UNITED RENTALS, INC. 
otherwise indicated) As discussed in note 2 to our consolidated financial statements, in 2021, we adoptedSEC guidance that is intended to modernize, simplify, and enhance certain disclosures throughout this "Management's Discussion and Analysis of Financial Condition and Results of Operations." In accordance with this guidance, we have omitted discussions comparing 2020 and 2019 results, as such disclosures were included in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . As discussed below, inMarch 2020 , we first experienced rental volume declines associated with COVID-19, and the COVID-19 impact was more pronounced in 2020 than 2021. Our Annual Report on Form 10-K for the year endedDecember 31, 2020 and our Quarterly Reports on Form 10-Q filed in 2021 include detailed disclosures addressing the COVID-19 response plan that is summarized below. COVID-19 As discussed in note 1 to our consolidated financial statements, the COVID-19 pandemic has significantly disrupted supply chains and businesses around the world. Uncertainty remains regarding the ongoing impact of existing and emerging variant strains of COVID-19 on the operations and financial position ofUnited Rentals , and on the global economy. Uncertainty also remains regarding the length of time it will take for the COVID-19 pandemic to ultimately subside, which will be impacted by the effectiveness of vaccines against COVID-19 (including against emerging variant strains), and by measures that may in the future be implemented to protect public health. See "Item 1. Business-Industry Overview and Economic Outlook" for a discussion of market performance in 2021 and 2020. We began to experience a decline in revenues inMarch 2020 , which is when theWorld Health Organization characterized COVID-19 as a pandemic and when our rental volume first declined in response to shelter-in-place orders and other market restrictions. The volume declines were more pronounced in 2020 than 2021, and we have seen recent evidence of recovery across our construction and industrial markets, as well as encouraging gains in end-market indicators, as reflected in our 2022 forecast. In earlyMarch 2020 , we initiated contingency planning ahead of the impact of COVID-19 on our end-markets. Our COVID-19 response plan is focused on five work-streams: 1) ensuring the safety and well-being of our employees and customers, 2) leveraging our competitive advantages to support the needs of customers, 3) aggressively managing capital expenditures, 4) controlling core operating expenses and 5) proactively managing the balance sheet with a focus on liquidity. We believe that this response plan helped mitigate the impact of COVID-19 on our results. As noted above, our Annual Report on Form 10-K for the year endedDecember 31, 2020 and our Quarterly Reports on Form 10-Q filed in 2021 include additional detailed COVID-19 disclosures. The impact of COVID-19 on our business is discussed throughout this "Management's Discussion and Analysis of Financial Condition and Results of Operations." Executive Overview We are the largest equipment rental company in the world, with an integrated network of 1,345 rental locations. We primarily operate inthe United States andCanada , and have a limited presence inEurope ,Australia and New Zealand (see Item 2-Properties for further detail). Although the equipment rental industry is highly fragmented and diverse, we believe that we are well positioned to take advantage of this environment because, as a larger company, we have more extensive resources and certain competitive advantages. These include a fleet of rental equipment with a total original equipment cost ("OEC") of$15.8 billion , and a North American branch network that operates in 49 U.S. states and every Canadian province, and serves 99 of the 100 largest metropolitan areas in theU.S. Our size also gives us greater purchasing power, the ability to provide customers with a broader range of equipment and services, the ability to provide customers with equipment that is more consistently well-maintained and therefore more productive and reliable, and the ability to enhance the earning potential of our assets by transferring equipment among branches to satisfy customer needs. We offer approximately 4,300 classes of equipment for rent to a diverse customer base that includes construction and industrial companies, manufacturers, utilities, municipalities, homeowners and government entities. Our revenues are derived from the following sources: equipment rentals, sales of rental equipment, sales of new equipment, contractor supplies sales and service and other revenues. In 2021, equipment rental revenues represented 84 percent of our total revenues. For the past several years, we have executed a strategy focused on improving the profitability of our core equipment rental business through revenue growth, margin expansion and operational efficiencies. In particular, we have focused on customer segmentation, customer service differentiation, rate management, fleet management and operational efficiency. We are continuing to manage the impact of COVID-19, which is discussed above. Our general strategy focuses on profitability and return on invested capital, and, in particular, calls for: 25 -------------------------------------------------------------------------------- Table of Contents •A consistently superior standard of service to customers, often provided through a single lead contactwho can coordinate the cross-selling of the various services we offer throughout our network. We utilize a proprietary software application, Total Control®, which provides our key customers with a single in-house software application that enables them to monitor and manage all their equipment needs. Total Control® is a unique customer offering that enables us to develop strong, long-term relationships with our larger customers. Our digital capabilities, including our Total Control® platform, allow our sales teams to provide contactless end-to-end customer service; •The further optimization of our customer mix and fleet mix, with a dual objective: to enhance our performance in serving our current customer base, and to focus on the accounts and customer types that are best suited to our strategy for profitable growth. We believe these efforts will lead to even better service of our target accounts, primarily large construction and industrial customers, as well as select local contractors. Our fleet team's analyses are aligned with these objectives to identify trends in equipment categories and define action plans that can generate improved returns; •A continued focus on "Lean" management techniques, including kaizen processes focused on continuous improvement. We continue to implement Lean kaizen processes across our branch network, with the objectives of: reducing the cycle time associated with renting our equipment to customers; improving invoice accuracy and service quality; reducing the elapsed time for equipment pickup and delivery; and improving the effectiveness and efficiency of our repair and maintenance operations; •The continued expansion of our specialty footprint, as well as our tools and onsite services offerings, and the cross-selling of these services throughout our network. We believe that the expansion of our specialty business, as exhibited by our acquisition of General Finance discussed in note 4 to the consolidated financial statements, as well as our tools and onsite services offerings, will further positionUnited Rentals as a single source provider of total jobsite solutions through our extensive product and service resources and technology offerings; and •The pursuit of strategic acquisitions to continue to expand our core equipment rental business. Strategic acquisitions allow us to invest our capital to expand our business, further driving our ability to accomplish our strategic goals. In 2022, based on our analyses of industry forecasts and macroeconomic indicators, we expect a continuation of the market recovery experienced in 2021, following a market decline in 2020, which included the pronounced impact of COVID-19. Specifically, we expect that North American industry equipment rental revenue will increase approximately 10 percent in 2022. See "Item 1. Business- Industry Overview and Economic Outlook" for a discussion of market performance in 2021 and 2020. As discussed below, fleet productivity is a comprehensive metric that reflects the combined impact of changes in rental rates, time utilization, and mix that contribute to the variance in owned equipment rental revenue. For the full year 2021: •Equipment rentals increased 14.9 percent year-over-year, including the impact of theMay 2021 acquisition of General Finance discussed in note 4 to the consolidated financial statements; •Average OEC increased 4.0 percent year-over-year, including the impact of the General Finance acquisition; •Fleet productivity increased 10.4 percent, primarily due to improved fleet absorption in 2021. 2020 reflected more pronounced rental volume declines associated with COVID-19, and in 2021, we saw evidence of a continuing recovery of activity across our end-markets; and •72 percent of equipment rental revenue was derived from key accounts, as compared to 74 percent in 2020. Key accounts are each managed by a single point of contact to enhance customer service. The slight decrease from 2020 includes the impact of the General Finance acquisition, which added revenue fromAustralia and New Zealand that is not from key accounts. Financial Overview Prior to taking actions pertaining to our financial flexibility and liquidity, we consider the impact of COVID-19 on liquidity, and assess our available sources and anticipated uses of cash, including, with respect to sources, cash generated from operations and from the sale of rental equipment. In 2021, we took the following actions to improve our financial flexibility and liquidity, and to position us to invest the necessary capital in our business: •Issued$750 principal amount of 3 3/4 percent Senior Notes due 2032; •Redeemed all$1 billion principal amount of our 5 7/8 percent Senior Notes due 2026; and •Amended and extended our accounts receivable securitization facility, which expires onJune 24, 2022 and may be further extended on a 364-day basis by mutual agreement with the purchasers under the facility, including an increase in the size of the facility from$800 to$900 . 26 -------------------------------------------------------------------------------- Table of Contents Total debt as ofDecember 31, 2021 was flat year-over-year. In 2021, borrowings under the ABL facility were used to fund most of the cost of the General Finance acquisition discussed above. 2021 debt activity also included the use of cash generated from operations, net of the funds used for capital expenditures, to reduce borrowings under the ABL facility (excluding the impact of the General Finance acquisition) and the net impact of the debt issuance and redemption discussed above. As ofDecember 31, 2021 , we had available liquidity of$2.851 billion , comprised of cash and cash equivalents, and availability under the ABL and accounts receivable securitization facilities. Net income. Net income and diluted earnings per share for each of the three years in the period endedDecember 31, 2021 are presented below. Year Ended December 31, 2021 2020 2019 Net income$ 1,386 $ 890 $ 1,174 Diluted earnings per share$ 19.04 $ 12.20
Net income and diluted earnings per share for each of the three years in the period endedDecember 31, 2021 include the after-tax impacts of the items below. The tax rates applied to the items below reflect the statutory rates in the applicable entities. Year Ended December 31, 2021 2020 2019 Tax rate applied to items below 25.3 % 25.2 % 25.3 % Impact on Impact on Impact on Contribution to net diluted earnings per Contribution to net diluted earnings per Contribution to net diluted earnings per income (after-tax) share income (after-tax) share income (after-tax) share Merger related costs (1) $ (2) $ (0.03) $ - $ - $ (1) $ (0.01) Merger related intangible asset amortization (2) (143) (1.98) (163) (2.22) (194) (2.48) Impact on depreciation related to acquired fleet and property and equipment (3) (12) (0.16) (6) (0.08) (30) (0.39) Impact of the fair value mark-up of acquired fleet (4) (28) (0.38) (37) (0.51) (56) (0.72) Restructuring charge (5) (1) (0.02) (13) (0.18) (14) (0.18) Asset impairment charge (6) (10) (0.14) (27) (0.37) (4) (0.05) Loss on repurchase/redemption of debt securities (7) (22) (0.31) (137) (1.88) (45) (0.58) (1)This primarily reflects transaction costs associated with the General Finance acquisition discussed above. Merger related costs only include costs associated with major acquisitions completed since 2012 that significantly impact our operations (the "major acquisitions," each of which had annual revenues of over$200 prior to acquisition). For additional information, see "Results of Operations-Other costs/(income)-merger related costs" below. (2)This reflects the amortization of the intangible assets acquired in the major acquisitions. (3)This reflects the impact of extending the useful lives of equipment acquired in certain major acquisitions, net of the impact of additional depreciation associated with the fair value mark-up of such equipment. (4)This reflects additional costs recorded in cost of rental equipment sales associated with the fair value mark-up of rental equipment acquired in certain major acquisitions that was subsequently sold. (5)As discussed in note 6 to our consolidated financial statements, this primarily reflects severance costs and branch closure charges associated with our restructuring programs. (6)This reflects write-offs of leasehold improvements and other fixed assets. As discussed in note 6 to our consolidated financial statements, the 2020 charges primarily reflect the discontinuation of certain equipment programs, and were not related to COVID-19. (7)Reflects the difference between the net carrying amount and the total purchase price of the redeemed notes. For additional information, see "Results of Operations-Other costs/(income)-Interest expense, net" below. EBITDA GAAP Reconciliations. EBITDA represents the sum of net income, provision for income taxes, interest expense, net, depreciation of rental equipment and non-rental depreciation and amortization. Adjusted EBITDA represents EBITDA plus the sum of the merger related costs, restructuring charge, stock compensation expense, net, and the impact of the fair value mark-up of acquired fleet. These items are excluded from adjusted EBITDA internally when evaluating our operating performance and for strategic planning and forecasting purposes, and allow investors to make a more meaningful comparison between our core business operating results over different periods of time, as well as with those of other similar companies. The 27 -------------------------------------------------------------------------------- Table of Contents net income and adjusted EBITDA margins represent net income or adjusted EBITDA divided by total revenue. Management believes that EBITDA and adjusted EBITDA, when viewed with the Company's results underU.S. generally accepted accounting principles ("GAAP") and the accompanying reconciliations, provide useful information about operating performance and period-over-period growth, and provide additional information that is useful for evaluating the operating performance of our core business without regard to potential distortions. Additionally, management believes that EBITDA and adjusted EBITDA help investors gain an understanding of the factors and trends affecting our ongoing cash earnings, from which capital investments are made and debt is serviced. However, EBITDA and adjusted EBITDA are not measures of financial performance or liquidity under GAAP and, accordingly, should not be considered as alternatives to net income or cash flow from operating activities as indicators of operating performance or liquidity. The table below provides a reconciliation between net income and EBITDA and adjusted EBITDA: Year Ended December 31, 2021 2020 2019 Net income$ 1,386 $ 890 $ 1,174 Provision for income taxes 460 249 340 Interest expense, net 424 669 648 Depreciation of rental equipment 1,611 1,601 1,631 Non-rental depreciation and amortization 372 387 407 EBITDA 4,253 3,796 4,200 Merger related costs (1) 3 - 1 Restructuring charge (2) 2 17 18 Stock compensation expense, net (3) 119 70 61
Impact of the fair value mark-up of acquired fleet (4) 37
49 75 Adjusted EBITDA$ 4,414 $ 3,932 $ 4,355 Net income margin 14.3 % 10.4 % 12.6 % Adjusted EBITDA margin 45.4 % 46.1 % 46.6 %
The table below provides a reconciliation between net cash provided by operating activities and EBITDA and adjusted EBITDA:
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Year Ended December 31,
2021 2020 2019
Net cash provided by operating activities $ 3,689 Amortization of deferred financing costs and original issue discounts
(13) (14) (15)
Gain on sales of rental equipment 431 332 313
Gain on sales of non-rental equipment 10 8 6
Insurance proceeds from damaged equipment 25 40 24
Merger related costs (1) (3) - (1)
Restructuring charge (2) (2) (17) (18)
Stock compensation expense, net (3) (119) (70) (61)
Loss on repurchase/redemption of debt securities (5) (30) (183) (61)
Changes in assets and liabilities (328) 241 170
Cash paid for interest 391 483 581
Cash paid for income taxes, net 202 318 238
EBITDA 4,253 3,796 4,200
Add back:
Merger related costs (1) 3 - 1
Restructuring charge (2) 2 17 18
Stock compensation expense, net (3) 119 70 61
Impact of the fair value mark-up of acquired fleet (4) 37 49 75
Adjusted EBITDA $ 4,414 $ 3,932 $ 4,355
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(1)This primarily reflects transaction costs associated with the General Finance
acquisition discussed above. Merger related costs only include costs associated
with major acquisitions that significantly impact our operations. For additional
information, see "Results of Operations-Other costs/(income)-merger related
costs" below.
(2)As discussed in note 6 to our consolidated financial statements, this
primarily reflects severance costs and branch closure charges associated with
our restructuring programs.
(3)Represents non-cash, share-based payments associated with the granting of
equity instruments.
(4)This reflects additional costs recorded in cost of rental equipment sales
associated with the fair value mark-up of rental equipment acquired in certain
major acquisitions that was subsequently sold.
(5)Reflects the difference between the net carrying amount and the total
purchase price of the redeemed notes. For additional information, see "Results
of Operations-Other costs/(income)-Interest expense, net" below.
For the year ended December 31, 2021 , net income increased $496 , or 55.7
percent, and net income margin increased 390 basis points to 14.3 percent. For
the year ended December 31, 2021 , adjusted EBITDA increased $482 , or 12.3
percent, and adjusted EBITDA margin decreased 70 basis points to 45.4 percent.
The year-over-year increase in net income margin primarily reflected a reduction
in interest expense, improved gross margins from equipment rentals and sales of
rental equipment and decreased non-rental depreciation and amortization as a
percentage of revenue, partially offset by higher selling, general and
administrative ("SG&A") and income tax expenses. Net interest expense decreased
$245 , or 37 percent, year-over-year. Excluding the impact of debt redemption
losses, net interest expense decreased 19 percent year-over-year, primarily due
to decreases in both average debt and the average cost of debt. Equipment
rentals gross margin increased year-over-year primarily due to a reduction in
depreciation expense as a percentage of revenue, partially offset by higher
bonus expense primarily due to improved profitability, and increases in certain
operating expenses, including delivery costs, as a percentage of revenue. Gross
margin from sales of rental equipment increased primarily due to improved
pricing in a strong used equipment market. Non-rental depreciation and
amortization decreased 4 percent year-over-year, which equated to a significant
improvement as a percentage of revenue. SG&A expense increased year-over-year
primarily due to higher bonus and stock compensation expenses, which reflect
improved profitability. Year-over-year, income tax expense increased $211 , or 85
percent, and the effective income tax rate increased by 300 basis points,
primarily reflecting the release in 2020 of a valuation allowance on foreign tax
credits.
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The decrease in the adjusted EBITDA margin primarily reflects lower margins from
equipment rentals (excluding depreciation) and increased SG&A expense, partially
offset by higher margins from sales of rental equipment. Gross margin from
equipment rentals (excluding depreciation) decreased 110 basis points primarily
due to a higher bonus accrual, which reflects improved profitability, and
increases in certain operating expenses, including delivery costs, as a
percentage of revenue. SG&A expense increased primarily due to increased bonus
expense, which reflects improved profitability. Gross margin from sales of
rental equipment increased primarily due to improved pricing in a strong used
equipment market.
Revenues. Revenues for each of the three years in the period ended December 31,
2021 were as follows:
Year Ended December 31, Change
2021 2020 2019 2021 2020
Equipment rentals* $ 8,207 $ 7,140 $ 7,964 14.9% (10.3)%
Sales of rental equipment 968 858 831 12.8% 3.2%
Sales of new equipment 203 247 268 (17.8)% (7.8)%
Contractor supplies sales 109 98 104 11.2% (5.8)%
Service and other revenues 229 187 184 22.5% 1.6%
Total revenues $ 9,716 $ 8,530 $ 9,351 13.9% (8.8)%
*Equipment rentals variance components:
Year-over-year change in average OEC 4.0% (2.2)%
Assumed year-over-year inflation impact (1) (1.5)% (1.5)%
Fleet productivity (2) 10.4% (6.9)%
Contribution from ancillary and re-rent
revenue (3) 2.0% 0.3%
Total change in equipment rentals 14.9% (10.3)%
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(1)Reflects the estimated impact of inflation on the revenue productivity of
fleet based on OEC, which is recorded at cost.
(2)Reflects the combined impact of changes in rental rates, time utilization,
and mix that contribute to the variance in owned equipment rental revenue. See
note 3 to the consolidated financial statements for a discussion of the
different types of equipment rentals revenue. Rental rate changes are calculated
based on the year-over-year variance in average contract rates, weighted by the
prior period revenue mix. Time utilization is calculated by dividing the amount
of time an asset is on rent by the amount of time the asset has been owned
during the year. Mix includes the impact of changes in customer, fleet,
geographic and segment mix. The positive fleet productivity for 2021 and the
negative fleet productivity for 2020 include the impact of COVID-19, which
resulted in rental volume declines in response to shelter-in-place orders and
other market restrictions, as discussed further above. The COVID-19 volume
declines were more pronounced in 2020 than 2021, and in 2021, we saw evidence of
a continuing recovery of activity across our end-markets.
(3)Reflects the combined impact of changes in the other types of equipment
rentals revenue (see note 3 for further detail), excluding owned equipment
rental revenue.
Equipment rentals include our revenues from renting equipment, as well as
revenue related to the fees we charge customers: for equipment delivery and
pick-up; to protect the customer against liability for damage to our equipment
while on rent; for fuel; and for environmental costs. Collectively, these
"ancillary fees" represented approximately 14 percent of equipment rental
revenue in 2021. Delivery and pick-up revenue, which represented approximately
eight percent of equipment rental revenue in 2021, is the most significant
ancillary revenue component. Sales of rental equipment represent our revenues
from the sale of used rental equipment. Sales of new equipment represent our
revenues from the sale of new equipment. Contractor supplies sales represent our
sales of supplies utilized by contractors, which include construction
consumables, tools, small equipment and safety supplies. Services and other
revenues primarily represent our revenues earned from providing repair and
maintenance services on our customers' fleet (including parts sales). See note 3
to our consolidated financial statements for further discussion of our revenue
recognition accounting.
2021 total revenues of $9.7 billion increased 13.9 percent compared with 2020.
Equipment rentals and sales of rental equipment are our largest revenue types
(together, they accounted for 94 percent of total revenue for the year ended
December 31, 2021 ). Equipment rentals increased 14.9 percent, primarily due to a
10.4 percent increase in fleet productivity, which included the more pronounced
impact of COVID-19, which resulted in rental volume declines in response to
shelter-in-place orders and other market restrictions, in 2020. COVID-19 began
to impact our operations in March 2020 . In 2021, we have seen evidence of a
continuing recovery of activity across our end-markets. Sales of rental
equipment increased 12.8 percent, primarily due to improved pricing in a strong
used equipment market and the impact of the General Finance acquisition.
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Critical Accounting Policies
We prepare our consolidated financial statements in accordance with GAAP. A
summary of our significant accounting policies is contained in note 2 to our
consolidated financial statements. In applying many accounting principles, we
make assumptions, estimates and/or judgments. These assumptions, estimates
and/or judgments are often subjective and may change based on changing
circumstances or changes in our analysis. Material changes in these assumptions,
estimates and/or judgments have the potential to materially alter our results of
operations. We have identified below our accounting policies that we believe
could potentially produce materially different results if we were to change
underlying assumptions, estimates and/or judgments. Although actual results may
differ from those estimates, we believe the estimates are reasonable and
appropriate.
Allowance for Doubtful Accounts. We maintain allowances for doubtful accounts.
These allowances reflect our estimate of the amount of our receivables that we
will be unable to collect based on historical write-off experience and, as
applicable, current conditions and reasonable and supportable forecasts that
affect collectibility. Our estimate could require change based on changing
circumstances, including changes in the economy or in the particular
circumstances of individual customers. Accordingly, we may be required to
increase or decrease our allowances. Trade receivables that have contractual
maturities of one year or less are written-off when they are determined to be
uncollectible based on the criteria necessary to qualify as a deduction for
federal tax purposes. Write-offs of such receivables require management approval
based on specified dollar thresholds. See note 3 to our consolidated financial
statements for further detail.
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 50 percent of cost. The weighted average salvage value of
our rental equipment is 11 percent of cost (immaterial salvage values are
assigned to our property and equipment). Rental equipment is depreciated whether
or not it is out on rent.
The useful life of an asset is determined based on our estimate of the period
over which the asset can 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 $170 or $213 , respectively.
If the estimated salvage values of all of our rental equipment were to increase
or decrease by one percentage point, we estimate that our annual depreciation
expense would change by approximately $19 . Any change in depreciation expense as
a result of a hypothetical change in either useful lives or salvage values would
generally result in a proportional increase or decrease in the gross profit we
would recognize upon the ultimate sale of the asset. To the extent that the
useful lives of all of our depreciable property and equipment were to increase
or decrease by one year, we estimate that our annual non-rental depreciation
expense would decrease or increase by approximately $36 or $55 , respectively.
Acquisition Accounting. We have made a number of acquisitions in the past and
may continue to make acquisitions in the future. The assets acquired and
liabilities assumed are recorded based on their respective fair values at the
date of acquisition. Long-lived assets (principally rental equipment), goodwill
and other intangible assets generally represent the largest components of our
acquisitions. Rental equipment is valued utilizing either a cost, market or
income approach, or a combination of certain of these methods, depending on the
asset being valued and the availability of market or income data. The intangible
assets that we have acquired are non-compete agreements, customer relationships
and trade names and associated trademarks. The estimated fair values of these
intangible assets reflect various assumptions about discount rates, revenue
growth rates, operating margins, terminal values, useful lives and other
prospective financial information. Goodwill is calculated as the excess of the
cost of the acquired business over the net of the fair value of the assets
acquired and the liabilities assumed. Non-compete agreements, customer
relationships and trade names and associated trademarks are valued based on an
excess earnings or income approach based on projected cash flows.
Determining the fair value of the assets and liabilities acquired can be
judgmental in nature and can involve the use of significant estimates and
assumptions. The significant judgments include estimation of future cash flows,
which is dependent on forecasts; estimation of the long-term rate of growth;
estimation of the useful life over which cash flows will occur; and
determination of a risk-adjusted weighted average cost of capital. When
appropriate, our estimates of the fair values of assets and liabilities acquired
include assistance from independent third-party appraisal firms. The judgments
made in determining the estimated fair value assigned to the assets acquired, as
well as the estimated life of the assets, can materially impact net income in
periods subsequent to the acquisition through depreciation and amortization, and
in certain instances through impairment charges, if the asset becomes impaired
in the future. As discussed below, we regularly review for impairments.
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When we make an acquisition, we also acquire other assets and assume
liabilities. These other assets and liabilities typically include, but are not
limited to, parts inventory, accounts receivable, accounts payable and other
working capital items. Because of their short-term nature, the fair values of
these other assets and liabilities generally approximate the book values on the
acquired entities' balance sheets.
Evaluation of Goodwill Impairment. Goodwill is tested for impairment annually or
more frequently if an event or circumstance indicates that an impairment loss
may have been incurred. Application of the goodwill impairment test requires
judgment, including: the identification of reporting units; assignment of assets
and liabilities to reporting units; assignment of goodwill to reporting units;
determination of the fair value of each reporting unit; and an assumption as to
the form of the transaction in which the reporting unit would be acquired by a
market participant (either a taxable or nontaxable transaction).
When conducting the goodwill impairment test, we are required to compare the
fair value of our reporting units (which are our regions) with the carrying
amount. As discussed in note 5 to our consolidated financial statements, as of
December 31, 2021 , our divisions were our operating segments. We conducted the
goodwill impairment test as of October 1, 2021 at the reporting unit level,
which is one level below the operating segment level. We conducted the goodwill
impairment test as of October 1, 2020 at the same reporting unit level, although
at that time, the reporting unit was also the operating segment (see note 5 for
further discussion of our segment structure).
Financial Accounting Standards Board ("FASB") guidance permits entities to first
assess qualitative factors to determine whether it is more likely than not that
the fair value of a reporting unit is less than its carrying amount. We estimate
the fair value of our reporting units using a combination of an income approach
based on the present value of estimated future cash flows and a market approach
based on market price data of shares of our Company and other corporations
engaged in similar businesses as well as acquisition multiples paid in recent
transactions. We believe this approach, which utilizes multiple valuation
techniques, yields the most appropriate evidence of fair value.
Inherent in our preparation of cash flow projections are assumptions and
estimates derived from a review of our operating results, business plans,
expected growth rates, cost of capital and tax rates. We also make certain
forecasts about future economic conditions, interest rates and other market
data. Many of the factors used in assessing fair value are outside the control
of management, and these assumptions and estimates may change in future periods.
Changes in assumptions or estimates could materially affect the estimate of the
fair value of a reporting unit, and therefore could affect the likelihood and
amount of potential impairment. The following assumptions are significant to our
income approach:
Business Projections- We make assumptions about the level of equipment rental
activity in the marketplace and cost levels. These assumptions drive our
planning assumptions for pricing and utilization and also represent key inputs
for developing our cash flow projections. These projections are developed using
our internal business plans over a ten-year planning period that are updated at
least annually;
Long-term Growth Rates- Beyond the planning period, we also utilize an assumed
long-term growth rate representing the expected rate at which a reporting unit's
cash flow stream is projected to grow. These rates are used to calculate the
terminal value of our reporting units, and are added to the cash flows projected
during our ten-year planning period; and
Discount Rates- Each reporting unit's estimated future cash flows are
discounted at a rate that is consistent with a weighted-average cost of capital
that is likely to be expected by market participants. The weighted-average cost
of capital is an estimate of the overall after-tax rate of return required by
equity and debt holders of a business enterprise.
The market approach is one of the other methods used for estimating the fair
value of our reporting units' business enterprise. This approach takes two
forms: The first is based on the market value (market capitalization plus
interest-bearing liabilities) and operating metrics (e.g., revenue and EBITDA)
of companies engaged in the same or similar line of business. The second form is
based on multiples paid in recent acquisitions of companies.
In connection with our goodwill impairment test that was conducted as of October
1, 2021 , we bypassed the optional qualitative assessment for each reporting unit
and quantitatively compared the fair values of our reporting units with their
carrying amounts. Our goodwill impairment testing as of this date indicated that
all of our reporting units, excluding our Mobile Storage and Mobile Storage
International reporting units, had estimated fair values which exceeded their
respective carrying amounts by at least 59 percent. As discussed in note 4 to
the consolidated financial statements, in May 2021 , we completed the acquisition
of General Finance. All of the assets in the Mobile Storage and Mobile Storage
International reporting units were acquired in the General Finance acquisition.
The estimated fair values of our Mobile Storage and Mobile Storage International
reporting units exceeded their carrying amounts by 10 percent and 17 percent,
respectively. As all of the assets in the Mobile Storage and Mobile Storage
International reporting units were recorded at fair value as of the May 2021
acquisition date, we
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expected the percentages by which the fair values for these reporting units
exceeded the carrying values to be significantly less than the equivalent
percentages determined for our other reporting units.
In connection with our goodwill impairment test that was conducted as of October
1, 2020 , we bypassed the optional qualitative assessment for each reporting unit
and quantitatively compared the fair values of our reporting units with their
carrying amounts. We considered the impact of COVID-19 when performing the test,
and it did not have a material impact on the test results. Our goodwill
impairment testing as of this date indicated that all of our reporting units,
excluding our Fluid Solutions Europe reporting unit, had estimated fair values
which exceeded their respective carrying amounts by at least 42 percent. As
discussed above, in July 2018 , we completed the acquisition of BakerCorp . All of
the assets in the Fluid Solutions Europe reporting unit were acquired in the
BakerCorp acquisition. The estimated fair value of our Fluid Solutions Europe
reporting unit exceeded its carrying amount by 22 percent. As all of the assets
in the Fluid Solutions Europe reporting unit were recorded at fair value as of
the July 2018 acquisition date, we expected the percentage by which the Fluid
Solutions Europe reporting unit's fair value exceeded its carrying value to be
significantly less than the equivalent percentages determined for our other
reporting units.
Impairment of Long-lived Assets (Excluding Goodwill). We review the
recoverability of our rental equipment, property and equipment and lease assets
when events or changes in circumstances occur that indicate that the carrying
value of the assets may not be recoverable. If there are such indications, we
assess our ability to recover the carrying value of the assets from their
expected future pre-tax cash flows (undiscounted and without interest charges).
If the expected cash flows are less than the carrying value of the assets, an
impairment loss is recognized for the difference between the estimated fair
value and carrying value. We also conduct impairment reviews in connection with
branch consolidations and other changes in our business. As discussed in note 6
to our consolidated financial statements, during the years ended December 31,
2021 , 2020 and 2019, we recorded asset impairment charges of $14 , $36 and $5 ,
respectively. The 2020 charges principally related to the discontinuation of
certain equipment programs, and were not related to COVID-19.
In support of our review for indicators of impairment, we perform a review of
all assets at the district level relative to district performance and conclude
whether indicators of impairment exist associated with our long-lived assets,
including rental equipment. We also specifically review the financial
performance of our rental equipment. Such review includes an estimate of the
future rental revenues from our rental assets based on current and expected
utilization levels, the age of the assets and their remaining useful lives.
Additionally, we estimate when the assets are expected to be removed or retired
from our rental fleet as well as the expected proceeds to be realized upon
disposition. Based on our most recently completed quarterly reviews, there were
no indications of impairment associated with our rental equipment, property and
equipment or lease 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.
We have historically considered the undistributed earnings of our foreign
subsidiaries to be indefinitely reinvested, and, accordingly, no taxes were
provided on such earnings prior to the fourth quarter of 2020. In the fourth
quarter of 2020, we identified cash in our foreign operations in excess of
near-term working capital needs, and determined that such cash could no longer
be considered indefinitely reinvested. As a result, our prior assertion that all
undistributed earnings of our foreign
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subsidiaries should be considered indefinitely reinvested changed. In the fourth
quarter of 2021, we identified additional cash in our foreign operations in
excess of near-term working capital needs, and remitted $203 of cash from
foreign operations (such amount represents the cumulative amount of identified
cash in our foreign operations in excess of near-term working capital needs).
The taxes recorded associated with the remitted cash were immaterial in both
2020 and 2021.
We continue to expect that the remaining balance of our undistributed foreign
earnings will be indefinitely reinvested. If we determine that all or a portion
of such foreign earnings are no longer indefinitely reinvested, we may be
subject to additional foreign withholding taxes and U.S. state income taxes.
Reserves for Claims. We are exposed to various claims relating to our business,
including those for which we retain portions of the losses through the
application of deductibles and self-insured retentions, which we sometimes refer
to as "self-insurance." These claims include (i) workers' compensation claims
and (ii) claims by third parties for injury or property damage involving our
equipment, vehicles or personnel. These types of claims may take a substantial
amount of time to resolve and, accordingly, the ultimate liability associated
with a particular claim may not be known for an extended period of time. Our
methodology for developing self-insurance reserves is based on management
estimates, which incorporate periodic actuarial valuations. Our estimation
process considers, among other matters, the cost of known claims over time, cost
inflation and incurred but not reported claims. These estimates may change based
on, among other things, changes in our claims history or receipt of additional
information relevant to assessing the claims. Further, these estimates may prove
to be inaccurate due to factors such as adverse judicial determinations or
settlements at higher than estimated amounts. Accordingly, we may be required to
increase or decrease our reserve levels.
Results of Operations
As discussed in note 5 to our consolidated financial statements, our reportable
segments are general rentals and specialty. The general rentals segment includes
the rental of construction, aerial, industrial and homeowner equipment and
related services and activities. The general rentals segment's customers include
construction and industrial companies, manufacturers, utilities, municipalities,
homeowners and government entities. This segment operates throughout the United
States and Canada . The specialty segment includes the rental of specialty
construction products such as i) trench safety equipment, such as trench
shields, aluminum hydraulic shoring systems, slide rails, crossing plates,
construction lasers and line testing equipment for underground work, ii) power
and HVAC equipment, such as portable diesel generators, electrical distribution
equipment, and temperature control equipment, iii) fluid solutions equipment
primarily used for fluid containment, transfer and treatment, and iv) mobile
storage equipment and modular office space. The specialty segment's customers
include construction companies involved in infrastructure projects,
municipalities and industrial companies. This segment primarily operates in the
United States and Canada , and has a limited presence in Europe , Australia and
New Zealand .
As discussed in note 5 to our consolidated financial statements, we aggregate
our four geographic divisions-Central, Northeast, Southeast and West-into our
general rentals reporting segment. Historically, there have occasionally been
variances in the levels of equipment rentals gross margins achieved by these
divisions, though such variances have generally been small (close to or less
than 10 percent, measured versus the equipment rentals gross margins of the
aggregated general rentals' divisions). For the five year period ended
December 31, 2021 , there was no general rentals' division with an equipment
rentals gross margin that differed materially from the equipment rentals gross
margin of the aggregated general rentals' divisions. The rental industry is
cyclical, and there historically have occasionally been divisions with equipment
rentals gross margins that varied by greater than 10 percent from the equipment
rentals gross margins of the aggregated general rentals' divisions, though the
specific divisions with margin variances of over 10 percent have fluctuated, and
such variances have generally not exceeded 10 percent by a significant amount.
We monitor the margin variances and confirm margin similarity between divisions
on a quarterly basis.
We believe that the divisions that are aggregated into our segments have similar
economic characteristics, as each division is capital intensive, offers similar
products to similar customers, uses similar methods to distribute its products,
and is subject to similar competitive risks. The aggregation of our divisions
also reflects the management structure that we use for making operating
decisions and assessing performance. Although we believe aggregating these
divisions into our reporting segments for segment reporting purposes is
appropriate, to the extent that there are significant margin variances that do
not converge, we may be required to disaggregate the divisions into separate
reporting segments. Any such disaggregation would have no impact on our
consolidated results of operations.
These reporting segments align our external segment reporting with how
management evaluates business performance and allocates resources. We evaluate
segment performance primarily based on segment equipment rentals gross profit.
Our revenues, operating results, and financial condition fluctuate from quarter
to quarter reflecting the seasonal rental patterns of our customers, with rental
activity tending to be lower in the winter.
Revenues by segment were as follows:
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General
rentals Specialty Total
Year Ended December 31, 2021
Equipment rentals $ 6,074 $ 2,133 $ 8,207
Sales of rental equipment 862 106 968
Sales of new equipment 142 61 203
Contractor supplies sales 71 38 109
Service and other revenues 202 27 229
Total revenue $ 7,351 $ 2,365 $ 9,716
Year Ended December 31, 2020
Equipment rentals $ 5,472 $ 1,668 $ 7,140
Sales of rental equipment 785 73 858
Sales of new equipment 214 33 247
Contractor supplies sales 64 34 98
Service and other revenues 164 23 187
Total revenue $ 6,699 $ 1,831 $ 8,530
Year Ended December 31, 2019
Equipment rentals $ 6,202 $ 1,762 $ 7,964
Sales of rental equipment 768 63 831
Sales of new equipment 238 30 268
Contractor supplies sales 71 33 104
Service and other revenues 157 27 184
Total revenue $ 7,436 $ 1,915 $ 9,351
Equipment rentals. 2021 equipment rentals of $8.2 billion increased 14.9 percent
as compared to 2020, primarily due to a 10.4 percent increase in fleet
productivity, which included the more pronounced impact of COVID-19, which
resulted in rental volume declines in response to shelter-in-place orders and
other market restrictions, in 2020. COVID-19 began to impact our operations in
March 2020 . In 2021, we have seen evidence of a continuing recovery of activity
across our end-markets. Equipment rentals represented 84 percent of total
revenues in 2021.
On a segment basis, equipment rentals represented 83 percent and 90 percent of
total revenues for general rentals and specialty, respectively. General rentals
equipment rentals increased 11.0 percent as compared to 2020, primarily due to
increased fleet productivity, which included the more pronounced impact of
COVID-19 during 2020. In 2021, we have seen evidence of a continuing recovery of
activity across our end-markets. Specialty rentals increased 27.9 percent as
compared to 2020, including the impact of the General Finance acquisition. On a
pro forma basis including the standalone, pre-acquisition revenues of General
Finance, equipment rentals increased 18 percent. The increase in equipment
rentals reflects increased fleet productivity, which included the more
pronounced impact of COVID-19 during 2020, as well as a slight increase in
average OEC.
Sales of rental equipment. For the three years in the period ended December 31,
2021 , sales of rental equipment represented approximately 10 percent of our
total revenues. Our general rentals segment accounted for most of these sales.
2021 sales of rental equipment increased 12.8 percent from 2020 primarily due to
improved pricing in a strong used equipment market and the impact of the General
Finance acquisition.
Sales of new equipment. For the three years in the period ended December 31,
2021 , sales of new equipment represented approximately 3 percent of our total
revenues. Our general rentals segment accounted for most of these sales. 2021
sales of new equipment of $203 decreased 17.8 percent from 2020 primarily due to
supply chain challenges. For a discussion of the risks associated with supply
chain disruptions, see Item 1A- Risk Factors ("Operational Risks-Disruptions in
our supply chain could result in adverse effects on our results of operations
and financial performance").
Sales of contractor supplies. For the three years in the period ended
December 31, 2021 , sales of contractor supplies represented approximately 1
percent of our total revenues. Our general rentals segment accounted for most of
these sales. 2021 sales of contractor supplies did not change materially from
2020.
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Service and other revenues. For the three years in the period ended December 31,
2021 , service and other revenues represented approximately 2 percent of our
total revenues. Our general rentals segment accounted for most of these sales.
2021 service and other revenues increased 22.5 percent from 2020 primarily due
to the more pronounced impact of COVID-19 in 2020.
Fourth Quarter Items. There were no unusual or infrequently occurring items
recognized in the fourth quarter of 2021 that had a material impact on our
financial statements. In the fourth quarter of 2020, we redeemed all of our 4
5/8 percent Senior Notes due 2025 using borrowings available under our ABL
facility. Upon redemption, we recognized a loss of $24 in interest expense, net,
reflecting the difference between the net carrying amount and the total purchase
price of the redeemed notes.
Segment Equipment Rentals Gross Profit
Segment equipment rentals gross profit and gross margin for each of the three
years in the period ended December 31, 2021 were as follows:
General
rentals Specialty Total
2021
Equipment Rentals Gross Profit $ 2,269 $ 998 $ 3,267
Equipment Rentals Gross Margin 37.4 % 46.8 % 39.8 %
2020
Equipment Rentals Gross Profit $ 1,954 $ 765 $ 2,719
Equipment Rentals Gross Margin 35.7 % 45.9 % 38.1 %
2019
Equipment Rentals Gross Profit $ 2,407 $ 800 $ 3,207
Equipment Rentals Gross Margin 38.8 % 45.4 % 40.3 %
General rentals. For the three years in the period ended December 31, 2021 ,
general rentals accounted for 72 percent of our total equipment rentals gross
profit. This contribution percentage is consistent with general rentals'
equipment rental revenue contribution over the same period. For the year ended
December 31, 2021 , general rentals' equipment rentals gross profit increased by
$315 , and equipment rentals gross margin increased by 170 basis points, from
2020, which included a $26 asset impairment charge that primarily reflected the
discontinuation of certain equipment programs and was not related to COVID-19.
Excluding the impact of asset impairment charges, equipment rentals gross margin
increased 130 basis points year-over-year, primarily due to a reduction in
depreciation expense as a percentage of revenue, partially offset by a higher
bonus accrual, which reflects improved profitability, and increases in certain
operating expenses, including delivery costs, as a percentage of revenue.
Specialty. For the year ended December 31, 2021 , equipment rentals gross profit
increased by $233 , and equipment rentals gross margin increased by 90 basis
points from 2020. Gross margin increased primarily due to decreases in
depreciation and labor expenses as a percentage of revenue, partially offset by
a higher proportion of revenue from certain lower margin ancillary fees in 2021
and increases in certain operating expenses, including delivery costs, as a
percentage of revenue.
Gross Margin. Gross margins by revenue classification were as follows:
Year Ended December 31, Change
2021 2020 2019 2021 2020
Total gross margin 39.7% 37.3% 39.2% 240 bps (190) bps
Equipment rentals 39.8% 38.1% 40.3%
170 bps (220) bps
Sales of rental equipment 44.5% 38.7% 37.7% 580 bps 100 bps Sales of new equipment 16.7% 13.4% 13.8% 330 bps (40) bps Contractor supplies sales 28.4% 29.6% 29.8%
(120) bps (20) bps
Service and other revenues 39.3% 37.4% 44.6%
190 bps (720) bps
2021 gross margin of 39.7 percent increased 240 basis points from 2020.
Equipment rentals gross margin increased 170 basis points from 2020, which
included a
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gross margin increased 150 basis points year-over-year, primarily due to a
reduction in depreciation expense as a percentage of revenue, partially offset
by higher bonus expense, which reflects improved profitability, and increases in
certain operating expenses, including delivery costs, as a percentage of
revenue. Gross margin from sales of rental equipment increased 580 basis points
from 2020 primarily due to improved pricing in a strong used equipment market.
The gross margin fluctuations from sales of new equipment, contractor supplies
sales and service and other revenues generally reflect normal variability, the
more pronounced impact of COVID-19 in 2020 and the impact of the General Finance
acquisition, and such revenue types did not account for a significant portion of
total gross profit (gross profit for these revenue types represented 4 percent
of total gross profit for the year ended December 31, 2021 ).
Other costs/(income)
The table below includes the other costs/(income) in our consolidated statements
of income, as well as key associated metrics, for the three years in the period
ended December 31, 2021 :
Year Ended December 31, Change
2021 2020 2019 2021 2020
Selling, general and administrative
("SG&A") expense $ 1,199 $ 979 $ 1,092 22.5% (10.3)%
SG&A expense as a percentage of revenue 12.3 % 11.5 %
11.7 % 80 bps (20) bps
Merger related costs 3 - 1 - (100.0)%
Restructuring charge 2 17 18 (88.2)% (5.6)%
Non-rental depreciation and amortization 372 387 407 (3.9)% (4.9)%
Interest expense, net 424 669 648 (36.6)% 3.2%
Other expense (income), net 7 (8) (10) (187.5)% (20.0)%
Provision for income taxes 460 249 340 84.7% (26.8)%
Effective tax rate 24.9 % 21.9 % 22.5 % 300 bps (60) bps
SG&A expense primarily includes sales force compensation, information technology
costs, third party professional fees, management salaries, bad debt expense and
clerical and administrative overhead. The increase in SG&A expense as a
percentage of revenue for the year ended December 31, 2021 was primarily due to
higher bonus and stock compensation expenses, which reflect improved
profitability.
The merger related costs primarily reflect transaction costs associated with the
General Finance acquisition that was completed in May 2021 , as discussed in note
4 to the consolidated financial statements. We have made a number of
acquisitions in the past and may continue to make acquisitions in the future.
Merger related costs only include costs associated with major acquisitions, each
of which had annual revenues of over $200 prior to acquisition, that
significantly impact our operations.
The restructuring charges for the years ended December 31, 2021 , 2020 and 2019
primarily reflect severance costs and branch closure charges associated with our
restructuring programs. See note 6 to our consolidated financial statements for
additional information.
Non-rental depreciation and amortization includes (i) the amortization of other
intangible assets and (ii) depreciation expense associated with equipment that
is not offered for rent (such as computers and office equipment) and
amortization expense associated with leasehold improvements. Our other
intangible assets consist of customer relationships, non-compete agreements and
trade names and associated trademarks.
Interest expense, net for the years ended December 31, 2021 and 2020 included
aggregate debt redemption losses of $30 and $183 , respectively. The debt
redemption losses reflect the difference between the net carrying amount and the
total purchase price of the redeemed notes. Excluding the impact of these
losses, interest expense, net for the year ended December 31, 2021 decreased by
18.9 percent year-over-year primarily due to decreases in average debt and the
average cost of debt.
Other expense (income), net primarily includes (i) currency gains and losses,
(ii) finance charges, (iii) gains and losses on sales of non-rental equipment
and (iv) other miscellaneous items.
A detailed reconciliation of the effective tax rates to the U.S. federal
statutory income tax rate is included in note 15 to our consolidated financial
statements. The effective income tax rate for the year ended December 31, 2021
increased year-over-year primarily due to the release in 2020 of a valuation
allowance on foreign tax credits.
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In March 2020 , the Coronavirus Aid, Relief and Economic Security Act ("CARES
Act") was enacted. The CARES Act, among other things, includes provisions
relating to net operating loss carryback periods, alternative minimum tax credit
refunds, modifications to the net interest deduction limitations, technical
corrections to tax depreciation methods for qualified improvement property and
deferral of employer payroll taxes. The CARES Act did not materially impact our
effective tax rate for the year ended December 31, 2021 . As of December 31,
2021 , we have deferred employer payroll taxes of $27 under the CARES Act, all of
which is due in 2022.
Balance sheet. Accounts receivable, net increased by $362 , or 27.5 percent, from
December 31, 2020 to December 31, 2021 primarily due to increased revenue.
Prepaid expenses and other assets decreased by $209 , or 55.7 percent, from
December 31, 2020 to December 31, 2021 , primarily due to refundable deposits on
expected purchases, primarily of rental equipment, pursuant to advanced purchase
agreements, as discussed further in note 7 to our consolidated financial
statements. Rental equipment, net increased by $1.855 billion , or 21.3 percent,
from December 31, 2020 to December 31, 2021 primarily due to the impact of the
General Finance acquisition and increased capital expenditures. As discussed
above, capital expenditures were significantly reduced in 2020 due to COVID-19,
while capital expenditures in 2021 have exceeded historic (pre-COVID-19) levels.
Accounts payable increased by $350 , or 75.1 percent, from December 31, 2020 to
December 31, 2021 , primarily due to increased business activity. Accrued
expenses and other liabilities increased $161 , or 22.4 percent, from
December 31, 2020 to December 31, 2021 , primarily due to a higher bonus accrual,
which reflects increased profitability, and the impact of the General Finance
acquisition. See note 11 to our consolidated financial statements for further
detail on accrued expenses and other liabilities. Deferred taxes increased by
$386 , or 21.8 percent, from December 31, 2020 to December 31, 2021 primarily due
to the impact of the General Finance acquisition and increased capital
expenditures. See note 15 to our consolidated financial statements for further
detail on deferred taxes.
Liquidity and Capital Resources.
We manage our liquidity using internal cash management practices, which are
subject to (i) the policies and cooperation of the financial institutions we
utilize to maintain and provide cash management services, (ii) the terms and
other requirements of the agreements to which we are a party and (iii) the
statutes, regulations and practices of each of the local jurisdictions in which
we operate. See "Financial Overview" above for a summary of the 2021 capital
structure actions taken to improve our financial flexibility and liquidity.
Since 2012, we have repurchased a total of $3.7 billion of Holdings' common
stock under five completed share repurchase programs. On January 28, 2020 , our
Board of Directors authorized a $500 share repurchase program, which commenced
in the first quarter of 2020 and was intended to run for 12 months. Through
March 2020 , when the program was paused due to the COVID-19 pandemic, we
repurchased $257 of common stock under the program. On January 25, 2022 , our
Board authorized a $1 billion share repurchase program, which is expected to
commence in the first quarter of 2022 and be completed in 2022. This program
replaces the prior $500 program.
Our principal existing sources of cash are cash generated from operations and
from the sale of rental equipment, and borrowings available under our ABL and
accounts receivable securitization facilities. As of December 31, 2021 , we had
cash and cash equivalents of $144 . Cash equivalents at December 31, 2021 consist
of direct obligations of financial institutions rated A or better. We believe
that our existing sources of cash will be sufficient to support our existing
operations over the next 12 months. The table below presents financial
information associated with our principal sources of cash as of and for the year
December 31, 2021 :
ABL facility:
Borrowing capacity, net of letters of credit $ 2,650
Outstanding debt, net of debt issuance costs 1,029
Interest rate at December 31, 2021 1.4 %
Average month-end principal amount of debt outstanding (1) 1,032
Weighted-average interest rate on average debt outstanding 1.3 %
Maximum month-end principal amount of debt outstanding (1) 1,672
Accounts receivable securitization facility (2):
Borrowing capacity 57
Outstanding debt, net of debt issuance costs 843
Interest rate at December 31, 2021 0.9 %
Average month-end principal amount of debt outstanding 736
Weighted-average interest rate on average debt outstanding 1.0 %
Maximum month-end principal amount of debt outstanding 872
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(1)The maximum outstanding debt under the ABL facility exceeded the average
outstanding debt primarily due to the use of borrowings under the ABL facility
to fund most of the cost of the General Finance acquisition discussed in note 4
to the consolidated financial statements.
(2)As discussed in note 13 to the consolidated financial statements, the
accounts receivable securitization facility expires on June 24, 2022 and may be
further extended on a 364-day basis by mutual agreement with the purchasers
under the facility.
We expect that our principal short-term (over the next 12 months) and long-term
needs for cash relating to our operations will be to fund (i) operating
activities and working capital, (ii) the purchase of rental equipment and
inventory items offered for sale, (iii) payments due under operating leases,
(iv) debt service, (v) share repurchases and (vi) acquisitions. We plan to fund
such cash requirements from our existing sources of cash. In addition, we may
seek additional financing through the securitization of some of our real estate,
the use of additional operating leases or other financing sources as market
conditions permit. The table below presents information on payments coming due
under the most significant categories of our needs for cash (excluding operating
cash flows pertaining to normal business operations, such as human capital
costs, which are not accurately estimable) as of December 31, 2021 :
2022 2023 2024 2025 2026 Thereafter Total
Debt and finance leases (1) $ 906 $ 52 $ 1,070 $ 949 $ 2 $ 6,775 $ 9,754
Interest due on debt (2) 344 340 327 321 306 676 2,314
Operating leases (1) 226 196 162 124 84 101 893
Purchase obligations (3) 3,695 58 - - - - 3,753
_________________
(1) The payments due with respect to a period represent (i) in the case of debt
and finance leases, the scheduled principal payments due in such period, and
(ii) in the case of operating leases, the payments due in such period for
non-cancelable operating leases with initial or remaining terms of one year or
more. See note 13 to the consolidated financial statements for further debt
information, and note 14 for further finance lease and operating lease
information.
(2) Estimated interest payments have been calculated based on the principal
amount of debt and the applicable interest rates as of December 31, 2021 .
(3) As of December 31, 2021 , we had outstanding advance purchase orders, which
were negotiated in the ordinary course of business, with our equipment and
inventory suppliers. These purchase orders can generally be cancelled by us
without cancellation penalties. The equipment and inventory receipts from the
suppliers pursuant to these purchase orders and the related payments to the
suppliers are expected to be completed throughout 2022 and 2023.
The amount of our future capital expenditures will depend on a number of
factors, including general economic conditions and growth prospects. We expect
that we will fund such expenditures from cash generated from operations,
proceeds from the sale of rental and non-rental equipment and, if required,
borrowings available under the ABL facility and accounts receivable
securitization facility. Net rental capital expenditures (defined as purchases
of rental equipment less the proceeds from sales of rental equipment) were
$2.030 billion and $103 in 2021 and 2020, respectively. As discussed above,
disciplined management of capital expenditures and fleet capacity is a component
of our COVID-19 response plan, which contributed to net rental capital
expenditures in 2020 that were significantly below historic levels.
To access the capital markets, we rely on credit rating agencies to assign
ratings to our securities as an indicator of credit quality. Lower credit
ratings generally result in higher borrowing costs and reduced access to debt
capital markets. Credit ratings also affect the costs of derivative
transactions, including interest rate and foreign currency derivative
transactions. As a result, negative changes in our credit ratings could
adversely impact our costs of funding. Our credit ratings as of January 24, 2022
were as follows:
Corporate Rating Outlook
Moody's Ba1 Stable
Standard & Poor's BB+ Stable
A security rating is not a recommendation to buy, sell or hold securities. There
is no assurance that any rating will remain in effect for a given period of time
or that any rating will not be revised or withdrawn by a rating agency in the
future.
Loan Covenants and Compliance. As of December 31, 2021 , we were in compliance
with the covenants and other provisions of the ABL, accounts receivable
securitization and term loan facilities and the senior notes. Any failure to be
in compliance with any material provision or covenant of these agreements could
have a material adverse effect on our liquidity and operations.
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The only financial covenant that currently exists under the ABL facility is the
fixed charge coverage ratio. Subject to certain limited exceptions specified in
the ABL facility, the fixed charge coverage ratio covenant under the ABL
facility will only apply in the future if specified availability under the ABL
facility falls below 10 percent of the maximum revolver amount under the ABL
facility. When certain conditions are met, cash and cash equivalents and
borrowing base collateral in excess of the ABL facility size may be included
when calculating specified availability under the ABL facility. As of
December 31, 2021 , specified availability under the ABL facility exceeded the
required threshold and, as a result, this financial covenant was inapplicable.
Under our accounts receivable securitization facility, we are required, among
other things, to maintain certain financial tests relating to: (i) the default
ratio, (ii) the delinquency ratio, (iii) the dilution ratio and (iv) days sales
outstanding. The accounts receivable securitization facility also requires us to
comply with the fixed charge coverage ratio under the ABL facility, to the
extent the ratio is applicable under the ABL facility.
URNA's payment capacity is restricted under the covenants in the ABL and term
loan facilities and the indentures governing its outstanding indebtedness.
Although this restricted capacity limits our ability to move operating cash
flows to Holdings, because of certain intercompany arrangements, we do not
expect any material adverse impact on Holdings' ability to meet its cash
obligations.
Sources and Uses of Cash. During 2021, we (i) generated cash from operating
activities of $3.689 billion and (ii) generated cash from the sale of rental and
non-rental equipment of $998 . We used cash during this period principally to (i)
purchase rental and non-rental equipment and intangible assets of $3.198
billion , (ii) purchase other companies for $1.436 billion and (iii) make debt
payments, net of proceeds, of $98 . During 2020, we (i) generated cash from
operating activities of $2.658 billion , which included $300 of cash outflow for
refundable deposits on expected rental equipment purchases, as discussed further
in note 7 to the consolidated financial statements, and (ii) generated cash from
the sale of rental and non-rental equipment of $900 . We used cash during this
period principally to (i) purchase rental and non-rental equipment of $1.158
billion , (ii) make debt payments, net of proceeds, of $1.985 billion and (iii)
purchase shares of our common stock for $286 .
Free Cash Flow GAAP Reconciliation
We define "free cash flow" as net cash provided by operating activities less
purchases of, and plus proceeds from, equipment and intangible assets. The
equipment and intangible asset purchases and proceeds are included in cash flows
from investing activities. Management believes that free cash flow provides
useful additional information concerning cash flow available to meet future debt
service obligations and working capital requirements. However, free cash flow is
not a measure of financial performance or liquidity under GAAP. Accordingly,
free cash flow should not be considered an alternative to net income or cash
flow from operating activities as an indicator of operating performance or
liquidity. The table below provides a reconciliation between net cash provided
by operating activities and free cash flow.
Year
Ended
2021 2020 2019
Net cash provided by operating activities $ 3,689 $ 2,658 $ 3,024
Purchases of rental equipment (2,998) (961) (2,132)
Purchases of non-rental equipment and intangible
assets (200) (197) (218)
Proceeds from sales of rental equipment 968 858 831
Proceeds from sales of non-rental equipment 30 42 37
Insurance proceeds from damaged equipment 25 40 24
Free cash flow $ 1,514 $ 2,440 $ 1,566
Free cash flow for the year ended December 31, 2021 was $1.514 billion , a
decrease of $926 as compared to $2.440 billion for the year ended December 31,
2020 . Free cash flow decreased primarily due to increased net rental capital
expenditures (purchases of rental equipment less the proceeds from sales of
rental equipment), partially offset by increased net cash provided by operating
activities. Net rental capital expenditures increased $1.927 billion , or 1,871
percent, year-over-year. As discussed above, disciplined management of capital
expenditures and fleet capacity is a component of our COVID-19 response plan,
which contributed to net rental capital expenditures in 2020 that were
significantly below historic (pre-COVID-19) levels, while capital expenditures
in 2021 have exceeded historic levels.
Relationship between Holdings and URNA. Holdings is principally a holding
company and primarily conducts its operations through its wholly owned
subsidiary, URNA, and subsidiaries of URNA. Holdings licenses its tradename and
other intangibles and provides certain services to URNA in connection with its
operations. These services principally include: (i) senior management services;
(ii) finance and tax-related services and support; (iii) information technology
systems and
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support; (iv) acquisition-related services; (v) legal services; and (vi) human
resource support. In addition, Holdings leases certain equipment and real
property that are made available for use by URNA and its subsidiaries.
Information Regarding Guarantors of URNA Indebtedness
URNA is 100 percent owned by Holdings and has certain outstanding indebtedness
that is guaranteed by both Holdings and, with the exception of its U.S. special
purpose vehicle which holds receivable assets relating to the Company's accounts
receivable securitization facility (the "SPV"), captive insurance subsidiaries
and immaterial subsidiaries acquired in connection with the General Finance
acquisition, all of URNA's U.S. subsidiaries (the "guarantor subsidiaries").
Other than the guarantee by our Canadian subsidiary of URNA's indebtedness under
the ABL facility, none of URNA's indebtedness is guaranteed by URNA's foreign
subsidiaries, the SPV, captive insurance subsidiaries or immaterial subsidiaries
acquired in connection with the General Finance acquisition (together, the
"non-guarantor subsidiaries"). The receivable assets owned by the SPV have been
sold or contributed by URNA to the SPV and are not available to satisfy the
obligations of URNA or Holdings' other subsidiaries. Holdings consolidates each
of URNA and the guarantor subsidiaries in its consolidated financial statements.
URNA and the guarantor subsidiaries are all 100 percent-owned and controlled by
Holdings. Holdings' guarantees of URNA's indebtedness are full and
unconditional, except that the guarantees may be automatically released and
relieved upon satisfaction of the requirements for legal defeasance or covenant
defeasance under the applicable indenture being met. The Holdings guarantees are
also subject to subordination provisions (to the same extent that the
obligations of the issuer under the relevant notes are subordinated to other
debt of the issuer) and to a standard limitation which provides that the maximum
amount guaranteed by Holdings will not exceed the maximum amount that can be
guaranteed without making the guarantee void under fraudulent conveyance laws.
The guarantees of Holdings and the guarantor subsidiaries are made on a joint
and several basis. The guarantees of the guarantor subsidiaries are not full and
unconditional because a guarantor subsidiary can be automatically released and
relieved of its obligations under certain circumstances, including sale of the
guarantor subsidiary, the sale of all or substantially all of the guarantor
subsidiary's assets, the requirements for legal defeasance or covenant
defeasance under the applicable indenture being met, designating the guarantor
subsidiary as an unrestricted subsidiary for purposes of the applicable
covenants or the notes being rated investment grade by both Standard & Poor's
Ratings Services and Moody's Investors Service, Inc. , or, in certain
circumstances, another rating agency selected by URNA. Like the Holdings
guarantees, the guarantees of the guarantor subsidiaries are subject to
subordination provisions (to the same extent that the obligations of the issuer
under the relevant notes are subordinated to other debt of the issuer) and to a
standard limitation which provides that the maximum amount guaranteed by each
guarantor will not exceed the maximum amount that can be guaranteed without
making the guarantee void under fraudulent conveyance laws.
All of the existing guarantees by Holdings and the guarantor subsidiaries rank
equally in right of payment with all of the guarantors' existing and future
senior indebtedness. The secured indebtedness of Holdings and the guarantor
subsidiaries (including guarantees of URNA's existing and future secured
indebtedness) will rank effectively senior to guarantees of any unsecured
indebtedness to the extent of the value of the assets securing such
indebtedness. Future guarantees of subordinated indebtedness will rank junior to
any existing and future senior indebtedness of the guarantors. The guarantees of
URNA's indebtedness are effectively junior to any indebtedness of our
subsidiaries that are not guarantors, including our foreign subsidiaries. As of
December 31, 2021 , indebtedness of our non-guarantors included (i) $843 of
outstanding borrowings by the SPV in connection with the Company's accounts
receivable securitization facility, (ii) $141 of outstanding borrowings under
the ABL facility by non-guarantor subsidiaries and (iii) $9 of finance leases of
our non-guarantor subsidiaries.
Covenants in the ABL facility, accounts receivable securitization and term loan
facilities, and the other agreements governing our debt, impose operating and
financial restrictions on URNA, Holdings and the guarantor subsidiaries,
including limitations on the ability to make share repurchases and dividend
payments. As of December 31, 2021 , the amount available for distribution under
the most restrictive of these covenants was $1.602 billion . The Company's total
available capacity for making share repurchases and dividend payments includes
the intercompany receivable balance of Holdings. As of December 31, 2021 , our
total available capacity for making share repurchases and dividend payments,
which includes URNA's capacity to make restricted payments and the intercompany
receivable balance of Holdings, was $5.396 billion .
Based on our understanding of Rule 3-10 of Regulation S-X ("Rule 3-10"), we
believe that Holdings' guarantees of URNA indebtedness comply with the
conditions set forth in Rule 3-10, which enable us to present summarized
financial information for Holdings, URNA and the consolidated guarantor
subsidiaries in accordance with Rule 13-01 of Regulation S-X. The summarized
financial information excludes information regarding the non-guarantor
subsidiaries. In accordance with Rule 3-10, separate financial statements of the
guarantor subsidiaries have not been presented.
The summarized financial information of Holdings, URNA and the guarantor
subsidiaries on a combined basis is as follows:
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December 31, 2021
Current assets $417
Long-term assets 18,423
Total assets 18,840
Current liabilities 1,569
Long-term liabilities 11,280
Total liabilities 12,849
Year Ended December 31, 2021
Total revenues $8,755
Gross profit 3,490
Net income 1,386© Edgar Online, source
