures, net, depreciation of rental equipment and non-rental depreciation and amortization. Adjusted EBITDA represents EBITDA plus the sum of the RSC merger related costs, restructuring charge, stock compensation expense, net, the impact of the fair value mark-up of the acquired RSC fleet and inventory, and the gain on sale of software subsidiary. These items are excluded from adjusted EBITDA internally when evaluating our operating performance 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. Management believes that EBITDA and adjusted EBITDA, when viewed with the Company’s results under U.S. generally accepted accounting principles (“GAAP”) and the accompanying reconciliation, provide useful information about operating performance and period-over-period growth, and provide additional information that is useful for evaluating the operating performance of our core business without regard to potential distortions. Additionally, management believes that EBITDA and adjusted EBITDA permit investors to 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 (loss) or cash flow from operating activities as indicators of operating performance or liquidity.
The table below provides a reconciliation between net income (loss) and EBITDA and adjusted EBITDA:

 
Year Ended December 31,  
 
2012
 
2011
 
2010
Net income (loss)
$
75

 
$
101

 
$
(26
)
Loss from discontinued operation, net of taxes

 

 
4

Provision (benefit) for income taxes
13

 
63

 
(41
)
Interest expense, net
512

 
228

 
255

Interest expense—subordinated convertible debentures, net
4

 
7

 
8

Depreciation of rental equipment
699

 
423

 
389

Non-rental depreciation and amortization
198

 
57

 
60

EBITDA
1,501

 
879

 
649

RSC merger related costs (1)
111

 
19

 

Restructuring charge (2)
99

 
19

 
34

Stock compensation expense, net (3)
32

 
12

 
8

Impact of the fair value mark-up of acquired RSC fleet and inventory (4)
37

 

 

Gain on sale of software subsidiary (5)
(8
)
 

 

Adjusted EBITDA
$
1,772

 
$
929

 
$
691


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


24


 
Year Ended December 31,  
 
2012
 
2011
 
2010
Net cash provided by operating activities
$
721

 
$
612

 
$
452

Adjustments for items included in net cash provided by operating activities but excluded from the calculation of EBITDA:


 
 
 
 
Loss from discontinued operation, net of taxes

 

 
4

Amortization of deferred financing costs and original issue discounts
(23
)
 
(22
)
 
(23
)
Gain on sales of rental equipment
125

 
66

 
41

Gain (loss) on sales of non-rental equipment
2

 
2

 

Gain on sale of software subsidiary (5)
8

 

 

RSC merger related costs (1)
(111
)
 
(19
)
 

Restructuring charge (2)
(99
)
 
(19
)
 
(34
)
Stock compensation expense, net (3)
(32
)
 
(12
)
 
(8
)
Loss on extinguishment of debt securities and ABL amendment (6)
(72
)
 
(3
)
 
(28
)
Loss on retirement of subordinated convertible debentures

 
(2
)
 

Changes in assets and liabilities
571

 
49

 
65

Cash paid for interest, including subordinated convertible debentures
371

 
203

 
229

Cash paid (received) for income taxes, net
40

 
24

 
(49
)
EBITDA
1,501

 
879

 
649

Add back:
 
 
 
 
 
RSC merger related costs (1)
111

 
19

 

Restructuring charge (2)
99

 
19

 
34

Stock compensation expense, net (3)
32

 
12

 
8

Impact of the fair value mark-up of acquired RSC fleet and inventory (4)
37

 

 

Gain on sale of software subsidiary (5)
(8
)
 

 

Adjusted EBITDA
$
1,772

 
$
929

 
$
691

_________________

(1)
This reflects transaction costs associated with the RSC acquisition discussed above.
(2)
As discussed below (see “Restructuring charge”), this reflects severance costs and branch closure charges associated with the RSC acquisition and our closed restructuring program.
(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, cost of equipment rentals, excluding depreciation, and cost of contractor supplies sales associated with the fair value mark-up of rental equipment and inventory acquired in the RSC acquisition. The costs relate to equipment and inventory acquired in the RSC acquisition and subsequently sold.
(5)
This reflects a gain recognized upon the sale of a former subsidiary that developed and marketed software.
(6)
This reflects losses on the extinguishment of certain debt securities and write-offs of debt issuance costs associated with the October 2011 amendment of our ABL facility.
For the year ended December 31, 2012, EBITDA increased $622, or 70.8 percent, and adjusted EBITDA increased $843, or 90.7 percent. The EBITDA increase primarily reflects increased profit from equipment rentals and sales of rental equipment, partially offset by the impact of the RSC merger related costs and restructuring charge and increased selling, general and administrative expense, and the adjusted EBITDA increase primarily reflects increased profit from equipment rentals and sales of rental equipment, partially offset by increased selling, general and administrative expense. For the year ended December 31, 2012, EBITDA margin increased 2.8 percentage points to 36.5 percent, and adjusted EBITDA margin increased 7.4 percentage points to 43.0 percent. The increase in EBITDA margin primarily reflects increased margins from equipment rentals and improved selling, general and administrative leverage, partially offset by the impact of the RSC merger related costs and restructuring charge. The increase in adjusted EBITDA margin primarily reflects increased margins from equipment rentals and improved selling, general and administrative leverage. EBITDA and adjusted EBITDA for 2012 also include the impact of $104 of cost savings from operating efficiencies and synergies achieved subsequent to the RSC acquisition. We expect to achieve approximately $200 of additional cost savings related to the acquisition in 2013.

25


For the year ended December 31, 2011, EBITDA increased $230, or 35.4 percent, and adjusted EBITDA increased $238, or 34.4 percent, primarily reflecting increased profit from equipment rentals. For the year ended December 31, 2011, EBITDA margin increased 4.7 percentage points to 33.7 percent, and adjusted EBITDA margin increased 4.7 percentage points to 35.6 percent, primarily reflecting increased margins from equipment rentals and improved selling, general and administrative leverage.
Revenues. Revenues for each of the three years in the period ended December 31, 2012 were as follows:
 
 
Year Ended December 31,
 
Percent Change 
 
2012
 
2011
 
2010
 
2012
 
2011
Equipment rentals
$
3,455

 
$
2,151

 
$
1,834

 
60.6
 
17.3

Sales of rental equipment
399

 
208

 
144

 
91.8
 
44.4

Sales of new equipment
93

 
84

 
78

 
10.7
 
7.7

Contractor supplies sales
87

 
85

 
95

 
2.4
 
(10.5
)
Service and other revenues
83

 
83

 
86

 
 
(3.5
)
Total revenues
$
4,117

 
$
2,611

 
$
2,237

 
57.7
 
16.7


Equipment rentals include our revenues from renting equipment, as well as related revenues such as the fees we charge for equipment delivery, fuel, repair or maintenance of rental equipment and damage waivers. 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 (including parts sales).
2012 total revenues of $4.1 billion increased 57.7 percent compared with total revenues of $2.6 billion in 2011. The increase reflects a 60.6 percent increase in equipment rentals, which was primarily due to a 63.2 percent increase in the volume of OEC on rent, and a 6.9 percent rental rate increase on a pro forma basis, partially offset by changes in rental mix. There are two components of rental mix that impact equipment rentals: 1) the type of equipment rented and 2) the duration of the rental contract (daily, weekly and monthly). In 2012, we increased the proportion of equipment rentals generated from monthly rental contracts, which results in equipment rentals increasing at a lesser rate than the volume of OEC on rent, but produces higher margins as there are less transaction costs. We believe that the rate and volume improvements for 2012 reflect, in addition to the impact of the RSC acquisition, a modest improvement in our operating environment and a shift from customer ownership to the rental of construction equipment. As discussed above, we acquired RSC on April 30, 2012, and the results of RSC's operations have been included in our consolidated financial statements since that date. The impact of the RSC acquisition on equipment rentals is primarily reflected in the increase in the volume of OEC on rent. Rental rate changes are calculated based on the year over year variance in average contract rates, weighted by the prior period revenue mix. Additionally, sales of rental equipment increased 91.8 percent, primarily reflecting increased volume and improved pricing in a stronger retail market and the impact of the RSC acquisition.
2011 total revenues of $2.6 billion increased 16.7 percent compared with total revenues of $2.2 billion in 2010. The increase primarily reflects a 17.3 percent increase in equipment rentals, which was primarily due to a 14.5 percent increase in the volume of OEC on rent and a 5.3 percent rental rate increase, and a 44.4 percent increase in sales of rental equipment, which was primarily due to increased volume, improved pricing and changes in the mix of equipment sold.
Critical Accounting Policies
We prepare our consolidated financial statements in accordance with GAAP. A summary of our significant accounting policies is contained in note 2 to our consolidated financial statements. In applying many accounting principles, we make assumptions, estimates and/or judgments. These assumptions, estimates and/or judgments are often subjective and may change based on changing circumstances or changes in our analysis. Material changes in these assumptions, estimates and/or judgments have the potential to materially alter our results of operations. We have identified below our accounting policies that we believe could potentially produce materially different results if we were to change underlying assumptions, estimates and/or judgments. Although actual results may differ from those estimates, we believe the estimates are reasonable and appropriate.
Revenue Recognition. We recognize equipment rental revenue on a straight-line basis. Our rental contract periods are hourly, daily, weekly or monthly. By way of example, if a customer were to rent a piece of equipment and the daily, weekly and monthly rental rates for that particular piece were (in actual dollars) $100, $300 and $900, respectively, we would recognize revenue of $32.14 per day. The daily rate for recognition purposes is calculated by dividing the monthly rate of $900 by the

26


monthly term of 28 days. As part of this straight-line methodology, when the equipment is returned, we recognize as incremental revenue the excess, if any, between the amount the customer is contractually required to pay over the cumulative amount of revenue recognized to date. In any given accounting period, we will have customers return equipment and be contractually required to pay us more than the cumulative amount of revenue recognized to date. For instance, continuing the above example, if the above customer rented a piece of equipment on December 29 and returned it at the close of business on January 1, we would recognize incremental revenue on January 1 of $171.44 (in actual dollars, representing the difference between the amount the customer is contractually required to pay and the cumulative amount recognized to date on a straight-line basis). We record amounts billed to customers in excess of recognizable revenue as deferred revenue on our balance sheet. We had deferred revenue of $26 and $16 as of December 31, 2012 and 2011, respectively. Revenues from the sale of rental equipment and new equipment are recognized at the time of delivery to, or pick-up by, the customer and when collectibility is reasonably assured. Sales of contractor supplies are also recognized at the time of delivery to, or pick-up by, the customer. Service revenue is recognized as the services are performed.
Allowance for Doubtful Accounts. We maintain allowances for doubtful accounts. These allowances reflect our estimate of the amount of our receivables that we will be unable to collect based on historical write-off experience. Our estimate could require change based on changing circumstances, including changes in the economy or in the particular circumstances of individual customers. Accordingly, we may be required to increase or decrease our allowances. Trade receivables that have contractual maturities of one year or less are written-off when they are determined to be uncollectible based on the criteria necessary to qualify as a deduction for federal tax purposes. Write-offs of such receivables require management approval based on specified dollar thresholds.
Useful Lives and Salvage Values of Rental Equipment and Property and Equipment. We depreciate rental equipment and property and equipment over their estimated useful lives, after giving effect to an estimated salvage value which ranges from zero percent to 10 percent of cost. Rental equipment is depreciated whether or not it is out on rent. Costs we incur in connection with refurbishment programs that extend the life of our equipment are capitalized and amortized over the remaining useful life of the equipment. The costs incurred under these refurbishment programs were $24, $10 and $12 for the years ended December 31, 2012, 2011 and 2010, respectively, and are included in purchases of rental equipment in our consolidated statements of cash flows.
The useful life of an asset is determined based on our estimate of the period over which the asset will generate revenues; such periods are periodically reviewed for reasonableness. In addition, the salvage value, which is also reviewed periodically for reasonableness, is determined based on our estimate of the minimum value we will realize from the asset after such period. We may be required to change these estimates based on changes in our industry or other changing circumstances. If these estimates change in the future, we may be required to recognize increased or decreased depreciation expense for these assets.
To the extent that the useful lives of all of our rental equipment were to increase or decrease by one year, we estimate that our annual depreciation expense would decrease or increase by approximately $89 or $119, respectively. Similarly, to the extent the estimated salvage values of all of our rental equipment were to increase or decrease by one percentage point, we estimate that our annual depreciation expense would change by approximately $9. Any change in depreciation expense as a result of a hypothetical change in either useful lives or salvage values would generally result in a proportional increase or decrease in the gross profit we would recognize upon the ultimate sale of the asset. To the extent that the useful lives of all of our depreciable property and equipment were to increase or decrease by one year, we estimate that our annual non-rental depreciation expense would decrease or increase by approximately $13 or $20, respectively.
Purchase Price Allocation. We have made a number of acquisitions in the past (including the acquisition of RSC in 2012) and may continue to make acquisitions in the future. We allocate the cost of the acquired entity to the assets acquired and liabilities assumed based on their respective fair values at the date of acquisition. Long lived assets (principally rental equipment) and goodwill generally represent the largest components of our acquisitions. In addition to goodwill, the intangible assets that we have acquired are non-compete agreements, customer relationships and trade names and associated trademarks. Goodwill is calculated as the excess of the cost of the acquired entity over the net of the fair value of the assets acquired and the liabilities assumed. Non-compete agreements, customer relationships and trade names and associated trademarks are valued based on an excess earnings or income approach based on projected cash flows.
When we make an acquisition, we also acquire other assets and assume liabilities. These other assets and liabilities typically include, but are not limited to, parts inventory, accounts receivable, accounts payable and other working capital items. Because of their short-term nature, the fair values of these other assets and liabilities generally approximate the book values on the acquired entities' balance sheets.
Evaluation of Goodwill Impairment. Goodwill is tested for impairment annually or more frequently if an event or circumstance indicates that an impairment loss may have been incurred. Application of the goodwill impairment test requires

27


judgment, including: the identification of reporting units; assignment of assets and liabilities to reporting units; assignment of goodwill to reporting units; determination of the fair value of each reporting unit; and an assumption as to the form of the transaction in which the reporting unit would be acquired by a market participant (either a taxable or nontaxable transaction).
We estimate the fair value of our reporting units (which are our regions) using a combination of an income approach based on the present value of estimated future cash flows and a market approach based on market price data of shares of our Company and other corporations engaged in similar businesses as well as acquisition multiples paid in recent transactions within our industry (including our own acquisitions). We believe this approach, which utilizes multiple valuation techniques, yields the most appropriate evidence of fair value. We review goodwill for impairment utilizing a two-step process. The first step of the impairment test requires a comparison of the fair value of each of our reporting units' net assets to the respective carrying value of net assets. If the carrying value of a reporting unit's net assets is less than its fair value, no indication of impairment exists and a second step is not performed. If the carrying amount of a reporting unit's net assets is higher than its fair value, there is an indication that an impairment may exist and a second step must be performed. In the second step, the impairment is calculated by comparing the implied fair value of the reporting unit's goodwill (as if purchase accounting were performed on the testing date) with the carrying amount of the goodwill. If the carrying amount of the reporting unit's goodwill is greater than the implied fair value of its goodwill, an impairment loss must be recognized for the excess and charged to operations.
Inherent in our preparation of cash flow projections are assumptions and estimates derived from a review of our operating results, business plans, expected growth rates, cost of capital and tax rates. We also make certain forecasts about future economic conditions, interest rates and other market data. Many of the factors used in assessing fair value are outside the control of management, and these assumptions and estimates may change in future periods. Changes in assumptions or estimates could materially affect the estimate of the fair value of a reporting unit, and therefore could affect the likelihood and amount of potential impairment. The following assumptions are significant to our income approach:
Business Projections-We make assumptions about the level of equipment rental activity in the marketplace and cost levels. These assumptions drive our planning assumptions for pricing and utilization and also represent key inputs for developing our cash flow projections. These projections are developed using our internal business plans over a ten-year planning period that are updated at least annually;
Long-term Growth Rates-Beyond the planning period, we also utilize an assumed long-term growth rate representing the expected rate at which a reporting unit's earnings stream is projected to grow. These rates are used to calculate the terminal value of our reporting units, and are added to the cash flows projected during our ten-year planning period; and
Discount Rates-Our combined future cash flows are then discounted at a rate that is consistent with a weighted-average cost of capital that is likely to be expected by market participants. The weighted-average cost of capital is an estimate of the overall after-tax rate of return required by equity and debt holders of a business enterprise.

The market approach is one of the other methods used for estimating the fair value of our reporting units. This approach takes two forms: The first is based on the market value (market capitalization plus interest-bearing liabilities) and operating metrics (e.g., revenue and EBITDA) of companies engaged in the same or similar line of business. The second form is based on multiples paid in recent acquisitions of companies within our industry, including our own acquisitions.

In September 2011, the Financial Accounting Standards Board ("FASB") issued guidance that simplified how entities test for goodwill impairment. This guidance permits entities to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. We early adopted this guidance and, in connection with our annual goodwill impairment test that was conducted as of October 1, 2011, we concluded that it was more likely than not that the fair values of our reporting units were greater than their carrying amounts. After reaching this conclusion, no further testing was performed. The qualitative factors we considered included, but were not limited to, general economic conditions, our outlook for construction activity, our recent and forecasted financial performance and the price of the Company's common stock. In connection with our goodwill impairment test that was conducted as of October 1, 2012, we bypassed the qualitative assessment for each of our reporting units and proceeded directly to the first step of the goodwill impairment test.
As of October 1, 2012 (our annual goodwill impairment testing date), we had $3.0 billion of goodwill on our balance sheet, of which $2.7 billion arose from the RSC acquisition. Our goodwill impairment testing as of this date indicated that all of our reporting units had estimated fair values which exceeded their respective carrying values by at least 15 percent. In connection with this impairment testing, we generally utilized a discount rate of 9.0 percent and a long-term terminal growth rate of 3.0 percent beyond our planning period. We also performed sensitivity analyses related to the discount rate and long-term growth rate. Specifically, we stress tested our results under the following three scenarios: (i) increasing the discount rate by 100 basis points; (ii) reducing the long-term growth rate to 2.0 percent; and (iii) increasing the discount rate by 100 basis points and reducing the

28


long-term growth rate to 2.0 percent. In each of these three scenarios, the fair values still exceeded the carrying values for each reporting unit.
Impairment of Long-lived Assets (Excluding Goodwill). We review the recoverability of our long-lived assets, including rental equipment and property and equipment, when events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable. The assessment of possible impairment is based on our ability to recover the carrying value of the asset from the expected future pre-tax cash flows (undiscounted and without interest charges). If these cash flows are less than the carrying value of such asset, an impairment loss is recognized for the difference between the estimated fair value and carrying value. During the years ended December 31, 2012, 2011 and 2010, we recognized asset impairment charges of $15, $4 and $9, respectively, in our general rentals segment. The impairment charges primarily represent write-offs of leasehold improvements and other fixed assets which were recognized in connection with the restructuring activity discussed below, and are primarily reflected in non-rental depreciation and amortization in the accompanying consolidated statements of income. As of December 31, 2012 and 2011, there were no held-for-sale assets in our consolidated balance sheets.
In addition to the impairment reviews we conduct in connection with branch consolidations and other changes in the business, each quarter we conduct a review of rental assets with utilization below a specified threshold. We select these assets, which represented approximately four percent of our total rental assets at December 31, 2012, as we believe they are at the greatest risk of potential impairment. As part of this impairment review, we estimate future rental revenues based on current and expected utilization levels, the age of these assets and their remaining useful lives. Additionally, we estimate when the asset is expected to be removed or retired from our rental fleet as well as the expected proceeds to be realized upon disposition. Based on our most recently completed December 31, 2012 quarterly review, there was no impairment associated with these assets.
Income Taxes. We recognize deferred tax assets and liabilities for certain future deductible or taxable temporary differences expected to be reported in our income tax returns. These deferred tax assets and liabilities are computed using the tax rates that are expected to apply in the periods when the related future deductible or taxable temporary difference is expected to be settled or realized. In the case of deferred tax assets, the future realization of the deferred tax benefits and carryforwards are determined with consideration to historical profitability, projected future taxable income, the expected timing of the reversals of existing temporary differences, and tax planning strategies. After consideration of all these factors, we recognize deferred tax assets when we believe that it is more likely than not that we will realize them. The most significant positive evidence that we consider in the recognition of deferred tax assets is the expected reversal of cumulative deferred tax liabilities resulting from book versus tax depreciation of our rental equipment fleet that is well in excess of the deferred tax assets.
We use a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return regarding uncertainties in income tax positions. The first step is recognition: we determine whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, we presume that the position will be examined by the appropriate taxing authority with full knowledge of all relevant information. The second step is measurement: a tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.
We are subject to ongoing tax examinations and assessments in various jurisdictions. Accordingly, accruals for tax contingencies are established based on the probable outcomes of such matters. Our ongoing assessments of the probable outcomes of the examinations and related tax accruals require judgment and could increase or decrease our effective tax rate as well as impact our operating results.
Reserves for Claims. We are exposed to various claims relating to our business, including those for which we retain portions of the losses through the application of deductibles and self-insured retentions, which we sometimes refer to as “self-insurance.” These claims include (i) workers' compensation claims and (ii) claims by third parties for injury or property damage involving our equipment or personnel. These types of claims may take a substantial amount of time to resolve and, accordingly, the ultimate liability associated with a particular claim may not be known for an extended period of time. Our methodology for developing self-insurance reserves is based on management estimates, which incorporate periodic actuarial valuations. Our estimation process considers, among other matters, the cost of known claims over time, cost inflation and incurred but not reported claims. These estimates may change based on, among other things, changes in our claims history or receipt of additional information relevant to assessing the claims. Further, these estimates may prove to be inaccurate due to factors such as adverse judicial determinations or settlements at higher than estimated amounts. Accordingly, we may be required to increase or decrease our reserve levels. As discussed below, during the fourth quarters of 2012, 2011 and 2010, we recognized a benefit of $6, a benefit of $8 and a charge of $24, respectively, related to our provision for self-insurance reserves.

29


Legal Contingencies. We are involved in a variety of claims, lawsuits, investigations and proceedings, as described in note 15 to our consolidated financial statements and elsewhere in this report. We determine whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. We assess our potential liability by analyzing our litigation and regulatory matters using available information. We develop our views on estimated losses in consultation with outside counsel handling our defense in these matters, which involves an analysis of potential results, assuming a combination of litigation and settlement strategies. Should developments in any of these matters cause a change in our determination such that we expect an unfavorable outcome and result in the need to recognize a material accrual, or should any of these matters result in a final adverse judgment or be settled for a significant amount, they could have a material adverse effect on our results of operations in the period or periods in which such change in determination, judgment or settlement occurs.

Results of Operations
As discussed in note 4 to our consolidated financial statements, our reportable segments are general rentals and trench safety, power and HVAC. The general rentals segment includes the rental of construction, aerial and industrial equipment, general tools and light equipment, and related services and activities. The general rentals segment’s customers include construction and industrial companies, manufacturers, utilities, municipalities and homeowners. The general rentals segment operates throughout the United States and Canada. The trench safety, power and HVAC segment includes the rental of specialty construction products and related services. The trench safety, power and HVAC segment’s customers include construction companies involved in infrastructure projects, municipalities and industrial companies. This segment operates throughout the United States and in Canada.
As discussed in note 4 to our consolidated financial statements, we aggregate our 12 geographic regions—Eastern Canada, Gulf South, Industrial (which serves the geographic Gulf region and has a strong industrial presence), Mid-Atlantic, Mid-Central, Midwest, Mountain West, Northeast, Northwest, South, Southeast and Southwest—into our general rentals reporting segment. Historically, there have been variances in the levels of equipment rentals gross margins achieved by these regions. For instance, for the five year period ended December 31, 2012, certain of our regions had equipment rentals gross margins that varied by between 10 percent and 23 percent from the equipment rentals gross margins of the aggregated general rentals' regions over the same period. For the year ended December 31, 2012, the aggregate general rentals' equipment rentals gross margin increased 6.0 percentage points to 38.9 percent, primarily reflecting increased rental rates, a 0.3 percentage point increase in time utilization on a significantly larger fleet, and cost improvements. As compared to the equipment rentals revenue increase of 63.2 percent, (i) aggregate repairs and maintenance and delivery costs increased 45.4 percent due primarily to higher rental volume, (ii) compensation costs increased 44.1 percent due primarily to increased headcount associated with higher rental volume and the RSC acquisition and (iii) building and property costs increased 32.3 percent due primarily to the impact of the RSC acquisition. Our equipment rental revenue increased more than our costs because rates—which were a significant driver of the year-over-year revenue improvement—result in fewer variable costs compared to utilization.
For the five year period ended December 31, 2012, the general rentals' region with the lowest equipment rentals gross margin was the Southeast. The Southeast region's equipment rentals gross margin of 26.8 percent for the five year period ended December 31, 2012 was 23 percent less than the equipment rentals gross margins of the aggregated general rentals' regions over the same period. The Southeast region's equipment rentals gross margin was less than the other general rentals' regions during this period as it experienced more significant declines in its end markets than the other regions, which led to more competitive pricing pressure and lower fleet investment. For the year ended December 31, 2012, the Southeast region's equipment rentals gross margin increased 7.4 percentage points to 34.4 percent, primarily reflecting a 5.9 percent rental rate increase on a pro forma basis and cost improvements, partially offset by a 0.5 percentage point decrease in time utilization. As compared to equipment rentals revenue, which increased 54.0 percent, (i) aggregate repairs and maintenance and delivery costs increased 30.9 percent due primarily to higher rental volume, (ii) compensation costs increased 41.2 percent and (iii) building and property costs increased 23.4 percent.
For the five year period ended December 31, 2012, the general rentals' region with the highest equipment rentals gross margin was the South. The South region's equipment rentals gross margin of 38.0 percent for the five year period ended December 31, 2012 was 11 percent more than the equipment rentals gross margins of the aggregated general rentals' regions over the same period. The South region's equipment rentals gross margin was more than the other general rentals' regions during this period as its end markets grew faster than the other regions, which resulted in stronger pricing. For the year ended December 31, 2012, the South region's equipment rentals gross margin increased 10.4 percentage points to 46.0 percent, primarily reflecting a 9.4 percent rental rate increase on a pro forma basis and cost improvements, partially offset by a 1.6 percentage point decrease in time utilization. As compared to equipment rentals revenue, which increased 133.3 percent, including the impact of the RSC acquisition, (i) aggregate repairs and maintenance and delivery costs increased 82.0 percent due primarily to higher rental volume, (ii) compensation costs increased 93.1 percent and (iii) building and property costs increased 38.3 percent.

30


Although the margins for certain of our general rentals' regions exceeded a 10 percent variance level for the five year period ended December 31, 2012, we expect convergence going forward given the cyclical nature of the construction industry, which impacts each region differently, and our continued focus on cost cutting, improved processes and fleet sharing. Additionally, the margins for the five year period ended December 31, 2012 include the significant impact of the economic downturn in 2009 that impacted all our regions. For the year ended December 31, 2012, the largest variance from the aggregated general rentals' regions margin was 16 percent as compared to 23 percent for the five year period ended December 31, 2012. Although we believe aggregating these regions into our general rentals reporting segment for segment reporting purposes is appropriate, to the extent that the margin variances persist and the equipment rentals gross margins 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 business performance 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 safety,
power and HVAC
 
Total
Year Ended December 31, 2012
 
 
 
 
 
Equipment rentals
$
3,188

 
$
267

 
$
3,455

Sales of rental equipment
387

 
12

 
399

Sales of new equipment
86

 
7

 
93

Contractor supplies sales
80

 
7

 
87

Service and other revenues
79

 
4

 
83

Total revenue
$
3,820

 
$
297

 
$
4,117

Year Ended December 31, 2011
 
 
 
 
 
Equipment rentals
$
1,953

 
$
198

 
$
2,151

Sales of rental equipment
201

 
7

 
208

Sales of new equipment
77

 
7

 
84

Contractor supplies sales
79

 
6

 
85

Service and other revenues
79

 
4

 
83

Total revenue
$
2,389

 
$
222

 
$
2,611

Year ended December 31, 2010
 
 
 
 
 
Equipment rentals
$
1,693

 
$
141

 
$
1,834

Sales of rental equipment
134

 
10

 
144

Sales of new equipment
72

 
6

 
78

Contractor supplies sales
89

 
6

 
95

Service and other revenues
83

 
3

 
86

Total revenue
$
2,071

 
$
166

 
$
2,237


Equipment rentals. 2012 equipment rentals of $3.5 billion increased $1.3 billion, or 60.6 percent, as compared to 2011, primarily reflecting a 63.2 percent increase in the volume of OEC on rent and a 6.9 percent rental rate increase on a pro forma basis, partially offset by changes in rental mix. In 2012, we increased the proportion of equipment rentals generated from monthly rental contracts, which results in equipment rentals increasing at a lesser rate than the volume of OEC on rent, but produces higher margins as there are less transaction costs. We believe that the rate and volume improvements for 2012 reflect, in addition to the impact of the RSC acquisition, a modest improvement in our operating environment and a shift from customer ownership to the rental of construction equipment. As discussed above, we acquired RSC on April 30, 2012, and the results of RSC's operations have been included in our consolidated financial statements since that date. The impact of the RSC acquisition on equipment rentals is primarily reflected in the increase in the volume of OEC on rent. Equipment rentals represented 84 percent of total revenues in 2012. On a segment basis, equipment rentals represented 83 percent and 90 percent of total revenues for general rentals and trench safety, power and HVAC, respectively. General rentals equipment rentals increased $1,235, or 63.2 percent, primarily reflecting a 63.6 percent increase in the volume of OEC on rent and increased rental rates, partially offset by an increase in the proportion of equipment rentals generated from monthly rental contracts.

31


Trench safety, power and HVAC equipment rentals increased $69, or 34.8 percent, primarily reflecting an increase in the volume of OEC on rent. Trench safety, power and HVAC average OEC for 2012 increased 47 percent as compared to 2011. The trench safety, power and HVAC equipment rentals growth was less than the increase in average OEC primarily due to OEC mix, as a significant portion of the OEC growth was in product lines that generate less revenue per OEC dollar, such as power and HVAC equipment.

2011 equipment rentals of $2.2 billion increased $317, or 17.3 percent, as compared to 2010, primarily reflecting a 14.5 percent increase in the volume of OEC on rent and a 5.3 percent rental rate increase. Equipment rentals represented 82 percent of total revenues in 2011. On a segment basis, equipment rentals represented 82 percent and 89 percent of total revenues for general rentals and trench safety, power and HVAC, respectively. General rentals equipment rentals increased $260, or 15.4 percent, primarily reflecting an increase in the volume of OEC on rent and increased rental rates. Trench safety, power and HVAC equipment rentals increased $57, or 40.4 percent, primarily reflecting an increase in the volume of OEC on rent. Trench safety, power and HVAC average OEC for 2011 increased 47 percent as compared to 2010. The increases in equipment rentals and average OEC reflect our strategic focus on the higher margin power and temperature control equipment rented by the trench safety, power and HVAC segment.
Sales of rental equipment. For the three years in the period ended December 31, 2012, sales of rental equipment represented approximately 8 percent of our total revenues. Our general rentals segment accounted for substantially all of these sales. 2012 sales of rental equipment of $399 increased $191, or 91.8 percent, from 2011 primarily reflecting increased volume and improved pricing in a stronger retail market and the impact of the RSC acquisition. 2011 sales of rental equipment of $208 increased $64, or 44.4 percent, from 2010 primarily reflecting increased volume, improved pricing and changes in the mix of equipment sold.
Sales of new equipment. For the three years in the period ended December 31, 2012, sales of new equipment represented approximately 3 percent of our total revenues. Our general rentals segment accounted for substantially all of these sales. 2012 sales of new equipment of $93 increased $9, or 10.7 percent, from 2011 primarily reflecting changes in the mix of equipment sold and improved pricing. 2011 sales of new equipment of $84 increased $6, or 7.7 percent, from 2010 primarily reflecting changes in the mix of equipment sold and improved pricing.
Sales of contractor supplies. For the three years in the period ended December 31, 2012, sales of contractor supplies represented approximately 3 percent of our total revenues. Our general rentals segment accounted for substantially all of these sales. 2012 sales of contractor supplies of $87 increased $2, or 2.4 percent, from 2011. 2011 sales of contractor supplies of $85 decreased $10, or 10.5 percent, from 2010 reflecting a reduction in the volume of supplies sold, partially offset by improved pricing and product mix.
Service and other revenues. For the three years in the period ended December 31, 2012, service and other revenues represented approximately 3 percent of our total revenues. Our general rentals segment accounted for substantially all of these sales. 2012 service and other revenues of $83 were flat with 2011. 2011 service and other revenues of $83 decreased $3, or 3.5 percent, from 2010.
Fourth Quarter 2012 Items. In the fourth quarter of 2012, we recognized $13 of charges related to the RSC merger. Additionally, during the quarter, we recognized restructuring charges of $6, primarily reflecting branch closure charges associated with the RSC merger. During the quarter, we also recognized asset impairment charges of $2 which are primarily reflected in non-rental depreciation and amortization and principally relate to write-offs of leasehold improvements and other fixed assets. During the fourth quarter of 2012, we redeemed our 10 7/8 percent Senior Notes and all of our outstanding 1 7/8 percent Convertible Senior Subordinated Notes were converted. Upon redemption/conversion, we recognized a loss of $72 in interest expense, net. The loss represents the difference between the net carrying amount and the total purchase/conversion price of these securities. During the quarter, we also recognized a benefit of $6 in cost of equipment rentals, excluding depreciation related to our provision for self-insurance reserves.
 Fourth Quarter 2011 Items. In the fourth quarter of 2011, we recognized $19 of acquisition-related costs associated with the RSC acquisition. Additionally, during the quarter, we closed 18 branches and recognized restructuring charges of $14. During the quarter, we also recognized a benefit of $8 in cost of equipment rentals, excluding depreciation related to our provision for self-insurance reserves. During the quarter, we also recognized asset impairment charges of $3 which are primarily reflected in non-rental depreciation and amortization and principally relate to write-offs of leasehold improvements and other fixed assets in connection with our closed restructuring program. In the quarter, we also purchased an aggregate of $32 of Quarterly Income Preferred Securities (“QUIPS”) for $32. In connection with this transaction, we retired $32 principal amount of our subordinated convertible debentures and recognized a loss of $1 in interest expense-subordinated convertible debentures, net, reflecting the write-off of capitalized debt issuance costs. Interest expense, net for the fourth quarter of 2011

32


also includes a loss of $3 reflecting write-offs of debt issuance costs associated with the amendment of our ABL facility discussed below.
Fourth Quarter 2010 Items. In the fourth quarter of 2010, we repurchased and retired an aggregate of $814 principal amount of our outstanding 7 3/4 percent Senior Subordinated Notes due 2013, 7 percent Senior Subordinated Notes due 2014 and 1  7/8 percent Convertible Senior Subordinated Notes due 2023. Interest expense, net for the fourth quarter of 2010 includes a charge of $25, representing the difference between the net carrying amount of these securities and the total purchase price of $827. The $25 charge includes a $4 write-off of a previously terminated derivative transaction. During the quarter, we also recognized a charge of $24 related to our provision for self-insurance reserves, comprised of $18 recorded in cost of equipment rentals, excluding depreciation, and $6 recorded in discontinued operation. The charge reflected recent adverse experience in our portfolio of automobile and general liability claims, as well as workers' compensation claims. The discontinued operation component of the charge is reflected net of taxes in our consolidated statements of income. Additionally, during the quarter, we recognized restructuring charges of $15 related to the closure of 22 branches and reductions in headcount of approximately 100. During the quarter, we also recognized asset impairment charges of $6 which are primarily reflected in non-rental depreciation and amortization and principally relate to write-offs of leasehold improvements and other fixed assets in connection with the consolidation of our branch network discussed above. Additionally, the income tax provision (benefit) for the quarter includes a benefit of $7 related to a correction of a deferred tax asset recognized in prior periods.
Segment Equipment Rentals Gross Profit
Segment equipment rentals gross profit and gross margin for each of the three years in the period ended December 31, 2012 were as follows:  
 
General
rentals
 
Trench safety,
power and HVAC
 
Total
2012
 
 
 
 
 
Equipment Rentals Gross Profit
$
1,239

 
$
125

 
$
1,364

Equipment Rentals Gross Margin
38.9
%
 
46.8
%
 
39.5
%
2011
 
 
 
 
 
Equipment Rentals Gross Profit
$
643

 
$
93

 
$
736

Equipment Rentals Gross Margin
32.9
%
 
47.0
%
 
34.2
%
2010
 
 
 
 
 
Equipment Rentals Gross Profit
$
461

 
$
60

 
$
521

Equipment Rentals Gross Margin
27.2
%
 
42.6
%
 
28.4
%

General rentals. For the three years in the period ended December 31, 2012, general rentals accounted for approximately 89 percent of our total equipment rentals gross profit. This contribution percentage is consistent with general rentals’ equipment rental revenue contribution over the same period. General rentals’ equipment rentals gross profit in 2012 increased $596 and equipment rentals gross margin increased 6.0 percentage points, primarily reflecting increased rental rates, a 0.3 percentage point increase in time utilization on a significantly larger fleet, and cost improvements. As compared to the equipment rentals revenue increase of 63.2 percent, (i) aggregate repairs and maintenance and delivery costs increased 45.4 percent due primarily to higher rental volume, (ii) compensation costs increased 44.1 percent due primarily to increased headcount associated with higher rental volume and the RSC acquisition and (iii) building and property costs increased 32.3 percent due primarily to the impact of the RSC acquisition. Time utilization was 68.1 percent and 67.8 percent for the years ended December 31, 2012 and 2011, respectively. General rentals’ equipment rentals gross profit in 2011 increased $182 and equipment rentals gross margin increased 5.7 percentage points, primarily reflecting increased rental rates, a 3.4 percentage point increase in time utilization and cost improvements. As compared to the equipment rentals revenue increase of 15.4 percent, (i) depreciation increased 7.0 percent, (ii) aggregate repairs and maintenance and delivery costs increased 9.1 percent due primarily to higher rental volume, (iii) compensation costs increased 8.3 percent due primarily to increased headcount associated with higher rental volume, (iv) insurance decreased 42.6 percent as 2011 included a benefit of $8 related to our provision for self-insurance reserves as compared to a self-insurance charge of $18 in 2010 and (v) building and property costs decreased 2.7 percent. Time utilization was 67.8 percent percent and 64.4 percent for the years ended December 31, 2011 and 2010, respectively.
Trench safety, power and HVAC. For the year ended December 31, 2012, equipment rentals gross profit increased by $32 and equipment rentals gross margin decreased by 0.2 percentage points from 2011. The increase in gross profit primarily reflects increased average OEC which contributed to higher revenue. Trench safety, power and HVAC average OEC for the year ended December 31, 2012 increased 47 percent as compared to 2011. The decrease in gross margin primarily reflects increased depreciation due to increased OEC, partially offset by a reduction in lower margin re-rent revenue (equipment we

33


rent from other companies and then rent to customers). As compared to the equipment rentals revenue increase of 34.8 percent, depreciation increased 50.0 percent. For the year ended December 31, 2011, equipment rentals gross profit increased by $33 and equipment rentals gross margin increased by 4.4 percentage points from 2010. The increase in gross profit primarily reflects increased average OEC which contributed to higher revenue, and cost improvements. Trench safety, power and HVAC average OEC for the year ended December 31, 2011 increased 47 percent as compared to 2010. As compared to the equipment rentals revenue increase of 40.4 percent, (i) depreciation increased 50.0 percent, (ii) compensation costs increased 18.9 percent due primarily to increased headcount associated with higher rental volume, (iii) insurance decreased 12.0 percent due to improvements in our claims experience as we continued to focus on customer, driver and employee safety and (iv) building and property costs increased 9.4 percent due to an increase in the number of rental locations.
Gross Margin. Gross margins by revenue classification were as follows:  
 
Year Ended December 31, 
 
2012
 
2011
 
2010
Total gross margin
38.5
%
 
34.4
%
 
29.4
%
Equipment rentals
39.5
%
 
34.2
%
 
28.4
%
Sales of rental equipment
31.3
%
 
31.7
%
 
28.5
%
Sales of new equipment
20.4
%
 
20.2
%
 
16.7
%
Contractor supplies sales
28.7
%
 
31.8
%
 
30.5
%
Service and other revenues
65.1
%
 
62.7
%
 
62.8
%

2012 gross margin of 38.5 percent increased 4.1 percentage points as compared to 2011, primarily reflecting increased gross margins from equipment rentals. Equipment rentals gross margin increased 5.3 percentage points, primarily reflecting a 6.9 percent rental rate increase on a pro forma basis, a 0.3 percentage point increase in time utilization on a significantly larger fleet, and cost improvements. As compared to the equipment rentals revenue increase of 60.6 percent, (i) aggregate repairs and maintenance and delivery costs increased 44.8 percent due primarily to higher rental volume, (ii) compensation costs increased 43.2 percent due primarily to increased headcount associated with higher rental volume and the RSC acquisition and (iii) building and property costs increased 32.7 percent due primarily to the impact of the RSC acquisition. Time utilization was 67.5 percent and 67.2 percent for the years ended December 31, 2012 and 2011, respectively.
2011 gross margin of 34.4 percent increased 5.0 percentage points as compared to 2010, primarily reflecting increased gross margins from equipment rentals and sales of rental equipment. Equipment rentals gross margin increased 5.8 percentage points, primarily reflecting a 5.3 percent rental rate increase and a 3.2 percentage point increase in time utilization. As compared to the equipment rentals revenue increase of 17.3 percent, (i) depreciation increased 8.7 percent, (ii) aggregate repairs and maintenance and delivery costs increased 11.4 percent due primarily to higher rental volume, (iii) compensation costs increased 9.0 percent due primarily to increased headcount associated with higher rental volume, (iv) insurance decreased 40.0 percent as 2011 included a benefit of $8 related to our provision for self-insurance reserves as compared to a self-insurance charge of $18 in 2010 and (v) building and property costs decreased 1.6 percent. For the years ended December 31, 2011 and 2010, time utilization was 67.2 percent and 64.0 percent, respectively. The 3.2 percentage point increase in gross margins from sales of rental equipment primarily reflects improved pricing. Gross margins from sales of rental equipment may change in future periods if the mix of the channels (primarily retail and auction) that we use to sell rental equipment changes.
Selling, general and administrative (“SG&A”) expenses. SG&A expense information for each of the three years in the period ended December 31, 2012 was as follows:  
 
Year Ended December 31, 
 
2012
 
2011
 
2010
Total SG&A expense
$
588

 
$
407

 
$
367

SG&A expense as a percentage of revenue
14.3
%
 
15.6
%
 
16.4
%

SG&A expense primarily includes sales force compensation, information technology costs, third party professional fees, advertising and marketing expenses, management salaries, bad debt expense and clerical and administrative overhead.
2012 SG&A expense of $588 increased $181 as compared to 2011. The increase in SG&A primarily reflects increased compensation costs associated with higher revenues, improved profitability and increased headcount following the RSC acquisition. Additionally, our bad debt expense was higher due to a 70.9 percent increase in accounts receivable, including the acquired RSC accounts receivable, since December 31, 2011, and a deterioration in our accounts receivable aging. Additionally,

34


travel and entertainment and office expenses have increased following the RSC acquisition. As a percentage of revenue, SG&A expense improved by 1.3 percentage points year over year.
2011 SG&A expense of $407 increased $40 as compared to 2010. The increase in SG&A primarily reflects increased commissions and bonuses associated with improved profitability. As a percentage of revenue, SG&A expense improved by 0.8 percentage points year over year.
RSC merger related costs. As discussed above, in the second quarter of 2012, we completed the RSC acquisition. The years ended December 31, 2012 and 2011 include acquisition-related costs of $111 and $19, respectively, primarily related to financial and legal advisory fees. The fees for the year ended December 31, 2012 include $31 of interim bridge financing costs.
Restructuring charge. For the years ended December 31, 2012, 2011 and 2010, the restructuring charges of $99, $19 and $34, respectively, reflect severance costs and branch closure charges associated with the RSC acquisition and our closed restructuring program. The branch closure charges primarily reflect continuing lease obligations at vacant facilities. We expect to incur an additional $5 to $10 of charges in connection with the current restructuring program, which is expected to be substantially complete by June 30, 2013. See note 5 to our consolidated financial statements for additional information.
Non-rental depreciation and amortization for each of the three years in the period ended December 31, 2012 was as follows:  
 
Year Ended December 31, 
 
2012
 
2011
 
2010
Non-rental depreciation and amortization
$
198

 
$
57

 
$
60


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. Non-rental depreciation and amortization for the year ended December 31, 2012 increased primarily due to the 2012 acquisition of RSC discussed in note 3 to our consolidated financial statements.
Interest expense, net for each of the three years in the period ended December 31, 2012 was as follows:  
 
Year Ended December 31, 
 
2012
 
2011
 
2010
Interest expense, net
$
512

 
$
228

 
$
255


Interest expense, net for the year ended December 31, 2012 increased by $284, or 125 percent. As discussed in note 12 to our consolidated financial statements, in March 2012, we issued $2,825 of debt ("the merger financing notes") in connection with the RSC acquisition. Upon completion of the RSC acquisition, we also assumed RSC's debt that remained after repayment of certain of RSC's debt. Interest expense, net for the year ended December 31, 2012 includes $29 of interest recorded on the merger financing notes prior to the closing of the merger. Additionally, during 2012, we redeemed our 10 7/8 percent Senior Notes and all of our outstanding 1 7/8 percent Convertible Senior Subordinated Notes were converted. Upon redemption/conversion, we recognized a loss of $72 in interest expense, net. The loss represents the difference between the net carrying amount and the total purchase/conversion price of these securities. In addition to these matters, interest expense, net for the year ended December 31, 2012 increased primarily due to increased average outstanding debt, including the debt issued and assumed in connection with the RSC acquisition, as compared to 2011. Interest expense, net for the year ended December 31, 2011 decreased by $27, or 11 percent. Interest expense, net for the year ended December 31, 2011 includes a loss of $3 primarily related to write-offs of debt issuance costs associated with the October 2011 amendment of our ABL facility. Interest expense, net for the year ended December 31, 2010 includes a loss of $28 related to repurchases or redemptions of $1,273 principal amount of our outstanding debt. Excluding the impact of these losses, interest expense, net decreased slightly as the impact of a slight increase in average outstanding debt was offset by the impact of lower interest rates.
Interest expense—subordinated convertible debentures, net for each of the three years in the period ended December 31, 2012 was as follows:  
 
Year Ended December 31, 
 
2012
 
2011
 
2010
Interest expense-subordinated convertible debentures, net
$
4

 
$
7

 
$
8



35


As discussed further in note 13 to our consolidated financial statements, the subordinated convertible debentures included in our consolidated balance sheets reflect the obligation to our subsidiary trust that has issued QUIPS. This subsidiary is not consolidated in our financial statements because we are not the primary beneficiary of the trust. As of December 31, 2012 and 2011, the aggregate amount of subordinated convertible debentures outstanding was $55. Interest expense- subordinated convertible debentures, net for 2011 includes a $2 loss recognized in connection with the simultaneous purchase of $69 of QUIPS and retirement of $69 principal amount of our subordinated convertible debentures.

Other income, net for each of the three years in the period ended December 31, 2012 was as follows:  
 
Year Ended December 31,
 
2012
 
2011
 
2010
Other income, net
$
(13
)
 
$
(3
)
 
$
(3
)

The increase in other income, net for the year ended December 31, 2012 primarily reflects an $8 gain recognized upon the sale of a former subsidiary that developed and marketed software.
Income taxes. The following table summarizes our continuing operations provision (benefit) for income taxes and the related effective tax rates for each respective period:
 
Year Ended December 31, 
 
2012
 
2011
 
2010
Income (loss) from continuing operations before provision (benefit) for income taxes
$
88

 
$
164

 
$
(63
)
Provision (benefit) for income taxes
13

 
63

 
(41
)
Effective tax rate (1)
14.8
%
 
38.4
%
 
65.1
%
 
_________________
(1)
A detailed reconciliation of the effective tax rates to the U.S. federal statutory income tax rate is included in note 14 to our consolidated financial statements.
The differences between the effective tax rates of 14.8 percent, 38.4 percent, and 65.1 percent for 2012, 2011, and 2010, respectively, and the U.S. federal statutory income tax rate of 35.0 percent relate primarily to the geographical mix of income between U.S. and foreign and state operations, and state taxes and certain nondeductible charges. The 2012 provision reflects a write-off of certain state deferred tax assets as a result of the RSC acquisition, a Canadian tax benefit due to settlements with the Canadian Revenue Authority and a U.S. tax transfer pricing benefit. The 2011 provision reflects the non-deductibility of certain costs associated with the proposed RSC acquisition. The 2010 income tax benefit includes a benefit of $7 related to a correction of a deferred tax asset recognized in prior periods. Our effective income tax rate will change based on discrete events (such as audit settlements) as well as other factors, including the geographical mix of income before taxes and the related tax rates in those jurisdictions.
Balance sheet. The increases in our balance sheet from December 31, 2011 to December 31, 2012 primarily reflect the impact of the RSC acquisition. See note 3 to our consolidated financial statements for a summary of the estimated fair values of the RSC assets acquired and liabilities assumed.

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.
During 2012, we took a number of actions related to our capital structure to improve our financial flexibility and liquidity. These actions, which are discussed in note 12 to our consolidated financial statements, include:
In March 2012, in connection with the RSC acquisition, we issued $750 aggregate principal amount of 5 3/4 percent Senior Secured Notes due 2018, $750 aggregate principal amount of 7 3/8 percent Senior Notes due 2020 and $1,325 aggregate principal amount of 7 5/8 percent Senior Notes due 2022.
In March 2012, the size of the ABL facility was increased from $1.8 billion to $1.9 billion.

36


In September 2012, we amended our accounts receivable securitization facility. The amended facility expires on September 23, 2013, includes an increase in the facility size from $300 to $475, and may be extended on a 364-day basis by mutual agreement of the Company and the purchasers under the facility.
In October 2012, we issued $400 aggregate principal amount of 6 1/8 percent Senior Notes due 2023.
In October 2012, we redeemed our 10 7/8 percent Senior Notes.
In December 2012, all of our outstanding 1 7/8 percent Convertible Senior Subordinated Notes were converted.
As previously announced, in connection with the RSC acquisition, our Board authorized a stock buyback of up to $200 of Holdings' common stock. As of January 21, 2013, we have repurchased $115 of Holdings' common stock and our intent is to complete the stock buyback within 18 months after the April 30, 2012 closing of the RSC acquisition.
Total debt at December 31, 2012 increased by $4,322, or 144.7 percent, as compared to December 31, 2011, primarily due to additional borrowings and debt assumed in connection with the RSC acquisition. Short-term debt at December 31, 2012 primarily reflects $453 of borrowings under our accounts receivable securitization facility and $137 of 4 percent Convertible Senior Notes. The 4 percent Convertible Senior Notes mature in 2015, but are reflected as short-term debt because they were redeemable at December 31, 2012.
Our principal existing sources of cash are cash generated from operations and from the sale of rental equipment and borrowings available under the ABL facility and accounts receivable securitization facility. As of December 31, 2012, we had (i) $654 of borrowing capacity, net of $62 of letters of credit, available under the ABL facility, (ii) $22 of borrowing capacity available under our accounts receivable securitization facility and (iii) cash and cash equivalents of $106. Cash equivalents at December 31, 2012 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.
As of December 31, 2012, $1,184 and $453 were outstanding under the ABL facility and the accounts receivable securitization facility, respectively. The interest rates applicable to the ABL facility and the accounts receivable securitization facility at December 31, 2012 were 2.3 percent and 0.9 percent, respectively. During the year ended December 31, 2012, the monthly average amounts outstanding under the ABL facility and the accounts receivable securitization facility, including both the former facilities and the amended facilities, were $1,138 and $315, respectively, and the weighted-average interest rates thereon were 2.3 percent and 0.9 percent, respectively. The maximum month-end amounts outstanding under the ABL facility and the accounts receivable securitization facility, including both the former facilities and the amended facilities, during the year ended December 31, 2012 were $1,287 and $475, respectively. The maximum amounts outstanding under the ABL facility and the accounts receivable securitization facility exceeded the average amounts outstanding during the year primarily due to additional borrowings following the RSC acquisition.
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, and (v) 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. For information on the scheduled principal and interest payments coming due on our outstanding debt and on the payments coming due under our existing operating leases, see “Certain Information Concerning Contractual Obligations.”
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 January 21, 2013 were as follows:  
 
Corporate Rating
 
Outlook 
Moody’s
B2
 
Stable
Standard & Poor’s
B+
 
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.
The amount of our future capital expenditures will depend on a number of factors, including general economic conditions and growth prospects. We expect that we will fund such expenditures from cash generated from operations, proceeds from the sale of rental and non-rental equipment and, if required, borrowings available under the ABL facility and accounts receivable securitization facility. Our gross and net rental capital expenditures increased significantly in 2012 relative to 2011. Net rental

37


capital expenditures (defined as purchases of rental equipment less the proceeds from sales of rental equipment) were $873 and $566 in 2012 and 2011, respectively. We expect our gross and net rental capital expenditures to increase significantly in 2013 relative to 2012. We expect net rental capital expenditures of approximately $1.05 billion and gross rental purchases of approximately $1.5 billion in 2013.
Loan Covenants and Compliance. As of December 31, 2012, we were in compliance with the covenants and other provisions of the ABL facility, the accounts receivable securitization facility, the senior notes and the QUIPS. 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.
As discussed in note 12 to our consolidated financial statements, in October 2011, we amended our ABL facility. The only material financial covenants which currently exist relate to the fixed charge coverage ratio and the senior secured leverage ratio under the ABL facility. Subject to certain limited exceptions specified in the ABL facility, these covenants will only apply in the future if availability under the ABL facility falls below the greater of 10 percent of the maximum revolver amount under the amended ABL facility and $150. Since the October 2011 amendment of the facility and through December 31, 2012, availability under the facility has exceeded the required threshold and, as a result, these maintenance covenants have been 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.
As of December 31, 2012, URNA had limited restricted payment capacity under the most restrictive restricted payment covenants in the indentures governing its outstanding indebtedness. Although this limited capacity restricts 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 2012, we (i) generated cash from operating activities of $721, (ii) generated cash from the sale of rental and non-rental equipment of $430 and (iii) received cash from debt proceeds, net of payments, of $1,643, including $2,825 of proceeds from debt issuances associated with the RSC acquisition, a portion of which was used to repay certain of RSC's senior debt. We used cash during this period principally to (i) purchase rental and non-rental equipment of $1,369, (ii) purchase other companies for $1,175, including cash paid for the RSC acquisition, (iii) purchase shares of our common stock for $131 and (iv) pay financing costs of $75. During 2011, we (i) generated cash from operating activities of $612, (ii) generated cash from the sale of rental and non-rental equipment of $221 and (iii) received cash from debt proceeds, net of payments, of $79. We used cash during this period principally to (i) purchase rental and non-rental equipment of $810 and (ii) purchase other companies for $276.
Free Cash Flow GAAP Reconciliation
We define “free cash (usage) 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, net. Management believes that free cash (usage) flow provides useful additional information concerning cash flow available to meet future debt service obligations and working capital requirements. However, free cash (usage) flow is not a measure of financial performance or liquidity under GAAP. Accordingly, free cash (usage) flow should not be considered an alternative to net income (loss) 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 (usage) flow.
 
 
Year Ended December 31, 
 
2012
 
2011
 
2010
Net cash provided by operating activities
$
721

 
$
612

 
$
452

Purchases of rental equipment
(1,272
)
 
(774
)
 
(346
)
Purchases of non-rental equipment
(97
)
 
(36
)
 
(28
)
Proceeds from sales of rental equipment
399

 
208

 
144

Proceeds from sales of non-rental equipment
31

 
13

 
7

Excess tax benefits from share-based payment arrangements, net
(5
)
 

 
(2
)
Free cash (usage) flow
$
(223
)
 
$
23

 
$
227


Free cash usage for the year ended December 31, 2012 was $223, a decrease of $246 as compared to free cash flow of $23 for the year ended December 31, 2011. Free cash usage increased primarily due to increased purchases of rental and non-rental equipment, partially offset by increased proceeds from sales of rental equipment and non-rental equipment and increased

38


net cash provided by operating activities. Free cash flow for the year ended December 31, 2011 was $23, a decrease of $204 as compared to $227 for the year ended December 31, 2010. Net cash provided by operating activities for the year ended December 31, 2010 included a $55 federal tax refund. Excluding the impact of this refund, free cash flow decreased primarily due to increased purchases of rental equipment, partially offset by increased net cash provided by operating activities and increased proceeds from sales of rental equipment. We expect significant positive free cash flow in 2013 and intend to use this to reduce our leverage.
Certain Information Concerning Contractual Obligations. The table below provides certain information concerning the payments coming due under certain categories of our existing contractual obligations as of December 31, 2012:
 
 
2013
2014
2015
2016
2017
Thereafter
Total 
Debt and capital leases (1)
$
493

$
36

$
197

$
1,202

$
11

$
5,339

$
7,278

Interest due on debt (2)
450

445

443

431

408

1,190

3,367

Operating leases (1):
 
 
 
 
 
 

Real estate
102

85

72

58

40

82

439

Non-rental equipment
29

22

19

15

14

16

115

Service agreements (3)
8

8

4




20

Purchase obligations (4)
728






728

Subordinated convertible debentures (5)
4

4

4

4

4

91

111

Total (6)
$
1,814

$
600

$
739

$
1,710

$
477

$
6,718

$
12,058

 
_________________
(1)
The payments due with respect to a period represent (i) in the case of debt and capital leases, the scheduled principal payments due in such period, and (ii) in the case of operating leases, the minimum lease payments due in such period under non-cancelable operating leases. Our 4 percent Convertible Senior Notes mature in 2015, but are reflected as short-term debt in our consolidated balance sheet because they were redeemable at December 31, 2012. The 4 percent Convertible Senior Notes are reflected in the table above based on the contractual maturity date in 2015.
(2)
Estimated interest payments have been calculated based on the principal amount of debt and the applicable interest rates as of December 31, 2012. As discussed above, our 4 percent Convertible Senior Notes mature in 2015, but are reflected as short-term debt in our consolidated balance sheet because they were redeemable at December 31, 2012. Interest on the 4 percent Convertible Senior Notes is reflected in the table above based on the contractual maturity date in 2015.
(3)
These represent service agreements with third parties to provide wireless and network services, refurbish our aerial equipment and operate the distribution centers associated with contractor supplies.
(4)
As of December 31, 2012, we had outstanding purchase orders, which were negotiated in the ordinary course of business, with our equipment and inventory suppliers. These purchase commitments can be cancelled by us, generally with 30 days notice and without cancellation penalties. The equipment and inventory receipts from the suppliers for these purchases and related payments to the suppliers are expected to be completed throughout 2013.
(5)
Represents principal and interest payments on the $55 of 6 1/2 percent subordinated convertible debentures reflected in our consolidated balance sheets as of December 31, 2012.
(6)
This information excludes $6 of unrecognized tax benefits, which are discussed further in note 14 to our consolidated financial statements. It is not possible to estimate the time period during which these unrecognized tax benefits may be paid to tax authorities.
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 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.

Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk primarily consists of (i) interest rate risk associated with our variable and fixed rate debt, (ii) foreign currency exchange rate risk associated with our Canadian operations and (iii) equity price risk associated with our convertible debt.

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Interest Rate Risk. As of December 31, 2012, we had an aggregate of $1,637 of indebtedness that bears interest at variable rates, comprised of $1,184 of borrowings under the ABL facility and $453 of borrowings under our accounts receivable securitization facility. The interest rates applicable to our variable rate debt on December 31, 2012 were (i) 2.3 percent for the ABL facility and (ii) 0.9 percent for the accounts receivable securitization facility. As of December 31, 2012, based upon the amount of our variable rate debt outstanding, our annual after-tax earnings would decrease by approximately $12 for each one percentage point increase in the interest rates applicable to our variable rate debt.
The amount of variable rate indebtedness outstanding under the ABL facility and accounts receivable securitization facility may fluctuate significantly. For additional information concerning the terms of our variable rate debt, see note 12 to our consolidated financial statements.
At December 31, 2012, we had an aggregate of $5.7 billion of indebtedness that bears interest at fixed rates, including our subordinated convertible debentures. A one percentage point decrease in market interest rates as of December 31, 2012 would increase the fair value of our fixed rate indebtedness by approximately six percent. For additional information concerning the fair value and terms of our fixed rate debt, see notes 11 (see “Fair Value of Financial Instruments”) and 12 to our consolidated financial statements.
Currency Exchange Risk. The functional currency for our Canadian operations is the Canadian dollar. As a result, our future earnings could be affected by fluctuations in the exchange rate between the U.S. and Canadian dollars. Based upon the level of our Canadian operations during 2012 relative to the Company as a whole, a 10 percent change in this exchange rate would cause our annual after-tax earnings to change by approximately $10. We do not engage in purchasing forward exchange contracts for speculative purposes.
Equity Price Risk. In connection with the November 2009 4 percent Convertible Notes offering, Holdings entered into convertible note hedge transactions with option counterparties. The convertible note hedge transactions cost $26, and decreased additional paid-in capital by $17, net of taxes, in our accompanying consolidated statements of stockholders’ equity (deficit). The convertible note hedge transactions cover, subject to anti-dilution adjustments, 15.1 million shares of our common stock. The convertible note hedge transactions are intended to reduce, subject to a limit, the potential dilution with respect to our common stock upon conversion of the 4 percent Convertible Notes. The effect of the convertible note hedge transactions is to increase the effective conversion price to $15.56 per share, equal to an approximately 75 percent premium over the $8.89 closing price of our common stock at issuance. The effective conversion price is subject to change in certain circumstances, such as if the 4 percent Convertible Notes are converted prior to May 15, 2015. In the event the market value of our common stock exceeds the effective conversion price per share, the settlement amount received from such transactions will only partially offset the potential dilution. For example, if, at the time of exercise of the conversion right, the price of our common stock was $40.00 or $45.00 per share, assuming an effective conversion price of $15.56 per share, on a net basis, we would issue 9.2 million or 9.9 million shares, respectively. Based on the price of our common stock during the fourth quarter of 2012, holders of the 4 percent Convertible Notes have the right to redeem the notes during the first quarter of 2013 at a conversion price of $11.11 per share of common stock. Between January 1, 2013 (the beginning of the first quarter) and January 21, 2013, none of the 4 percent Convertible Senior Notes were redeemed.
If the total $168 outstanding principal amount of the 4 percent Convertible Notes was converted, the total cost to settle the notes would be $687, assuming a conversion price of $45.52 (the closing price of our common stock on December 31, 2012) per share of common stock. The $168 principal amount would be settled in cash, and the remaining $519 could be settled in cash, shares of our common stock, or a combination thereof, at our discretion. Based on the December 31, 2012 closing stock price, approximately 11 million shares of stock, excluding any stock we would receive from the option counterparties as discussed below, would be issued if we settled the entire $519 of conversion value in excess of the principal amount in stock. The total cost to settle would change approximately $15 for each $1 (actual dollars) change in our stock price. If the full principal amount was converted at our December 31, 2012 closing stock price, we estimate that we would receive approximately $51 in either cash or stock from the option counterparties, after which the effective conversion price would be approximately $14.52.
 

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Item 8.
Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of United Rentals, Inc.

We have audited the accompanying consolidated balance sheets of United Rentals, Inc. as of December 31, 2012 and 2011, and the related consolidated statements of income, comprehensive income, stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 2012. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of United Rentals, Inc. at December 31, 2012 and 2011, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), United Rentals Inc.'s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated January 23, 2013 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Stamford, Connecticut
January 23, 2013