UNITED RENTALS, INC. Executive Overview We are the largest equipment rental company in the world, with an integrated network of 1,175 rental locations in theU.S. ,Canada andEurope . As discussed in note 4 to the consolidated financial statements, inJuly 2018 , we completed the acquisition ofBakerCorp , which allowed for our entry into select European markets. Although the equipment rental industry is highly fragmented and diverse, we believe that we are well positioned to take advantage of this environment because, as a larger company, we have more extensive resources and certain competitive advantages. These include a fleet of rental equipment with a total original equipment cost ("OEC") of$14.6 billion , and a North American branch network that operates in 49 U.S. states and every Canadian province, and serves 99 of the 100 largest metropolitan areas in theU.S. TheBakerCorp acquisition discussed above added 11 European locations inFrance ,Germany , theUnited Kingdom andthe Netherlands to our branch network. Our size also gives us greater purchasing power, the ability to provide customers with a broader range of equipment and services, the ability to provide customers with equipment that is more consistently well-maintained and therefore more productive and reliable, and the ability to enhance the earning potential of our assets by transferring equipment among branches to satisfy customer needs. We offer approximately 4,000 classes of equipment for rent to a diverse customer base that includes construction and industrial companies, manufacturers, utilities, municipalities, homeowners and government entities. Our revenues are derived from the following sources: equipment rentals, sales of rental equipment, sales of new equipment, contractor supplies sales and service and other revenues. In 2019, equipment rental revenues represented 85 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 2020, 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 kaizenprocesses 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 theeffectiveness and efficiency of our repair and maintenance operations;
• A continued focus on 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 fluid solutions
footprint, as well as our tools and onsite services offerings, and thecross-selling of these services throughout our network, as exhibited by
our recent acquisition of
least 25 specialty rental branches/tool hubs/onsite services locations in
2020 and continue to invest in specialty rental fleet to further position
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, Neff and BlueLine (which is discussed further innote 4 to the consolidated financial statements). Strategic acquisitions
allow us to invest our capital to expand our business, further driving
our ability to accomplish our strategic goals.
In 2020, 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 3 percent, with similar growth expected in the
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As discussed below, fleet productivity is a comprehensive metric that reflects the combined impact of changes in rental rates, time utilization, and mix that contribute to the variance in owned equipment rental revenue. The pro forma metrics below include the standalone, pre-acquisition results ofBakerCorp and BlueLine. For the full year 2019: • Equipment rentals increased 14.8 percent and 4.1 percent year-over-year,
on an actual and a pro forma basis, respectively;
• Average OEC increased 17.7 percent and 4.9 percent year-over-year, on an
actual and a pro forma basis, respectively;
• Fleet productivity decreased 2.2 percent primarily due to the impact of
the
productivity increased 0.6 percent;
• 72 percent of equipment rental revenue was derived from key accounts, as
compared to 71 percent in 2018. 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
fluid solutions (also referred to as "specialty") segment increased by 27
year-over-year primarily due to acquisitions and cold starts.
Financial Overview
In 2019, we took the following actions to improve our financial flexibility and
liquidity, and to position us to invest the necessary capital in our business:
• Issued $750 principal amount of 5 1/4 percent Senior Notes due 2030;
• Issued
• Redeemed all
• Redeemed all$1.0 billion principal amount of our 4 5/8 percent Senior Secured Notes; • Amended and extended our ABL facility, including an increase in the facility size from$3.0 billion to$3.75 billion ; and
• Amended and extended our accounts receivable securitization facility.
As ofDecember 31, 2019 , we had available liquidity of$2.143 billion , including cash and cash equivalents of$52 . Net income. Net income and diluted earnings per share for each of the three years in the period endedDecember 31, 2019 are presented below. Net income and diluted earnings per share for the year endedDecember 31, 2017 include a substantial benefit associated with the enactment of the Tax Cuts and Jobs Act (the "Tax Act"). The enactment of the Tax Act resulted in an estimated net income increase for the year endedDecember 31, 2017 of$689 , or$8.05 per diluted share, primarily due to a one-time revaluation of our net deferred tax liability based on aU.S. federal tax rate of 21 percent, which was partially offset by the impact of a one-time transition tax on our unremitted foreign earnings and profits, which we elected to pay over an eight-year period. The Tax Act reduced theU.S. federal statutory tax rate from 35 percent to 21 percent, and 2019 and 2018 reflect the lower tax rate. The Tax Act is discussed further in note 14 to the consolidated financial statements. Year Ended December 31, 2019 2018 2017 Net income$ 1,174 $ 1,096 $ 1,346 Diluted earnings per share$ 15.11 $ 13.12 $ 15.73 Net income and diluted earnings per share for each of the three years in the period endedDecember 31, 2019 include the after-tax impacts of the items below. The tax rates applied to the items below reflect the statutory rates in the applicable entity. The reduced tax rates for 2019 and 2018 reflect the enactment of the Tax Act. 23
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Year Ended December 31,
2019 2018 2017
Tax rate applied to items
below 25.3 % 25.5 % 38.5 %
Contribution to net Impact on diluted earnings Contribution to net income Impact on diluted earnings Contribution to net income Impact on diluted earnings
income (after-tax) per share (after-tax) per share (after-tax) per share
Merger related costs (1) $ (1 ) $ (0.01 ) $ (27 ) $ (0.32 ) $ (31 ) $ (0.36 )
Merger related intangible
asset amortization (2) (194 ) (2.48 ) (147 ) (1.76 ) (99 ) (1.15 )
Impact on depreciation
related to acquired fleet and
property and equipment (3) (30 ) (0.39 ) (16 ) (0.19 ) (5 ) (0.05 )
Impact of the fair value
mark-up of acquired fleet (4) (56 ) (0.72 ) (49 ) (0.59 ) (50 ) (0.59 )
Restructuring charge (5) (14 ) (0.18 ) (23 ) (0.28 ) (31 ) (0.36 )
Asset impairment charge (6) (4 ) (0.05 ) - - (1 ) (0.01 )
Loss on extinguishment of
debt securities and amendment
of ABL facility (45 ) (0.58 ) - - (33 ) (0.39 )
(1) This reflects transaction costs associated with the NES and Neff acquisitions
that were completed in 2017, and the
discussed in note 4 to the consolidated financial statements. Merger related
costs only include costs associated with major acquisitions that
significantly impact our operations. For additional information, see "Results
of Operations-Other costs/(income)-merger related costs" below.
(2) This reflects the amortization of the intangible assets acquired in the RSC,
National Pump, NES, Neff,
(3) This reflects the impact of extending the useful lives of equipment acquired
in the RSC, NES, Neff,
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, Neff and BlueLine acquisitions that was subsequently sold.
(5) As discussed in note 6 to our consolidated financial statements, this
primarily reflects severance costs and branch closure charges associated with
our restructuring programs.
(6) This reflects write-offs of leasehold improvements and other fixed assets.
EBITDA GAAP Reconciliations. EBITDA represents the sum of net income, provision (benefit) 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 underU.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
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Year Ended December 31,
2019 2018 2017
Net income $ 1,174 $ 1,096 $ 1,346
Provision (benefit) for income taxes 340 380 (298 )
Interest expense, net 648 481 464
Depreciation of rental equipment 1,631 1,363 1,124
Non-rental depreciation and amortization 407 308 259
EBITDA 4,200 3,628 2,895
Merger related costs (1) 1 36 50
Restructuring charge (2) 18 31 50
Stock compensation expense, net (3) 61 102 87
Impact of the fair value mark-up of acquired
fleet (4) 75 66 82
Adjusted EBITDA $ 4,355 $ 3,863 $ 3,164 The table below provides a reconciliation between net cash provided by operating activities and EBITDA and adjusted EBITDA:
Year Ended
2019 2018 2017
Net cash provided by operating activities
$ 2,209 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 (15 ) (12 ) (9 ) Gain on sales of rental equipment 313 278
220
Gain on sales of non-rental equipment 6 6 4 Gain on insurance proceeds from damaged equipment 24 22 21 Merger related costs (1) (1 ) (36 ) (50 ) Restructuring charge (2) (18 ) (31 ) (50 ) Stock compensation expense, net (3) (61 ) (102 ) (87 ) Loss on extinguishment of debt securities and amendment of ABL facility (61 ) - (54 ) Changes in assets and liabilities 170 124
129
Cash paid for interest 581 455
357
Cash paid for income taxes, net 238 71 205 EBITDA 4,200 3,628 2,895 Add back: Merger related costs (1) 1 36 50 Restructuring charge (2) 18 31 50 Stock compensation expense, net (3) 61 102 87 Impact of the fair value mark-up of acquired fleet (4) 75 66 82 Adjusted EBITDA$ 4,355 $ 3,863 $ 3,164 _________________
(1) This reflects transaction costs associated with the NES and Neff acquisitions
that were completed in 2017, and the
discussed in note 4 to the consolidated financial statements. Merger related
costs only include costs associated with major acquisitions that
significantly impact our operations. For additional information, see "Results
of Operations-Other costs/(income)-merger related costs" below.
(2) As discussed in note 6 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.
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(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, Neff and BlueLine acquisitions that was subsequently sold.
For the year endedDecember 31, 2019 , EBITDA increased$572 , or 15.8 percent, and adjusted EBITDA increased$492 , or 12.7 percent. For the year endedDecember 31, 2019 , EBITDA margin decreased 20 basis points to 44.9 percent, and adjusted EBITDA margin decreased 140 basis points to 46.6 percent. As discussed above, we completed the acquisitions ofBakerCorp and BlueLine inJuly 2018 andOctober 2018 , respectively, and the EBITDA and adjusted EBITDA increases for 2019 include the impact of these acquisitions. The decrease in the adjusted EBITDA margin primarily reflects the impact of theBakerCorp and BlueLine acquisitions. For the year endedDecember 31, 2018 , EBITDA increased$733 , or 25.3 percent, and adjusted EBITDA increased$699 , or 22.1 percent. For the year endedDecember 31, 2018 , EBITDA margin increased 150 basis points to 45.1 percent, and adjusted EBITDA margin increased 40 basis points to 48.0 percent. As discussed above, we completed the acquisitions of NES, Neff,BakerCorp and BlueLine inApril 2017 ,October 2017 ,July 2018 andOctober 2018 , respectively, and EBITDA and adjusted EBITDA for 2018 include the impact of these acquisitions. The increase in the EBITDA margin primarily reflects i) a decrease in selling, general and administrative ("SG&A") expense as a percentage of revenue primarily due to a reduction in salaries and bonuses as a percentage of revenue and ii) reduced merger related costs and restructuring charges. The increase in the adjusted EBITDA margin primarily reflects a decrease in SG&A expense as a percentage of revenue primarily due to a reduction in salaries and bonuses as a percentage of revenue. Revenues. Revenues for each of the three years in the period endedDecember 31, 2019 were as follows: Year Ended December 31, Change 2019 2018 2017 2019 2018 Equipment rentals*$ 7,964 $ 6,940 $ 5,715 14.8% 21.4% Sales of rental equipment 831 664 550 25.2% 20.7% Sales of new equipment 268 208 178 28.8% 16.9% Contractor supplies sales 104 91 80 14.3% 13.8% Service and other revenues 184 144 118 27.8% 22.0% Total revenues$ 9,351 $ 8,047 $ 6,641 16.2% 21.2% *Equipment rentals variance components: Year-over-year change in average OEC 17.7% 20.3% Assumed year-over-year inflation impact (1) (1.5)% (1.5)% Fleet productivity (2) (2.2)% 1.9% Contribution from ancillary and re-rent revenue (3) 0.8% 0.7% Total change in equipment rentals 14.8% 21.4% *Pro forma equipment rentals variance components (4): Year-over-year change in average OEC 4.9% 6.6% Assumed year-over-year inflation impact (1) (1.5)% (1.5)% Fleet productivity (2) 0.6% 5.0% Contribution from ancillary and re-rent revenue (3) 0.1% 0.4% Total change in equipment rentals 4.1% 10.5% _________________
(1) Reflects the estimated impact of inflation on the revenue productivity of
fleet based on OEC, which is recorded at cost.
(2) Reflects the combined impact of changes in rental rates, time utilization,
and mix that contribute to the variance in owned equipment rental revenue.
See note 3 to the consolidated financial statements for a discussion of the
different types of equipment rentals revenue. Rental rate changes are
calculated based on the year-over-year variance in average contract rates,
weighted by the prior period revenue mix. Time utilization is calculated by
dividing the amount of time an asset is on rent by the amount of time the
asset has been owned during the year. Mix includes the impact of changes in
customer, fleet, geographic and segment mix.
(3) Reflects the combined impact of changes in the other types of equipment
rentals revenue (see note 3 for further detail), excluding owned equipment
rental revenue.
(4) As discussed in note 4 to the consolidated financial statements, we completed
the acquisitions of
respectively. Additionally, we completed the acquisition of NES and Neff in
April 2017 26
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and
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 13 percent of equipment rental revenue in 2019. Delivery and pick-up revenue, which represented approximately seven percent of equipment rental revenue in 2019, 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 3 to our consolidated financial statements for further discussion of our revenue recognition accounting. 2019 total revenues of$9.4 billion increased 16.2 percent compared with 2018. Equipment rentals and sales of rental equipment are our largest revenue types (together, they accounted for 94 percent of total revenue for the year endedDecember 31, 2019 ). Equipment rentals increased 14.8 percent, primarily due to a 17.7 percent increase in average OEC, which includes the impact of theBakerCorp and BlueLine acquisitions. On a pro forma basis including the standalone, pre-acquisition results ofBakerCorp and BlueLine, equipment rentals increased 4.1 percent, primarily due to a 4.9 percent increase in average OEC and a fleet productivity increase of 0.6 percent, partially offset by the impact of fleet inflation. Sales of rental equipment increased 25.2 percent primarily due to increased volume, which included the impact of the BlueLine acquisition, driven by a larger fleet size in a strong used equipment market. 2018 total revenues of$8.0 billion increased 21.2 percent compared with 2017. Equipment rentals increased 21.4 percent, primarily due to a 20.3 percent increase in average OEC, which included the impact of the NES, Neff,BakerCorp and BlueLine acquisitions. On a pro forma basis including the standalone, pre-acquisition results of NES, Neff,BakerCorp and BlueLine, equipment rentals increased 10.5 percent, primarily due to a 6.6 percent increase in average OEC and a fleet productivity increase of 5.0 percent, partially offset by the impact of inflation. The fleet productivity increase reflected improving demand in many of our core markets. Sales of rental equipment increased 20.7 percent primarily due to increased volume, driven by a significantly larger fleet size, in a strong used equipment market. As noted above, average OEC increased 20.3 percent, which included the impact of the NES, Neff,BakerCorp and BlueLine acquisitions. 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. 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 endedDecember 31, 2019 , 2018 and 2017, we recognized total additions, excluding acquisitions, to our allowances for doubtful accounts of$42 ,$45 and$40 , respectively, primarily 1) as a reduction to equipment rental revenue (primarily for 2019 doubtful accounts associated with lease revenues) or 2) as bad debt expense within selling, general and administrative expenses in our consolidated statements of income. 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. 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. 27
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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$187 or$243 , respectively. If 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$19 . 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$31 or$48 , 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. Rental equipment is valued utilizing either a cost, market or income approach, or a combination of certain of these methods, depending on the asset being valued and the availability of market or income data. The intangible assets that we have acquired are non-compete agreements, customer relationships and trade names and associated trademarks. The estimated fair values of these intangible assets reflect various assumptions about discount rates, revenue growth rates, operating margins, terminal values, useful lives and other prospective financial information.Goodwill is calculated as the excess of the cost of the acquired entity over the net of the fair value of the assets acquired and the liabilities assumed. Non-compete agreements, customer relationships and trade names and associated trademarks are valued based on an excess earnings or income approach based on projected cash flows. Determining the fair value of the assets and liabilities acquired is judgmental in nature and can involve the use of significant estimates and assumptions. The significant judgments include estimation of future cash flows, which is dependent on forecasts; estimation of the long-term rate of growth; estimation of the useful life over which cash flows will occur; and determination of a risk-adjusted weighted average cost of capital. When appropriate, our estimates of the fair values of assets and liabilities acquired include assistance from independent third-party appraisal firms. The judgments made in determining the estimated fair value assigned to the assets acquired, as well as the estimated life of the assets, can materially impact net income in periods subsequent to the acquisition through depreciation and amortization, and in certain instances through impairment charges, if the asset becomes impaired in the future. As discussed below, we regularly review for impairments. 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 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 28
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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, in 2020, we will adopt accounting guidance that eliminates the second step from the goodwill impairment test (this guidance is not expected to have a significant impact on our financial statements). In connection with our goodwill impairment test that was conducted as ofOctober 1, 2018 , 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 Fluid Solutions Europe reporting unit, had estimated fair values which exceeded their respective carrying amounts by at least 52 percent. As discussed in note 4 to the consolidated financial statements, inJuly 2018 , we completed the acquisition ofBakerCorp , which added 11 European locations to our branch network. The European locations are in our Fluid Solutions Europe reporting unit. All of the assets in the Fluid Solutions Europe reporting unit were acquired in theBakerCorp acquisition. The estimated fair value of our Fluid Solutions Europe reporting unit exceeded its carrying amount by 7 percent. As all of the assets in the Fluid Solutions Europe reporting unit were recorded at fair value as of theJuly 2018 acquisition date, we expected the percentage by which the Fluid Solutions Europe reporting unit's fair value exceeded its carrying value to be significantly less than the equivalent percentages determined for our other reporting units. In connection with our goodwill impairment test that was conducted as ofOctober 1, 2019 , 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 Fluid Solutions Europe reporting unit, had estimated fair values which exceeded their respective carrying amounts by at least 32 percent. As discussed above, inJuly 2018 , we completed the acquisition ofBakerCorp . All of the assets in the Fluid Solutions Europe reporting unit were acquired in theBakerCorp acquisition. The estimated fair value of our Fluid Solutions Europe reporting unit exceeded its carrying amount by 12 percent. As all of the assets in the Fluid Solutions Europe reporting unit were recorded at fair value as of theJuly 2018 acquisition date, we expected the percentage by which the Fluid Solutions Europe reporting unit's fair value exceeded its carrying value to be significantly less than the equivalent percentages determined for our other reporting units. Impairment of Long-lived Assets (Excluding Goodwill). We review the recoverability of our rental equipment and property and equipment when events or changes in circumstances occur that indicate that the carrying value of the assets may not be recoverable. If there are such indications, we assess our ability to recover the carrying value of the assets from their expected future pre-tax cash flows (undiscounted and without interest charges). If the expected cash flows are less than the carrying value of the assets, an impairment loss is recognized for the difference between the estimated fair value and carrying value. We also conduct impairment reviews in connection with branch consolidations and other changes in our business. We recognized immaterial asset impairment charges during the years endedDecember 31, 2019 , 2018 and 2017. In support of our review for indicators of impairment, we perform a review of all assets at the district level relative to district performance and conclude whether indicators of impairment exist associated with our long-lived assets, including rental equipment. We also specifically review the financial performance of our rental equipment. Such review includes an estimate of 29
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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 reviews, there were no indications of impairment associated with our rental equipment or property and equipment. 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. We have historically considered the undistributed earnings of our foreign subsidiaries to be indefinitely reinvested, and, accordingly, no taxes have been provided on such earnings. We continue to evaluate our plans for reinvestment or repatriation of unremitted foreign earnings and have not changed our previous indefinite reinvestment determination following the enactment of the Tax Act discussed above. We have not repatriated funds to theU.S. to satisfy domestic liquidity needs, nor do we anticipate the need to do so. The Tax Act required a one-time transition tax for deemed repatriation of accumulated undistributed earnings of certain foreign investments. As discussed in note 14 to the consolidated financial statements, we completed our accounting for the tax effects of enactment of the Tax Act in 2018. We regularly review our cash positions and our determination of permanent reinvestment of foreign earnings. If we determine that all or a portion of such foreign earnings are no longer indefinitely reinvested, we may be subject to additional foreign withholding taxes andU.S. state income taxes. 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. Results of Operations As discussed in note 5 to our consolidated financial statements, our reportable segments are general rentals and trench, power and fluid solutions. The general rentals segment includes the rental of construction, aerial, industrial and homeowner equipment and related services and activities. The general rentals segment's customers include construction and industrial companies, manufacturers, utilities, municipalities, homeowners and government entities. This segment operates throughoutthe United States andCanada . The trench, power and fluid solutions 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, 30
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construction lasers and line testing equipment for underground work, (ii) the Power and HVAC region, which rents power and HVAC equipment such as portable diesel generators, electrical distribution equipment, and temperature control equipment including heating and cooling equipment, and (iii) the Fluid Solutions and (iv) Fluid Solutions Europe regions, both of which rent equipment primarily used for fluid containment, transfer and treatment. The trench, power and fluid solutions segment's customers include construction companies involved in infrastructure projects, municipalities and industrial companies. This segment operates throughoutthe United States and inCanada andEurope . As discussed in note 5 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 andWestern Canada -into our general rentals reporting segment. Historically, there have been variances in the levels of equipment rentals gross margins achieved by these regions. For the five year period endedDecember 31, 2019 , three of our general rentals' regions had an equipment rentals gross margin that varied by between 10 percent and 22 percent from the equipment rentals gross margins of the aggregated general rentals' regions over the same period. For the five year period endedDecember 31, 2019 , the general rentals' region with the lowest equipment rentals gross margin wasWestern Canada . TheWestern Canada region's equipment rentals gross margin of 33.2 percent for the five year period endedDecember 31, 2019 was 22 percent less than the equipment rentals gross margins of the aggregated general rentals' regions over the same period. TheWestern Canada region's equipment rentals gross margin was less than the other general rentals' regions during this period primarily due to declines in the oil and gas business in the region. 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. When monitoring for margin convergence, we include projected future results. We similarly monitor the margin variances for the regions in the trench, power and fluid solutions segment. The trench, power and fluid solutions segment includes the locations acquired in theJuly 2018 BakerCorp acquisition discussed in note 4 to the consolidated financial statements. As such, there is not a long history of the acquired locations' rental margins included in the trench, power and fluid solutions segment. When monitoring for margin convergence, we include projected future results. We monitor the trench, power and fluid solutions segment margin variances and confirm the expectation of future convergence on a quarterly basis. The historic, pre-acquisition margins for the acquiredBakerCorp locations are lower than the margins achieved at the other locations in the segment. We expect that the margins at the acquired locations will increase as we realize synergies following the acquisition, as a result of which, we expect future margin convergence. 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 primarily based on segment equipment rentals gross profit. Our revenues, operating results, and financial condition fluctuate from quarter to quarter reflecting the seasonal rental patterns of our customers, with rental activity tending to be lower in the winter. Revenues by segment were as follows: 31
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General Trench,
rentals power and fluid solutions Total
Year Ended December 31, 2019
Equipment rentals $ 6,202 $ 1,762 $ 7,964
Sales of rental equipment 768 63 831
Sales of new equipment 238 30 268
Contractor supplies sales 71 33 104
Service and other revenues 157 27 184
Total revenue $ 7,436 $ 1,915 $ 9,351
Year Ended December 31, 2018
Equipment rentals $ 5,550 $ 1,390 $ 6,940
Sales of rental equipment 619 45 664
Sales of new equipment 186 22 208
Contractor supplies sales 68 23 91
Service and other revenues 127 17 144
Total revenue $ 6,550 $ 1,497 $ 8,047
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
Equipment rentals. 2019 equipment rentals of $8.0 billion increased 14.8
percent, primarily due to a 17.7 percent increase in average OEC, which includes
the impact of the BakerCorp and BlueLine acquisitions. On a pro forma basis
including the standalone, pre-acquisition results of BakerCorp and BlueLine,
equipment rentals increased 4.1 percent, primarily due to a 4.9 percent increase
in average OEC and a fleet productivity increase of 0.6 percent, partially
offset by the impact of inflation. Equipment rentals represented 85 percent of
total revenues in 2019.
On a segment basis, equipment rentals represented 83 percent and 92 percent of
total revenues for general rentals and trench, power and fluid solutions,
respectively. General rentals equipment rentals increased 11.7 percent as
compared to 2018, primarily reflecting a 15.4 percent increase in average OEC,
which includes the impact of the BlueLine acquisition. On a pro forma basis
including the standalone, pre-acquisition results of BlueLine, equipment rental
revenue increased 1.8 percent year-over-year, primarily due to a 3.8 percent
increase in average OEC, partially offset by the impact of fleet inflation.
Trench, power and fluid solutions equipment rentals increased 26.8 percent as
compared to 2018, primarily reflecting the impact of acquisitions, including
BakerCorp , and cold starts. On a pro forma basis including the standalone,
pre-acquisition results of BakerCorp , equipment rental revenue increased 12.8
percent year-over-year, primarily due to a 14.1 percent increase in average OEC,
partially offset by the impact of fleet inflation. The pro forma increase in
average OEC includes the impact of cold starts and acquisitions other than
BakerCorp .
2018 equipment rentals of $6.9 billion increased 21.4 percent, primarily due to
a 20.3 percent increase in average OEC, which includes the impact of the NES,
Neff, BakerCorp and BlueLine acquisitions. On a pro forma basis including the
standalone, pre-acquisition results of BakerCorp and BlueLine, equipment rentals
increased 10.5 percent, primarily due to a 6.6 percent increase in average OEC
and a fleet productivity increase of 5.0 percent, partially offset by the impact
of inflation. The fleet productivity increase reflected improving demand in many
of our core markets. Equipment rentals represented 86 percent of total revenues
in 2018.
On a segment basis, equipment rentals represented 85 percent and 93 percent of
total revenues for general rentals and trench, power and fluid solutions,
respectively. General rentals equipment rentals increased 17.4 percent as
compared to 2017, primarily reflecting a 17.9 percent increase in average OEC,
which includes the impact of the NES, Neff and BlueLine acquisitions. On a pro
forma basis including the standalone, pre-acquisition results of NES, Neff and
BlueLine, equipment rental revenue increased 7.3 percent year-over-year,
primarily due to a 5.5 percent increase in average OEC. Trench, power and fluid
solutions equipment rentals increased 40.7 percent as compared to 2017,
primarily reflecting a 43.0 percent increase in
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average OEC, which included the impact of theBakerCorp acquisition. On a pro forma basis including the standalone, pre-acquisition results ofBakerCorp , equipment rental revenue increased 25.4 percent year-over-year, primarily due to a 16.7 percent increase in average OEC and improved time utilization. The increased utilization reflects improved performance in our Fluid Solutions and Power and HVAC regions. The improvement in the Fluid Solutions region reflects growth in revenue from upstream oil and gas customers, which have experienced significant volatility in recent years. Additionally, due in part to the upstream oil and gas volatility, we have sought to diversify our revenue mix to achieve a reduced portion of business tied to oil and gas. We have diversified outside of oil and gas, and have grown our revenue from most of our non oil and gas customers (for example, industrial, construction and mining customers). The Power and HVAC region experienced growth in revenue from oil and gas, and non-residential construction, customers. Sales of rental equipment. For the three years in the period endedDecember 31, 2019 , sales of rental equipment represented approximately 9 percent of our total revenues. Our general rentals segment accounted for most of these sales. 2019 sales of rental equipment of$831 increased 25.2 percent from 2018 primarily reflecting increased volume, which included the impact of the BlueLine acquisition, driven by a larger fleet size in a strong used equipment market. Average OEC for the year endedDecember 31, 2019 increased 17.7 percent year-over-year. 2018 sales of rental equipment of$664 increased 20.7 percent from 2017 primarily reflecting increased volume, driven by a significantly larger fleet size, in a strong used equipment market. Average OEC for the year endedDecember 31, 2018 increased 20.3 percent year-over-year. Sales of new equipment. For the three years in the period endedDecember 31, 2019 , sales of new equipment represented approximately 3 percent of our total revenues. Our general rentals segment accounted for most of these sales. 2019 sales of new equipment of$268 increased 28.8 percent from 2018 primarily reflecting increased volume driven by broad-based demand. 2018 sales of new equipment of$208 increased 16.9 percent from 2017 primarily reflecting increased volume driven partially by some larger sales. Sales of contractor supplies. For the three years in the period endedDecember 31, 2019 , sales of contractor supplies represented approximately 1 percent of our total revenues. Our general rentals segment accounted for most of these sales. 2019 sales of contractor supplies did not change materially from 2018, and 2018 sales of contractor supplies did not change materially from 2017. Service and other revenues. For the three years in the period endedDecember 31, 2019 , service and other revenues represented approximately 2 percent of our total revenues. Our general rentals segment accounted for most of these sales. 2019 service and other revenues of$184 increased 27.8 percent from 2018 primarily reflecting an increased emphasis on this line of business and the impact of the BlueLine acquisition. 2018 service and other revenues of$144 increased 22.0 percent from 2017 primarily reflecting an increased emphasis on this line of business. Fourth Quarter 2019 Items. As discussed in note 12 to our consolidated financial statements, in the fourth quarter of 2019, we issued$750 aggregate principal amount of 3 7/8 percent Senior Secured Notes due 2027 and redeemed all of our 4 5/8 percent Senior Secured Notes. Upon redemption, we recognized a loss of$29 in interest expense, net. The loss represented the difference between the net carrying amount and the total purchase price of the redeemed notes. In the fourth quarter of 2019, we also completed the$1.25 billion share repurchase program that commenced inJuly 2018 . Fourth Quarter 2018 Items. The fourth quarter of 2018 includes$22 of merger related costs and$16 of restructuring charges primarily associated with theBakerCorp and BlueLine acquisitions discussed in note 4 to our consolidated financial statements. In the fourth quarter of 2018, we entered into a$1 billion senior secured term loan facility and issued$1.1 billion principal amount of 6 1/2 percent Senior Notes due 2026. As discussed in note 4 to the consolidated financial statements, the proceeds from the 6 1/2 percent Senior Notes and borrowings under the term loan facility were used to finance the acquisition of BlueLine inOctober 2018 . Segment Equipment Rentals Gross Profit Segment equipment rentals gross profit and gross margin for each of the three years in the period endedDecember 31, 2019 were as follows: 33
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General Trench,
rentals power and fluid solutions Total
2019
Equipment Rentals Gross Profit $ 2,407 $ 800 $ 3,207
Equipment Rentals Gross Margin 38.8 % 45.4 % 40.3 % 2018 Equipment Rentals Gross Profit$ 2,293 $ 670 $
2,963
Equipment Rentals Gross Margin 41.3 % 48.2 % 42.7 % 2017 Equipment Rentals Gross Profit$ 1,950 $ 490 $
2,440
Equipment Rentals Gross Margin 41.3 % 49.6 %
42.7 %
General rentals. For the three years in the period endedDecember 31, 2019 , general rentals accounted for 77 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 2019 increased by$114 , primarily due to increased equipment rentals, including the impact of the BlueLine acquisition. As discussed above, equipment rentals increased 11.7 percent as compared to 2018, primarily reflecting a 15.4 percent increase in average OEC. Equipment rentals gross margin decreased 250 basis points from 2018, due primarily to the impact of the BlueLine acquisition and increased operating costs. The BlueLine acquisition was a significant driver of the 17.7 percent depreciation increase, which exceeded the equipment rentals increase of 11.7 percent. Operating costs were impacted by repair and repositioning initiatives that resulted in increased repairs and maintenance expense, which increased 19.8 percent (such increase includes the impact of both the BlueLine acquisition and the repair and repositioning initiatives). General rentals' equipment rentals gross profit in 2018 increased$343 , primarily due to increased equipment rentals, including the impact of the NES, Neff and BlueLine acquisitions. Equipment rentals increased 17.4 percent as compared to 2017, primarily reflecting a 17.9 percent increase in average OEC. On a pro forma basis including the standalone, pre-acquisition results of NES, Neff and BlueLine, equipment rental revenue increased 7.3 percent year-over-year, primarily due to a 5.5 percent increase in average OEC. Equipment rentals gross margin was flat with 2017. Trench, power and fluid solutions. For the year endedDecember 31, 2019 , equipment rentals gross profit increased by$130 and equipment rentals gross margin decreased 280 basis points from 2018. The increase in equipment rentals gross profit primarily reflects increased equipment rentals revenue on a larger fleet. Year-over-year, trench, power and fluid solutions equipment rentals increased 26.8 percent and average OEC increased 36.0 percent primarily due to the impact of acquisitions, includingBakerCorp , and cold starts. On a pro forma basis including the standalone, pre-acquisition results ofBakerCorp , equipment rental revenue increased 12.8 percent year-over-year, primarily due to a 14.1 percent increase in average OEC. The decrease in the equipment rentals gross margin was primarily due to the impact of acquisitions. For the year endedDecember 31, 2018 , equipment rentals gross profit increased by$180 and equipment rentals gross margin decreased 140 basis points from 2017. The increase in equipment rentals gross profit primarily reflects increased equipment rentals revenue on a larger fleet. Year-over-year, trench, power and fluid solutions equipment rentals increased 40.7 percent and average OEC increased 43.0 percent. The decrease in the equipment rentals gross margin includes the impact of theBakerCorp acquisition and mix changes (in particular, fuel revenue, which generates lower margins, increased). The historic, pre-acquisition margins for the acquiredBakerCorp locations are lower than the margins achieved at the other locations in the segment. We expect that the margins at the acquired locations will increase as we realize synergies following the acquisition. Gross Margin. Gross margins by revenue classification were as follows: Year Ended December 31, Change 2019 2018 2017 2019 2018 Total gross margin 39.2% 41.8% 41.7% (260) bps 10 bps Equipment rentals 40.3% 42.7% 42.7% (240) bps - Sales of rental equipment 37.7% 41.9% 40.0% (420) bps 190 bps Sales of new equipment 13.8% 13.9% 14.6% (10) bps (70) bps Contractor supplies sales 29.8% 34.1% 30.0% (430) bps 410 bps Service and other revenues 44.6% 43.8% 50.0% 80 bps (620) bps 34
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2019 gross margin of 39.2 percent decreased 260 basis points from 2018. Equipment rentals gross margin decreased 240 basis points year-over-year, due primarily to the impact of the BlueLine andBakerCorp acquisitions and increased operating costs. The BlueLine andBakerCorp acquisitions were significant drivers of the 19.7 percent depreciation increase, which exceeded the equipment rentals increase of 14.8 percent. Operating costs were impacted by repair and repositioning initiatives that resulted in increased repairs and maintenance expense, which increased 22.4 percent (such increase includes the impact of both 1) the BlueLine andBakerCorp acquisitions and 2) the repair and repositioning initiatives). On a pro forma basis including the standalone, pre-acquisition results ofBakerCorp and BlueLine, equipment rentals increased 4.1 percent, primarily due to a 4.9 percent increase in average OEC and a fleet productivity increase of 0.6 percent, partially offset by the impact of inflation. Gross margin from sales of rental equipment decreased 420 basis points from 2018 primarily due to lower margin sales of fleet acquired in the BlueLine acquisition and changes in the mix of equipment sold and channel mix. The gross margin fluctuations from sales of new equipment, contractor supplies sales and service and other revenues generally reflect normal variability, and such margins did not have a significant impact on total gross margin (gross profit for these revenue types represented 4 percent of total gross profit for the year endedDecember 31, 2019 ). 2018 gross margin of 41.8 percent increased 10 basis points. Equipment rentals gross margin was flat with 2017. Gross margin from sales of rental equipment increased 190 basis points, primarily reflecting improved pricing and changes in the mix of equipment sold. The gross margin fluctuations from sales of new equipment, contractor supplies sales and service and other revenues generally reflect normal variability, and such margins did not have a significant impact on total gross margin (gross profit for these revenue types represented 4 percent of total gross profit for the year endedDecember 31, 2018 ). Other costs/(income) 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 endedDecember 31, 2019 : Year Ended December 31, Change 2019 2018 2017 2019 2018 Selling, general and administrative ("SG&A") expense$ 1,092 $ 1,038 $ 903 5.2% 15.0% SG&A expense as a percentage of revenue 11.7 % 12.9 % 13.6 % (120) bps (70) bps Merger related costs 1 36 50 (97.2)% (28.0)% Restructuring charge 18 31 50 (41.9)% (38.0)% Non-rental depreciation and amortization 407 308 259 32.1% 18.9% Interest expense, net 648 481 464 34.7% 3.7% Other income, net (10 ) (6 ) (5 ) 66.7% 20.0% Provision (benefit) for income taxes 340 380 (298 ) (10.5)% (227.5)% Effective tax rate 22.5 % 25.7 % (28.4 )% (320) bps 5,410 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 decrease in SG&A expense as a percentage of revenue for the year endedDecember 31, 2019 primarily reflects a reduction in stock compensation as a percentage of revenue, and decreased bad debt expense. The reduced bad debt expense primarily reflects our adoption in 2019 of an updated lease accounting standard (see note 13 to the consolidated financial statements for further detail). This new standard requires that we recognize doubtful accounts associated with lease revenues as a reduction to equipment rentals revenue (such amounts were recognized as SG&A expense prior to 2019). The decrease in SG&A expense as a percentage of revenue for the year endedDecember 31, 2018 primarily reflects a reduction in salaries and bonuses as a percentage of revenue. The merger related costs reflect transaction costs associated with the NES and Neff acquisitions that were completed in 2017, and theBakerCorp and BlueLine acquisitions discussed in note 4 to the consolidated financial statements. We have made a number of acquisitions in the past and may continue to make acquisitions in the future. Merger related costs only include costs associated with major acquisitions that significantly impact our operations. The historic acquisitions that have included merger related costs are RSC, which had annual revenues of approximately$1.5 billion prior to the acquisition, and National Pump, which had annual revenues of over$200 prior to the acquisition. NES had annual revenues of approximately$369 and Neff had annual revenues of approximately$413 . As discussed in note 4 to the consolidated financial statements,BakerCorp had annual revenues of approximately$295 and BlueLine had annual revenues of approximately$786 . 35
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The restructuring charges for the years endedDecember 31, 2019 , 2018 and 2017 primarily reflect severance costs and branch closure charges associated with our restructuring programs. See note 6 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, non-compete agreements and trade names and associated trademarks. The year-over-year increases in non-rental depreciation and amortization for the years endedDecember 31, 2019 and 2018 primarily reflect the impact of the Neff,BakerCorp and BlueLine acquisitions discussed above. Interest expense, net for the years endedDecember 31, 2019 and 2017 included aggregate losses of$61 and$54 , respectively, associated with debt redemptions and the amendments of our ABL facility. Excluding the impact of the 2019 losses, interest expense, net for the year endedDecember 31, 2019 increased year-over-year primarily due to the impact of higher average debt. The year-over-year increase in average debt includes the impact of the debt used to finance theBakerCorp and BlueLine acquisitions discussed above. Excluding the impact of the 2017 losses, interest expense, net for the year endedDecember 31, 2018 increased year-over-year primarily due to the impact of higher average debt. The year-over-year increase in average debt includes the impact of the debt used to finance the NES, Neff,BakerCorp and BlueLine acquisitions discussed above. A detailed reconciliation of the effective tax rates to theU.S. federal statutory income tax rate is included in note 14 to our consolidated financial statements. As discussed further in note 14, the income tax benefit for the year endedDecember 31, 2017 includes the substantial impact of the enactment of the Tax Act discussed above. The Tax Act reduced theU.S. federal statutory tax rate from 35 percent to 21 percent and the years endedDecember 31, 2019 and 2018 reflect the decreased tax rate. Balance sheet. As discussed in note 13 to the consolidated financial statement, in 2019, we adopted an updated lease accounting standard that resulted in the recognition of operating lease right-of-use assets and lease liabilities. We adopted this standard using a transition method that does not require application to periods prior to adoption. Accrued expenses and other liabilities increased by$70 , or 10.3 percent, fromDecember 31, 2018 toDecember 31, 2019 , due partially to the accounting for operating leases under the updated accounting standard (accrued expenses and other liabilities as ofDecember 31, 2019 includes$178 of current operating lease liabilities). Excluding the impact of the operating lease liabilities, accrued expenses and other liabilities decreased primarily due to an increase in anticipated income tax refunds. Accounts payable decreased by$82 , or 15.3 percent, fromDecember 31, 2018 toDecember 31, 2019 primarily due to the timing of (i) invoice payments and (ii) payroll taxes. See note 14 to the consolidated financial statements for a discussion addressing our deferred tax liability. 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 2019 capital structure actions taken to improve our financial flexibility and liquidity. Since 2012, we have repurchased a total of$3.7 billion of Holdings' common stock under five completed share repurchase programs. Additionally, inJanuary 2020 , our Board authorized a new$500 share repurchase program, which will commence in the first quarter of 2020. We intend to complete the new program over twelve months. Our principal existing sources of cash are cash generated from operations and from the sale of rental equipment, and borrowings available under our ABL and accounts receivable securitization facilities. As ofDecember 31, 2019 , we had cash and cash equivalents of$52 . Cash equivalents atDecember 31, 2019 consist of direct obligations of financial institutions rated A or better. We believe that our existing sources of cash will be sufficient to support our existing operations over the next 12 months. The table below presents financial information associated with our principal sources of cash as of and for the yearDecember 31, 2019 : 36
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ABL facility: Borrowing capacity, net of letters of credit$ 2,045 Outstanding debt, net of debt issuance costs 1,638 Interest rate atDecember 31, 2019 3.1 %
Average month-end principal amount of debt outstanding 1,601 Weighted-average interest rate on average debt outstanding 3.7 % Maximum month-end principal amount of debt outstanding 1,727 Accounts receivable securitization facility: Borrowing capacity
46
Outstanding debt, net of debt issuance costs 929
Interest rate at December 31, 2019 2.6 %
Average month-end principal amount of debt outstanding 915 Weighted-average interest rate on average debt outstanding 3.1 % Maximum month-end principal amount of debt outstanding 967
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 ofJanuary 27, 2020 were as follows: Corporate Rating Outlook Moody's Ba2 Stable Standard & Poor's BB Stable A security rating is not a recommendation to buy, sell or hold securities. There is no assurance that any rating will remain in effect for a given period of time or that any rating will not be revised or withdrawn by a rating agency in the future. 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$1.30 billion and$1.44 billion in 2019 and 2018, respectively. Loan Covenants and Compliance. As ofDecember 31, 2019 , we were in compliance with the covenants and other provisions of the ABL, accounts receivable securitization and term loan facilities and the senior notes. Any failure to be in compliance with any material provision or covenant of these agreements could have a material adverse effect on our liquidity and operations. The only financial covenant that currently exists under the ABL facility is the fixed charge coverage ratio. Subject to certain limited exceptions specified in the ABL facility, the fixed charge coverage ratio covenant under the ABL facility will only apply in the future if specified availability under the ABL facility falls below 10 percent of the maximum revolver amount under the ABL facility. When certain conditions are met, cash and cash equivalents and borrowing base collateral in excess of the ABL facility size may be included when calculating specified availability under the ABL facility. As ofDecember 31, 2019 , specified availability under the ABL facility exceeded the required threshold and, as a result, this financial covenant was inapplicable. Under our accounts receivable securitization facility, we are required, among other things, to maintain certain financial tests relating to: (i) the default ratio, (ii) the delinquency ratio, (iii) the dilution ratio and (iv) days sales outstanding. The accounts receivable securitization facility also requires us to comply with the fixed charge coverage ratio under the ABL facility, to the extent the ratio is applicable under the ABL facility. 37
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URNA's payment capacity is restricted under the covenants in the ABL and term loan facilities and the indentures governing its outstanding indebtedness. Although this restricted capacity limits our ability to move operating cash flows to Holdings, because of certain intercompany arrangements, we do not expect any material adverse impact on Holdings' ability to meet its cash obligations. Sources and Uses of Cash. During 2019, we (i) generated cash from operating activities of$3.02 billion and (ii) generated cash from the sale of rental and non-rental equipment of$868 . We used cash during this period principally to (i) purchase rental and non-rental equipment of$2.35 billion , (ii) purchase other companies for$249 , (iii) make debt payments, net of proceeds, of$418 and (iv) purchase shares of our common stock for$870 . During 2018, we (i) generated cash from operating activities of$2.85 billion , (ii) generated cash from the sale of rental and non-rental equipment of$687 and (iii) received cash from debt proceeds, net of payments, of$2.24 billion . We used cash during this period principally to (i) purchase rental and non-rental equipment of$2.29 billion , (ii) purchase other companies for$2.97 billion and (iii) purchase shares of our common stock for$817 . Free Cash Flow GAAP Reconciliation We define "free cash flow" as net cash provided by operating activities less purchases of, and plus proceeds from, equipment. The equipment purchases and proceeds are included in cash flows from investing activities. Management believes that free cash flow provides useful additional information concerning cash flow available to meet future debt service obligations and working capital requirements. However, free cash flow is not a measure of financial performance or liquidity under GAAP. Accordingly, free cash flow should not be considered an alternative to net income or cash flow from operating activities as an indicator of operating performance or liquidity. The table below provides a reconciliation between net cash provided by operating activities and free cash flow. Year Ended December 31, 2019 2018 2017
Net cash provided by operating activities
(2,132 ) (2,106 ) (1,769 )
Purchases of non-rental equipment (218 ) (185 ) (120 )
Proceeds from sales of rental equipment 831 664 550
Proceeds from sales of non-rental equipment 37 23 16
Insurance proceeds from damaged equipment 24 22 21
Free cash flow $ 1,566 $ 1,271 $ 907
Free cash flow for the year ended December 31, 2019 was $1.566 billion , an
increase of $295 as compared to $1.271 billion for the year ended December 31,
2018 . Free cash flow increased primarily due to increased cash provided by
operating activities and increased proceeds from sales of rental equipment. Net
rental capital expenditures (purchases of rental equipment less the proceeds
from sales of rental equipment) decreased $141 , or 10 percent, year-over-year.
Free cash flow for the year ended December 31, 2018 was $1.271 billion , an
increase of $364 as compared to $907 for the year ended December 31, 2017 . Free
cash flow increased primarily due to increased cash provided by operating
activities and increased proceeds from sales of rental equipment, partially
offset by increased purchases of rental and non-rental equipment. Net rental
capital expenditures increased $223 , or 18 percent, year-over-year.
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, 2019 :
2020 2021 2022 2023 2024 Thereafter Total
Debt and finance leases
(1) $ 997 $ 40 $ 32 $ 21 $ 1,661 $ 8,765 $ 11,516
Interest due on debt (2) 514 503 501 500 454 982 3,454
Operating leases (1) 206 180 141 107 73 91 798
Service agreements (3) 18 18 18 - - - 54
Purchase obligations (4) 1,552 - - - - - 1,552
Transition tax on
unremitted foreign
earnings and profits (5) - - - - - 14 14
Total (6) $ 3,287 $ 741 $ 692 $ 628 $ 2,188 $ 9,852 $ 17,388
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(1) The payments due with respect to a period represent (i) in the case of debt
and finance leases, the scheduled principal payments due in such period, and
(ii) in the case of operating leases, the payments due in such period for
non-cancelable operating leases with initial or remaining terms of one year
or more. See note 12 to the consolidated financial statements for further
debt information, and note 13 for further finance lease and operating lease
information.
(2) Estimated interest payments have been calculated based on the principal
amount of debt and the applicable interest rates as of
(3) These primarily represent service agreements with third parties to provide
wireless and network services.
(4) As of
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 2020.
(5) As discussed further in note 14 to the consolidated financial statements,
the Tax Act, which was enacted in
on unremitted foreign earnings and profits, and we completed the accounting
for the transition tax in 2018. We have elected to pay the transition tax
amount payable of
to pay as reflected in the table above represents the total we owe, net of
an overpayment of federal taxes, which we are required to apply to the
transition tax.
(6) This information excludes
possible to estimate the time period during which these unrecognized tax
benefits may be paid to tax authorities. Additionally, 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."
Our self-insurance reserves totaled $121 at December 31,
2019 . Self-insurance liabilities are based on estimates and actuarial
assumptions and can fluctuate in both amount and in timing of cash
settlement because historical trends are not necessarily predictive of the
future, and, accordingly, are not included in the table above.
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.
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