10-K 1 uri-2017123110k.htm 10-K Document

 

 
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, 2017
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.)
 
 
100 First Stamford Place, Suite 700,
Stamford, Connecticut
06902
(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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
 
þ
Accelerated Filer
 
o
Non-Accelerated Filer
 
o
Smaller Reporting Company
 
o
Emerging Growth Company
 
o
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    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, 2017 there were 84,538,835 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, 2017 was approximately $9.49 billion, calculated by using the closing price of the common stock on such date on the New York Stock Exchange of $112.71.
As of January 22, 2018, there were 84,427,665 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 2018 Annual Meeting of Stockholders, which is expected to be filed with the Securities and Exchange Commission on or before March 27, 2018, 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 companies that we have acquired or may acquire, including NES Rentals Holdings II, Inc. (“NES”) and Neff Corporation ("Neff"), could have undiscovered liabilities or involve other unexpected costs, may strain our management capabilities or may be difficult to integrate;
the cyclical nature of our business, which is highly sensitive to North American construction and industrial activities; if construction or industrial activity decline, our revenues and, because many of our costs are fixed, our profitability may be adversely affected;
our significant indebtedness (which totaled $9.4 billion at December 31, 2017) 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;
inability to refinance our indebtedness on terms that are favorable to us, or at all;
incurrence of additional debt, which could exacerbate the risks associated with our current level of indebtedness;
noncompliance with financial or other covenants in our debt agreements, which could result in our lenders terminating the agreements and requiring us to repay outstanding borrowings;
restrictive covenants and amount of borrowings permitted in our debt instruments, which can limit our financial and operational flexibility;
overcapacity of fleet in the equipment rental industry;
inability to benefit from government spending, including spending associated with infrastructure projects;
fluctuations in the price of our common stock and inability to complete stock repurchases in the time frame and/or on the terms anticipated;
rates we charge and time utilization we achieve being less than anticipated;
inability to manage credit risk adequately or to collect on contracts with a large number of customers;
inability to access the capital that our businesses or growth plans may require;
incurrence of impairment charges;
trends in oil and natural gas could adversely affect the demand for our services and products;
the fact that our holding company structure requires us to depend in part on distributions from subsidiaries and such distributions could be limited by contractual or legal restrictions;
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;
the outcome or other potential consequences of regulatory matters and commercial litigation;
shortfalls in our insurance coverage;
our charter provisions as well as provisions of certain debt agreements and our significant indebtedness may have the effect of making more difficult or otherwise discouraging, delaying or deterring a takeover or other change of control of us;
turnover in our management team and inability to attract and retain key personnel;
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;
inability to sell our new or used fleet in the amounts, or at the prices, we expect;
competition from existing and new competitors;
risks related to security breaches, cybersecurity attacks and other significant disruptions in our information technology systems;
the costs of complying with environmental, safety and foreign law and regulations, as well as other risks associated with non-U.S. operations, including currency exchange risk;
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;

1


increases in our maintenance and replacement costs and/or decreases in the residual value of our equipment;
the effect of changes in tax law, such as the effect of the Tax Cuts and Jobs Act that was enacted on December 22, 2017; 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.


2


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, 2018.

Item 1.    Business
United Rentals is the largest equipment rental company in the world, and operates throughout the United States and Canada. The table below presents key information about our business as of and for the years ended December 31, 2017 and 2016. Our business is discussed in more detail below. 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. As discussed in note 3 to the consolidated financial statements, we completed the acquisitions of NES Rentals Holdings II, Inc. (“NES”) and Neff Corporation ("Neff") in April 2017 and October 2017, respectively. The results of

1


NES and Neff subsequent to their acquisition dates are reflected in the table below.
 
2017
 
2016
PERFORMANCE MEASURES
 
 
 
Total revenues (in millions)
$6,641
 
$5,762
Equipment rental revenue percent of total revenues
86%
 
86%
Year-over-year decrease in rental rates
(0.2)%
 
(2.2)%
Year-over-year increase in the volume of equipment on rent
18.2%
 
3.1%
Time utilization
69.5%
 
67.9%
Key account percent of equipment rental revenue
69%
 
70%
National account percent of equipment rental revenue
43%
 
45%
FLEET
 
 
 
Fleet original equipment cost (“OEC”) (in billions)
$11.51
 
$8.99
Equipment classes
3,400
 
3,200
Equipment units
520,000
 
440,000
Fleet age in months
47.0
 
45.2
Percent of fleet that is current on manufacturer's recommended maintenance
86%
 
90%
Equipment rental revenue percent by fleet type:
 
 
 
General construction and industrial equipment
43%
 
43%
Aerial work platforms
32%
 
32%
General tools and light equipment
7%
 
8%
Power and HVAC (heating, ventilating and air conditioning) equipment
7%
 
7%
Trench safety equipment
6%
 
6%
Pumps
5%
 
4%
LOCATIONS/PERSONNEL
 
 
 
Rental locations
997
 
887
Approximate number of branches per district
5-10
 
5-10
Approximate number of districts per region
6-10
 
7-9
Total employees
14,800
 
12,500
INDUSTRY
 
 
 
Estimated market share (1)
11.4%
 
9.7%
Estimated North American equipment rental industry revenue growth
4.2%
 
3.9%
United Rentals equipment rental revenue increase (decrease)
15.7%
 
(0.2)%
2018 projected North American industry equipment rental revenue growth
4.4%
 
-
CUSTOMERS/SUPPLIERS
 
 
 
Largest customer percent of total revenues
1%
 
1%
Top 10 customers percent of total revenues
5%
 
6%
Largest supplier percent of capital expenditures
18%
 
22%
Top 10 supplier percent of capital expenditures
57%
 
62%
(1) As discussed above, we completed the acquisitions of NES and Neff in April 2017 and October 2017, respectively. Estimated market share as of December 31, 2017 includes the standalone, pre-acquisition revenues of NES and Neff. Estimated market share as of December 31, 2016 does not include NES and Neff because we had not acquired them as of December 31, 2016. If the standalone, pre-acquisition revenues of NES and Neff were included for the year ended December 31, 2016, estimated market share as of December 31, 2016 would have been 11.0 percent.
Strategy

2


For the past several years, we have executed a strategy focused on improving the profitability of our core equipment rental business through revenue growth, margin expansion and operational efficiencies. In particular, we have focused on customer segmentation, customer service differentiation, rate management, fleet management and operational efficiency.
In 2018, we expect to continue our disciplined focus on increasing our profitability and return on invested capital. In particular, our strategy calls for:
A consistently superior standard of service to customers, often provided through a single point of contact;
The further optimization of our customer mix and fleet mix, with a dual objective: to enhance our performance in serving our current customer base, and to focus on the accounts and customer types that are best suited to our strategy for profitable growth. We believe these efforts will lead to even better service of our target accounts, primarily large construction and industrial customers, as well as select local contractors. Our fleet team's analyses are aligned with these objectives to identify trends in equipment categories and define action plans that can generate improved returns;
A continued focus on “Lean” management techniques, including kaizen processes focused on continuous improvement. We continue to implement Lean kaizen processes across our branch network, with the objectives of: reducing the cycle time associated with renting our equipment to customers; improving invoice accuracy and service quality; reducing the elapsed time for equipment pickup and delivery; and improving the effectiveness and efficiency of our repair and maintenance operations. We achieved the anticipated run rate savings from the Lean initiatives, including those included in the Project XL work streams discussed below, in 2017 and 2016, and expect to continue to generate savings from these initiatives;
The implementation of Project XL, which is a set of eight specific work streams focused on driving profitable growth through revenue opportunities and generating incremental profitability through cost savings across our business; and
The continued expansion of our trench, power and pump footprint, as well as our tools offering, and the cross-selling of these services throughout our network. We plan to open at least 18 specialty rental branches/tool hubs in 2018 and continue to invest in specialty rental fleet to further position United Rentals as a single source provider of total jobsite solutions through our extensive product and service resources and technology offerings; and
The pursuit of strategic acquisitions to continue to expand our core equipment rental business, as exhibited by our recently completed acquisitions of NES and Neff. Strategic acquisitions allow us to invest our capital to expand our business, further driving our ability to accomplish our strategic goals.
Industry Overview and Economic Outlook
United Rentals serves the following three principal end markets for equipment rental in North America: industrial and other non-construction; commercial (or private non-residential) construction; and residential construction, which includes remodeling. In 2017, based on an analysis of our charge account customers’ Standard Industrial Classification (“SIC”) codes:
Industrial and other non-construction rentals represented approximately 50 percent of our rental revenue, primarily reflecting rentals to manufacturers, energy companies, chemical companies, paper mills, railroads, shipbuilders, utilities, retailers and infrastructure entities;
Commercial construction rentals represented approximately 46 percent of our rental revenue, primarily reflecting rentals related to the construction and remodeling of facilities for office space, lodging, healthcare, entertainment and other commercial purposes; and
Residential rentals represented approximately four percent of our rental revenue, primarily reflecting rentals of equipment for the construction and renovation of homes.
We estimate that, in 2017, North American equipment rental industry revenue grew approximately 4 percent year-over-year, with similar growth, on a constant currency basis, in both the U.S. and Canada. In 2017, our full year rental revenue increased by 15.7 percent year-over-year, including the impact of the NES and Neff acquisitions. On a pro forma basis including the standalone, pre-acquisition results of NES and Neff, equipment rental revenue increased 7.6 percent year-over-year.
In 2018, based on our analyses of industry forecasts and macroeconomic indicators, we expect that the majority of our end markets will continue to experience solid demand for equipment rental services. Specifically, we expect that North American industry equipment rental revenue will increase approximately 4 percent, with slightly higher growth, on a constant currency basis, in the U.S. than Canada.

3


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 repair 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.
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. National accounts are generally defined as customers with potential annual equipment rental spend of at least $500,000 or customers doing business in multiple states. 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. National accounts are a subset of key accounts, which are our accounts that are managed by a single point of contact. Establishing a single point of contact for our key accounts helps us provide customer service management that is more consistent and satisfactory.
Operating Efficiencies. We benefit from the following operating efficiencies:
Equipment Sharing Among Branches. Each branch within a region can access equipment located elsewhere in the region. This fleet 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 telephone calls to our customer service telephone line, 1-800-UR-RENTS. 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.
Our information technology systems, some of which are proprietary and some of which are licensed, support our operations. Our 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.
Our information technology systems are accessible to management, branch and call center personnel. 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 data center. Rental transactions can be entered at these workstations and processed on a real-time basis.
Our information technology 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;
allow our mobile sales and service team members to support our customers efficiently while in the field;
permit customers to access their accounts online; and
allow management to obtain a wide range of operational and financial data.
We have a fully functional back-up facility designed to enable business continuity for our core rental and financial systems in the event that our main computer facility becomes inoperative. This back-up facility also allows us to perform

4


system upgrades and maintenance without interfering with the normal ongoing operation of our information technology systems.
Strong Brand Recognition. As the largest equipment rental company in the world, we have strong brand recognition, which helps us attract new customers and build customer loyalty.
Geographic and Customer Diversity. We have 997 rental locations in 49 U.S. states and every Canadian province 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 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 2017, our employees enhanced their skills through approximately 500,000 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.
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– i) general rentals and ii) trench, power and pump. 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 eleven geographic regions—Carolinas, Gulf South, Industrial (which serves the geographic Gulf region and has a strong industrial presence), Mid-Atlantic, Mid Central, Midwest, Northeast, Pacific West, South, Southeast and Western Canada—and operates throughout the United States and Canada. We periodically review the size and geographic scope of our regions, and have occasionally reorganized the regions to create a more balanced and effective structure. 
The trench, power and pump segment includes the rental of specialty construction products and related services. The trench, power and pump segment is comprised of (i) the Trench Safety region, which rents trench safety equipment such as trench shields, aluminum hydraulic shoring systems, slide rails, crossing plates, construction lasers and line testing equipment for underground work, (ii) the Power and HVAC region, which rents power and HVAC equipment such as portable diesel generators, electrical distribution equipment, and temperature control equipment including heating and cooling equipment, and (iii) the Pump Solutions region, which rents pumps primarily used by energy and petrochemical customers. The trench, power and pump 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.

5


Equipment Rental. We offer for rent approximately 3,400 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; pumps; and general tools and light equipment.
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 and export sales forces, which can access many resale markets across our network; 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 such as aerial lifts, reach forklifts, telehandlers, compressors and generators from many leading equipment manufacturers. 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.
Service and Other Revenues. We offer repair and maintenance services and sell parts for equipment that is owned by our customers.
Customers
Our customer base is highly diversified and ranges from Fortune 500 companies to small businesses and homeowners. 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.
Online Rental Platform (UROne®). Our customers can check equipment availability and pricing, and reserve equipment online, 24 hours a day, seven days a week, by accessing our equipment catalog and used equipment listing, which can be found at www.unitedrentals.com. Our customers can also use our UR Control® application to actively manage their rental process and access real-time reports on their business activity with us.
Total Control®. We utilize a proprietary software application, Total Control®, which provides our key customers with a single in-house software application that enables them to monitor and manage all their equipment needs. This software can be

6


integrated into the customers' enterprise resource planning system. Total Control® is a unique customer offering that enables us to develop strong, long-term relationships with our larger customers.
Advertising. We promote our business through local and national advertising in various media, including television, 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 and national promotional events.
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 believe we have sufficient alternative sources of supply available for each of our major equipment categories.
Competition
The North American equipment rental industry is highly fragmented and competitive. As the largest equipment rental company in the industry, we estimate that we have an approximate 11.4 percent market share based on 2017 total equipment rental industry revenues as measured by the ARA. As discussed above, we completed the acquisitions of NES and Neff in April 2017 and October 2017, respectively. Estimated market share includes the standalone, pre-acquisition revenues of NES and Neff, and is calculated by dividing total 2017 rental revenue, calculated using ARA’s constant currency methodology, by ARA’s forecasted 2017 industry revenue. 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, customer demand. The fragmented nature of the industry and our relatively small market share, however, may adversely impact our ability to mitigate rental 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 send 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
Approximately 4,600 of our employees are salaried and approximately 10,200 are hourly. Collective bargaining agreements relating to approximately 100 separate locations cover approximately 1,100 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 www.unitedrentals.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

7


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.
Our business is cyclical in nature. An economic slowdown or a decrease in general economic activity could cause weakness in our end markets and have adverse effects on our revenues and operating results.
Our general rental equipment and trench, power and pump equipment are used in connection with private non-residential construction and industrial activities, which are cyclical in nature. Our industry experienced a decline in construction and industrial activity as a result of the economic downturn that commenced in the latter part of 2008 and continued through 2010. The weakness in our end markets led to a decrease in the demand for our equipment and in the rates we realized. Such decreases adversely affected our operating results by causing our revenues to decline and, because certain of our costs are fixed, our operating margins to be reduced. A 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 overcapacity of fleet in the equipment rental industry;
a decrease in the level of exploration, development, production activity and capital spending by oil and natural gas companies;
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.
Our significant indebtedness exposes us to various risks.
At December 31, 2017, our total indebtedness was $9.4 billion. Our significant indebtedness could adversely affect our business, results of operations and financial condition in a number of ways by, among other things:
increasing our vulnerability to, and limiting our flexibility to plan for, or react to, adverse economic, industry or competitive developments;
making it more difficult to pay or refinance our debts as they become due during periods of adverse economic, financial market or industry conditions;
requiring us to devote a substantial portion of our cash flow to debt service, reducing the funds available for other purposes, including funding working capital, capital expenditures, acquisitions, execution of our growth strategy and other general corporate purposes, or otherwise constraining our financial flexibility;
restricting our ability to move operating cash flows to Holdings. URNA’s payment capacity is restricted under the covenants in our senior secured asset-based revolving credit facility (“ABL facility”) and the indentures governing its outstanding indebtedness;  
affecting our ability to obtain additional financing for working capital, acquisitions or other purposes, particularly since substantially all of our tangible assets are subject to security interests relating to existing indebtedness;
decreasing our profitability or cash flow;
causing 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;
causing us to be disadvantaged compared to competitors with less debt and lower debt service requirements;
resulting 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;
requiring our debt to become due and payable upon a change in control; and

8


limiting our ability to borrow additional monies in the future to fund working capital, capital expenditures and other general corporate purposes.
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, 2017, we had $2.4 billion of indebtedness that bears interest at variable rates. Our variable rate indebtedness currently represents 25 percent of our total indebtedness. See Item 7A—Quantitative and Qualitative Disclosures About Market Risk for additional information related to interest rate risk.
To service our indebtedness, we will require a significant amount of cash and our ability to generate cash depends on many factors beyond our control.
We depend on cash on hand and cash flows from operations to make scheduled debt payments. To a significant extent, our ability to do so is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We may not be able to generate sufficient cash flow from operations to repay our indebtedness when it becomes due and to meet our other cash needs. If we are unable to service our indebtedness and fund our operations, we will have 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.
We may not be able to refinance our indebtedness on favorable terms, if at all. Our inability to refinance our indebtedness could materially and adversely affect our liquidity and our ongoing results of operations.
Our ability to refinance indebtedness will depend in part on our operating and financial performance, which, in turn, is subject to prevailing economic conditions and to financial, business, legislative, regulatory and other factors beyond our control. In addition, prevailing interest rates or other factors at the time of refinancing could increase our interest expense. A refinancing of our indebtedness could also require us to comply with more onerous covenants and further restrict our business operations. Our inability to refinance our indebtedness or to do so upon attractive terms could materially and adversely affect our business, prospects, results of operations, financial condition and cash flows, and make us vulnerable to adverse industry and general economic conditions.
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 current 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 current 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 current 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.
The only financial maintenance covenant that currently exists under our ABL facility is the fixed charge coverage ratio. Subject to certain limited exceptions specified in the ABL facility, the fixed charge coverage ratio covenant under the ABL facility will only apply in the future if specified availability under the ABL facility falls below 10 percent of the maximum revolver amount under the ABL facility. When certain conditions are met, cash and cash equivalents and borrowing base collateral in excess of the ABL facility size may be included when calculating specified availability under the ABL facility. As of December 31, 2017, specified availability under the ABL facility exceeded the required threshold and, as a result, this financial maintenance covenant was inapplicable. Under our accounts receivable securitization facility, we are required, among other things, to maintain certain financial tests relating to: (i) the default ratio, (ii) the delinquency ratio, (iii) the dilution ratio

9


and (iv) days sales outstanding. The accounts receivable securitization facility also requires us to comply with the fixed charge coverage ratio under the ABL facility, to the extent the ratio is applicable under the ABL facility. If we are unable to satisfy these or any of the other 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.
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: (i) liens; (ii) sale-leaseback transactions; (iii) indebtedness; (iv) mergers, consolidations and acquisitions; (v) sales, transfers and other dispositions of assets; (vi) loans and other investments; (vii) dividends and other distributions, stock repurchases and redemptions and other restricted payments; (viii) dividends, other payments and other matters affecting subsidiaries; (ix) transactions with affiliates; and (x) issuances of preferred stock of certain subsidiaries. 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 guarantee 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 under these agreements 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 agent 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.
Our growth strategies may be unsuccessful if we are unable to identify and complete future acquisitions and successfully integrate acquired businesses or assets.
We have historically achieved a significant 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 by, other public companies or large privately-held companies to explore consolidation opportunities. There can be no assurance that we will be able to identify suitable acquisition opportunities in the future or that we will be able to consummate any such transactions on terms and conditions acceptable to us.
In addition, it is possible that we will not realize the expected benefits from any completed acquisition, or that our existing operations will be adversely affected as a result of acquisitions. Acquisitions entail certain risks, including:

10


unrecorded liabilities of acquired companies and unidentified issues that we fail to discover during our due diligence investigations or that are not subject to indemnification or reimbursement by the seller;
greater than expected expenses such as the need to obtain additional debt or equity financing for any transaction;
unfavorable accounting treatment and unexpected increases in taxes;
adverse effects on our ability to maintain relationships with customers, employees and suppliers;
inherent risk associated with entering a geographic area or line of business in which we have no or limited experience;
difficulty in assimilating the operations and personnel of an acquired company within our existing operations, including the consolidation of corporate and administrative functions;
difficulty in integrating marketing, information technology and other systems;
difficulty in conforming standards, controls, procedures and policies, business cultures and compensation structures;
difficulty in identifying and eliminating redundant and underperforming operations and assets;
loss of key employees of the acquired company;
operating inefficiencies that have a negative impact on profitability;
impairment of goodwill or other acquisition-related intangible assets;
failure to achieve anticipated synergies or receiving an inadequate return of capital; and
strains on management and other personnel time and resources to evaluate, negotiate and integrate acquisitions.
Our failure to address these risks or other problems encountered in connection with any past or future acquisition could cause us to fail to realize the anticipated benefits of the acquisitions, cause us to incur unanticipated liabilities and harm our business generally. In addition, if we are unable to successfully integrate our acquisitions with our existing business, we may not obtain the advantages that the acquisitions were intended to create, which may materially and adversely affect our business, results of operations, financial condition, cash flows, our ability to introduce new services and products and the market price of our stock.
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, or the risks associated with debt incurrence.
We have also spent resources and efforts, apart from acquisitions, in attempting to grow and 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 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:
the 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;
an overcapacity of fleet in the equipment rental industry;
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;

11


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 associated with 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;
fluctuations in the prices of oil and natural gas;
expectations regarding our share repurchase program; 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 certain 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.
We cannot guarantee that we will repurchase our common stock pursuant to our share repurchase program or that our share repurchase program will enhance long-term stockholder value. Share repurchases could also increase the volatility of the price of our common stock and could diminish our cash reserves.
In July 2015, our Board of Directors authorized a share repurchase program. Under the program, we are authorized to repurchase shares of common stock for an aggregate purchase price not to exceed $1 billion, excluding fees, commissions and other ancillary expenses. In October 2016, we paused repurchases under the program as we evaluated a number of potential acquisition opportunities. As discussed in note 3 to the consolidated financial statements, we completed the acquisitions of NES in April 2017 and Neff in October 2017. In October 2017, our Board authorized the resumption of the $1 billion share repurchase program, and we intend to complete the program in 2018. The Company had completed $655 million of repurchases under the program as of December 31, 2017.
Although the Board of Directors has authorized the share repurchase program, the share repurchase program does not obligate the Company to repurchase any specific dollar amount or to acquire any specific number of shares. The timing and amount of repurchases, if any, will depend upon several factors, including market and business conditions, the trading price of the Company’s common stock and the nature of other investment opportunities. The repurchase program may be limited, suspended or discontinued at any time without prior notice. In addition, repurchases of our common stock pursuant to our share repurchase program could affect our stock price and increase its volatility. The existence of a share repurchase program could cause our stock price to be higher than it would be in the absence of such a program and could potentially reduce the market liquidity for our stock. Additionally, our share repurchase program could diminish our cash reserves, which may impact our ability to finance future growth and to pursue possible future strategic opportunities and acquisitions. There can be no assurance that any share repurchases will enhance stockholder value because the market price of our common stock may decline below the levels at which we repurchased shares of stock. Although our share repurchase program is intended to

12


enhance long-term stockholder value, there is no assurance that it will do so and short-term stock price fluctuations could reduce the program’s effectiveness.
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 recent 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 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 worsening of economic conditions.
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, 2017, we had $4.1 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 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. For a discussion of our goodwill impairment testing, see “Critical Accounting Policies-Evaluation of Goodwill Impairment” in Part II, Item 7A-Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Trends in oil and natural gas prices could adversely affect the level of exploration, development and production activity of certain of our customers and the demand for our services and products.
Demand for our services and products is sensitive to the level of exploration, development and production activity of, and the corresponding capital spending by, oil and natural gas companies, including national oil companies, regional exploration and production providers, and related service providers. The level of exploration, development and production activity is directly affected by trends in oil and natural gas prices, which historically have been volatile and are likely to continue to be volatile.
Prices for oil and natural gas are subject to large fluctuations in response to relatively minor changes in the supply of and demand for oil and natural gas, market uncertainty, and a variety of other economic factors that are beyond our control. Any prolonged reduction in oil and natural gas prices will depress the immediate levels of exploration, development and production activity, which could have an adverse effect on our business, results of operations and financial condition. Even the perception of longer-term lower oil and natural gas prices by oil and natural gas companies and related service providers can similarly reduce or defer major expenditures by these companies and service providers given the long-term nature of many large-scale development projects. Factors affecting the prices of oil and natural gas include:
the level of supply and demand for oil and natural gas;
governmental regulations, including the policies of governments regarding the exploration for, and production and development of, oil and natural gas reserves;
weather conditions and natural disasters;
worldwide political, military and economic conditions;
the level of oil production by non-OPEC countries and the available excess production capacity within OPEC;

13


oil refining capacity and shifts in end-customer preferences toward fuel efficiency and the use of natural gas;
the cost of producing and delivering oil and natural gas; and
potential acceleration of the development of alternative fuels.
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;
our director and officer liability insurance policy has no deductible for individual non-indemnifiable loss, but is subject to a deductible for company reimbursement coverage;
we do not currently maintain Company-wide 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 semi-annually evaluate our loss reserves to address casualty claims, or portions thereof, not covered by our insurance policies. To the extent that we are subject to a higher frequency of claims, are subject to more serious claims or insurance coverage is not available, we could have to significantly increase our reserves, and our liquidity and operating results could be materially and adversely affected. 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.
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 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 adversely 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 our senior management staff will be successful.

14


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 2018 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. 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 or a compromise of security with respect to our systems could adversely affect our operating results by limiting our ability to effectively monitor and control our operations, adjust to changing market conditions, implement strategic initiatives or support our online ordering system.
We rely on our information technology systems to be able to monitor and control our operations, adjust to changing market conditions, implement strategic initiatives and support our online ordering system. Any disruptions in these systems or

15


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 ability to effectively monitor and control our operations, adjust to changing market conditions, implement strategic initiatives and service online orders. In addition, the security measures we employ to protect our systems may not detect or prevent all attempts to hack our systems, denial-of-service attacks, viruses, malicious software, phishing attacks, security breaches or other attacks and similar disruptions that may jeopardize the security of information stored in or transmitted by the sites, networks and systems that we otherwise maintain. We have, from time to time, experienced threats to our data and systems, including malware and computer virus attacks. Additionally, we may not anticipate or combat all types of future attacks until after they have been launched. If any of these breaches of security occur or are anticipated in the future, we could be required to expend additional capital and other resources, including costs to deploy additional personnel and protection technologies, train employees and engage third-party experts and consultants. 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 lead to disruptions in our online ordering system or other data systems, unauthorized release of confidential or otherwise protected information or corruption of data. Our failure to appropriately maintain the security of the data we hold could also violate applicable privacy, data security and other laws and give rise to legal liabilities leading to lower revenues, increased costs and other material adverse effects on our results of operations. Any compromise or breach of our systems could result in adverse publicity, harm our reputation, lead to claims against us and affect our relationships with our customers and employees, any of which could have a material adverse effect on our business. Certain of our software applications are also utilized by third parties who provide outsourced administrative functions, which may increase the risk of a cybersecurity incident. Although we maintain insurance coverage for various cybersecurity risks, there can be no guarantee that all costs or losses incurred will be fully insured.
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. While our operations generally do not raise significant environmental risks, 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.
We cannot be certain 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.
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 874 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 1,100 employees who are represented by unions and covered by collective bargaining agreements and approximately 13,700 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-

16


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, our business 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.
We have operations outside the United States. As a result, we may incur losses from the impact of foreign currency fluctuations 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.


17


Item  1B.
Unresolved Staff Comments
None.

Item 2.
Properties
As of January 1, 2018, we operated 997 rental locations. 874 of these locations are in the United States and 123 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, power and pump (TPP) segments.
 
United States
 
 
 
 
Alabama (GR 22, TPP 5)
Maine (GR 4)
Ohio (GR 15, TPP 4)
Alaska (GR 2)
Maryland (GR 11, TPP 4)
Oklahoma (GR 20, TPP 4)
Arizona (GR 14, TPP 2)
Massachusetts (GR 9, TPP 3)
Oregon (GR 10, TPP 2)
Arkansas (GR 11, TPP 1)
Michigan (GR 7, TPP 2)
Pennsylvania (GR 14, TPP 5)
California (GR 65, TPP 21)
Minnesota (GR 9, TPP 3)
Rhode Island (GR 2)
Colorado (GR 12, TPP 3)
Mississippi (GR 12)
South Carolina (GR 17, TPP 4)
Connecticut (GR 6, TPP 2)
Missouri (GR 12, TPP 4)
South Dakota (GR 2)
Delaware (GR 2, TPP 1)
Montana (GR 1)
Tennessee (GR 20, TPP 6)
Florida (GR 41, TPP 14)
Nebraska (GR 2, TPP 1)
Texas (GR 106, TPP 27)
Georgia (GR 32, TPP 5)
Nevada (GR 5, TPP 3)
Utah (GR 3, TPP 3)
Idaho (GR 2)
New Hampshire (GR 1, TPP 1)
Vermont (GR 2)
Illinois (GR 14, TPP 3)
New Jersey (GR 9, TPP 4)
Virginia (GR 19, TPP 6)
Indiana (GR 6, TPP 1)
New Mexico (GR 8)
Washington (GR 18, TPP 6)
Iowa (GR 9, TPP 1)
New York (GR 23)
West Virginia (GR 5)
Kansas (GR 12)
North Carolina (GR 26, TPP 6)
Wisconsin (GR 9, TPP 1)
Kentucky (GR 10)
North Dakota (GR 5, TPP 2)
Wyoming (GR 4)
Louisiana (GR 34, TPP 10)
 
 
 
 
 
 
 
 
 
 
 
Canada
 
 
 
 
Alberta (GR 24, TPP 9)
 
 
 
 
British Columbia (GR 17, TPP 4)
 
 
 
 
Manitoba (GR 4)
 
 
 
 
New Brunswick (GR 6, TPP 1)
 
 
 
 
Newfoundland (GR 6)
 
 
 
 
Nova Scotia (GR 4)
 
 
 
 
Ontario (GR 23, TPP 5)
 
 
 
 
Prince Edward Island (GR 1)
 
 
 
 
Quebec (GR 7, TPP 2)
 
 
 
 
Saskatchewan (GR 7, TPP 3)
 
 
 
 
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 116 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.

18


We have a fleet of approximately 9,300 vehicles. These vehicles are used for delivery, maintenance, management and sales functions. Approximately 43 percent of this fleet is leased and the balance is owned.
Our corporate headquarters are located in Stamford, Connecticut, where we occupy approximately 47,000 square feet under a lease that expires in 2024. Additionally, we maintain other corporate facilities, including in Shelton, Connecticut, where we occupy approximately 12,000 square feet under a lease that expires in 2021, and in Scottsdale, Arizona, where we occupy approximately 20,000 square feet under a lease that expires in 2018. Further, we maintain shared-service facilities in Tampa, Florida, where we occupy approximately 31,000 square feet under a lease that expires in 2020 and in Charlotte, North Carolina, where we occupy approximately 55,000 square feet under a lease that expires in 2025.

Item  3.
Legal Proceedings
A description of legal proceedings can be found in note 14 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
2017:
 
 
 
 
First Quarter
 
$
134.28

 
$
105.33

Second Quarter
 
126.77

 
100.62

Third Quarter
 
139.98

 
106.52

Fourth Quarter
 
174.40

 
136.84

2016:
 
 
 
 
First Quarter
 
$
71.51

 
$
41.90

Second Quarter
 
76.04

 
56.01

Third Quarter
 
84.63

 
61.92

Fourth Quarter
 
109.90

 
70.58


As of January 1, 2018, there were 69 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 2017:
 

19


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, 2017 to October 31, 2017
1,042

(1)
$
137.62

 

 

November 1, 2017 to November 30, 2017
5,831

(1)
$
145.23

 

 

December 1, 2017 to December 31, 2017
175,471

(1)
$
168.39

 
167,560

 

Total
182,344

 
$
167.48

 
167,560

 
$
344,701,141


(1)
In October 2017, November 2017 and December 2017, 1,042, 5,831 and 7,911 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)
On July 21, 2015, our Board authorized a $1 billion share repurchase program. In October 2016, we paused repurchases under the program as we evaluated potential acquisition opportunities. As discussed in note 3 to the consolidated financial statements, we completed the acquisitions of NES in April 2017 and Neff in October 2017. In October 2017, our Board authorized the resumption of the share repurchase program, and we intend to complete the program in 2018.
Equity Compensation Plans
For information regarding equity compensation plans, see Item 12 of this annual report on Form 10-K.


20


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, 2013 to 2017. The following acquired companies are reflected in our results of operations for all periods subsequent to the noted acquisition dates:
In April 2014, we acquired certain assets of the following entities: National Pump & Compressor, Ltd., Canadian Pump and Compressor Ltd., GulfCo Industrial Equipment, LP and LD Services, LLC (collectively “National Pump”). National Pump had annual revenues of approximately $210;
In April 2017, we completed the acquisition of NES Rentals Holdings II, Inc. (“NES”). NES had annual revenues of approximately $369; and
In October 2017, we completed the acquisition of Neff Corporation ("Neff"). Neff had annual revenues of approximately $413.
See note 3 to the consolidated financial statements for additional detail on the NES and Neff acquisitions. 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.  
 
Year Ended December 31,  
2017
 
2016
 
2015
 
2014
 
2013
(in millions, except per share data)
Income statement data:
 
 
 
 
 
 
 
 
 
Total revenues
$
6,641

 
$
5,762

 
$
5,817

 
$
5,685

 
$
4,955

Total cost of revenues
3,872

 
3,359

 
3,337

 
3,253

 
2,968

Gross profit
2,769

 
2,403

 
2,480

 
2,432

 
1,987

Selling, general and administrative expenses
903

 
719

 
714

 
758

 
642

Merger related costs
50

 

 
(26
)
 
11

 
9

Restructuring charge
50

 
14

 
6

 
(1
)
 
12

Non-rental depreciation and amortization
259

 
255

 
268

 
273

 
246

Operating income
1,507

 
1,415

 
1,518

 
1,391

 
1,078

Interest expense, net
464

 
511

 
567

 
555

 
475

Interest expense-subordinated convertible debentures

 

 

 

 
3

Other income, net
(5
)
 
(5
)
 
(12
)
 
(14
)
 
(5
)
Income before (benefit) provision for income taxes
1,048

 
909

 
963

 
850

 
605

(Benefit) provision for income taxes (1)
(298
)
 
343

 
378

 
310

 
218

Net income (1)
1,346

 
566

 
585

 
540

 
387

Basic earnings per share (1)
$
15.91

 
$
6.49

 
$
6.14

 
$
5.54

 
$
4.14

Diluted earnings per share (1)
$
15.73

 
$
6.45

 
$
6.07

 
$
5.15

 
$
3.64


(1)2017 includes the significant impact of the enactment of the Tax Cuts and Jobs Act discussed further in note 13 to the consolidated financial statements.
 
December 31, 
 
2017
 
2016
 
2015
 
2014
 
2013
 
(in millions)
Balance sheet data:
 
 
 
 
 
 
 
 
 
Total assets
$
15,030

 
$
11,988

 
$
12,083

 
$
12,129

 
$
10,876

Total debt
9,440

 
7,790

 
8,162

 
7,962

 
7,078

Stockholders’ equity
3,106

 
1,648

 
1,476

 
1,796

 
1,828




21


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 997 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 $11.5 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 3,400 classes of equipment for rent to construction and industrial companies, manufacturers, utilities, municipalities, homeowners, government entities and other customers. 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 2017, equipment rental revenues represented 86 percent of our total revenues.
For the past several years, we have executed a strategy focused on improving the profitability of our core equipment rental business through revenue growth, margin expansion and operational efficiencies. In particular, we have focused on customer segmentation, customer service differentiation, rate management, fleet management and operational efficiency.
In 2018, we expect to continue our disciplined focus on increasing our profitability and return on invested capital. In particular, our strategy calls for:
A consistently superior standard of service to customers, often provided through a single point of contact;
The further optimization of our customer mix and fleet mix, with a dual objective: to enhance our performance in serving our current customer base, and to focus on the accounts and customer types that are best suited to our strategy for profitable growth. We believe these efforts will lead to even better service of our target accounts, primarily large construction and industrial customers, as well as select local contractors. Our fleet team's analyses are aligned with these objectives to identify trends in equipment categories and define action plans that can generate improved returns;
A continued focus on “Lean” management techniques, including kaizen processes focused on continuous improvement. We continue to implement Lean kaizen processes across our branch network, with the objectives of: reducing the cycle time associated with renting our equipment to customers; improving invoice accuracy and service quality; reducing the elapsed time for equipment pickup and delivery; and improving the effectiveness and efficiency of our repair and maintenance operations. We achieved the anticipated run rate savings from the Lean initiatives, including those included in the Project XL work streams discussed below, in 2017 and 2016, and expect to continue to generate savings from these initiatives;
The implementation of Project XL, which is a set of eight specific work streams focused on driving profitable growth through revenue opportunities and generating incremental profitability through cost savings across our business;
The continued expansion of our trench, power and pump footprint, as well as our tools offering, and the cross-selling of these services throughout our network. We plan to open at least 18 specialty rental branches/tool hubs in 2018 and continue to invest in specialty rental fleet to further position United Rentals as a single source provider of total jobsite solutions through our extensive product and service resources and technology offerings; and
The pursuit of strategic acquisitions to continue to expand our core equipment rental business, as exhibited by our recently completed acquisitions of NES and Neff. Strategic acquisitions allow us to invest our capital to expand our business, further driving our ability to accomplish our strategic goals.
In 2018, based on our analyses of industry forecasts and macroeconomic indicators, we expect that the majority of our end markets will continue to experience solid demand for equipment rental services. Specifically, we expect that North American industry equipment rental revenue will increase approximately 4 percent, with slightly higher growth, on a constant currency basis, in the U.S. than Canada.
We use the American Rental Association criteria for reporting rental rates, time utilization and OEC. As discussed above, we completed the acquisitions of NES and Neff in April 2017 and October 2017, respectively. The pro forma metrics below include the standalone, pre-acquisition results of NES and Neff. For the full year 2017:

22


Rental rates decreased 0.2 percent and increased 0.4 percent year-over-year, on an actual and a pro forma basis, respectively;
The volume of OEC on rent increased 18.2 percent and 7.1 percent year-over-year, on an actual and a pro forma basis, respectively;
Time utilization was 69.5 percent and 69.1 percent on an actual and a pro forma basis, respectively, reflecting increases of 160 basis points and 150 basis points year-over-year, respectively. Time utilization was a full-year record on both an actual and a pro forma basis;
69 percent of equipment rental revenue was derived from key accounts, as compared to 70 percent in 2016. Key accounts are each managed by a single point of contact to enhance customer service; and
The number of rental locations in our higher margin trench, power and pump (also referred to as "specialty") segment increased by thirteen year-over-year due to cold starts.
Financial Overview
In 2017 and 2016, we took a number of positive actions related to our capital structure that have significantly improved our financial flexibility and liquidity, including:
Redeemed all of our 8 1/4 percent Senior Notes, 7 5/8 percent Senior Notes, 7 3/8 percent Senior Notes and 6 1/8 percent Senior Notes;
Issued $750 principal amount of 4 5/8 percent Senior Notes due 2025;
Issued $1.0 billion principal amount of 5 7/8 percent Senior Notes due 2026;
Issued $1.0 billion principal amount of 5 1/2 percent Senior Notes due 2027;
Issued $1.675 billion principal amount of 4 7/8 percent Senior Notes due 2028, comprised of separate and distinct issuances of $925 in August 2017 and $750 in September 2017;
Amended and extended our ABL facility, including an increase in the facility size to $3.0 billion; and
Amended and extended our accounts receivable securitization facility, including an increase in the facility size to $775.
These actions have improved our financial flexibility and liquidity and positioned us to invest the necessary capital to take advantage of business opportunities. As of December 31, 2017, we had available liquidity of $1.71 billion, including cash of $352.
Net income. Net income and diluted earnings per share for each of the three years in the period ended December 31, 2017 are presented below. Net income and diluted earnings per share for the year ended December 31, 2017 include a substantial benefit associated with the enactment of the Tax Cuts and Jobs Act (the "Act"). The enactment of the Act resulted in an estimated net income increase of $689, or $8.05 per diluted share, primarily due to a one-time revaluation of our net deferred tax liability based on a U.S. federal tax rate of 21 percent, which was partially offset by the impact of a one-time transition tax on our unremitted foreign earnings and profits, which we will elect to pay over an eight-year period. We expect to meaningfully benefit from the Act in future periods, primarily due to the impact of the lower U.S. federal tax rate.  
 
Year Ended December 31,  
 
2017
 
2016
 
2015
Net income
$
1,346

 
$
566

 
$
585

Diluted earnings per share
$
15.73

 
$
6.45

 
$
6.07


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

23


 
Year Ended December 31,  
 
2017
 
2016
 
2015
Tax rate applied to items below
38.5
%
 
 
 
38.2
%
 
 
 
38.6
%
 
 
 
Contribution to net income (after-tax)
 
Impact on diluted earnings per share
 
Contribution to net income (after-tax)
 
Impact on diluted earnings per share
 
Contribution to net income (after-tax)
 
Impact on diluted earnings per share
Merger related costs (1)
$
(31
)
 
$
(0.36
)
 
$

 
$

 
$
17

 
$
0.17

Merger related intangible asset amortization (2)
(99
)
 
(1.15
)
 
(99
)
 
(1.12
)
 
(111
)
 
(1.15
)
Impact on depreciation related to acquired fleet and property and equipment (3)
(5
)
 
(0.05
)
 

 

 
2

 
0.02

Impact of the fair value mark-up of acquired fleet (4)
(50
)
 
(0.59
)
 
(22
)
 
(0.25
)
 
(18
)
 
(0.19
)
Impact on interest expense related to fair value adjustment of acquired RSC indebtedness (5)

 

 
1

 
0.01

 
2

 
0.02

Restructuring charge (6)
(31
)
 
(0.36
)
 
(9
)
 
(0.11
)
 
(4
)
 
(0.04
)
Asset impairment charge (7)
(1
)
 
(0.01
)
 
(2
)
 
(0.03
)
 

 

Loss on extinguishment of debt securities and amendment of ABL facility
(33
)
 
(0.39
)
 
(62
)
 
(0.70
)
 
(75
)
 
(0.78
)
 

(1)
This reflects transaction costs associated with the NES and Neff acquisitions discussed in note 3 to the consolidated financial statements, and the April 2014 National Pump acquisition. The income for the year ended December 31, 2015 reflects a decline in the fair value of the contingent cash consideration component of the National Pump purchase price. Merger related costs only include costs associated with major acquisitions that significantly impact our operations. For additional information, see "Results of Operations-Other costs/(income)-merger related costs" below.
(2)
This reflects the amortization of the intangible assets acquired in the RSC, National Pump, NES and Neff acquisitions.
(3)
This reflects the impact of extending the useful lives of equipment acquired in the RSC, NES and Neff acquisitions, 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 associated with the fair value mark-up of rental equipment acquired in the RSC, NES and Neff acquisitions that was subsequently sold.
(5)
This reflects a reduction of interest expense associated with the fair value mark-up of debt acquired in the RSC acquisition.
(6)
As discussed in note 5 to our consolidated financial statements, this primarily reflects severance costs and branch closure charges associated with our restructuring programs.
(7)
This reflects write-offs of leasehold improvements and other fixed assets in connection with our restructuring programs.
EBITDA GAAP Reconciliations. EBITDA represents the sum of net income, (benefit) provision for income taxes, interest expense, net, depreciation of rental equipment and non-rental depreciation and amortization. Adjusted EBITDA represents EBITDA plus the sum of the merger related costs, restructuring charge, stock compensation expense, net, and the impact of the fair value mark-up of acquired fleet. These items are excluded from adjusted EBITDA internally when evaluating our operating performance and for strategic planning and forecasting purposes, and allow investors to make a more meaningful comparison between our core business operating results over different periods of time, as well as with those of other similar companies. The EBITDA and adjusted EBITDA margins represent EBITDA or adjusted EBITDA divided by total revenue. Management believes that EBITDA and adjusted EBITDA, when viewed with the Company’s results under U.S. generally accepted accounting principles (“GAAP”) and the accompanying reconciliations, provide useful information about operating performance and period-over-period growth, and provide additional information that is useful for evaluating the operating performance of our core business without regard to potential distortions. Additionally, management believes that EBITDA and adjusted EBITDA help investors gain an understanding of the factors and trends affecting our ongoing cash earnings, from which capital investments are made and debt is serviced. However, EBITDA and adjusted EBITDA are not measures of financial performance or liquidity under GAAP and, accordingly, should not be considered as alternatives to net income or cash flow from operating activities as indicators of operating performance or liquidity.
The table below provides a reconciliation between net income and EBITDA and adjusted EBITDA:


24


 
Year Ended December 31,  
 
2017
 
2016
 
2015
Net income
$
1,346

 
$
566

 
$
585

(Benefit) provision for income taxes
(298
)
 
343

 
378

Interest expense, net
464

 
511

 
567

Depreciation of rental equipment
1,124

 
990

 
976

Non-rental depreciation and amortization
259

 
255

 
268

EBITDA
2,895

 
2,665

 
2,774

Merger related costs (1)
50

 

 
(26
)
Restructuring charge (2)
50

 
14

 
6

Stock compensation expense, net (3)
87

 
45

 
49

Impact of the fair value mark-up of acquired fleet (4)
82

 
35

 
29

Adjusted EBITDA
$
3,164

 
$
2,759

 
$
2,832


The table below provides a reconciliation between net cash provided by operating activities and EBITDA and adjusted EBITDA:
 
Year Ended December 31,  
 
2017
 
2016
 
2015
Net cash provided by operating activities
$
2,230

 
$
1,953

 
$
1,995

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


 
 
 
 
Amortization of deferred financing costs and original issue discounts
(9
)
 
(9
)
 
(10
)
Gain on sales of rental equipment
220

 
204

 
227

Gain on sales of non-rental equipment
4

 
4

 
8

Merger related costs (1)
(50
)
 

 
26

Restructuring charge (2)
(50
)
 
(14
)
 
(6
)
Stock compensation expense, net (3)
(87
)
 
(45
)
 
(49
)
Loss on extinguishment of debt securities and amendment of ABL facility
(54
)
 
(101
)
 
(123
)
Excess tax benefits from share-based payment arrangements

 
58

 
5

Changes in assets and liabilities
129

 
101

 
194

Cash paid for interest
357

 
415

 
447

Cash paid for income taxes, net
205

 
99

 
60

EBITDA
2,895

 
2,665

 
2,774

Add back:
 
 
 
 
 
Merger related costs (1)
50

 

 
(26
)
Restructuring charge (2)
50

 
14

 
6

Stock compensation expense, net (3)
87

 
45

 
49

Impact of the fair value mark-up of acquired fleet (4)
82

 
35

 
29

Adjusted EBITDA
$
3,164

 
$
2,759

 
$
2,832

_________________

(1)
This reflects transaction costs associated with the NES and Neff acquisitions discussed in note 3 to the consolidated financial statements, and the April 2014 National Pump acquisition. The income for the year ended December 31, 2015 reflects a decline in the fair value of the contingent cash consideration component of the National Pump purchase price. Merger related costs only include costs associated with major acquisitions that significantly impact our operations. For additional information, see "Results of Operations-Other costs/(income)-merger related costs" below.
(2)
As discussed in note 5 to our consolidated financial statements, this primarily reflects severance costs and branch closure charges associated with our restructuring programs.
(3)
Represents non-cash, share-based payments associated with the granting of equity instruments.

25


(4)
This reflects additional costs recorded in cost of rental equipment sales associated with the fair value mark-up of rental equipment acquired in the RSC, NES and Neff acquisitions that was subsequently sold.
For the year ended December 31, 2017, EBITDA increased $230, or 8.6 percent, and adjusted EBITDA increased $405, or 14.7 percent. The EBITDA increase primarily reflects increased profit from equipment rentals, partially offset by i) increased selling, general and administrative ("SG&A") compensation costs, including stock compensation costs, largely due to the impact of the NES and Neff acquisitions, increased revenue, improved profitability, and increases in our stock price and in the volume of stock awards, and ii) increased merger related costs and restructuring charges associated with the NES and Neff acquisitions. The adjusted EBITDA increase primarily reflects increased profit from equipment rentals and sales of rental equipment, partially offset by increased SG&A compensation costs, largely due to the impact of the NES and Neff acquisitions, increased revenue and improved profitability. For the year ended December 31, 2017, EBITDA margin decreased 270 basis points to 43.6 percent, and adjusted EBITDA margin decreased 30 basis points to 47.6 percent. The decrease in the EBITDA margin primarily reflects i) increased SG&A compensation costs, including stock compensation costs, largely due to the impact of the NES and Neff acquisitions, increased revenue, improved profitability, and increases in our stock price and in the volume of stock awards, and ii) increased merger related costs and restructuring charges associated with the NES and Neff acquisitions. The decrease in the adjusted EBITDA margin primarily reflects increased SG&A compensation costs largely due to the impact of the NES and Neff acquisitions, increased revenue and improved profitability, partially offset by increased profit from sales of rental equipment.
For the year ended December 31, 2016, EBITDA decreased $109, or 3.9 percent, and adjusted EBITDA decreased $73, or 2.6 percent. The EBITDA decrease primarily reflects decreased profit from equipment rentals and sales of rental equipment, and the impact of the merger credit recognized during the year ended December 31, 2015 associated with a decline in the fair value of the contingent cash consideration component of the National Pump purchase price due to lower than expected financial performance compared to agreed upon financial targets. The adjusted EBITDA decrease primarily reflects decreased profit from equipment rentals and sales of rental equipment. For the year ended December 31, 2016, EBITDA margin decreased 140 basis points to 46.3 percent, and adjusted EBITDA margin decreased 80 basis points to 47.9 percent. The decrease in the EBITDA margin primarily reflects decreased margins from equipment rentals and the impact of the National Pump merger credit recognized during the year ended December 31, 2015. The decrease in the adjusted EBITDA margin primarily reflects decreased margins from equipment rentals.
Revenues. Revenues for each of the three years in the period ended December 31, 2017 were as follows:  
 
Year Ended December 31,
 
Change 
 
2017
 
2016
 
2015
 
2017
 
2016
Equipment rentals*
$
5,715

 
$
4,941

 
$
4,949

 
15.7%
 
(0.2)%
Sales of rental equipment
550

 
496

 
538

 
10.9%
 
(7.8)%
Sales of new equipment
178

 
144

 
157

 
23.6%
 
(8.3)%
Contractor supplies sales
80

 
79

 
79

 
1.3%
 
—%
Service and other revenues
118

 
102

 
94

 
15.7%
 
8.5%
Total revenues
$
6,641

 
$
5,762

 
$
5,817

 
15.3%
 
(0.9)%
*Equipment rentals metrics:
 
 
 
 
 
 
 
 
 
Year-over-year decrease in rental rates (1)
 
 
 
 
 
 
(0.2)%
 
(2.2)%
Year-over-year increase in the volume of equipment on rent
 
 
 
 
 
 
18.2%
 
3.1%
Time utilization (2)
69.5
%
 
67.9
%
 
67.3
%
 
160 bps
 
60 bps
*Pro forma equipment rentals information (3):
 
 
 
 
 
 
 
 
 
Equipment rentals variance
 
 
 
 
 
 
7.6%
 
 
Year-over-year increase in rental rates (1)
 
 
 
 
 
 
0.4%
 
 
Year-over-year increase in the volume of equipment on rent
 
 
 
 
 
 
7.1%
 
 
Time utilization (2)
69.1
%
 
67.6
%
 
 
 
150 bps
 

_________________

(1)
Rental rate changes are calculated based on the year-over-year variance in average contract rates, weighted by the prior period revenue mix.
(2)
Time utilization is calculated by dividing the amount of time an asset is on rent by the amount of time the asset has been owned during the year.

26


(3)
As discussed in note 3 to the consolidated financial statements, we completed the acquisitions of NES and Neff in April 2017 and October 2017, respectively. The pro forma information includes the standalone, pre-acquisition results of NES and Neff.

Equipment rentals include our revenues from renting equipment, as well as revenue related to the fees we charge customers: for equipment delivery and pick-up; to protect the customer against liability for damage to our equipment while on rent; for fuel; and for environmental costs. Collectively, these "ancillary fees" represented approximately 12 percent of equipment rental revenue in 2017. Delivery and pick-up revenue, which represented approximately seven percent of equipment rental revenue in 2017, is the most significant ancillary revenue component. Sales of rental equipment represent our revenues from the sale of used rental equipment. Sales of new equipment represent our revenues from the sale of new equipment. Contractor supplies sales represent our sales of supplies utilized by contractors, which include construction consumables, tools, small equipment and safety supplies. Services and other revenues primarily represent our revenues earned from providing repair and maintenance services on our customers’ fleet (including parts sales). See note 2 to our consolidated financial statements for further discussion of our revenue recognition accounting.
2017 total revenues of $6.6 billion increased 15.3 percent compared with 2016. On a pro forma basis including the standalone, pre-acquisition results of NES and Neff, 2017 total revenues increased 7.7 percent. The revenue increase primarily reflects a 15.7 percent increase in equipment rental revenue, primarily due to an 18.2 percent increase in the volume of OEC on rent, which includes the impact of the NES and Neff acquisitions, partially offset by a 0.2 percent rental rate decrease. On the pro forma basis including the standalone, pre-acquisition results of NES and Neff, equipment rental revenue increased 7.6 percent year-over-year, primarily reflecting a 7.1 percent increase in the volume of OEC on rent and a 0.4 percent rental rate increase. We believe that the increase in the volume of OEC on rent reflects improving demand in many of our core markets. Sales of rental equipment increased 10.9 percent primarily due to increased volume. Sales of new equipment increased 23.6 percent primarily due to increased volume and increased sales of larger equipment.
2016 total revenues of $5.8 billion decreased 0.9 percent compared with 2015. The revenue decrease primarily reflects a 7.8 percent decrease in sales of rental equipment due primarily to a decrease in the volume of equipment sold through wholesale channels. Rental revenue decreased 0.2 percent, primarily due to a 2.2 percent rental rate decrease, partially offset by a 3.1 percent increase in the volume of OEC on rent, which included the adverse impact of currency. Excluding the adverse impact from currency, rental revenue would have increased 0.2 percent year-over-year.
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 revenues from renting equipment on a straight-line basis. We account for such rentals as operating leases. 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 monthly term of 28 days. This daily rate assumes that the equipment will be on rent for the full 28 days, as we are unsure of when the customer will return the equipment and therefore unsure of which rental contract period will apply.
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, which is based on the rental contract period applicable to the actual number of days the equipment was out on rent, 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 under the straight-line methodology. For instance, continuing the above example, if the customer rented the above 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, or $300 at the weekly rate, and the cumulative amount recognized to date on a straight-line basis, or $128.56, which represents four days at $32.14 per day).

27


We record amounts billed to customers in excess of recognizable revenue as deferred revenue on our balance sheet. We had deferred revenue of $38 and $33 as of December 31, 2017 and 2016, respectively. Equipment rentals include our revenues from renting equipment, as well as revenue related to the "ancillary fees" we charge customers: for equipment delivery and pick-up; to protect the customer against liability for damage to our equipment while on rent; for fuel; and for environmental costs. Delivery and pick-up revenue is the most significant ancillary revenue component and is recognized when the service is performed.
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.
See note 2 to our consolidated financial statements for further discussion of our revenue recognition accounting.
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. During the years ended December 31, 2017, 2016 and 2015, we recognized expenses of $40, $24 and $32, respectively, within selling, general and administrative expenses in our consolidated statements of income, associated with our allowances for doubtful accounts.
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 $10, $18 and $30 for the years ended December 31, 2017, 2016 and 2015, 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 $127 or $160, 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 $14. 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 $23 or $35, respectively.
Acquisition Accounting. We have made a number of acquisitions in the past and may continue to make acquisitions in the future. The assets acquired and liabilities assumed are recorded based on their respective fair values at the date of acquisition. Long-lived assets (principally rental equipment), goodwill and other intangible assets generally represent the largest components of our acquisitions. The intangible assets that we have acquired are non-compete agreements and customer relationships. 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 and customer relationships 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

28


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. 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 cash flow 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- Each reporting unit's estimated future cash flows are 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' business enterprise. 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.
Financial Accounting Standards Board ("FASB") 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. As discussed in note 2 to our consolidated financial statements, we expect to adopt accounting guidance that eliminates the second step from the goodwill impairment test when it becomes effective (for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019).
In connection with our goodwill impairment test that was conducted as of October 1, 2016, we bypassed the qualitative assessment for each reporting unit and proceeded directly to the first step of the goodwill impairment test. Our goodwill impairment testing as of this date indicated that all of our reporting units, excluding our Pump Solutions reporting unit, had estimated fair values which exceeded their respective carrying amounts by at least 53 percent. The estimated fair value of our Pump Solutions reporting unit exceeded its carrying amount by approximately 15 percent. Given the relatively small percent by which the Pump Solutions reporting unit’s fair value exceeded its carrying amount, we further tested the Pump Solution reporting unit for impairment by performing a sensitivity test that included a reduction in the long-term growth rate and an increase in the discount rate. The Pump Solutions reporting unit passed step one of the goodwill impairment test under the sensitivity test. We continue to monitor the Pump Solutions reporting unit for impairment, and the Pump Solution reporting unit’s operating results improved significantly in 2017, as evidenced in its fair value exceeding its carrying value by 62 percent in the goodwill impairment test that was conducted as of October 1, 2017.

29


In connection with our goodwill impairment test that was conducted as of October 1, 2017, we bypassed the qualitative assessment for each reporting unit and proceeded directly to the first step of the goodwill impairment test. Our goodwill impairment testing as of this date indicated that all of our reporting units had estimated fair values which exceeded their respective carrying amounts by at least 45 percent.
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. We recognized immaterial asset impairment charges during the years ended December 31, 2017, 2016 and 2015.
In addition to the impairment reviews we conduct in connection with branch consolidations and other changes in the business, each quarter we conduct an impairment review of rental assets. As part of this impairment review, we estimate the future rental revenues from our rental assets based on current and expected utilization levels, the age of the assets and their remaining useful lives. Additionally, we estimate when the assets are 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 quarterly review, there was no impairment associated with our rental 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.
The Tax Cuts and Jobs Act, which was enacted in December 2017, had a substantial impact on our income tax benefit for the year ended December 31, 2017. We expect to meaningfully benefit from its enactment in future periods. See note 13 to the consolidated financial statements for further detail.
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, vehicles 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.

30


Legal Contingencies. We are involved in a variety of claims, lawsuits, investigations and proceedings, as described in note 14 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 two reportable segments are i) general rentals and ii) trench, power and pump. The general rentals segment includes the rental of construction, aerial, industrial and homeowner equipment and related services and activities. The general rentals segment’s customers include construction and industrial companies, manufacturers, utilities, municipalities, homeowners and government entities. The general rentals segment operates throughout the United States and Canada. The trench, power and pump segment is comprised of: (i) the Trench Safety region, which rents trench safety equipment such as trench shields, aluminum hydraulic shoring systems, slide rails, crossing plates, construction lasers and line testing equipment for underground work, (ii) the Power and HVAC region, which rents power and HVAC equipment such as portable diesel generators, electrical distribution equipment, and temperature control equipment including heating and cooling equipment, and (iii) the Pump Solutions region, which rents pumps primarily used by energy and petrochemical customers. The trench, power and pump 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 eleven geographic regions—Carolinas, Gulf South, Industrial (which serves the geographic Gulf region and has a strong industrial presence), Mid-Atlantic, Mid Central, Midwest, Northeast, Pacific West, South, Southeast and Western Canada—into our general rentals reporting segment. We periodically review the size and geographic scope of our regions, and have occasionally reorganized the regions to create a more balanced and effective structure. Historically, there have been variances in the levels of equipment rentals gross margins achieved by these regions. For the five year period ended December 31, 2017, one of our general rentals' regions had an equipment rentals gross margin that varied by between 10 percent and 12 percent from the equipment rentals gross margins of the aggregated general rentals' regions over the same period. The rental industry is cyclical, and there historically have been regions with equipment rentals gross margins that varied by greater than 10 percent from the equipment rentals gross margins of the aggregated general rentals' regions, though the specific regions with margin variances of over 10 percent have fluctuated. We expect margin convergence going forward given the cyclical nature of the rental industry, and monitor the margin variances and confirm the expectation of future convergence on a quarterly basis.
We similarly monitor the margin variances for the regions in the trench, power and pump segment. The Pump Solutions region is primarily comprised of locations acquired in the April 2014 National Pump acquisition. As such, there isn’t a long history of the Pump Solutions region's rental margins included in the trench, power and pump segment. When monitoring for margin convergence, we include projected future results. We monitor the trench, power and pump segment margin variances and confirm the expectation of future convergence on a quarterly basis.
We believe that the regions that are aggregated into our segments have similar economic characteristics, as each region is capital intensive, offers similar products to similar customers, uses similar methods to distribute its products, and is subject to similar competitive risks. The aggregation of our regions also reflects the management structure that we use for making operating decisions and assessing performance. Although we believe aggregating these regions into our reporting segments for segment reporting purposes is appropriate, to the extent that there are significant margin variances that do not converge, we may be required to disaggregate the regions into separate reporting segments. Any such disaggregation would have no impact on our consolidated results of operations.
These segments align our external segment reporting with how management evaluates 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:  

31


 
General
rentals
 
Trench,
power and pump
 
Total
Year Ended December 31, 2017
 
 
 
 
 
Equipment rentals
$
4,727

 
$
988

 
$
5,715

Sales of rental equipment
509

 
41

 
550

Sales of new equipment
159

 
19

 
178

Contractor supplies sales
65

 
15

 
80

Service and other revenues
105

 
13

 
118

Total revenue
$
5,565

 
$
1,076

 
$
6,641

Year Ended December 31, 2016
 
 
 
 
 
Equipment rentals
$
4,166

 
$
775

 
$
4,941

Sales of rental equipment
459

 
37

 
496

Sales of new equipment
128

 
16

 
144

Contractor supplies sales
64

 
15

 
79

Service and other revenues
91

 
11

 
102

Total revenue
$
4,908

 
$
854

 
$
5,762

Year ended December 31, 2015
 
 
 
 
 
Equipment rentals
$
4,241

 
$
708

 
$
4,949

Sales of rental equipment
504

 
34

 
538

Sales of new equipment
137

 
20

 
157

Contractor supplies sales
67

 
12

 
79

Service and other revenues
83

 
11

 
94

Total revenue
$
5,032

 
$
785

 
$
5,817


Equipment rentals. 2017 equipment rentals of $5.7 billion increased $774, or 15.7 percent, as compared to 2016, primarily reflecting an 18.2 percent increase in the volume of OEC on rent, which includes the impact of the NES and Neff acquisitions, partially offset by a 0.2 percent rental rate decrease. On a pro forma basis including the standalone, pre-acquisition results of NES and Neff, equipment rental revenue increased 7.6 percent year-over-year, primarily reflecting a 7.1 percent increase in the volume of OEC on rent and a 0.4 percent rental rate increase. We believe that the increase in the volume of OEC on rent reflects improving demand in many of our core markets. Equipment rentals represented 86 percent of total revenues in 2017. On a segment basis, equipment rentals represented 85 percent and 92 percent of total revenues for general rentals and trench, power and pump, respectively. General rentals equipment rentals increased $561, or 13.5 percent, as compared to 2016, primarily reflecting a 16.9 percent increase in the volume of OEC on rent, which includes the impact of the NES and Neff acquisitions. On a pro forma basis including the standalone, pre-acquisition results of NES and Neff, the volume of OEC on rent increased 5.5 percent. We believe that the increase in the volume of OEC on rent reflects improving demand in many of our core markets. Trench, power and pump equipment rentals increased $213, or 27.5 percent, primarily reflecting a 34.9 percent increase in the volume of OEC on rent. Trench, power and pump average OEC increased 14.3 percent. The increase in the volume of OEC on rent significantly exceeded the increase in average OEC primarily due to improved performance in our Pump Solutions region. The improvement in the Pump Solutions region primarily reflected growth in revenue from i) upstream oil and gas customers, which have experienced significant volatility in recent years, and ii) construction and mining customers.

2016 equipment rentals of $4.9 billion decreased $8, or 0.2 percent, as compared to 2015. The equipment rentals decrease was primarily due to a 2.2 percent rental rate decrease, partially offset by a 3.1 percent increase in the volume of OEC on rent, which included the adverse impact of currency. Excluding the adverse impact from currency, rental revenue would have increased 0.2 percent year-over-year. Equipment rentals represented 86 percent of total revenues in 2016. On a segment basis, equipment rentals represented 85 percent and 91 percent of total revenues for general rentals and trench, power and pump, respectively. General rentals equipment rentals decreased $75, or 1.8 percent, as compared to 2015, primarily reflecting decreased rental rates partially offset by a 2.9 percent increase in the volume of OEC on rent, which included the adverse impact of currency. Trench, power and pump equipment rentals increased $67, or 9.5 percent, primarily reflecting increased average OEC. Trench, power and pump average OEC for 2016 increased 6.7 percent as compared to 2015.
Sales of rental equipment. For the three years in the period ended December 31, 2017, sales of rental equipment represented approximately 9 percent of our total revenues. Our general rentals segment accounted for most of these sales. 2017

32


sales of rental equipment of $550 increased 10.9 percent from 2016 primarily reflecting increased volume. 2016 sales of rental equipment of $496 decreased slightly from 2015.
Sales of new equipment. For the three years in the period ended December 31, 2017, sales of new equipment represented approximately 3 percent of our total revenues. Our general rentals segment accounted for most of these sales. 2017 sales of new equipment of $178 increased 23.6 percent from 2016 primarily reflecting increased volume and increased sales of larger equipment. 2016 sales of new equipment of $144 decreased slightly from 2015.
Sales of contractor supplies. For the three years in the period ended December 31, 2017, sales of contractor supplies represented approximately 1 percent of our total revenues. Our general rentals segment accounted for most of these sales. 2017 sales of contractor supplies were flat with 2016, and 2016 sales of contractor supplies were flat with 2015.
Service and other revenues. For the three years in the period ended December 31, 2017, service and other revenues represented approximately 2 percent of our total revenues. Our general rentals segment accounted for most of these sales. 2017 service and other revenues of $118 increased 15.7 percent from 2016 primarily reflecting the impact of the NES acquisition discussed in note 3 to the consolidated financial statements and an increased emphasis on this line of business. 2016 service and other revenues of $102 increased slightly from 2015.
Fourth Quarter 2017 Items. The fourth quarter of 2017 includes an estimated benefit of $689 associated with the enactment of the Tax Cuts and Jobs Act discussed further in note 13 to our consolidated financial statements. The fourth quarter of 2017 also includes $18 of merger related costs and $22 of restructuring charges primarily associated with the NES and Neff acquisitions discussed in note 3 to our consolidated financial statements. Additionally, in the fourth quarter of 2017, we redeemed the remaining $225 principal amount of our 7 5/8 percent Senior Notes due 2022. Upon the redemption of these notes, we recognized a loss of $11 in interest expense, net. The loss represented the difference between the net carrying amount and the total purchase price of the redeemed notes. The fourth quarter of 2017 also reflects a year-over-year increase of $11 in stock compensation expense primarily due to the impact of increased revenue, improved profitability, and increases in our stock price and in the volume of stock awards.
 Fourth Quarter 2016 Items. The fourth quarter of 2016 includes $6 of restructuring charges associated with the restructuring program we initiated in the fourth quarter of 2015 and closed in the fourth quarter of 2016, which is discussed further in note 5 to our consolidated financial statements. Additionally, in the fourth quarter of 2016, we redeemed $850 principal amount of our 7 5/8 percent Senior Notes due 2022 and issued $750 principal amount of 5 1/2 percent Senior Notes due 2027. Upon the partial redemption of the 7 5/8 percent Senior Notes due 2022, we recognized a loss of $65 in interest expense, net. The loss represented the difference between the net carrying amount and the total purchase price of the redeemed notes.
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, 2017 were as follows:  
 
General
rentals
 
Trench,
power and pump
 
Total
2017
 
 
 
 
 
Equipment Rentals Gross Profit
$
1,950

 
$
490

 
$
2,440

Equipment Rentals Gross Margin
41.3
%
 
49.6
%
 
42.7
%
2016
 
 
 
 
 
Equipment Rentals Gross Profit
$
1,725

 
$
364

 
$
2,089

Equipment Rentals Gross Margin
41.4
%
 
47.0
%
 
42.3
%
2015
 
 
 
 
 
Equipment Rentals Gross Profit
$
1,819

 
$
328

 
$
2,147

Equipment Rentals Gross Margin
42.9
%
 
46.3
%
 
43.4
%

General rentals. For the three years in the period ended December 31, 2017, general rentals accounted for 82 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 2017 increased $225 and equipment rentals gross margin decreased 10 basis points. Time utilization increased 90 basis points, and was 70.2 percent and 69.3 percent for the years ended December 31, 2017 and 2016, respectively. In 2017, we saw improving demand in many of our core markets, as evidenced by a 16.9 percent increase in the volume of OEC on rent, which includes the impact of the NES and

33


Neff acquisitions. On a pro forma basis including the standalone, pre-acquisition results of NES and Neff, the volume of OEC on rent increased 5.5 percent.
General rentals’ equipment rentals gross profit in 2016 decreased $94 and equipment rentals gross margin decreased 150 basis points, primarily reflecting decreased rental rates partially offset by a 70 basis point increase in time utilization. Time utilization was 69.3 percent and 68.6 percent for the years ended December 31, 2016 and 2015, respectively. The decreased rental rates reflected continued pressure from oil and gas and from Canada, and the impact of recent industry fleet expansion. Although we experienced rate pressures during 2016, we also saw improving demand in many of our core markets, as evidenced by a 2.9 percent increase in the volume of OEC on rent.
Trench, power and pump. For the year ended December 31, 2017, equipment rentals gross profit increased by $126 and equipment rentals gross margin increased 260 basis points from 2016, primarily reflecting increased equipment rentals revenue on a larger fleet. Year-over-year, trench, power and pump equipment rentals increased 27.5 percent, average OEC increased 14.3 percent and the volume of OEC on rent increased 34.9 percent. The increase in the volume of OEC on rent significantly exceeded the increase in average OEC primarily due to improved performance in our Pump Solutions region. The improvement in the Pump Solutions region primarily reflected growth in revenue from i) upstream oil and gas customers, which have experienced significant volatility in recent years, and ii) construction and mining customers.
For the year ended December 31, 2016, equipment rentals gross profit increased by $36 and equipment rentals gross margin increased 70 basis points from 2015. The increase in equipment rentals gross profit primarily reflects increased equipment rentals revenue on a larger fleet across a larger network of branches. Year-over-year, trench, power and pump equipment rentals increased 9.5 percent and average OEC increased 6.7 percent. Capitalizing on the demand for the higher margin equipment rented by our trench, power and pump segment has been a key component of our strategy in recent years.
Gross Margin. Gross margins by revenue classification were as follows:  
 
Year Ended December 31, 
 
Change
 
2017
 
2016
 
2015
 
2017
 
2016
Total gross margin
41.7%
 
41.7%
 
42.6%
 
 
(90) bps
Equipment rentals
42.7%
 
42.3%
 
43.4%
 
40 bps
 
(110) bps
Sales of rental equipment
40.0%
 
41.1%
 
42.2%
 
(110) bps
 
(110) bps
Sales of new equipment
14.6%
 
17.4%
 
16.6%
 
(280) bps
 
80 bps
Contractor supplies sales
30.0%
 
30.4%
 
30.4%
 
(40) bps
 
Service and other revenues
50.0%
 
59.8%
 
59.6%
 
(980) bps
 
20 bps

2017 gross margin of 41.7 percent was flat with 2016. Equipment rentals gross margin increased 40 basis points, primarily reflecting a 160 basis point increase in time utilization partially offset by a 0.2 percent rental rate decrease. Time utilization was 69.5 percent and 67.9 percent for the years ended December 31, 2017 and 2016, respectively. Time utilization for 2017 was a full-year record. The volume of OEC on rent increased 18.2 percent, including the impact of the NES and Neff acquisitions. On a pro forma basis including the standalone, pre-acquisition results of NES and Neff, the volume of OEC on rent increased 7.1 percent and rental rates increased 0.4 percent. We believe that the increase in the volume of OEC on rent reflects improving demand in many of our core markets. Gross margin from sales of new equipment decreased 280 basis points. Sales of new equipment increased 23.6 percent, primarily reflecting increased volume and increased sales of larger equipment, some of which were at lower margins. Gross margin from service and other revenues decreased 980 basis points. In 2017, as a result of our increased focus on the service line of business, we increased the allocation of labor to it. Such labor costs were formerly included in cost of equipment rentals.

2016 gross margin of 41.7 percent decreased 90 basis points as compared to 2015, primarily reflecting decreased gross margins from equipment rentals and sales of rental equipment. Equipment rentals gross margin decreased 110 basis points as compared to 2015, primarily reflecting a 2.2 percent rental rate decrease partially offset by a 60 basis point increase in time utilization. Time utilization was 67.9 percent and 67.3 percent for the years ended December 31, 2016 and 2015, respectively. The decreased rental rates reflected continued pressure from oil and gas and from Canada, and the impact of recent industry fleet expansion. Although we experienced rate pressures during 2016, we also saw improving demand in many of our core markets, as evidenced by a 3.1 percent increase in the volume of OEC on rent. Gross margin from sales of rental equipment decreased 110 basis points primarily due to decreased pricing.
Other costs/(income)

34


The table below includes the other costs/(income) in our consolidated statements of income, as well as key associated metrics, for the three years in the period ended December 31, 2017:  
 
Year Ended December 31,
 
Change 
 
2017
 
2016
 
2015
 
2017
 
2016
Selling, general and administrative ("SG&A") expense
$
903

 
$
719

 
$
714

 
25.6%
 
0.7%
SG&A expense as a percentage of revenue
13.6
 %
 
12.5
%
 
12.3
%
 
110 bps
 
20 bps
Merger related costs
50

 

 
(26
)
 
 
(100.0)%
Restructuring charge
50

 
14

 
6

 
257.1%
 
133.3%
Non-rental depreciation and amortization
259

 
255

 
268

 
1.6%
 
(4.9)%
Interest expense, net
464

 
511

 
567

 
(9.2)%
 
(9.9)%
Other income, net
(5
)
 
(5
)
 
(12
)
 
—%
 
(58.3)%
(Benefit) provision for income taxes
(298
)
 
343

 
378

 
(186.9)%
 
(9.3)%
Effective tax rate
(28.4
)%
 
37.7
%
 
39.3
%
 
(6,610) bps
 
(160) bps
SG&A expense primarily includes sales force compensation, information technology costs, third party professional fees, management salaries, bad debt expense and clerical and administrative overhead. The increase in SG&A expense as a percentage of revenue for the year ended December 31, 2017 primarily reflects increased compensation costs, including stock compensation costs, largely due to the impact of the NES and Neff acquisitions discussed in note 3 to the consolidated financial statements, improved profitability, and increases in our stock price and in the volume of stock awards.
SG&A expense for the year ended December 31, 2016 did not change significantly year-over-year.
The merger related costs reflect transaction costs associated with the NES and Neff acquisitions discussed in note 3 to the consolidated financial statements, and the April 2014 National Pump acquisition. We have made a number of acquisitions in the past and may continue to make acquisitions in the future. Merger related costs only include costs associated with major acquisitions that significantly impact our operations. The historic acquisitions that have included merger related costs are RSC, which had annual revenues of approximately $1.5 billion prior to the acquisition, and National Pump, which had annual revenues of over $200 prior to the acquisition. As discussed in note 3 to the consolidated financial statements, NES had annual revenues of approximately $369 and Neff had annual revenues of approximately $413. The merger related costs for the year ended December 31, 2017 include a termination fee we paid associated with a merger agreement Neff entered into with a prior bidder. The income for the year ended December 31, 2015 reflects a decline in the fair value of the contingent cash consideration component of the National Pump purchase price due to lower than expected financial performance compared to agreed upon financial targets.
The restructuring charges for the years ended December 31, 2017, 2016 and 2015 primarily reflect severance costs and branch closure charges associated with our restructuring programs. In the second quarter of 2017, we initiated a restructuring program following the closing of the NES acquisition discussed in note 3 to the consolidated financial statements. The restructuring program also includes actions undertaken associated with Project XL, which is a set of eight specific work streams focused on driving profitable growth through revenue opportunities and generating incremental profitability through cost savings across our business, and the Neff acquisition that is discussed in note 3 to the consolidated financial statements. See note 5 to our consolidated financial statements for additional information.
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 and non-compete agreements.
Interest expense, net for the years ended December 31, 2017, 2016 and 2015 includes aggregate losses of $54, $101 and $123, respectively, associated with debt redemptions and the amendments of our ABL facility. Excluding the impact of these losses, interest expense, net, for the year ended December 31, 2017 was flat year-over-year as the impact of higher average debt was offset by a lower average cost of debt. Excluding the impact of these losses, interest expense, net, for the year ended December 31, 2016 decreased primarily due to lower average debt and a lower average cost of debt.
The decrease in other income, net for the year ended December 31, 2016 primarily reflects decreased gains on sales of non-rental equipment.

35


A detailed reconciliation of the effective tax rates to the U.S. federal statutory income tax rate is included in note 13 to our consolidated financial statements. As discussed further in note 13, the income tax benefit for the year ended December 31, 2017 includes the substantial impact of the enactment of the Tax Cuts and Jobs Act.
Balance sheet. Accounts receivable, net increased by $313, or 34.0 percent, from December 31, 2016 to December 31, 2017 primarily due to increased revenue, which included the impact of the NES and Neff acquisitions discussed in note 3 to the consolidated financial statements. Rental equipment, net increased by $1.635 billion, or 26.4 percent, from December 31, 2016 to December 31, 2017 primarily due to the impact of the NES and Neff acquisitions and increased capital expenditures in response to a strong operating environment. Accounts payable increased by $166, or 68.3 percent, from December 31, 2016 to December 31, 2017 primarily due to increased capital expenditures in response to a strong operating environment. Accrued expenses and other liabilities increased by $192, or 55.8 percent, from December 31, 2016 to December 31, 2017 primarily due to (i) increased incentive compensation accruals associated with improved profitability and (ii) increased accrued interest expense primarily due to the debt issued to partially finance the acquisitions of NES and Neff, as discussed in note 12 to the consolidated financial statements. See notes 12 and 13 to the consolidated financial statements for discussions addressing our debt and deferred tax liability, respectively.

Liquidity and Capital Resources.
We manage our liquidity using internal cash management practices, which are subject to (i) the policies and cooperation of the financial institutions we utilize to maintain and provide cash management services, (ii) the terms and other requirements of the agreements to which we are a party and (iii) the statutes, regulations and practices of each of the local jurisdictions in which we operate. See "Financial Overview" above for a summary of the capital structure actions taken in 2017 and 2016 to improve our financial flexibility and liquidity.
Since 2012, we have repurchased a total of $1.450 billion of Holdings' common stock under three completed share repurchase programs. Additionally, in July 2015, our Board authorized a new $1 billion share repurchase program. In October 2016, we paused repurchases under the program as we evaluated potential acquisition opportunities. As discussed in note 3 to the consolidated financial statements, we completed the acquisitions of NES in April 2017 and Neff in October 2017. In October 2017, our Board authorized the resumption of the share repurchase program, and we intend to complete the program in 2018. As of January 22, 2018, we have repurchased $701 of Holdings' common stock under the $1 billion share repurchase program.  
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, 2017, we had cash and cash equivalents of $352. Cash equivalents at December 31, 2017 consist of direct obligations of financial institutions rated A or better. We believe that our existing sources of cash will be sufficient to support our existing operations over the next 12 months. The table below presents financial information associated with our principal sources of cash as of and for the year December 31, 2017:
ABL facility:
 
Borrowing capacity, net of letters of credit
$
1,282

Outstanding debt, net of debt issuance costs
1,670

Interest rate at December 31, 2017
3.0
%
Average month-end debt outstanding (1)
1,321

Weighted-average interest rate on average debt outstanding
2.6
%
Maximum month-end debt outstanding (1)
1,802

Accounts receivable securitization facility:
 
Borrowing capacity
80

Outstanding debt, net of debt issuance costs
695

Interest rate at December 31, 2017
2.3
%
Average month-end debt outstanding
605

Weighted-average interest rate on average debt outstanding
1.9
%
Maximum month-end debt outstanding
695

________________
(1)
The maximum month-end amount outstanding under the ABL facility exceeded the average amount outstanding during the year ended December 31, 2017 primarily due to the use of borrowings under the ABL facility to partially finance the debt redemptions discussed in note 12 to the consolidated financial statements.

36


We expect that our principal needs for cash relating to our operations over the next 12 months will be to fund (i) operating activities and working capital, (ii) the purchase of rental equipment and inventory items offered for sale, (iii) payments due under operating leases, (iv) debt service, (v) share repurchases and (vi) acquisitions. We plan to fund such cash requirements from our existing sources of cash. In addition, we may seek additional financing through the securitization of some of our real estate, the use of additional operating leases or other financing sources as market conditions permit. 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 22, 2018 were as follows:  
 
Corporate Rating
 
Outlook 
Moody’s
Ba2
 
Stable
Standard & Poor’s
BB-
 
Positive

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. Net rental capital expenditures (defined as purchases of rental equipment less the proceeds from sales of rental equipment) were $1.22 billion and $750 in 2017 and 2016, respectively.
Loan Covenants and Compliance. As of December 31, 2017, we were in compliance with the covenants and other provisions of the ABL facility, the accounts receivable securitization facility and the senior notes. Any failure to be in compliance with any material provision or covenant of these agreements could have a material adverse effect on our liquidity and operations.
The only financial maintenance covenant that currently exists under the ABL facility is the fixed charge coverage ratio. Subject to certain limited exceptions specified in the ABL facility, the fixed charge coverage ratio covenant under the ABL facility will only apply in the future if specified availability under the ABL facility falls below 10 percent of the maximum revolver amount under the ABL facility. When certain conditions are met, cash and cash equivalents and borrowing base collateral in excess of the ABL facility size may be included when calculating specified availability under the ABL facility. As of December 31, 2017, specified availability under the ABL facility exceeded the required threshold and, as a result, this financial maintenance covenant was inapplicable. Under our accounts receivable securitization facility, we are required, among other things, to maintain certain financial tests relating to: (i) the default ratio, (ii) the delinquency ratio, (iii) the dilution ratio and (iv) days sales outstanding. The accounts receivable securitization facility also requires us to comply with the fixed charge coverage ratio under the ABL facility, to the extent the ratio is applicable under the ABL facility.
URNA’s payment capacity is restricted under the covenants in the ABL facility and the indentures governing its outstanding indebtedness. Although this restricted capacity limits our ability to move operating cash flows to Holdings, because of certain intercompany arrangements, we do not expect any material adverse impact on Holdings’ ability to meet its cash obligations.
Sources and Uses of Cash. During 2017, we (i) generated cash from operating activities of $2.23 billion, (ii) generated cash from the sale of rental and non-rental equipment of $566 and (iii) received cash from debt proceeds, net of payments, of $1.59 billion. We used cash during this period principally to (i) purchase rental and non-rental equipment of $1.89 billion, (ii) purchase other companies for $2.38 billion, (iii) purchase shares of our common stock for $56 and (iv) pay financing costs of $44. During 2016, we (i) generated cash from operating activities of $1.95 billion and (ii) generated cash from the sale of rental and non-rental equipment of $510. We used cash during this period principally to (i) purchase rental and non-rental equipment of $1.34 billion, (ii) purchase shares of our common stock for $528 and (iii) make debt payments, net of proceeds, of $471.
Free Cash Flow GAAP Reconciliation
We define “free cash flow” as (i) net cash provided by operating activities less (ii) purchases of rental and non-rental equipment plus (iii) proceeds from sales of rental and non-rental equipment and excess tax benefits from share-based payment arrangements. Management believes that free cash flow provides useful additional information concerning cash flow available

37


to meet future debt service obligations and working capital requirements. However, free cash flow is not a measure of financial performance or liquidity under GAAP. Accordingly, free cash flow should not be considered an alternative to net income or cash flow from operating activities as an indicator of operating performance or liquidity. The table below provides a reconciliation between net cash provided by operating activities and free cash flow.  
 
Year Ended December 31, 
 
2017
 
2016
 
2015
Net cash provided by operating activities
$
2,230

 
$
1,953

 
$
1,995

Purchases of rental equipment
(1,769
)
 
(1,246
)
 
(1,534
)
Purchases of non-rental equipment
(120
)
 
(93
)
 
(102
)
Proceeds from sales of rental equipment
550

 
496

 
538

Proceeds from sales of non-rental equipment
16

 
14

 
17

Excess tax benefits from share-based payment arrangements

 
58

 
5

Free cash flow
$
907

 
$
1,182

 
$
919


Free cash flow for the year ended December 31, 2017 was $907, a decrease of $275 as compared to $1.18 billion for the year ended December 31, 2016. Free cash flow decreased primarily due to increased purchases of rental equipment partially offset by increased cash provided by operating activities. As discussed in note 2 to our consolidated financial statements, we adopted accounting guidance in 2017 that changed the cash flow presentation of excess tax benefits from share-based payment arrangements. In the table above, the excess tax benefits from share-based payment arrangements for 2017 are presented as a component of net cash provided by operating activities, while, for 2016 and 2015, they are presented as a separate line item. Because we historically included the excess tax benefits from share-based payment arrangements in the free cash flow calculation, the adoption of this guidance did not change the calculation of free cash flow. Free cash flow for the year ended December 31, 2016 was $1.18 billion, an increase of $263 as compared to $919 for the year ended December 31, 2015. Free cash flow increased primarily due to decreased purchases of rental equipment.

In 2018, we expect free cash flow of approximately $1.3 billion to $1.4 billion. As discussed further in note 13 to the consolidated financial statements, the Tax Cuts and Jobs Act (the “Act”) was enacted in December 2017. We expect that our future free cash flow will meaningfully benefit from the Act primarily due to (i) the lower U.S. federal tax rate of 21 percent and (ii) the full expensing of capital spending, the combined impact of which we expect to materially exceed the impact of (iii) the repeal of Like-Kind Exchange provisions, which had allowed for the deferral of taxable gains on the sale of used equipment.
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, 2017:
 
 
2018
2019
2020
2021
2022
Thereafter
Total 
Debt and capital leases (1)
$
723

$
20

$
11

$
1,683

$
1

$
7,078

$
9,516

Interest due on debt (2)
432

420

420

392

369

1,196

3,229

Operating leases (1):
 
 
 
 
 
 

Real estate
117

99

77

58

35

39

425

Non-rental equipment
43

37

31

22

15

9

157

Service agreements (3)
15

4

2




21

Purchase obligations (4)
1,549






1,549

Transition tax on unremitted foreign earnings and profits (5)
5

4

5

4

5

34

57

Total (6)
$
2,884

$
584

$
546

$
2,159

$
425

$
8,356

$
14,954

 
_________________
(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.
(2)
Estimated interest payments have been calculated based on the principal amount of debt and the applicable interest rates as of December 31, 2017.
(3)
These primarily represent service agreements with third parties to provide wireless and network services.

38


(4)
As of December 31, 2017, we had outstanding purchase orders, which were negotiated in the ordinary course of business, with our equipment and inventory suppliers. These purchase commitments can generally be cancelled by us 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 2018.
(5)
As discussed further in note 13 to the consolidated financial statements, the Tax Cuts and Jobs Act, which was enacted in December 2017, includes a transition tax on unremitted foreign earnings and profits. We will elect to pay the estimated amount above over an eight-year period.
(6)
This information excludes $6 of unrecognized tax benefits. 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 and (ii) foreign currency exchange rate risk associated with our Canadian operations.
Interest Rate Risk. As of December 31, 2017, we had an aggregate of $2.4 billion of indebtedness that bears interest at variable rates, comprised of borrowings under the ABL facility and the accounts receivable securitization facility. See "Liquidity and Capital Resources" above for the amounts outstanding, and the interest rates thereon, as of December 31, 2017 under the ABL facility and the accounts receivable securitization facility. As of December 31, 2017, based upon the amount of our variable rate debt outstanding, our annual after-tax earnings would decrease by approximately $14 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, 2017, we had an aggregate of $7.1 billion of indebtedness that bears interest at fixed rates. A one percentage point decrease in market interest rates as of December 31, 2017 would increase the fair value of our fixed rate indebtedness by approximately seven percent. For additional information concerning the fair value and terms of our fixed rate debt, see note 11 (see “Fair Value of Financial Instruments”) and note 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 2017 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 $6. We do not engage in purchasing forward exchange contracts for speculative purposes.
 

39


Item 8.
Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of United Rentals, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of United Rentals Inc. (“the Company”) as of December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and the financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2017 and 2016, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated January 24, 2018 expressed an unqualified opinion thereon.
Basis of Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1997.
Stamford, Connecticut
January 24, 2018
 



40


UNITED RENTALS, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
 
 
December 31,
 
2017

2016
ASSETS
 
 
 
Cash and cash equivalents
$
352

 
$
312

 Accounts receivable, net of allowance for doubtful accounts of $68 at December 31, 2017 and $54 at December 31, 2016
1,233

 
920

Inventory
75

 
68

Prepaid expenses and other assets
112

 
61

Total current assets
1,772

 
1,361

Rental equipment, net
7,824

 
6,189

Property and equipment, net
467

 
430

Goodwill
4,082

 
3,260

Other intangible assets, net
875

 
742

Other long-term assets
10

 
6

Total assets
$
15,030

 
$
11,988

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Short-term debt and current maturities of long-term debt
$
723

 
$
597

Accounts payable
409

 
243

Accrued expenses and other liabilities
536

 
344

Total current liabilities
1,668

 
1,184

Long-term debt
8,717

 
7,193

Deferred taxes
1,419

 
1,896

Other long-term liabilities
120

 
67

Total liabilities
11,924

 
10,340

 Common stock—$0.01 par value, 500,000,000 shares authorized, 112,394,395 and 84,463,662 shares issued and outstanding, respectively, at December 31, 2017 and 111,985,215 and 84,222,042 shares issued and outstanding, respectively, at December 31, 2016
1

 
1

Additional paid-in capital
2,356

 
2,288

Retained earnings
3,005

 
1,654

 Treasury stock at cost—27,930,733 and 27,763,173 shares at December 31, 2017 and December 31, 2016, respectively
(2,105
)
 
(2,077
)
Accumulated other comprehensive loss
(151
)
 
(218
)
Total stockholders’ equity
3,106

 
1,648

Total liabilities and stockholders’ equity
$
15,030

 
$
11,988


See accompanying notes.
 



41


UNITED RENTALS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share amounts)
 
 
Year Ended December 31,
 
2017
 
2016
 
2015
Revenues:
 
 
 
 
 
Equipment rentals
$
5,715

 
$
4,941

 
$
4,949

Sales of rental equipment
550

 
496

 
538

Sales of new equipment