Registrants’ Telephone Number, Including Area Code: (203) 622-3131
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on
Which Registered
Common Stock, $.01 par value, of United Rentals, Inc.
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer þ
Accelerated Filer o
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Smaller Reporting Company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
As of June 30, 2011 there were 62,607,743 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, 2011 was approximately $1.38 billion, calculated by using the closing price of the common stock on such date on the New York Stock Exchange of $25.40.
As of January 23, 2012, there were 62,909,022 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 2012 Annual Meeting of Stockholders, which is expected to be filed with the Securities and Exchange Commission on or before April 27, 2012, are incorporated by reference into Part III of this annual report.
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:
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we and/or RSC Holdings, Inc. (“RSC”) may be unable to obtain stockholder or regulatory approvals required in connection with our proposed acquisition of RSC, or we may be required to accept conditions that could reduce the anticipated benefits of the merger as a condition to obtaining regulatory approvals;
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the length of time necessary to consummate the proposed acquisition of RSC may be longer than anticipated, and our business and/or RSC's business may suffer as a result of uncertainty surrounding the proposed transaction;
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the possibility that RSC or other companies that we have acquired or may acquire could have undiscovered liabilities may strain our management capabilities or may be difficult to integrate;
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our highly leveraged capital structure, which will increase as a result of the proposed acquisition of RSC, 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;
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a change in the pace of the recovery in our end markets which began late in the first quarter of 2010. Our business is cyclical and highly sensitive to North American construction and industrial activities. Although we have recently experienced an upturn in rental activity, there is no certainty this trend will continue. If the pace of the recovery slows or construction activity declines, our revenues and, because many of our costs are fixed, our profitability, may be adversely affected;
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inability to benefit from government spending associated with stimulus-related construction projects;
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restrictive covenants in our debt instruments, which can limit our financial and operational flexibility;
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noncompliance with financial or other covenants in our debt agreements, which could result in our lenders terminating our credit facilities and requiring us to repay outstanding borrowings;
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inability to access the capital that our businesses or growth plans may require;
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inability to manage credit risk adequately or to collect on contracts with a large number of customers;
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the outcome or other potential consequences of regulatory matters and commercial litigation;
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incurrence of additional expenses (including indemnification obligations) and other costs in connection with litigation, regulatory and investigatory matters;
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increases in our maintenance and replacement costs if we age our fleet, and decreases in the residual value of our equipment;
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inability to sell our new or used fleet in the amounts, or at the prices, we expect;
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turnover in our management team and inability to attract and retain key personnel;
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rates we can charge and time utilization we can achieve being less than anticipated;
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costs we incur being more than anticipated, and the inability to realize expected savings in the amounts or time frames planned;
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dependence on key suppliers to obtain equipment and other supplies for our business on acceptable terms;
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competition from existing and new competitors;
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disruptions in our information technology systems;
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the costs of complying with environmental and safety regulations;
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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;
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shortfalls in our insurance coverage;
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adverse developments in our existing claims or significant increases in new claims; 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.
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, 2012.
Item 1. Business
General
United Rentals is the largest equipment rental company in the world and our network consists of 529 rental locations in the United States and Canada. We offer approximately 3,000 classes of equipment for rent to customers that include construction and industrial companies, manufacturers, utilities, municipalities, homeowners, and government entities. In 2011, we generated total revenues of $2.6 billion, including $2.2 billion of equipment rental revenue.
As of December 31, 2011, our fleet of rental equipment included approximately 230,000 units. The total original equipment cost of our fleet (“OEC”), based on the initial consideration paid, was $4.3 billion and $3.8 billion at December 31, 2011 and 2010, respectively. The fleet includes:
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General construction and industrial equipment, such as backhoes, skid-steer loaders, forklifts, earthmoving equipment and material handling equipment, which accounted for approximately 41 percent of our total 2011 equipment rental revenue;
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Aerial work platforms, such as boom lifts and scissor lifts, which accounted for approximately 39 percent of our total 2011 equipment rental revenue;
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General tools and light equipment, such as pressure washers, water pumps, generators, heaters and power tools, which accounted for approximately 8 percent of our total 2011 equipment rental revenue;
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Trench safety equipment, such as trench shields, aluminum hydraulic shoring systems, slide rails, crossing plates, construction lasers and line testing equipment for underground work, which accounted for approximately 6 percent of our total 2011 equipment rental revenue; and
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Power and HVAC (“heating, ventilating and air conditioning”) equipment, such as portable diesel generators, electrical distribution equipment, and temperature control equipment including heating and cooling equipment, which accounted for approximately 6 percent of our total 2011 equipment rental revenue.
In addition to renting equipment, we sell new and used equipment as well as related contractor supplies, parts and service.
Proposed Acquisition of RSC Holdings, Inc.
On December 15, 2011, we entered into a definitive merger agreement with RSC Holdings, Inc. (“RSC”), pursuant to which we have agreed to acquire RSC in a cash-and-stock transaction that ascribes a total enterprise value of $4.2 billion to RSC. RSC is one of the largest providers of rental equipment in North America, focusing on industrial, maintenance and non-residential construction markets, with approximately $2.7 billion of equipment at original cost as of September 30, 2011. At the effective time of the merger, each outstanding share of RSC common stock will be converted into the right to receive $10.80 in cash and 0.2783 of a share of our common stock. Total cash consideration paid to holders of RSC common stock is expected to be approximately $1.1 billion and we anticipate issuing approximately 29 million shares of common stock in the merger. In addition, at the effective time of the merger, the size of our board of directors will be increased as three of RSC's current independent directors designated by RSC will be appointed to our board of directors. The cash portion of the merger will be financed through new debt issuances and drawing on current loan facilities. In connection with the proposed merger, we intend to re-pay the outstanding amounts on RSC's existing senior secured credit facilities and senior secured notes due 2017, which totaled $854 million as of September 30, 2011, and assume all of RSC's remaining $1.4 billion of unsecured debt after such repayment.
The parties' obligations to complete the merger are subject to several conditions including, among others, (i) approval of the transaction by our stockholders and RSC stockholders, (ii) notification and clearance under certain antitrust statutes, (iii) delivery of tax opinions and a solvency opinion, (iv) the absence of any change, event, circumstance or development from the date of the merger agreement until the effective time of the merger, that has had or is reasonably likely to have a material adverse effect on us or RSC, and (v) other customary conditions, including the items described in our Current Report on Form
8-K filed December 21, 2011. We expect the merger to close in the first half of 2012.
As previously announced, our Board has indicated its intention to authorize a stock buyback of up to $200 million of the Company's common stock after closing of the RSC acquisition. Our current intention is to complete the stock buyback within six to twelve months after closing of the RSC acquisition. It is currently expected that the stock buyback will be financed by drawing on current loan facilities.
Strategy
For the past several years, we have focused on optimizing the profitability of our core rental business through revenue growth and margin expansion. To achieve this objective, we have developed a strategy focused on customer segmentation, rate management, fleet management and disciplined cost control. Additionally, we are continuing to strengthen our competitiveness through customer service excellence. This strategy calls for a superior standard of service to customers, often provided through a single point of contact; an increasing proportion of revenues derived from larger accounts; and a targeted presence in industrial and specialty markets.
Although the economic environment continued to present challenges for both our Company and the U.S. equipment rental industry in 2011, we succeeded in realizing a number of achievements related to our strategy. For the full year 2011, compared with 2010, these achievements included:
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A 6.1 percent increase in rental rates;
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A 13.4 percent increase in the volume of OEC on rent;
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A 3.5 percentage point increase in time utilization on a larger fleet;
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An increase in the proportion of equipment rental revenues derived from National Account customers, from 31 percent in 2010 to 35 percent in 2011. National Accounts are generally defined as customers with potential annual equipment rental spend of at least $500,000 or customers doing business in multiple locations;
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Continued improvement in customer service management, including an increase in the proportion of equipment rental revenues derived from accounts that are managed by a single point of contact from 51 percent in 2010 to 55 percent in 2011. Establishing a single point of contact for our key accounts helps us to provide customer service management that is more consistent and satisfactory. Additionally, we expanded our centralized Customer Care Center (“CCC”). The CCC, which established a second base of operations in 2010, handled 10 percent more rental reservations in 2011 compared to 2010;
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The continued optimization of our network of rental locations, including an increase in 2011 of 7, or 9 percent, in the number of our trench safety, power and HVAC rental locations; and
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A 0.8 percentage point improvement in selling, general and administrative expenses as a percentage of revenue.
In 2012, we will continue to focus on optimizing our core business through diligent management of the rental process, the strengthening of our customer service capabilities, and sustained cost efficiencies. Additionally, we will focus on:
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Leveraging technology and training to improve rental rate performance and to optimize the transportation of our rental equipment to and from customer jobsites;
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Further increasing the proportion of our revenues derived from National Accounts and other large customers through customer segmentation. To the extent that we are successful, we believe that we can improve our equipment rental gross margin and overall profitability over time, as large accounts tend to rent more equipment for longer periods and can be serviced more cost effectively than short-term transactional customers;
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Accelerating our pursuit of opportunities in the industrial marketplace, where we believe our depth of resources and branch footprint give us a competitive advantage. Additionally, industrial equipment demand is subject to different cyclical pressures than construction demand, making our aggregate end markets less volatile; and
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Further capitalizing on the demand for the higher-margin power and climate control equipment rented by our trench safety, power and HVAC business.
Industry Overview and Economic Outlook
We serve four principal end markets for equipment rental in North America: commercial, infrastructure, industrial and residential. In 2011, based on an analysis of our charge customers’ Standard Industrial Classification (“SIC”) codes:
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Commercial (private non-residential) construction rentals related to the construction and remodeling of office, retail, lodging and healthcare and other commercial facilities represented approximately 54 percent of our rental revenues;
Industrial rentals to manufacturers, chemical companies, paper mills, railroads, ship builders, utilities and other industries represented approximately 22 percent of our rental revenues;
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Infrastructure (private and public non-residential) construction rentals related to the building of public structures such as bridges, highways, power plants and airports represented approximately 18 percent of our rental revenues; and
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Residential rentals for the construction and renovation of homes represented approximately 6 percent of our rental revenues.
Although overall construction activity remained weak in 2011, our performance was strong. Compared with the prior year, our rental rates increased 6.1 percent and the volume of OEC on rent increased 13.4 percent. We believe these two metrics reflect a combination of positive factors: a modest improvement in our operating environment; a secular shift from customer ownership to the rental of construction equipment; and the benefit of our strategy, particularly our increased focus on National Accounts and other large customers. Although there is no certainty that these trends will continue, we believe that our strategy has already put us in a position to capitalize on our industry leadership and customer service differentiation in a recovery.
In 2012, based on our analysis of leading industry forecasts and broader economic indicators, we expect most of our end markets to continue to recover at a modest pace. Specifically, we estimate that U.S. spending on private non-residential construction, our primary end market, will show a single-digit percentage increase over 2011.
Competitive Advantages
We believe that we benefit from the following competitive advantages:
Large and Diverse Rental Fleet. Our large and diverse fleet allows us to serve large customers that require substantial quantities and/or wide varieties of equipment. We believe our ability to serve such customers should allow us to improve our performance and enhance our market leadership position.
We manage our rental fleet, which is the largest and most comprehensive in the industry, utilizing a life-cycle approach that focuses on satisfying customer demand and optimizing utilization levels. As part of this life-cycle approach, we closely monitor repairs and maintenance expense and can anticipate, based on our extensive experience with a large and diverse fleet, the optimum time to dispose of an asset. Our fleet age, which is calculated on a unit-weighted basis, was 46.4 months at December 31, 2011 compared with 47.7 months at December 31, 2010.
Significant Purchasing Power. We purchase large amounts of equipment, contractor supplies and other items, which enables us to negotiate favorable pricing, warranty and other terms with our vendors.
National Account Program. Our National Account sales force is dedicated to establishing and expanding relationships with large companies, particularly those with a national or multi-regional presence. We offer our National Account customers the benefits of a consistent level of service across North America, a wide selection of equipment and a single point of contact for all their equipment needs. Equipment rental revenues from National Account customers were approximately $750 million and $575 million in 2011 and 2010, respectively, and represented approximately 35 and 31 percent of our total equipment rental revenues in 2011 and 2010, respectively. With our continued focus on large National Accounts, we expect this percentage to increase over time.
Operating Efficiencies. We benefit from the following operating efficiencies:
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Equipment Sharing Among Branches. We generally group our branches into districts of six to 10 locations that are in the same geographic area. Our districts are generally grouped into regions of seven to 11 districts. Each branch within a region can access equipment located elsewhere in the region. This sharing increases equipment utilization because equipment that is idle at one branch can be marketed and rented through other branches. Additionally, fleet sharing allows us to be more disciplined with our capital spend.
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Customer Care Center. We have a CCC based in Tampa, Florida and Charlotte, North Carolina that handles all 1-800-UR-RENTS telephone calls. The CCC handles many of the 1-800-UR-RENTS telephone calls without having to route them to individual branches, which frees up branch employee time. In 2010, we established the North Carolina base of operations for the CCC, which facilitated the CCC’s handling of 10 percent more rental reservations in 2011 than in 2010. The CCC provides us with the ability to provide a more uniform quality experience to customers, manage fleet sharing more effectively and free up branch employee time.
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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.
Information Technology Systems. We have a wide variety of information technology systems, some proprietary and some licensed, that support our operations. This information technology infrastructure facilitates our ability to make rapid and informed decisions, respond quickly to changing market conditions and share rental equipment among branches. We have an in-house team of information technology specialists that supports our systems.
Strong Brand Recognition. As the largest equipment rental company in the United States, we have strong brand recognition, which helps us to attract new customers and build customer loyalty.
Geographic and Customer Diversity. We have 529 rental locations in 48 states and 10 Canadian provinces and serve customers that range from Fortune 500 companies to small businesses and homeowners. We believe that our geographic and customer diversity provides us with many advantages including:
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enabling us to better serve National Account customers with multiple locations;
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helping us achieve favorable resale prices by allowing us to access used equipment resale markets across North America; and
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reducing our dependence on any particular customer.
Our operations in Canada are subject to the risks normally associated with international operations. These include (i) the need to convert currencies, which could result in a gain or loss depending on fluctuations in exchange rates and (ii) the need to comply with foreign laws and regulations, as well as U.S. laws and regulations applicable to our operations in foreign jurisdictions. For additional financial information regarding our geographic diversity, see note 4 to our consolidated financial statements.
Strong and Motivated Branch Management. Each of our full-service branches has a branch manager who is supervised by a district manager. We believe that our managers are among the most knowledgeable and experienced in the industry and we empower them, within budgetary guidelines, to make day-to-day decisions concerning branch matters. Each regional office has a management team that monitors branch, district and regional performance with extensive systems and controls, including performance benchmarks and detailed monthly operating reviews.
Employee Training Programs. We are dedicated to providing training and development opportunities to our employees. In 2011, our employees enhanced their skills through over 265,000 hours of training, including safety training, equipment-related training from our suppliers and online courses covering a variety of 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–general rentals and trench safety, power and HVAC. Segment financial information is presented in note 4 to our consolidated financial statements. The general rentals segment includes the rental of construction, aerial, industrial and homeowner 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 seven geographic regions–the Southwest, Gulf, Northwest, Southeast, Midwest, East, and the Northeast Canada–and operates throughout the United States and Canada. The trench safety, power and HVAC segment includes the rental of specialty construction products and related services. The trench safety, power and HVAC segment’s customers include construction companies involved in infrastructure projects, municipalities and industrial companies. This segment operates throughout the United States and in Canada.
Products and Services
Our principal products and services are described below.
Equipment Rental. We offer for rent approximately 3,000 classes of rental equipment on an hourly, daily, weekly or monthly basis. The types of equipment that we offer include general construction and industrial equipment; aerial work platforms; trench safety equipment; power and HVAC equipment; and general tools and light equipment. The age of our fleet was 46.4 months at December 31, 2011, compared to 47.7 months at December 31, 2010.
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 this 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 the fleet and the need to adjust fleet composition to meet customer demand.
We utilize many channels to sell used equipment: through our national sales force, which can access many resale markets across North America; at auction; through brokers; and directly to manufacturers. We also sell used equipment through our website, which includes an online database of used equipment available for sale. In addition, we hold United Rentals Certified Auctions on eBay to provide customers with another convenient online tool for purchasing used equipment.
Sales of New Equipment. We sell equipment for many leading equipment manufacturers. The manufacturers that we represent and the brands that we carry include: Genie, JLG and Skyjack (aerial lifts); Multiquip, Wacker and Honda USA (compaction equipment, generators and pumps); Sullair (compressors); Skytrak and JLG (rough terrain reach forklifts); Takeuchi (skid-steer loaders); Terex (telehandlers); and DeWalt (generators). The type of new equipment that we sell varies by location.
Contractor Supplies Sales. We sell a variety of contractor supplies including construction consumables, tools, small equipment and safety supplies. Our target customers for contractor supplies are our existing rental customers.
Service and Other Revenues. We also offer repair, maintenance and rental protection services and sell parts for equipment that is owned by our customers. Our target customers for these types of ancillary services are our current rental customers as well as those who purchase both new and used equipment from our branches.
RENTALMAN(R) and INFOMANAGER(R) Software. We have two subsidiaries that develop and market software. One of the subsidiaries develops and markets RENTALMAN(R), which is an enterprise resource planning application used by ourselves and most of the other largest equipment rental companies. The other subsidiary develops and markets INFOMANAGER(R), which provides a complete solution for creating an advanced business intelligence system. INFOMANAGER(R) helps with extracting raw data from transactional applications, transforming it into more useful information and saving it in a database that is specifically optimized for analytical use.
Customers
Our customer base is highly diversified and ranges from Fortune 500 companies to small businesses and homeowners. In 2011, our largest customer accounted for less than one percent of our revenues and our top 10 customers in the aggregate accounted for approximately four percent of our revenues. Historically, over 90 percent of our business each year, as measured by equipment rental revenues, has been generated from previous customers.
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:
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construction companies that use equipment for constructing and renovating commercial buildings, warehouses, industrial and manufacturing plants, office parks, airports, residential developments and other facilities;
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industrial companies—such as manufacturers, chemical companies, paper mills, railroads, ship builders and utilities—that use equipment for plant maintenance, upgrades, expansion and construction;
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municipalities that require equipment for a variety of purposes; and
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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. We have approximately 1,700 sales people, including approximately 900 outside sales representatives who frequently travel to customer jobsites and meet with customers, and approximately 800 inside sales representatives who work in our branches and at our customer care center. Our sales representatives 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, which consists of approximately 55 sales professionals and support staff, and includes those who service government agencies, closely coordinates its efforts with the local sales force in each area.
E-Rentals. Our customers can rent or buy equipment online 24 hours a day, seven days a week, at our E-Rentals portal, which can be found at http://www.ur.com. Our customers can also use our UR data application to access real-time reports on their business activity with us.
Advertising. We promote our business through local and national advertising in various media, including trade publications, yellow pages, the Internet, radio and direct mail. We also regularly participate in industry trade shows and conferences and sponsor a variety of local promotional events.
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 the terms we negotiate are competitive and that there is sufficient product available to meet anticipated customer demand. We utilize a comprehensive selection process to determine our equipment vendors. We consider product capabilities and industry position, the terms being offered, product liability history, customer acceptance and financial strength. We estimate that our largest supplier accounted for approximately 19 percent of our 2011 purchases of equipment, measured on a dollar basis, and that our 10 largest suppliers in the aggregate accounted for approximately 68 percent of such purchases. We believe we have sufficient alternative sources of supply available for each of our major equipment categories.
Information Technology Systems
In support of our rental business, we have information technology systems which facilitate rapid and informed decision-making and enable us to respond quickly to changing market conditions. Each branch is equipped with one or more workstations that are electronically linked to our other locations and to our IBM System i™ system located at our data center. Rental transactions can be entered at these workstations and processed on a real-time basis. Management, branch and call center personnel can access these systems 24 hours a day.
These systems:
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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;
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permit customers to access their accounts online; and
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allow management to obtain a wide range of operational and financial data.
Our information technology systems and website are supported by our in-house group of information technology specialists working in conjunction with our strategic technology partners and service providers. This group trains our branch personnel; upgrades and customizes our systems; provides hardware and technology support; operates a support desk to assist branch and other personnel in the day-to-day use of the systems; extends the systems to newly acquired locations; and manages our website.
Leveraging information technology to achieve greater efficiencies and improve customer service is a critical element of our strategy. In 2011, we made the following investments in the area of technology:
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Pricing Optimization: We enhanced our price optimization software, which was deployed company-wide in 2010. We deployed a deal management application that allows us to evaluate and approve any preliminary pricing agreement the field employees enter into with a customer prior to approval in our systems. Our pricing system includes customer-centric pricing (differentiated pricing based on specific customer attributes) which is available in the branch rental system and is provided in real-time to our sales representatives in the field on their smartphones;
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Field Automation Strategy and Technology: We continued to increase the use of wireless handheld computers with GPS capabilities and route optimization and dispatching software for the delivery and pick-up of our equipment to improve service to our customers while operating more efficiently in our branches. This program is now used at approximately 75 percent of our branches. We expect to complete the company-wide deployment of handheld GPS devices and route optimization and dispatching software in 2012;
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Voice over Internet Protocol (“VoIP”): We continued to improve our VoIP voice communication systems for our
call center, credit offices and a group of pilot branches, to better answer, transfer and route calls to provide improved customer service and internal collaboration. Our VoIP systems allow us to route calls to other branches in the area or to our call center when all branch personnel are busy serving customers;
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Customer Service Scorecard: All of our branches utilize a customer service scorecard to improve and monitor their performance across five critical dimensions: service response time, on-time delivery, off-rent pick-up time, equipment availability and billing dispute resolution. In 2011, we made the scorecards available to our sales representatives at the customer level; and
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Enterprise Data Warehouse: We initially implemented an enterprise data warehouse focused on supporting our customer service and sales force automation initiatives in 2009, and subsequently implemented additional reporting packages within the enterprise data warehouse focused on customer relationship management, sales force effectiveness, financial management, operations management and customer and product profitability. Additionally, automated campaigns and leads from internal and external data sources were routed to our sales force automation system to improve customer retention and increase our share of wallet.
Each of these investments is aligned with our strategic focus on customer service and operational efficiencies.
We have a fully functional back-up facility designed to enable business continuity for our core rental and financial business systems in the event that our main computer facility becomes inoperative. This back-up facility also allows us to perform system upgrades and maintenance without interfering with the normal ongoing operation of our information technology systems.
Competition
The U.S. equipment rental industry is highly fragmented and competitive. As the largest equipment rental company in the industry, we estimate that we have an approximate nine percent market share and that the four largest companies, including RSC, account for approximately 24 percent of industry revenue, based on 2010 equipment rental revenues from construction and industrial equipment as measured by the American Rental Association (“ARA”). Our competitors primarily include small, independent businesses with one or two rental locations; regional competitors that operate in one or more states; public companies or divisions of public companies that operate nationally or internationally; and equipment vendors and dealers who both sell and rent equipment directly to customers. We believe we are well positioned to take advantage of this environment because, as a larger company, we have more resources and certain competitive advantages over our smaller competitors. These advantages include greater purchasing power, the ability to provide customers with a broader range of equipment and services, and greater flexibility to transfer equipment among locations in response to, and in anticipation of, customer demand. The fragmented nature of the industry and our relatively small market share, however, may adversely impact our ability to mitigate rate pressure.
Environmental and Safety Regulations
Our operations are subject to numerous laws governing environmental protection and occupational health and safety matters. These laws regulate such issues as wastewater, stormwater, solid and hazardous wastes and materials, and air quality. Our operations generally do not raise significant environmental risks, but we use and store hazardous materials as part of maintaining our rental equipment fleet and the overall operations of our business, dispose of solid and hazardous waste and wastewater from equipment washing, and store and dispense petroleum products from above-ground storage tanks located at certain of our locations. Under environmental and safety laws, we may be liable for, among other things, (i) the costs of investigating and remediating contamination at our sites as well as sites to which we sent hazardous wastes for disposal or treatment regardless of fault and (ii) fines and penalties for non-compliance. We incur ongoing expenses associated with the performance of appropriate investigation and remediation activities at certain of our locations.
Employees
We have approximately 7,500 employees. Of these, approximately 2,500 are salaried personnel and approximately 5,000 are hourly personnel. Collective bargaining agreements relating to 65 separate locations cover approximately 650 of our employees. We monitor employee satisfaction through ongoing surveys and consider our relationship with our employees to be good.
Available Information
We make our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports, as well as our other SEC filings, available on our website, free of charge, as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. Our website address is http://www.ur.com. The
information contained on our website is not incorporated by reference in this document.
Item 1A. Risk Factors
Our business, results of operations and financial condition are subject to numerous risks and uncertainties. In connection with any investment decision with respect to our securities, you should carefully consider the following risk factors, as well as the other information contained in this report and our other filings with the SEC. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. Should any of these risks materialize, our business, results of operations, financial condition and future prospects could be negatively impacted, which in turn could affect the trading value of our securities.
Clearance of the proposed RSC merger from the Canadian Competition Bureau (the "Bureau") may not be received, may take longer than expected or may impose conditions that are not presently anticipated or cannot be met. Any delay in completing the merger with RSC due to difficulties in obtaining regulatory approvals or satisfying other conditions may substantially reduce the benefits that we expect to obtain from the merger.
We must receive clearance with respect to the proposed merger with RSC. Although the waiting period under the Hart-Scott-Rodino Antitrust Improvement Act expired on January 20, 2012, the Bureau may impose conditions on the completion of the merger or require changes to the terms of the merger agreement. These conditions or changes could have the effect of delaying completion of the merger or imposing additional costs on or limiting the revenues of the combined company following the merger, any of which might have a material adverse effect on the combined company following the completion of the merger. Although we and RSC have agreed in the merger agreement to use our reasonable best efforts to obtain the requisite governmental approvals and/or clearances, we cannot provide any assurance that clearance from the Bureau will be obtained or that there will not be any adverse consequences to our business or RSC's business resulting from the failure to obtain the clearance or from conditions that could be imposed in connection with obtaining the clearance, including divestitures or other operating restrictions upon us, RSC, the combined company or its subsidiaries. Clearance from the Bureau may not be obtained in a timely manner, and this could result in a delay in the consummation of the merger.
In addition to obtaining the required governmental clearances and approvals, the merger is subject to a number of other conditions beyond our control, including, among others, receipt of approvals from our or RSC's stockholders and the receipt of a solvency opinion with respect to the combined company. We cannot predict whether or when the conditions required to complete the merger will be satisfied. Moreover, RSC or URI may terminate the merger agreement if the merger is not consummated by June 15, 2012, except in certain limited circumstances or if the transaction date is extended. Under specified circumstances, RSC or URI may be required to pay significant fees to the other party in connection with the termination of the merger agreement. Any delay in completing the merger, or failure to complete the merger as a result of such delay, may materially adversely affect the synergies and other benefits that we expect to achieve if the merger and the integration of our and RSC's respective businesses are completed within the expected timeframe (the first half of 2012).
Combining our business with RSC's business following completion of the proposed merger may be more difficult, costly or time consuming than expected, which may adversely affect our results and negatively affect the value of our stock following consummation of the merger.
The success of the merger with RSC will depend, in part, on our ability to realize the anticipated benefits and cost savings from combining our business and RSC's business. If we are unable to achieve these objectives within the anticipated time frame, or at all, the anticipated benefits and cost savings of the transaction may not be realized fully, or at all, or may take longer to realize than expected, and the value of our common stock may be affected adversely. It is possible that the integration process could result in the loss of key employees, the disruption of our ongoing business or inconsistencies in standards, controls, procedures and policies that adversely affect our ability to maintain relationships with customers, employees and suppliers or to achieve the anticipated benefits of the merger.
Issues that must be addressed in integrating the operations of RSC into our operations in order to realize the anticipated benefits of the merger include, among other things:
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integrating and optimizing the utilization of our and RSC's rental equipment;
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integrating our and RSC's marketing, information technology and other systems;
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maintenance of the combined company's rental equipment portfolio;
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conforming standards, controls, procedures and policies, business cultures and compensation structures between the companies;
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consolidating the equipment purchasing, maintenance and resale operations;
consolidating corporate and administrative functions;
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consolidating branch locations;
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consolidating sales and marketing operations;
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identifying and eliminating redundant and underperforming operations and assets;
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the retention of key employees;
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minimizing the diversion of management's attention from ongoing business concerns; and
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the possibility of tax costs or inefficiencies associated with the integration of the operations of the combined company.
An inability to realize the full extent of the anticipated benefits of the merger, as well as any delays encountered in the integration process, could have an adverse effect upon our revenues, level of expenses and operating results, which may adversely affect the value of our common stock after the completion of the merger.
In addition, the actual integration may result in additional and unforeseen expenses, and the anticipated benefits of the integration plan may not be realized. Actual synergies, if achieved at all, may be lower than what we expect and may take longer to achieve than anticipated. If we are not able to adequately address these challenges, we may be unable to successfully integrate RSC's operations into ours, or to fully realize the anticipated benefits of the integration of the two companies.
The recent economic downturn, and resulting decreases in North American construction and industrial activities, adversely affected our revenues and operating results by decreasing the demand for our equipment and the prices that we could charge. A slowdown in the economic recovery or a decrease in general economic activity could have further adverse effects on our revenues and operating results.
Our rental equipment is used primarily in the private non-residential construction industry, which is cyclical in nature. Trench safety, power and HVAC equipment is principally used in connection with construction and industrial activities. Over the past several years, our industry has experienced a decline in construction and industrial activity, and we experienced weakness in our end markets, though we saw modest improvements in our operating environment in 2011. The weakness in our end markets led to a decrease in the demand for our equipment and the prices that we can charge and could lead to further decreases. Such decreases adversely affect our operating results by causing our revenues to decline and, because certain of our costs are fixed, our operating margins to be reduced. While many areas of the global economy are improving, a slowdown in the economic recovery or worsening of economic conditions, in particular with respect to North American construction and industrial activities, could cause further 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:
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a decrease in expected levels of infrastructure spending, including lower than expected government funding for economic stimulus projects;
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a lack of availability of credit;
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an increase in the cost of construction materials;
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an increase in interest rates;
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adverse weather conditions, which may temporarily affect a particular region; or
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terrorism or hostilities involving the United States or Canada.
If we are unable to collect on contracts with customers, our operating results would be adversely affected.
One of the reasons some of our customers find it more attractive to rent equipment than own that equipment is the need to deploy their capital elsewhere. This has been particularly true in industries with high growth rates such as the construction industry. However, some of our customers may have liquidity issues and ultimately may not be able to fulfill the terms of their rental agreements with us. If we are unable to manage credit risk issues adequately, or if a large number of customers should have financial difficulties at the same time, our credit losses could increase above historical levels and our operating results would be adversely affected. Further, delinquencies and credit losses generally can be expected to increase during economic slowdowns or recessions.
Our operating results may fluctuate, which could affect the trading value of our securities.
Our revenues and operating results may fluctuate from quarter to quarter or over the longer term due to a number of factors, which could adversely affect the trading value of our securities. These factors, in addition to general economic conditions and the factors discussed above under “Cautionary Statement Regarding Forward-Looking Statements”, include, but are not limited to:
seasonal rental patterns of our customers, with rental activity tending to be lower in the winter;
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changes in the size of our rental fleet and/or in the rate at which we sell our used equipment;
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changes in private non-residential construction spending or government funding for infrastructure and other construction projects;
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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;
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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;
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other cost fluctuations, such as costs for employee-related compensation and healthcare benefits;
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labor shortages, work stoppages or other labor difficulties;
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potential enactment of new legislation affecting our operations or labor relations;
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completion of acquisitions (including the proposed merger with RSC), divestitures or recapitalizations;
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increases in interest rates and related increases in our interest expense and our debt service obligations;
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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
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currency risks and other risks of international operations.
Our common stock price has fluctuated significantly and may continue to do so in the future.
Our common stock price has fluctuated significantly and may continue to do so in the future for a number of reasons, including:
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announcements of developments related to our business;
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market perceptions of the pending merger with RSC and the likelihood of our involvement in other merger and acquisition activity;
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variations in our revenues, gross margins, earnings or other financial results from investors’ expectations;
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departure of key personnel;
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purchases or sales of large blocks of our stock by institutional investors or transactions by insiders;
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fluctuations in the results of our operations and general conditions in the economy, our market, and the markets served by our customers;
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investor perceptions of the equipment rental industry in general and our Company in particular; and
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the operating and stock performance of comparable companies or related industries.
In addition, prices in the stock market have been volatile over the past few years. In many cases, the fluctuations have been unrelated to the operating performance of the affected companies. As a result, the price of our common stock could fluctuate in the future without regard to our or our competitors’ operating performance.
Our current level of indebtedness, which will increase upon completion of the RSC acquisition, exposes us to various risks.
At December 31, 2011, our total indebtedness was approximately $3.0 billion, including $55 million of subordinated convertible debentures. In the event that the proposed merger with RSC is completed, we intend to finance the cash portion of the RSC merger consideration and repay the outstanding amounts on RSC's existing senior secured credit facilities and senior secured notes due 2017 through new debt issuances and drawing on current loan facilities, and to assume all of RSC's existing unsecured debt. We estimate that the principal amount of our total indebtedness will increase by approximately $3.7 billion following completion of the RSC merger. Our substantial indebtedness has the potential to affect us adversely in a number of ways. For example, it will or could:
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increase our vulnerability to adverse economic, industry or competitive developments;
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require us to devote a substantial portion of our cash flow to debt service, reducing the funds available for other purposes or otherwise constraining our financial flexibility;
restrict our ability to move operating cash flows to Holdings. As of December 31, 2011, primarily due to losses sustained in prior years, URNA had limited restricted payment capacity under the most restrictive restricted payment covenants in the indentures governing its outstanding indebtedness;
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affect our ability to obtain additional financing, particularly since substantially all of our assets are subject to security interests relating to existing indebtedness; and
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decrease our profitability or cash flow.
Our increased indebtedness following consummation of the merger with RSC could further adversely affect our operations and liquidity. In addition to increasing the foregoing risks, our anticipated level of indebtedness could, among other things:
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cause us to be less able to take advantage of significant business opportunities, such as acquisition opportunities, and to react to changes in market or industry conditions;
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cause us to be disadvantaged compared to competitors with less leverage;
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result in a downgrade in our credit rating or the credit ratings of any of the indebtedness of our subsidiaries which could increase the cost of further borrowings; and
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limit our ability to borrow additional monies in the future to fund working capital, capital expenditures and other general corporate purposes.
Further, if we are unable to service our indebtedness and fund our operations, we will be forced to adopt an alternative strategy that may include:
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reducing or delaying capital expenditures;
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limiting our growth;
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seeking additional capital;
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selling assets; or
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restructuring or refinancing our indebtedness.
Even if we adopt an alternative strategy, the strategy may not be successful and we may continue to be unable to service our indebtedness and fund our operations.
A portion of our indebtedness bears interest at variable rates that are linked to changing market interest rates. As a result, an increase in market interest rates would increase our interest expense and our debt service obligations. At December 31, 2011, we had $1,065 million of indebtedness that bears interest at variable rates, which we expect to increase following the RSC acquisition as we intend to finance a portion of the merger by drawing on our current loan facilities. Our variable rate indebtedness currently represents 35 percent of our total indebtedness, including our subordinated convertible debentures. We expect this percentage to decrease significantly following the RSC acquisition, as our variable rate indebtedness will represent a smaller portion of our total indebtedness following the acquisition. See Item 7A—Quantitative and Qualitative Disclosures About Market Risk for additional information related to interest rate risk.
Despite our indebtedness level, which will increase in connection with the acquisition of RSC, following the acquisition, we may be able to incur substantially more debt and take other actions that could diminish our ability to make payments on our indebtedness when due, which could further exacerbate the risks associated with our level of indebtedness.
Despite our indebtedness level, which will increase following the acquisition of RSC, we may be able to incur substantially more indebtedness in the future. We are not fully restricted under the terms of the indentures or agreements governing our indebtedness from incurring additional debt, securing existing or future debt, recapitalizing our debt or taking a number of other actions that are not prohibited by the terms of the indentures or agreements governing our indebtedness, any of which could have the effect of diminishing our ability to make payments on our indebtedness when due and further exacerbate the risks associated with our level of indebtedness.
If we are unable to satisfy the financial and other covenants in certain of our debt agreements, our lenders could elect to terminate the agreements and require us to repay the outstanding borrowings, or we could face other substantial costs.
Under the agreement governing our senior secured asset-based revolving credit facility (“ABL facility”), we are required, among other things, to satisfy certain financial tests relating to: (i) the fixed charge coverage ratio and (ii) the ratio of senior secured debt to adjusted EBITDA. As discussed in note 12 to our consolidated financial statements, in October 2011, we
amended the ABL facility. Subject to certain limited exceptions specified in the ABL facility, these covenants will only apply in the future if availability under the ABL facility falls below the greater of 10 percent of the maximum revolver amount under the ABL facility and $150 million. Since the October 2011 amendment date and through December 31, 2011, availability under the ABL facility has exceeded the required threshold and, as a result, these maintenance covenants have been inapplicable. Under our accounts receivable securitization facility, we are required, among other things, to maintain certain financial tests relating to: (i) the default ratio, (ii) the delinquency ratio, (iii) the dilution ratio and (iv) days sales outstanding. If we are unable to satisfy these or any other of the relevant covenants, the lenders could elect to terminate the ABL facility and/or the accounts receivable securitization facility and require us to repay outstanding borrowings. In such event, unless we are able to refinance the indebtedness coming due and replace the ABL facility, accounts receivable securitization facility and/or the other agreements governing our debt, we would likely not have sufficient liquidity for our business needs and would be forced to adopt an alternative strategy as described above. Even if we adopt an alternative strategy, the strategy may not be successful and we may not have sufficient liquidity to service our debt and fund our operations.
Restrictive covenants in certain of the agreements and instruments governing our indebtedness may adversely affect our financial and operational flexibility.
In addition to the risks with respect to covenant non-compliance, compliance with covenants may restrict our ability to conduct our operations. These covenants could adversely affect our operating results by significantly limiting our operating and financial flexibility. In addition to financial covenants, various other covenants in the ABL facility, accounts receivable securitization facility, and the other agreements governing our debt restrict our ability to, among other things:
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incur additional indebtedness;
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make prepayments of certain indebtedness;
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pay dividends;
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repurchase common stock;
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make investments;
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create liens; and
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sell assets and engage in mergers and acquisitions.
We rely on available borrowings under the ABL facility and accounts receivable securitization facility for cash to operate our business, which subjects us to 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 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 may cause material harm to our business or could affect our ability to operate our business as a going concern. In addition, if any of our lenders experience difficulties that render them unable to fund future draws on the facilities, we may not be able to access all or a portion of these funds, which could have similar adverse consequences.
If we are unable to obtain additional capital as required, we may be unable to fund the capital outlays required for the success of our business.
If the cash that we generate from our business, together with cash that we may borrow under the ABL facility and accounts receivable securitization facility, is not sufficient to fund our capital requirements, we will require additional debt and/or equity financing. However, we may not succeed in obtaining the requisite additional financing or such financing may include terms that are not satisfactory to us. We may not be able to obtain additional debt financing as a result of prevailing interest rates or other factors, including the presence of covenants or other restrictions under the ABL facility and/or other agreements governing our debt. In the event we seek to obtain equity financing, our stockholders may experience dilution as a result of the issuance of additional equity securities. This dilution may be significant depending upon the amount of equity securities that we issue and the prices at which we issue such securities. If we are unable to obtain sufficient additional capital in the future, we may be unable to fund the capital outlays required for the success of our business, including those relating to purchasing equipment, growth plans and refinancing existing indebtedness.
If we determine that our goodwill has become impaired, we may incur impairment charges, which would negatively impact our operating results.
At December 31, 2011, we had $289 million 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.
We have a holding company structure and we will depend in part on distributions from our subsidiaries in order 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, in order 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 subject to certain purported class action and stockholder litigation, which could adversely affect our liquidity and results of operations.
As described in greater detail under Item 3-Legal Proceedings, we are subject to certain purported class action and stockholder derivative lawsuits. We can give no assurances as to the outcome of these proceedings and, regardless of the outcome, we may incur significant costs, including defense and indemnification costs, and the time and attention of our management may be diverted from normal business operations. If we are ultimately required to pay significant costs, damages or settlement amounts, such payments, to the extent not covered, advanced or timely reimbursed by insurance, could materially and adversely affect our liquidity and results of operations.
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. Further, as described elsewhere in this report, several stockholder derivative and class action lawsuits have been filed against us. 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:
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our insurance policies, reflecting a program structure that we believe reflects market conditions for companies our size, are often subject to significant deductibles or self-insured retentions: $2 million per occurrence for each general liability or automobile liability claim, and $1 million per occurrence for each workers’ compensation claim;
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our director and officer liability insurance policy has no deductible for individual non-indemnifiable loss coverage, but is subject to a $2.5 million deductible for company reimbursement coverage and all director and officer coverage is subject to certain exclusions;
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we do not maintain stand-alone coverage for environmental liability (other than legally required coverage), since we believe the cost for such coverage is high relative to the benefit it provides; and
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certain types of claims, such as claims for punitive damages or for damages arising from intentional misconduct, which are often alleged in third party lawsuits, might not be covered by our insurance.
We establish and regularly evaluate our loss reserves to address business operations claims, or portions thereof, not covered by our insurance policies. To the extent that we are found liable for any significant claim or claims that exceed our established levels of reserves, or that are not otherwise covered by insurance, we could have to significantly increase our reserves, and our liquidity and operating results could be materially and adversely affected. For instance, during the fourth quarter of 2010, we recognized a charge of $24 million related to our provision for self-insurance reserves. The charge in particular reflected adverse experience in our portfolio of automobile and general liability claims, as well as worker’s compensation claims. In addition, the purported class action and derivative lawsuits against us, and our indemnification costs associated with such matters, may not be fully reimbursable or covered by insurance. It is also possible that some or all of the insurance that is currently available to us will not be available in the future on economically reasonable terms or at all.
We have made acquisitions in the past, which entail certain risks, as do any growth initiatives, including additional acquisitions or consolidations, that we may pursue in the future.
We have historically achieved a portion of our growth through acquisitions, and we will continue to consider potential acquisitions on a selective basis. From time-to-time we have also approached, or have been approached, to explore consolidation opportunities with other public companies or large privately-held companies.
Whether historical or in the future, it is possible that we will not realize the expected benefits from our acquisitions or
that our existing operations will be adversely affected as a result of acquisitions. Acquisitions entail certain risks, including:
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unrecorded liabilities of acquired companies that we fail to discover during our due diligence investigations or that are not subject to indemnification or reimbursement by the seller;
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difficulty in assimilating the operations and personnel of the acquired company within our existing operations or in maintaining uniform standards;
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loss of key employees of the acquired company;
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the failure to achieve anticipated synergies; and
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strains on management and other personnel time and resources to evaluate, negotiate and integrate acquisitions.
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 in any instance, we would expect to need additional debt or equity financing, which involves its own risks, such as the dilutive effect on shares held by our stockholders if we financed acquisitions by issuing convertible debt or equity securities.
We have also spent resources and efforts, apart from acquisitions, in attempting to enhance our rental business over the past few years. These efforts place strains on our management and other personnel time and resources, and require timely and continued investment in facilities, personnel and financial and management systems and controls. We may not be successful in implementing all of the processes that are necessary to support any of our growth initiatives, which could result in our expenses increasing disproportionately to our incremental revenues, causing our operating margins and profitability to be adversely affected.
Our charter provisions, as well as other factors, may affect the likelihood of a takeover or change of control of the Company.
Although our Board elected not to extend our stockholders’ rights plan upon its expiration in September 2011, we still have in place certain charter provisions, such as the inability for stockholders to act by written consent, that may have the effect of deterring hostile takeovers or delaying or preventing changes in control or management of the Company that are not approved by our board, including transactions in which our stockholders might otherwise receive a premium for their shares over then-current market prices. We are also subject to Section 203 of the Delaware General Corporation Law which, under certain circumstances, restricts the ability of a publicly held Delaware corporation to engage in a business combination, such as a merger or sale of assets, with any stockholder that, together with affiliates, owns 15 percent or more of the corporation’s outstanding voting stock, which similarly could prohibit or delay the accomplishment of a change of control transaction. In addition, under the ABL facility, a change of control (as defined in the credit agreement) constitutes an event of default, entitling our lenders to terminate the ABL facility and require us to repay outstanding borrowings. A change of control (as defined in the applicable agreement) is also a termination event under our accounts receivable securitization facility and generally would require us to offer to repurchase our outstanding senior and senior subordinated notes. As a result, the provisions of the agreements governing our debt also may affect the likelihood of a takeover or other change of control.
Turnover of members of our management and our ability to attract and retain key personnel may affect our ability to efficiently manage our business and execute our strategy.
Our success is dependent, in part, on the experience and skills of our management team, and competition in our industry and the business world for top management talent is generally significant. Although we believe we generally have competitive pay packages, we can provide no assurance that our efforts to attract and retain senior management staff will be successful. Moreover, given the volatility in our stock price, it may be more difficult and expensive to recruit and retain employees, particularly senior management, through grants of stock or stock options. This in turn could place greater pressure on the Company to increase the cash component of its compensation packages, which may adversely affect our operating results. If we are unable to fill and keep filled all of our senior management positions, or if we lose the services of any key member of our senior management team and are unable to find a suitable replacement in a timely fashion, we may be challenged to effectively manage our business and execute our strategy.
Our operational and cost reduction strategies may not generate the improvements and efficiencies we expect.
We have been pursuing a strategy of optimizing our field operations in order to improve sales force effectiveness, and to focus our sales force’s efforts on increasing revenues from our National Account and other large customers. We are also continuing to pursue our overall cost reduction program, which resulted in substantial cost savings in the past. The extent to which these strategies will achieve our desired efficiencies and goals in 2012 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 desired 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 to 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 companies. Competitive pressures could adversely affect our revenues and operating results by, among other things, decreasing our rental volumes, depressing the prices that we can charge or increasing our costs to retain employees.
Disruptions in our information technology systems could adversely affect our operating results by limiting our capacity to effectively monitor and control our operations.
Our information technology systems facilitate our ability to monitor and control our operations and adjust to changing market conditions. Any disruptions in these systems or the failure of these systems to operate as expected could, depending on the magnitude of the problem, adversely affect our operating results by limiting our capacity to effectively monitor and control our operations and adjust to changing market conditions. In addition, because our systems sometimes contain information about individuals and businesses, our failure to appropriately maintain the security of the data we hold, whether as a result of our own error or the malfeasance or errors of others, could harm our reputation or give rise to legal liabilities leading to lower revenues, increased costs and other material adverse effects on our results of operations.
We are subject to numerous environmental and safety regulations. If we are required to incur compliance or remediation costs that are not currently anticipated, our liquidity and operating results could be materially and adversely affected.
Our operations are subject to numerous laws and regulations governing environmental protection and occupational health and safety matters. These laws regulate such issues as wastewater, stormwater, solid and hazardous waste and materials, and air quality. Under these laws, we may be liable for, among other things, (i) the costs of investigating and remediating any contamination at our sites as well as sites to which we send hazardous waste for disposal or treatment, regardless of fault and (ii) fines and penalties for non-compliance. Our operations generally do not raise significant environmental risks, but we use hazardous materials to clean and maintain equipment, dispose of solid and hazardous waste and wastewater from equipment
washing, and store and dispense petroleum products from above-ground storage tanks located at certain of our locations.
Based on conditions currently known to us, we do not believe that any pending or likely remediation and/or compliance effort will have a material adverse effect on our business. We cannot be certain, however, as to the potential financial impact on our business if new adverse environmental conditions are discovered or environmental and safety requirements become more stringent. If we are required to incur environmental compliance or remediation costs that are not currently anticipated, our liquidity and operating results could be materially and adversely affected, depending on the magnitude of such costs.
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 436 branch locations in the United States are located in 48 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 generally otherwise impact our operations in adverse ways.
Labor disputes could disrupt our ability to serve our customers and/or lead to higher labor costs.
We currently have approximately 650 employees who are represented by unions and covered by collective bargaining agreements and approximately 6,850 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.
Fluctuations in fuel costs or reduced supplies of fuel could harm our business.
We believe that one of our competitive advantages is the mobility of our fleet. Accordingly, we could be adversely affected by limitations on fuel supplies or significant increases in fuel prices that result in higher costs to us for transporting equipment from one branch to another branch. Although we have used, and may continue to use, futures contracts to hedge against fluctuations in fuel prices, a significant or protracted price fluctuation or disruption of fuel supplies could have a material adverse effect on our financial condition and results of operations.
Our rental fleet is subject to residual value risk upon disposition, and may not sell at the prices or in the quantities we expect.
The market value of any given piece of rental equipment could be less than its depreciated value at the time it is sold. The market value of used rental equipment depends on several factors, including:
•
the market price for new equipment of a like kind;
•
wear and tear on the equipment relative to its age and the performance of preventive maintenance;
•
the time of year that it is sold;
•
the supply of used equipment on the market;
•
the existence and capacities of different sales outlets;
•
the age of the equipment at the time it is sold;
•
worldwide and domestic demand for used equipment; and
•
general economic conditions.
We include in income from operations the difference between the sales price and the depreciated value of an item of equipment sold. Changes in our assumptions regarding depreciation could change our depreciation expense, as well as the gain or loss realized upon disposal of equipment. Sales of our used rental equipment at prices that fall significantly below our projections and/or in lesser quantities than we anticipate will have a negative impact on our results of operations and cash flows.
We have operations outside the United States. As a result, we may incur losses from currency conversions and have higher costs than we otherwise would have due to the need to comply with foreign laws.
Our operations in Canada are subject to the risks normally associated with international operations. These include (i) the need to convert currencies, which could result in a gain or loss depending on fluctuations in exchange rates and (ii) the need to comply with foreign laws and regulations, as well as U.S. laws and regulations applicable to our operations in foreign jurisdictions. See Item 7A—Quantitative and Qualitative Disclosures About Market Risk for additional information related to currency exchange risk.
Item 1B.
Unresolved Staff Comments
None.
Item 2.
Properties
As of January 1, 2012, we operated 529 rental locations. 436 of these locations are in the United States and 93 are in Canada. The number of locations in each state or province is shown in the table below, as well as the number of locations that are in our general rentals (GR) and trench safety, power and HVAC (TPH) segments.
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.
We have a fleet of approximately 4,800 vehicles. These vehicles are used for delivery, maintenance, management and sales functions. Approximately 87 percent of this fleet is leased and the balance is owned.
Our corporate headquarters are located in Greenwich, Connecticut, where we occupy approximately 41,000 square feet under a lease that expires in 2013. Additionally, we maintain a facility in Shelton, Connecticut, where we occupy approximately 32,000 square feet under a lease that expires in 2016. Further, we maintain shared-service facilities in Tampa, Florida, where we occupy approximately 43,000 square feet under a lease that expires in 2015, and Charlotte, North Carolina, where we occupy approximately 23,000 square feet under a lease that expires in 2012.
Item 3.
Legal Proceedings
A description of legal proceedings can be found in note 15 to our consolidated financial statements, included in this report at Item 8—Financial Statements and Supplementary Data, and is incorporated by reference into this Item 3.
Item 4.
(Removed and Reserved)
PART II
Item 5.
Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Price Range of Common Stock
Holdings’ common stock trades on the New York Stock Exchange under the symbol “URI.” The following table sets forth, for the periods indicated, the intra-day high and low sale prices for our common stock, as reported by the New York Stock Exchange.
High
Low
2011:
First Quarter
$
33.63
$
22.66
Second Quarter
34.78
22.13
Third Quarter
27.21
12.81
Fourth Quarter
30.73
15.14
2010:
First Quarter
$
10.13
$
6.87
Second Quarter
14.79
9.26
Third Quarter
15.41
8.20
Fourth Quarter
23.69
14.46
As of January 1, 2012, there were approximately 89 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
The shares 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.
As previously announced, our Board announced its intention to authorize a stock buyback of up to $200 million of Holdings' common stock after closing of the proposed RSC merger. Our current intention is to complete the stock buyback within six to twelve months after closing.
Equity Compensation Plans
For information regarding equity compensation plans, see Item 12 of this annual report on Form 10-K.
Item 6.
Selected Financial Data
The following selected financial data reflects the results of operations and balance sheet data as of and for the years ended December 31, 2007 to 2011. The data below should be read in conjunction with, and is qualified by reference to, our Management’s Discussion and Analysis and our consolidated financial statements and notes thereto contained elsewhere in this report. In December 2006, we entered into a definitive agreement to sell our traffic control business and, as a result, the operations of our traffic control business are reflected as a discontinued operation for all periods presented. The financial information presented may not be indicative of our future performance.
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, with an integrated network of 529 rental locations in the United States and Canada. Although the equipment rental industry is highly fragmented and diverse, we believe that we are well positioned to take advantage of this environment because, as a larger company, we have more extensive resources and certain competitive advantages. These include a fleet of rental equipment with a total original equipment cost (“OEC”), based on the initial consideration paid, of $4.3 billion, and a national branch network that operates in 48 states and every Canadian province, and serves 99 of the largest 100 metropolitan areas in the United States. In addition, our size gives us greater purchasing power, the ability to provide customers with a broader range of equipment and services, the ability to provide customers with equipment that is better 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 3,000 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. In 2011, equipment rental revenues represented 82 percent of our total revenues.
For the past several years, we have focused on optimizing the profitability of our core rental business through revenue growth and margin expansion. To achieve this, we have developed a strategy focused on customer segmentation, rate management, fleet management and disciplined cost control. Additionally, we are continuing to strengthen our competitiveness through customer service excellence. This strategy calls for a superior standard of service to customers, often provided through a single point of contact; an increasing proportion of revenues derived from larger accounts; and a targeted presence in industrial and specialty markets.
Although the economic environment continued to present challenges for both our Company and the U.S. equipment rental industry in 2011, we succeeded in realizing a number of achievements related to our strategy. For the full year 2011, compared with 2010, these achievements included:
•
A 6.1 percent increase in rental rates;
•
A 13.4 percent increase in the volume of OEC on rent;
•
A 3.5 percentage point increase in time utilization on a larger fleet;
•
An increase in the proportion of equipment rental revenues derived from National Account customers, from 31 percent in 2010 to 35 percent in 2011. National Accounts are generally defined as customers with potential annual equipment rental spend of at least $500,000 or customers doing business in multiple locations;
•
Continued improvement in customer service management, including an increase in the proportion of equipment rental revenues derived from accounts that are managed by a single point of contact from 51 percent in 2010 to 55 percent in 2011. Establishing a single point of contact for our key accounts helps us to provide customer service management that is more consistent and satisfactory. Additionally, we expanded our centralized CCC. The CCC, which established a second base of operations in 2010, handled 10 percent more rental reservations in 2011;
•
The continued optimization of our network of rental locations, including an increase in 2011 of 7, or 9 percent, in the number of our trench safety, power and HVAC rental locations; and
•
A 0.8 percentage point improvement in selling, general and administrative expenses as a percentage of total revenue.
In 2012, we will continue to focus on optimizing our core business through diligent management of the rental process, the strengthening of our customer service capabilities, and sustained cost efficiencies. Additionally, we will focus on:
•
Leveraging technology and training to improve rental rate performance and optimize the transportation of our rental equipment to and from customer jobsites;
•
Further increasing the proportion of our revenues derived from National Accounts and other large customers through customer segmentation. To the extent that we are successful, we believe that we can improve our equipment rental gross margin and overall profitability over time, as large accounts tend to rent equipment for longer periods and can be serviced more cost effectively than short-term transactional customers;
•
Accelerating our pursuit of opportunities in the industrial marketplace, where we believe our depth of resources and branch footprint give us a competitive advantage. Additionally, industrial equipment demand is subject to different cyclical pressures than construction demand, making our aggregate end markets less volatile; and
•
Further capitalizing on the demand for the higher-margin power and climate control equipment rented by our trench
In 2012, based on our analysis of leading industry forecasts and broader economic indicators, we expect most of our end markets to continue to recover at a modest pace. Specifically, we estimate that U.S. spending on private non-residential construction, our primary end market, will show a single-digit percentage increase over 2011.
Proposed Acquisition of RSC
As discussed elsewhere in this report, on December 15, 2011, we entered into a definitive merger agreement with RSC, pursuant to which we have agreed to acquire RSC in a cash-and-stock transaction that ascribes a total enterprise value of $4.2 billion to RSC. Total cash consideration is expected to be approximately $1.1 billion and we anticipate issuing approximately 29 million shares of common stock in the merger. The cash portion of the merger will be financed through new debt issuances and drawing on current loan facilities. In connection with the proposed merger, we intend to re-pay the outstanding amounts on RSC's existing senior secured credit facilities and senior secured notes due 2017, which totaled $854 as of September 30, 2011, and assume all of RSC's remaining $1.4 billion of unsecured debt after such repayment. The proposed merger is subject to approval by our stockholders and RSC stockholders, regulatory approvals and other mutual conditions of the parties. We expect the merger to close in the first half of 2012.
Financial Overview
Despite the challenges posed by recent economic and credit market conditions, and as discussed elsewhere in this report, we succeeded in taking a number of positive actions in 2010 and 2011 related to our capital structure, and have significantly improved our financial flexibility and liquidity. For instance, most recently, in October 2011, we amended our ABL facility. The amended facility, which expires on October 13, 2016, provides for, among other things, an increase in the facility size from $1.36 billion to $1.80 billion, an uncommitted incremental increase in the size of the facility of up to $500, and generally lower borrowing costs. Additionally, in September 2011, we amended our accounts receivable securitization facility. The amended facility expires on September 26, 2012 and may be extended on a 364-day basis by mutual agreement of the Company and the purchasers under the facility. The amended facility provides for, among other things, a decrease in the facility size from $325 to $300, adjustments to the receivables subject to purchase, and generally lower borrowing costs. As of December 31, 2011, we had available liquidity of $972, including cash of $36.
Income (loss) from continuing operations. Income (loss) from continuing operations and diluted earnings (loss) per share from continuing operations for each of the three years in the period ended December 31, 2011 were as follows:
Year Ended December 31,
2011
2010
2009
Income (loss) from continuing operations
$
101
$
(22
)
$
(60
)
Diluted earnings (loss) per share from continuing operations
$
1.38
$
(0.38
)
$
(0.98
)
Income (loss) from continuing operations and diluted earnings (loss) per share from continuing operations for each of the three years in the period ended December 31, 2011 include the impacts of the following special items (amounts presented on an after-tax basis):
Year Ended December 31,
2011
2010
2009
Contribution to income from continuing operations (after-tax)
Impact on diluted earnings per share from continuing operations
Contribution to loss from continuing operations (after-tax)
Impact on diluted loss per share from continuing operations
Contribution to loss from continuing operations (after-tax)
Impact on diluted loss per share from continuing operations
RSC merger related costs (1)
$
(18
)
$
(0.25
)
$
—
$
—
$
—
$
—
Restructuring charge (2)
(12
)
(0.16
)
(21
)
(0.34
)
(19
)
(0.29
)
(Losses) gains on repurchase/retirement of debt securities and subordinated convertible debentures, and ABL amendment (3)
(3
)
(0.04
)
(17
)
(0.28
)
12
0.19
Asset impairment charge (4)
(3
)
(0.04
)
(6
)
(0.09
)
(8
)
(0.12
)
_________________
(1)
This reflects transaction costs associated with the proposed acquisition of RSC discussed above.
As discussed below (see “Restructuring charge”), this relates to branch closure charges and severance costs.
(3)
As discussed below, this reflects (losses) gains on the repurchase/retirement of debt securities and subordinated convertible debentures, and write-offs of debt issuance costs associated with the October 2011 amendment of our ABL facility.
(4)
As discussed in note 5 to our consolidated financial statements, this non-cash charge primarily relates to the impact of impairing certain rental equipment and leasehold improvement write-offs.
In addition to the matters discussed above, our 2011 performance reflects increased gross profit from equipment rentals and sales of rental equipment. As discussed below (see “Results of Operations- Income taxes”), our results for 2010 also include a tax benefit of $41, which equates to an effective tax rate of 65.1 percent.
EBITDA GAAP Reconciliations. EBITDA represents the sum of net income (loss), loss from discontinued operation, net of taxes, provision (benefit) for income taxes, interest expense, net, interest expense-subordinated convertible debentures, net, depreciation of rental equipment and non-rental depreciation and amortization. Adjusted EBITDA represents EBITDA plus the sum of the RSC merger related costs, the restructuring charge and stock compensation expense, net. These items are excluded from adjusted EBITDA internally when evaluating our operating performance and allow investors to make a more meaningful comparison between our core business operating results over different periods of time, as well as with those of other similar companies. Management believes that EBITDA and adjusted EBITDA, when viewed with the Company’s results under U.S. generally accepted accounting principles (“GAAP”) and the accompanying reconciliation, provide useful information about operating performance and period-over-period growth, and provide additional information that is useful for evaluating the operating performance of our core business without regard to potential distortions. Additionally, management believes that EBITDA and adjusted EBITDA permit investors to gain an understanding of the factors and trends affecting our ongoing cash earnings, from which capital investments are made and debt is serviced. However, EBITDA and adjusted EBITDA are not measures of financial performance or liquidity under GAAP and, accordingly, should not be considered as alternatives to net income (loss) or cash flow from operating activities as indicators of operating performance or liquidity.
The table below provides a reconciliation between net income (loss) and EBITDA and adjusted EBITDA:
Year Ended December 31,
2011
2010
2009
Net income (loss)
$
101
$
(26
)
$
(62
)
Loss from discontinued operation, net of taxes
—
4
2
Provision (benefit) for income taxes
63
(41
)
(47
)
Interest expense, net
228
255
226
Interest expense—subordinated convertible debentures, net
7
8
(4
)
Depreciation of rental equipment
423
389
417
Non-rental depreciation and amortization
57
60
57
EBITDA
879
649
589
RSC merger related costs (1)
19
—
—
Restructuring charge (2)
19
34
31
Stock compensation expense, net (3)
12
8
8
Adjusted EBITDA
$
929
$
691
$
628
_________________
The table below provides a reconciliation between net cash provided by operating activities and EBITDA and adjusted EBITDA:
Adjustments for items included in net cash provided by operating activities but excluded from the calculation of EBITDA:
Loss from discontinued operation, net of taxes
—
4
2
Amortization of deferred financing costs and original issue discounts
(22
)
(23
)
(17
)
Gain on sales of rental equipment
66
41
7
Gain (loss) on sales of non-rental equipment
2
—
(1
)
RSC merger related costs (1)
(19
)
—
—
Restructuring charge (2)
(19
)
(34
)
(31
)
Stock compensation expense, net (3)
(12
)
(8
)
(8
)
(Loss) gain on repurchase/redemption of debt securities and ABL amendment (4)
(3
)
(28
)
7
(Loss) gain on retirement of subordinated convertible debentures
(2
)
—
13
Changes in assets and liabilities
53
65
(58
)
Cash paid for interest, including subordinated convertible debentures
203
229
234
Cash paid (received) for income taxes, net
24
(49
)
3
EBITDA
879
649
589
Add back:
RSC merger related costs (1)
19
—
—
Restructuring charge (2)
19
34
31
Stock compensation expense, net (3)
12
8
8
Adjusted EBITDA
$
929
$
691
$
628
_________________
(1)
This reflects transaction costs associated with the proposed acquisition of RSC discussed above.
(2)
As discussed below (see “Restructuring charge”), this relates to branch closure charges and severance costs.
(3)
Represents non-cash, share-based payments associated with the granting of equity instruments.
(4)
As discussed below, this reflects (losses) gains on the repurchase/retirement of debt securities and write-offs of debt issuance costs associated with the October 2011 amendment of our ABL facility.
For the year ended December 31, 2011, EBITDA increased $230, or 35.4 percent, and adjusted EBITDA increased $238, or 34.4 percent, primarily reflecting increased profit from equipment rentals. For the year ended December 31, 2011, EBITDA margin increased 4.7 percentage points to 33.7 percent, and adjusted EBITDA margin increased 4.7 percentage points to 35.6 percent, primarily reflecting increased margins from equipment rentals and improved selling, general and administrative leverage.
For the year ended December 31, 2010, EBITDA increased $60, or 10.2 percent, and adjusted EBITDA increased $63, or 10.0 percent, primarily reflecting increased margins from sales of rental equipment and selling, general and administrative expense reductions. For the year ended December 31, 2010, EBITDA margin increased 4.0 percentage points to 29.0 percent, and adjusted EBITDA margin increased 4.3 percentage points to 30.9 percent, primarily reflecting increased margins from sales of rental equipment, and improved selling, general and administrative leverage.
Revenues. Revenues for each of the three years in the period ended December 31, 2011 were as follows:
Equipment rentals include our revenues from renting equipment, as well as related revenues such as the fees we charge for equipment delivery, fuel, repair or maintenance of rental equipment and damage waivers. Sales of rental equipment represent our revenues from the sale of used rental equipment. Sales of new equipment represent our revenues from the sale of new equipment. Contractor supplies sales represent our sales of supplies utilized by contractors, which include construction consumables, tools, small equipment and safety supplies. Services and other revenue includes our repair services (including parts sales) as well as the operations of our subsidiaries that develop and market software for use by equipment rental companies in managing and operating multiple branch locations.
2011 total revenues of $2.6 billion increased 16.7 percent compared with total revenues of $2.2 billion in 2010. The increase primarily reflects a 17.3 percent increase in equipment rentals, which was primarily due to a 13.4 percent increase in the volume of OEC on rent and a 6.1 percent rental rate increase, and a 44.4 percent increase in sales of rental equipment, which was primarily due to increased volume, improved pricing and changes in the mix of equipment sold. Rental rate changes are calculated based on the year over year variance in average contract rates, weighted by the current period revenue mix.
2010 total revenues of $2.2 billion decreased 5.1 percent compared with total revenues of $2.4 billion in 2009. The decrease primarily reflects a 37.1 percent decline in sales of rental equipment and a 21.5 percent decline in contractor supplies sales. Equipment rental revenue increased slightly as a 4.3 percent increase in the volume of OEC on rent was largely offset by a 2.1 percent decrease in rental rates and other. The decline in sales of rental equipment in 2010 primarily reflects a decline in the volume of equipment sold. The decline in contractor supplies sales in 2010 reflects a reduction in the volume of supplies sold, partially offset by improved pricing and product mix driven by our continued focus on higher margin products.
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 were we to change underlying assumptions, estimates and/or judgments. Although actual results may differ from those estimates, we believe the estimates are reasonable and appropriate.
Revenue Recognition. We recognize equipment rental revenue on a straight-line basis. Our rental contract periods are hourly, daily, weekly or monthly. By way of example, if a customer were to rent a piece of equipment and the daily, weekly and monthly rental rates for that particular piece were (in actual dollars) $100, $300 and $900, respectively, we would recognize revenue of $32.14 per day. The daily rate for recognition purposes is calculated by dividing the monthly rate of $900 by the monthly term of 28 days. As part of this straight-line methodology, when the equipment is returned, we recognize as incremental revenue the excess, if any, between the amount the customer is contractually required to pay over the cumulative amount of revenue recognized to date. In any given accounting period, we will have customers return equipment and be contractually required to pay us more than the cumulative amount of revenue recognized to date. For instance, continuing the above example, if the above customer rented a piece of equipment on December 29 and returned it at the close of business on January 1, we would recognize incremental revenue on January 1 of $171.44 (in actual dollars, representing the difference between the amount the customer is contractually required to pay and the cumulative amount recognized to date on a straight-line basis). We record amounts billed to customers in excess of recognizable revenue as deferred revenue on our balance sheet. We had deferred revenue of $16 and $12 as of December 31, 2011 and 2010, respectively. Revenues from the sale of rental equipment and new equipment are recognized at the time of delivery to, or pick-up by, the customer and when collectibility is reasonably assured. Sales of contractor supplies are also recognized at the time of delivery to, or pick-up by, the customer. Service revenue is recognized as the services are performed.
Allowance for Doubtful Accounts. We maintain allowances for doubtful accounts. These allowances reflect our estimate
of the amount of our receivables that we will be unable to collect based on historical write-off experience. Our estimate could require change based on changing circumstances, including changes in the economy or in the particular circumstances of individual customers. Accordingly, we may be required to increase or decrease our allowance. Trade receivables that have contractual maturities of one year or less are written-off when they are determined to be uncollectible based on the criteria necessary to qualify as a deduction for federal tax purposes. Write-offs of such receivables require management approval based on specified dollar thresholds.
Useful Lives and Salvage Values of Rental Equipment and Property and Equipment. We depreciate rental equipment and property and equipment over their estimated useful lives, after giving effect to an estimated salvage value which ranges from zero percent to 10 percent of cost. 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, $12 and $33 for the years ended December 31, 2011, 2010 and 2009, 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 $42 or $54, 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 $5. 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 $7 or $9, respectively.
Impairment of Long-lived Assets (Excluding Goodwill). We review the recoverability of our long-lived assets, including rental equipment and property and equipment, when events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable. The assessment of possible impairment is based on our ability to recover the carrying value of the asset from the expected future pre-tax cash flows (undiscounted and without interest charges). If these cash flows are less than the carrying value of such asset, an impairment loss is recognized for the difference between the estimated fair value and carrying value. During the years ended December 31, 2011, 2010 and 2009, we recognized asset impairment charges of $4, $9 and $12, respectively, in our general rentals segment. The 2011 and 2010 impairment charges primarily reflected write-offs of leasehold improvements and other fixed assets which were recognized in connection with the consolidation of our branch network discussed below, and are primarily reflected in non-rental depreciation and amortization in the accompanying consolidated statements of income. The 2009 impairment charge includes rental fleet impairment of $9 reflected in depreciation of rental equipment in the accompanying consolidated statements of income, as well as $3 primarily related to leasehold improvement write-offs which are reflected in non-rental depreciation and amortization in the accompanying consolidated statements of income. The impairment charges followed from our decision to consolidate our branch network. We have reduced our branch count by an aggregate of 168 branches between January 1, 2008 (the beginning of the restructuring period discussed in “Restructuring charge” below) and December 31, 2011. As of December 31, 2011 and 2010, there were no held-for-sale assets in our consolidated balance sheets.
In addition to the impairment reviews we conduct in connection with branch consolidations and other changes in the business, each quarter we conduct a review of rental assets with utilization below a specified threshold. We select these assets, which represented approximately three percent of our total rental assets at December 31, 2011, as we believe they are at the greatest risk of potential impairment. As part of this impairment review, we estimate future rental revenues based on current and expected utilization levels, the age of these assets and their remaining useful lives. Additionally, we estimate when the asset is expected to be removed or retired from our rental fleet as well as the expected proceeds to be realized upon disposition. Based on our most recently completed December 31, 2011 quarterly review, there was no impairment associated with these assets.
Income Taxes. We recognize deferred tax assets and liabilities for certain future deductible or taxable temporary differences expected to be reported in our income tax returns. These deferred tax assets and liabilities are computed using the tax rates that are expected to apply in the periods when the related future deductible or taxable temporary difference is expected to be settled or realized. In the case of deferred tax assets, the future realization of the deferred tax benefits and carryforwards are determined with consideration to historical profitability, projected future taxable income, the expected timing of the
reversals of existing temporary differences, and tax planning strategies. After consideration of all these factors, we recognize deferred tax assets when we believe that it is more likely than not that we will realize them. The most significant positive evidence that we consider in the recognition of deferred tax assets is the expected reversal of cumulative deferred tax liabilities resulting from book versus tax depreciation of our rental equipment fleet that is well in excess of the deferred tax assets.
We use a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return regarding uncertainties in income tax positions. The first step is recognition: we determine whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, we presume that the position will be examined by the appropriate taxing authority with full knowledge of all relevant information. The second step is measurement: a tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.
We are subject to ongoing tax examinations and assessments in various jurisdictions. Accordingly, accruals for tax contingencies are established based on the probable outcomes of such matters. Our ongoing assessments of the probable outcomes of the examinations and related tax accruals require judgment and could increase or decrease our effective tax rate as well as impact our operating results.
Reserves for Claims. We are exposed to various claims relating to our business, including those for which we retain portions of the losses through the application of deductibles and self-insured retentions, which we sometimes refer to as “self-insurance.” These claims include (i) workers compensation claims and (ii) claims by third parties for injury or property damage involving our equipment or personnel. These types of claims may take a substantial amount of time to resolve and, accordingly, the ultimate liability associated with a particular claim may not be known for an extended period of time. Our methodology for developing self-insurance reserves is based on management estimates, which incorporate periodic actuarial valuations. Our estimation process considers, among other matters, the cost of known claims over time, cost inflation and incurred but not reported claims. These estimates may change based on, among other things, changes in our claims history or receipt of additional information relevant to assessing the claims. Further, these estimates may prove to be inaccurate due to factors such as adverse judicial determinations or settlements at higher than estimated amounts. Accordingly, we may be required to increase or decrease our reserve levels. As discussed below, during the fourth quarters of 2011, 2010 and 2009, we recognized a benefit of $8, a charge of $24 and a charge of $8, respectively, related to our provision for self-insurance reserves.
Legal Contingencies. We are involved in a variety of claims, lawsuits, investigations and proceedings, as described in note 15 to our consolidated financial statements and elsewhere in this report. We determine whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. We assess our potential liability by analyzing our litigation and regulatory matters using available information. We develop our views on estimated losses in consultation with outside counsel handling our defense in these matters, which involves an analysis of potential results, assuming a combination of litigation and settlement strategies. Should developments in any of these matters cause a change in our determination such that we expect an unfavorable outcome and result in the need to recognize a material accrual, or should any of these matters result in a final adverse judgment or be settled for a significant amount, they could have a material adverse effect on our results of operations in the period or periods in which such change in determination, judgment or settlement occurs.
Results of Operations
As discussed in note 4 to our consolidated financial statements, our reportable segments are general rentals and trench safety, power and HVAC. The general rentals segment includes the rental of construction, aerial, industrial and homeowner equipment and related services and activities. The general rentals segment’s customers include construction and industrial companies, manufacturers, utilities, municipalities and homeowners. The general rentals segment operates throughout the United States and Canada. The trench safety, power and HVAC segment includes the rental of specialty construction products and related services. The trench safety, power and HVAC segment’s customers include construction companies involved in infrastructure projects, municipalities and industrial companies. This segment operates throughout the United States and in Canada.
As discussed in note 4 to our consolidated financial statements, we aggregate our seven geographic regions—the Southwest, Gulf, Northwest, Southeast, Midwest, East, and the Northeast 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 instance, for the five year period ended December 31, 2011, certain of our regions had equipment rentals gross margin that varied by between 10 percent and 17 percent from the equipment rentals gross margin of the aggregated general rentals’ regions over the same period. Although the margins for these regions exceeded a 10 percent variance level for this five year period, we expect convergence going forward given management’s focus on cost cutting, improved processes and fleet sharing. Although we believe aggregating these regions into our general rentals reporting segment for segment reporting purposes is appropriate, to
the extent that the margin variances persist and the equipment rentals gross margins do not converge, we may be required to disaggregate the regions into separate reporting segments. Any such disaggregation would have no impact on our consolidated results of operations.
These segments align our external segment reporting with how management evaluates and allocates resources. We evaluate segment performance based on segment operating results. Our revenues, operating results, and financial condition fluctuate from quarter to quarter reflecting the seasonal rental patterns of our customers, with rental activity tending to be lower in the winter.
Revenues by segment were as follows:
General rentals
Trench safety, power and HVAC
Total
Year Ended December 31, 2011
Equipment rentals
$
1,953
$
198
$
2,151
Sales of rental equipment
201
7
208
Sales of new equipment
77
7
84
Contractor supplies sales
79
6
85
Service and other revenues
79
4
83
Total revenue
$
2,389
$
222
$
2,611
Year Ended December 31, 2010
Equipment rentals
$
1,693
$
141
$
1,834
Sales of rental equipment
134
10
144
Sales of new equipment
72
6
78
Contractor supplies sales
89
6
95
Service and other revenues
83
3
86
Total revenue
$
2,071
$
166
$
2,237
Year Ended December 31, 2009
Equipment rentals
$
1,700
$
130
$
1,830
Sales of rental equipment
218
11
229
Sales of new equipment
81
5
86
Contractor supplies sales
114
7
121
Service and other revenues
89
3
92
Total revenue
$
2,202
$
156
$
2,358
Equipment rentals. 2011 equipment rentals of $2.2 billion increased $317, or 17.3 percent, as compared to 2010, primarily reflecting a 13.4 percent increase in the volume of OEC on rent and a 6.1 percent rental rate increase. Equipment rentals represented 82 percent of total revenues in 2011. On a segment basis, equipment rentals represented 82 percent and 89 percent of total revenues for general rentals and trench safety, power and HVAC, respectively. General rentals equipment rentals increased $260, or 15.4 percent, primarily reflecting an increase in the volume of OEC on rent and increased rental rates. Trench safety, power and HVAC equipment rentals increased $57, or 40.4 percent, primarily reflecting an increase in the volume of OEC on rent. Trench safety, power and HVAC average OEC for 2011 increased 47 percent as compared to 2010, including the impact of the acquisitions described below (see “Acquisitions”). The increases in equipment rentals and average OEC reflect our strategic focus on the higher margin power and temperature control equipment rented by the trench safety, power and HVAC segment.
2010 equipment rentals of $1.83 billion were flat with 2009 as a 4.3 percent increase in the volume of OEC on rent was largely offset by a 2.1 percent decrease in rental rates and other. Equipment rentals represented 82 percent of total revenues in 2010. On a segment basis, equipment rentals represented 82 percent and 85 percent of total revenues for general rentals and trench safety, power and HVAC, respectively. General rentals equipment rentals decreased slightly as an increase in the volume of OEC on rent and the favorable impact of currency were offset by a decrease in rental rates and other. Trench safety, power and HVAC equipment rentals increased $11, or 8.5 percent, primarily reflecting a 10.2 percent increase in the volume of OEC on rent partially offset by a 3.8 percent decrease in rental rates.
Sales of rental equipment. For the three years in the period ended December 31, 2011, sales of rental equipment
represented approximately 8 percent of our total revenues. Our general rentals segment accounted for substantially all of these sales. 2011 sales of rental equipment of $208 increased $64, or 44.4 percent, from 2010 primarily reflecting increased volume, improved pricing and changes in the mix of equipment sold. 2010 sales of rental equipment of $144 declined $85, or 37.1 percent, from 2009 primarily reflecting a decline in the volume of equipment sold.
Sales of new equipment. For the three years in the period ended December 31, 2011, sales of new equipment represented approximately 3 percent of our total revenues. Our general rentals segment accounted for substantially all of these sales. 2011 sales of new equipment of $84 increased $6, or 7.7 percent, from 2010 primarily reflecting changes in the mix of equipment sold and improved pricing. 2010 sales of new equipment of $78 declined $8, or 9.3 percent, from 2009 reflecting volume declines.
Sales of contractor supplies. For the three years in the period ended December 31, 2011, sales of contractor supplies represented approximately 4 percent of our total revenues. Our general rentals segment accounted for substantially all of these sales. 2011 sales of contractor supplies of $85 decreased $10, or 10.5 percent, from 2010 reflecting a reduction in the volume of supplies sold, partially offset by improved pricing and product mix. 2010 sales of contractor supplies of $95 declined $26, or 21.5 percent, from 2009 reflecting a reduction in the volume of supplies sold, partially offset by improved pricing and product mix.
Service and other revenues. For the three years in the period ended December 31, 2011, service and other revenues represented approximately 4 percent of our total revenues. Our general rentals segment accounted for substantially all of these sales. 2011 service and other revenues of $83 decreased $3, or 3.5 percent, from 2010 primarily reflecting decreased software license and related revenues. 2010 service and other revenues of $86 decreased $6, or 6.5 percent, from 2009 primarily reflecting reduced revenues from service labor and parts sales, partially offset by increased software license and related revenues.
Fourth Quarter 2011 Items. In the fourth quarter of 2011, we recognized $19 of acquisition-related costs associated with the proposed RSC merger. Additionally, during the quarter, we closed 18 branches and recognized restructuring charges of $14. During the quarter, we also recognized a benefit of $8 in cost of equipment rentals, excluding depreciation related to our provision for self-insurance reserves. During the quarter, we also recognized asset impairment charges of $3 which are primarily reflected in non-rental depreciation and amortization and principally relate to write-offs of leasehold improvements and other fixed assets in connection with the consolidation of our branch network discussed below. In the quarter, we also purchased an aggregate of $32 of QUIPS for $32. In connection with this transaction, we retired $32 principal amount of our subordinated convertible debentures and recognized a loss of $1 in interest expense-subordinated convertible debentures, net, reflecting the write-off of capitalized debt issuance costs. Interest expense, net for the fourth quarter of 2011 also includes a loss of $3 reflecting write-offs of debt issuance costs associated with the amendment of our ABL facility discussed below.
Fourth Quarter 2010 Items. In the fourth quarter of 2010, we repurchased and retired an aggregate of $814 principal amount of our outstanding 7 3/4 percent Senior Subordinated Notes due 2013, 7percent Senior Subordinated Notes due 2014 and 1 7/8 percent Convertible Senior Subordinated Notes due 2023. Interest expense, net for the fourth quarter of 2010 includes a charge of $25, representing the difference between the net carrying amount of these securities and the total purchase price of $827. The $25 charge includes a $4 write-off of a previously terminated derivative transaction. During the quarter, we also recognized a charge of $24 related to our provision for self-insurance reserves, comprised of $18 recorded in cost of equipment rentals, excluding depreciation, and $6 recorded in discontinued operation. The charge reflected recent adverse experience in our portfolio of automobile and general liability claims, as well as worker’s compensation claims. The discontinued operation component of the charge is reflected net of taxes in our consolidated statements of income. Additionally, during the quarter, we recognized restructuring charges of $15 related to the closure of 22 branches and reductions in headcount of approximately 100. During the quarter, we also recognized asset impairment charges of $6 which are primarily reflected in non-rental depreciation and amortization and principally relate to write-offs of leasehold improvements and other fixed assets in connection with the consolidation of our branch network discussed above. Additionally, the income tax provision (benefit) for the quarter includes a benefit of $7 related to a correction of a deferred tax asset recognized in prior periods.
Fourth Quarter 2009 Items. In the fourth quarter of 2009, we repurchased and retired an aggregate of $429 principal amount of our outstanding 6 1/2 percent Senior Notes due 2012 and 14 percent Senior Notes due 2014. Interest expense, net for the fourth quarter of 2009 includes a charge of $9, representing the difference between the net carrying amount of these securities and the total purchase price of $430. Additionally, during the quarter, we recognized restructuring charges of $6 related to the closure of 13 branches and reductions in headcount of approximately 400. During the quarter, we also recognized asset impairment charges of $3. These asset impairment charges include $2 reflected in depreciation of rental equipment, and $1 primarily related to leasehold improvement write-offs which are reflected in non-rental depreciation and amortization. During the quarter, we also recognized a charge of $8 reflecting recent experience related to our provision for self-insurance reserves, comprised of $4 recorded in cost of equipment rentals, excluding depreciation, and $4 recorded in discontinued
operation. The discontinued operation component of the charge is reflected net of taxes in our consolidated statements of income. Additionally, during the quarter, we recognized a benefit of $3 primarily relating to vacation forfeitures, comprised of $2 recorded in cost of equipment rentals, excluding depreciation, and $1 recorded in selling, general and administrative expenses.
Segment Operating Income. Segment operating income and operating margin for each of the three years in the period ended December 31, 2011 were as follows:
General rentals
Trench safety, power and HVAC
Total
2011
Operating Income
$
377
$
57
$
434
Operating Margin
15.8
%
25.7
%
16.6
%
2010
Operating Income
$
199
$
32
$
231
Operating Margin
9.6
%
19.3
%
10.3
%
2009
Operating Income
$
123
$
22
$
145
Operating Margin
5.6
%
14.1
%
6.1
%
The following is a reconciliation of segment operating income to total Company operating income:
2011
2010
2009
Total segment operating income
$
434
$
231
$
145
Unallocated RSC merger related costs
(19
)
—
—
Unallocated restructuring charge
(19
)
(34
)
(31
)
Operating income
$
396
$
197
$
114
General rentals. For the three years in the period ended December 31, 2011, general rentals accounted for approximately 86 percent of our total operating income, excluding the unallocated items in the reconciliation above. This contribution percentage is consistent with general rentals’ revenue contribution over the same period. General rentals’ operating income in 2011 increased $178 and operating margin increased 6.2 percentage points, primarily reflecting increased gross margins from equipment rentals and sales of rental equipment. General rentals’ operating income in 2010 increased $76 and operating margin increased 4.0 percentage points, primarily reflecting increased gross margins from sales of rental equipment and selling, general and administrative expense reductions.
Trench safety, power and HVAC. For the year ended December 31, 2011, operating income increased by $25 and operating margin increased by 6.4 percentage points from 2010, reflecting increased gross margins from equipment rentals and improved selling, general and administrative leverage. The 2011 improvements in operating income also reflect our strategic focus on the higher margin power and temperature control equipment rented by the trench safety, power and HVAC segment. Trench safety, power and HVAC average OEC for 2011 increased 47 percent, as compared to 2010, including the impact of the acquisitions described below (see “Acquisitions”). Operating income in 2010 increased by $10 and operating margin increased by 5.2 percentage points from 2009, reflecting increased gross margins from equipment rentals and improved selling, general and administrative leverage.
Gross Margin. Gross margins by revenue classification were as follows:
2011 gross margin of 34.4 percent increased 5.0 percentage points as compared to 2010, primarily reflecting increased gross margins from equipment rentals and sales of rental equipment. Equipment rentals gross margin increased 5.8 percentage points, primarily reflecting a 6.1 percent rental rate increase and a 3.5 percentage point increase in time utilization, which is calculated by dividing the amount of time equipment is on rent by the amount of time we have owned the equipment, partially offset by increases in certain variable costs (such as repairs and maintenance) associated with higher rental volume. Compensation costs also increased due to increased profit sharing associated with improved profitability. Additionally, as described above (see "Fourth Quarter 2011 Items" and "Fourth Quarter 2010 Items"), cost of equipment rentals for the year ended December 31, 2011 included an insurance benefit of $8 as compared to an insurance charge of $18 in 2010. For the years ended December 31, 2011 and 2010, time utilization was 69.1 percent and 65.6 percent, respectively. The 3.2 percentage point increase in gross margins from sales of rental equipment primarily reflects improved pricing. Gross margins from sales of rental equipment may change in future periods if the mix of the channels (primarily retail and auction) that we use to sell rental equipment changes.
2010 gross margin of 29.4 percent increased 3.5 percentage points as compared to 2009, primarily reflecting increased gross margins from equipment rentals and sales of rental equipment. Equipment rentals gross margin increased 0.9 percentage points, primarily reflecting a 4.9 percentage point increase in time utilization, a $28 reduction in depreciation due to a 3.2 percent decrease in average fleet size, on an original equipment cost basis, the impact of a $9 asset impairment charge related to certain rental equipment recognized in 2010, and savings realized from ongoing cost saving initiatives, partially offset by a 2.1 percent rental rate decline and increases in certain variable costs (including repairs and maintenance, fuel and delivery) associated with higher rental volume. For the years ended December 31, 2010 and 2009, time utilization was 65.6 percent and 60.7 percent, respectively. The 25.4 percentage point increase in gross margins from sales of rental equipment primarily reflects a higher proportion of retail sales, which yield higher margins, in 2010.
Selling, general and administrative (“SG&A”) expenses. SG&A expense information for each of the three years in the period ended December 31, 2011 was as follows:
Year Ended December 31,
2011
2010
2009
Total SG&A expense
$
407
$
367
$
408
SG&A expense as a percentage of revenue
15.6
%
16.4
%
17.3
%
SG&A expense primarily includes sales force compensation, information technology costs, third party professional fees, advertising and marketing expenses, management salaries, bad debt expense and clerical and administrative overhead.
2011 SG&A expense of $407 increased $40 as compared to 2010. The increase in SG&A primarily reflects increased commissions and bonuses associated with improved profitability. As a percentage of revenue, SG&A expense improved by 0.8 percentage points year over year.
2010 SG&A expense of $367 decreased $41 as compared to 2009 and improved by 0.9 percentage points as a percentage of revenue. The decline in SG&A reflects the benefits we realized from our cost-saving initiatives, including reduced compensation costs, professional fees and advertising expenses.
RSC merger related costs. As discussed above, on December 15, 2011, we entered into a definitive merger agreement with RSC, pursuant to which we have agreed to acquire RSC in a cash-and-stock transaction that ascribes a total enterprise value of $4.2 billion to RSC. The year ended December 31, 2011 includes acquisition-related costs of $19 associated with the proposed merger, primarily related to financial and legal advisory fees. Additional merger related costs are expected to be incurred in 2012, and only a portion of such costs are expected to be capitalized.
Restructuring charge. For the years ended December 31, 2011, 2010 and 2009, restructuring charges of $19, $34 and
$31, respectively, primarily reflect branch closure charges due to continuing lease obligations at vacant facilities, and severance costs associated with headcount reductions. Between January 1, 2008 (the beginning of the restructuring period) and December 31, 2011, we reduced the number of our branches by 168, or 24.1 percent, and reduced our headcount by approximately 3,400, or 31.2 percent. We believe that the restructuring activity is substantially complete as of December 31, 2011. See note 5 to our consolidated financial statements for additional information.
Non-rental depreciation and amortization for each of the three years in the period ended December 31, 2011 was as follows:
Year Ended December 31,
2011
2010
2009
Non-rental depreciation and amortization
$
57
$
60
$
57
Non-rental depreciation and amortization primarily includes (i) depreciation expense associated with equipment that is not offered for rent (such as computers and office equipment) and amortization expense associated with leasehold improvements as well as (ii) the amortization of other intangible assets. Our other intangible assets primarily consist of customer relationships and non-compete agreements.
Interest expense, net for each of the three years in the period ended December 31, 2011 was as follows:
Year Ended December 31,
2011
2010
2009
Interest expense, net
$
228
$
255
$
226
Interest expense, net for the year ended December 31, 2011 decreased by $27, or 11 percent. Interest expense, net for the year ended December 31, 2011 includes a loss of $3 primarily related to write-offs of debt issuance costs associated with the amendment of our ABL facility discussed below. Interest expense, net for the year ended December 31, 2010 includes a loss of $28 related to repurchases or redemptions of $1,273 principal amounts of our outstanding debt. Excluding the impact of these losses, interest expense, net decreased slightly as the impact of a slight increase in average outstanding debt was offset by the impact of lower interest rates. Interest expense, net for the year ended December 31, 2010 increased by $29, or 13 percent. Interest expense, net for the years ended December 31, 2010 and 2009 includes a loss of $28 and a gain of $7, respectively, related to repurchases or redemptions of $1,273 and $919 principal amounts of our outstanding debt, respectively. Excluding the impact of these gains/losses, interest expense, net decreased slightly as the impact of lower average outstanding debt was partially offset by the impact of higher interest rates.
Interest expense—subordinated convertible debentures, net for each of the three years in the period ended December 31, 2011 was as follows:
Year Ended December 31,
2011
2010
2009
Interest expense-subordinated convertible debentures, net
$
7
$
8
$
(4
)
As discussed further in note 13 to our consolidated financial statements, the subordinated convertible debentures included in our consolidated balance sheets reflect the obligation to our subsidiary trust that has issued Quarterly Income Preferred Securities (“QUIPS”). This subsidiary is not consolidated in our financial statements because we are not the primary beneficiary of the trust. As of December 31, 2011 and 2010, the aggregate amount of subordinated convertible debentures outstanding was $55 and $124, respectively. Interest expense- subordinated convertible debentures, net for 2011 includes a $2 loss recognized in connection with the simultaneous purchase of $69 of QUIPS and retirement of $69 principal amount of our subordinated convertible debentures. Interest expense- subordinated convertible debentures, net for 2009 included a $13 gain recognized in connection with the simultaneous purchase of $22 of QUIPS and retirement of $22 principal amount of our subordinated convertible debentures.
Other income, net for each of the three years in the period ended December 31, 2011 was as follows:
As discussed further in note 10 to our consolidated financial statements, other income, net for the year ended December 31, 2011 includes (i) a gain of $4 associated with foreign currency forward contracts and (ii) a loss of $4 associated with the revaluation of certain Canadian dollar denominated intercompany loans. Other income, net for the year ended December 31, 2010 includes (i) a gain of $13 associated with foreign currency forward contracts and (ii) a loss of $13 associated with the revaluation of certain Canadian dollar denominated intercompany loans.
Income taxes. The following table summarizes our continuing operations provision (benefit) for income taxes and the related effective tax rates for each respective period:
Year Ended December 31,
2011
2010
2009
Income (loss) from continuing operations before benefit for income taxes
$
164
$
(63
)
$
(107
)
Provision (benefit) for income taxes
63
(41
)
(47
)
Effective tax rate (1)
38.4
%
65.1
%
43.9
%
_________________
(1)
A detailed reconciliation of the effective tax rates to the U.S. federal statutory income tax rate is included in note 14 to our consolidated financial statements.
The differences between the effective tax rates of 38.4 percent, 65.1 percent, and 43.9 percent and the U.S. federal statutory income tax rate of 35.0 percent for 2011, 2010, and 2009, respectively, relate primarily to state taxes and certain nondeductible charges and other items, and the geographical mix of income between U.S. and foreign and state operations. The 2011 provision reflects the non-deductibility of certain costs associated with the proposed RSC acquisition. The 2010 income tax benefit includes a benefit of $7 related to a correction of a deferred tax asset recognized in prior periods. Our effective income tax rate will change based on discrete events (such as audit settlements) as well as other factors, including the geographical mix of income before taxes and the related tax rates in those jurisdictions.
Balance sheet. Accounts receivable, net increased by $87, or 23.1 percent, from December 31, 2010 to December 31, 2011 primarily due to increased business activity. Prepaid expenses and other assets increased by $38, or 102.7 percent, from December 31, 2010 to December 31, 2011 primarily due to increased amounts due from certain vendors related to increased capital expenditures and cash placed in escrow related to the acquisitions described below (see “Acquisitions”). Goodwill and other intangible assets, net increased by $145, or 63.9 percent, from December 31, 2010 to December 31, 2011 primarily due to the acquisitions described below. Accounts payable increased by $74, or 56.1 percent, from December 31, 2010 to December 31, 2011 primarily due to increased capital expenditures and increased business activity. Accrued expenses and other liabilities increased by $55, or 26.4 percent, from December 31, 2010 to December 31, 2011 primarily due to an increase in incentive compensation associated with improved profitability, and increases in professional fees and other expenses associated with the proposed RSC merger and the acquisitions described below.
Acquisitions. During 2011, we completed the acquisitions of Venetor Group (“Venetor”), a seven location equipment rental company in Canada located in the province of Ontario, GulfStar Rental Solutions, LP (“GulfStar”), a three location power and HVAC (“heating, ventilating and air conditioning”) equipment rental company located in Texas and Louisiana, Ontario Laser Rentals Ltd. (“Ontario Laser”), a two location trench safety equipment rental company in Canada located in the province of Ontario, and Blue Mountain Equipment Rental Corporation (“Blue Mountain”), a company primarily focused on the industrial segment with three locations in Pennsylvania and West Virginia. Venetor, GulfStar, Ontario Laser and Blue Mountain had annual revenues of approximately $50, $15, $20 and $40, respectively.
Liquidity and Capital Resources.
Liquidity and Capital Markets Activity. We manage our liquidity using internal cash management practices, which are subject to (i) the policies and cooperation of the financial institutions we utilize to maintain and provide cash management services, (ii) the terms and other requirements of the agreements to which we are a party and (iii) the statutes, regulations and practices of each of the local jurisdictions in which we operate.
During 2011, we purchased an aggregate of $69 of QUIPS for $68. In connection with this transaction, we retired $69 principal amount of our subordinated convertible debentures and recognized a loss of $2, inclusive of the write-off of
capitalized debt issuance costs. This loss is reflected in interest expense-subordinated convertible debentures, net in our consolidated statements of income. During 2011, we also recognized a loss of less than $1 associated with the conversion of $5 of our 4 percent Convertible Senior Notes. This loss is reflected in interest expense, net in our consolidated statements of income.
As discussed in note 12 to the consolidated financial statements, in September 2011, we amended our accounts receivable securitization facility. The amended facility expires on September 26, 2012 and may be extended on a 364-day basis by mutual agreement of the Company and the purchasers under the facility. The amended facility provides for, among other things, a decrease in the facility size from $325 to $300, adjustments to the receivables subject to purchase, and generally lower borrowing costs. As discussed in note 12 to our consolidated financial statements, in October 2011, we amended our ABL facility. The amended facility, which expires on October 13, 2016, provides for, among other things, an increase in the facility size from $1.36 billion to $1.80 billion, an uncommitted incremental increase in the size of the facility of up to $500, and generally lower borrowing costs. We recognized a loss of $3 in interest expense, net in our consolidated statements of income in connection with the amendment of our ABL facility.
Total debt at December 31, 2011 increased by $182, or 6.5 percent, as compared to December 31, 2010, primarily due to additional borrowings used to finance capital expenditures and the Company's acquisitions. Current maturities of long-term debt at December 31, 2011 primarily reflect $255 of borrowings under our accounts receivable securitization facility and $129 of 4 percent Convertible Senior Notes. The 4 percent Convertible Senior Notes mature in 2015, but are reflected as short-term debt because they are convertible at December 31, 2011.
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, 2011, we had (i) $929 of borrowing capacity, net of $50 of letters of credit, available under the ABL facility, (ii) $7 of borrowing capacity available under our accounts receivable securitization facility and (iii) cash and cash equivalents of $36. Cash equivalents at December 31, 2011 consist of direct obligations of financial institutions rated A or better. We believe that our existing sources of cash will be sufficient to support our existing operations over the next 12 months.
As of December 31, 2011, $810 and $255 were outstanding under the ABL facility and the accounts receivable securitization facility, respectively. The interest rates applicable to the ABL facility and the accounts receivable securitization facility at December 31, 2011 were 2.4 percent and 0.9 percent, respectively. During the year ended December 31, 2011, the monthly average amounts outstanding under the ABL facility and the accounts receivable securitization facility, including both the former facilities and the amended facilities, were $
