UNITED RENTALS, INC. We have omitted discussions comparing 2021 and 2020 results, as such disclosures were included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 .
Global Economic Conditions and COVID-19
Our operations are impacted by global economic conditions, including inflation, increased interest rates and supply chain constraints, and we take actions to modify our plans to address such economic conditions. In 2022, for example, we intentionally held back on sales of rental equipment to ensure we had sufficient capacity for our customers. In 2022, revenue from sales of rental equipment was largely flat year-over-year, however the number of units sold decreased approximately 17 percent year-over-year, as we held on to fleet to serve strong customer demand and to ensure greater fleet availability in the event industry supply chain challenges persist or worsen. While the volume of sales of rental equipment decreased year-over-year, gross margin from sales of rental equipment increased 14.2 percentage points, which primarily reflected strong pricing and improved channel mix. To date, our supply chain disruptions have been limited, but we may experience more severe supply chain disruptions in the future. Interest rates on our debt instruments have increased recently. For example, inNovember 2022 , URNA issued$1.5 billion aggregate principal amount of senior secured notes at a 6 percent interest rate, while URNA's immediately prior issuance inAugust 2021 of$750 aggregate principal amount of senior unsecured notes was at a 3 ¾ percent interest rate. Additionally, the weighted average interest rates on our variable debt instruments were 3.3 percent in 2022 and 1.4 percent in 2021. See Item 7A-Quantitative and Qualitative Disclosures About Market Risk for additional information related to interest rate risk. We have experienced and are continuing to experience inflationary pressures. A portion of inflationary cost increases is passed on to customers. The most significant cost increases that are passed on to customers are for fuel and delivery, and there are other costs for which the pass through to customers is less direct, such as repairs and maintenance, and labor. The impact of inflation and increased interest rates may be significant in the future. COVID-19 was first identified in people in late 2019. COVID-19 spread rapidly throughout the world and, inMarch 2020 , theWorld Health Organization characterized COVID-19 as a pandemic. The COVID-19 pandemic has significantly disrupted supply chains and businesses around the world. Uncertainty remains regarding the potential impact of existing and emerging variant strains of COVID-19 on the operations and financial position ofUnited Rentals , and on the global economy, which will be driven by, among other things, any resurgences in cases, the effectiveness of vaccines against COVID-19 (including against emerging variant strains), and the measures that may in the future be implemented to protect public health. InMarch 2020 , we first experienced rental volume declines associated with COVID-19, and the COVID-19 impact was most pronounced in 2020. In 2021 and 2022, we saw evidence of a continuing recovery of activity across our end-markets. The health and safety of our employees and customers has been, and remains, our top priority, and we also implemented a detailed COVID-19 response plan, which we believe helped mitigate the impact of COVID-19 on our results. Our Annual Report on Form 10-K for the year endedDecember 31, 2020 and our Quarterly Reports on Form 10-Q filed in 2021 and 2020 include detailed disclosures addressing the COVID-19 impact.
We continue to assess the economic environment in which we operate and any developments relating to the COVID-19 pandemic, and take appropriate actions to address the economic and other challenges we face. See "Item 1. Business-Industry Overview and Economic Outlook" for a discussion of our end-markets, and Item 1A- Risk Factors for further discussion of the risks related to us and our business.
Executive Overview
We are the largest equipment rental company in the world, with an integrated network of 1,521 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$19.6 billion , and a North American branch network that operates in 49 U.S. states and every Canadian province, and serves 99 of the 100 largest metropolitan areas in theU.S. 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 4,600 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 2022, equipment rental revenues represented 87 percent of our total revenues. 25
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For the past several years, as we continued to manage the impact of COVID-19, we 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. Our general strategy focuses on profitability and return on invested capital, and, in particular, calls for: •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 have a dedicated team responsible for reducing waste in our operational processes, with the objectives of: condensing the cycle time associated with preparing equipment for rent; optimizing our resources for delivery and pickup of equipment; improving the effectiveness and efficiency of our repair and maintenance operations; and implementing customer service best practices; •The continued expansion and cross-selling of adjacent specialty and services products, which enables us to provide a "one-stop" shop for our customers. We believe that the expansion of our specialty business, as exhibited by our acquisition ofGeneral Finance Corporation ("General Finance"), which is 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, as exhibited by our recently completed acquisition of assets ofAhern Rentals, Inc. ("Ahern Rentals"), which is discussed in note 4 to the consolidated financial statements. Strategic acquisitions allow us to invest our capital to expand our business, further driving our ability to accomplish our strategic goals. In 2023, based on our analyses of industry forecasts and macroeconomic indicators, we expect that North American industry equipment rental revenue will increase approximately 4 percent. See "Item 1. Business- Industry Overview and Economic Outlook" for a discussion of our end-markets. 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 2022: •Equipment rentals increased 23.3 percent year-over-year, including the impact of the General Finance acquisition that was completed inMay 2021 and theAhern Rentals acquisition that was completed inDecember 2022 , both of which are discussed in note 4 to the consolidated financial statements;
•Average OEC increased 13.6 percent year-over-year, including the impact of the
General Finance and
•Fleet productivity increased 9.4 percent, primarily due to broad-based strength of demand across our end-markets; and
•68 percent of equipment rental revenue was derived from key accounts, as compared to 72 percent in 2021. Key accounts are each managed by a single point of contact to enhance customer service.
Financial Overview
Prior to taking actions pertaining to our financial flexibility and liquidity,
we 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 2022, we took the following actions to improve our financial
flexibility and liquidity, and to position us to invest the necessary capital in
our business (see note 12 to the consolidated financial statements for further
discussion of our debt instruments):
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•Redeemed
•Amended and extended our accounts receivable securitization facility, including an increase in the size of the facility from$900 to$1.1 billion . The facility expires inJune 2024 and may be extended on a 364-day basis by mutual agreement with the purchasers under the facility;
•Amended and extended our ABL facility, including an increase in the size of the
facility from
•Entered into an uncommitted repurchase facility pursuant to which we may obtain
short-term financing in an amount up to
•Issued$1.5 billion principal amount of 6 percent Senior Secured Notes due 2029. The issued debt, together with drawings on our ABL facility, was used to fund theAhern Rentals acquisition that is discussed in note 4 to the consolidated financial statements. Total debt as ofDecember 31, 2022 increased by$1.685 billion , or 17.4 percent, fromDecember 31, 2021 , primarily due to the$1.5 billion principal amount of debt issued to partially fund theAhern Rentals acquisition, as discussed above. As ofDecember 31, 2022 , we had available liquidity of$2.896 billion , comprised of cash and cash equivalents, and availability under the ABL and accounts receivable securitization facilities. In 2022, we also repurchased$1 billion of common stock, completing the repurchase program that commenced in the first quarter of 2022. InOctober 2022 , our Board of Directors authorized a$1.25 billion share repurchase program. No repurchases were made as ofDecember 31, 2022 under this program, which was paused through the initial phase of the integration of theAhern Rentals acquisition. We expect to resume repurchases under the program in the first quarter of 2023, and to repurchase$1.0 billion of common stock under the program in 2023. As discussed in note 19 to the consolidated financial statements, our Board of Directors also approved a quarterly dividend program inJanuary 2023 , and the first such dividend under the program is payable inFebruary 2023 .
Net income. Net income and diluted earnings per share for each of the three
years in the period ended
Year Ended December 31,
2022 2021 2020
Net income $ 2,105 $ 1,386 $ 890
Diluted earnings per share $ 29.65 $ 19.04 Net income and diluted earnings per share for each of the three years in the period endedDecember 31, 2022 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, 2022 2021 2020 Tax rate applied to items below 25.3 % 25.3 % 25.2 % 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) $ - $ - Merger related intangible asset amortization (2) (126) (1.79) (143) (1.98) (163) (2.22) Impact on depreciation related to acquired fleet and property and equipment (3) (40) (0.56) (12) (0.16) (6) (0.08) Impact of the fair value mark-up of acquired fleet (4) (20) (0.29) (28) (0.38) (37) (0.51) Restructuring charge (5) - - (1) (0.02) (13) (0.18) Asset impairment charge (6) (2) (0.03) (10) (0.14) (27) (0.37) Loss on repurchase/redemption of debt securities (7) (13) (0.18) (22) (0.31) (137) (1.88) (1)This reflects transaction costs associated with the General Finance acquisition discussed in note 4 to the consolidated financial statements. 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. 27 -------------------------------------------------------------------------------- Table of Contents (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)This primarily reflects severance costs and branch closure charges associated with our restructuring programs. As ofDecember 31, 2022 , there were no open restructuring programs. For additional information, see "Results of Operations-Other costs/(income)-restructuring charges" below. (6)This reflects write-offs of leasehold improvements and other fixed assets. 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 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, 2022 2021 2020 Net income$ 2,105 $ 1,386 $ 890 Provision for income taxes 697 460 249 Interest expense, net 445 424 669 Depreciation of rental equipment 1,853 1,611 1,601 Non-rental depreciation and amortization 364 372 387 EBITDA 5,464 4,253 3,796 Merger related costs (1) - 3 - Restructuring charge (2) - 2 17 Stock compensation expense, net (3) 127 119 70
Impact of the fair value mark-up of acquired fleet (4) 27
37 49 Adjusted EBITDA$ 5,618 $ 4,414 $ 3,932 Net income margin 18.1 % 14.3 % 10.4 % Adjusted EBITDA margin 48.3 % 45.4 % 46.1 %
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,
2022 2021 2020
Net cash provided by operating activities $ 4,433 Amortization of deferred financing costs and original issue discounts
(13) (13) (14)
Gain on sales of rental equipment 566 431 332
Gain on sales of non-rental equipment 9 10 8
Insurance proceeds from damaged equipment 32 25 40
Merger related costs (1) - (3) -
Restructuring charge (2) - (2) (17)
Stock compensation expense, net (3) (127) (119) (70)
Loss on repurchase/redemption of debt securities (5) (17) (30) (183)
Changes in assets and liabilities (151) (328) 241
Cash paid for interest 406 391 483
Cash paid for income taxes, net 326 202 318
EBITDA 5,464 4,253 3,796
Add back:
Merger related costs (1) - 3 -
Restructuring charge (2) - 2 17
Stock compensation expense, net (3) 127 119 70
Impact of the fair value mark-up of acquired fleet (4) 27 37 49
Adjusted EBITDA $ 5,618 $ 4,414 $ 3,932
_________________
(1)This reflects transaction costs associated with the General Finance
acquisition discussed in note 4 to the consolidated financial statements. Merger
related costs only include costs associated with major acquisitions that
significantly impact our operations. For additional information, see "Results of
Operations-Other costs/(income)-merger related costs" below.
(2)This primarily reflects severance costs and branch closure charges associated
with our restructuring programs. As of December 31, 2022 , there were no open
restructuring programs. For additional information, see "Results of
Operations-Other costs/(income)-restructuring charges" below.
(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)This primarily 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 endedDecember 31, 2022 , net income increased$719 , or 51.9 percent, and net income margin increased 380 basis points to 18.1 percent. For the year endedDecember 31, 2022 , adjusted EBITDA increased$1.204 billion , or 27.3 percent, and adjusted EBITDA margin increased 290 basis points to 48.3 percent. The year-over-year increase in net income margin primarily reflects improved gross margins from equipment rentals and sales of rental equipment, reductions in SG&A expense, non-rental depreciation and amortization, and net interest expense as a percentage of revenue, partially offset by higher income tax expense as a percentage of revenue. Gross margin from sales of rental equipment increased year-over-year primarily due to strong pricing and improved channel mix. The higher gross margin from equipment rentals and the favorable margin impact of SG&A expense and non-rental depreciation and amortization all reflected better fixed cost absorption on higher revenue. Net interest expense for the years endedDecember 31, 2022 and 2021 included debt redemption losses of$17 and$30 , respectively. Excluding the impact of these losses, interest expense, net for the year endedDecember 31, 2022 increased by 8.6 percent year-over-year primarily due to a slight increase in average debt and higher interest rates (as noted above, the weighted average interest rates on our variable debt instruments were 3.3 percent in 2022 and 1.4 percent in 2021). While income tax expense increased$237 , or 51.5 percent, year-over-year, the effective income tax rate was flat. 29
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The increase in the adjusted EBITDA margin primarily reflects higher margins from equipment rentals (excluding depreciation) and sales of rental equipment, reduced SG&A expense as a percentage of revenue and an increase in the proportion of revenue from higher margin (excluding depreciation) equipment rentals. Gross margin from equipment rentals (excluding depreciation) increased 90 basis points primarily due to better fixed cost absorption on higher revenue. SG&A expense also benefited from better fixed cost absorption. Gross margin from sales of rental equipment (excluding the adjustment reflected in the table above for the impact of the fair value mark-up of acquired fleet) increased 13.2 percentage points primarily due to strong pricing and improved channel mix. Revenues. Revenues for each of the three years in the period endedDecember 31, 2022 were as follows: Year Ended December 31, Change 2022 2021 2020 2022 2021 Equipment rentals*$ 10,116 $ 8,207 $ 7,140 23.3% 14.9% Sales of rental equipment 965 968 858 (0.3)% 12.8% Sales of new equipment 154 203 247 (24.1)% (17.8)% Contractor supplies sales 126 109 98 15.6% 11.2% Service and other revenues 281 229 187 22.7% 22.5% Total revenues$ 11,642 $ 9,716 $ 8,530 19.8% 13.9% *Equipment rentals variance components: Year-over-year change in average OEC 13.6% 4.0% Assumed year-over-year inflation impact (1) (1.5)% (1.5)% Fleet productivity (2) 9.4% 10.4% Contribution from ancillary and re-rent revenue (3) 1.8% 2.0% Total change in equipment rentals 23.3% 14.9% _________________
(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 includes the impact of COVID-19, which resulted in rental volume declines in response to shelter-in-place orders and other market restrictions. The COVID-19 volume declines were most pronounced in 2020, and in 2021 and 2022, 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 16 percent of equipment rental revenue in 2022. Delivery and pick-up revenue, which represented approximately eight percent of equipment rental revenue in 2022, 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. 2022 total revenues of$11.6 billion increased 19.8 percent compared with 2021. Equipment rentals and sales of rental equipment are our largest revenue types (together, they accounted for 95 percent of total revenue for the year endedDecember 31, 2022 ). Equipment rentals increased 23.3 percent, primarily due to a 13.6 percent increase in average OEC, which includes the impact of theMay 2021 acquisition of General Finance and theDecember 2022 acquisition ofAhern Rentals , and a 9.4 percent increase in fleet productivity, which reflects broad-based strength of demand across our end-markets. InMarch 2020 , we first experienced rental volume declines, in response to shelter-in-place orders and other market restrictions, 30
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associated with COVID-19, and the COVID-19 impact was most pronounced in 2020. Beginning in 2021 and continuing through 2022, we have seen evidence of a continuing recovery of activity across our end-markets. Disciplined management of capital expenditures and fleet capacity is a component of our COVID-19 response plan, which contributed to rental capital expenditures in 2020 that were significantly below historic levels. While capital expenditures were significantly reduced in 2020 due to COVID-19, capital expenditures in 2021 and 2022 exceeded historic (pre-COVID-19) levels, which contributed to the increased average OEC. Revenue from sales of rental equipment was largely flat year-over-year, however the number of units sold decreased approximately 17 percent year-over-year, as we held on to fleet to serve strong customer demand and to ensure greater fleet availability in the event industry supply chain challenges persist or worsen. While the volume of sales of rental equipment decreased year-over-year, gross margin from sales of rental equipment increased 14.2 percentage points primarily due to strong pricing and improved channel mix.
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 Credit Losses. We maintain allowances for credit losses. 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 12 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$215 or$275 , 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$23 . 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$43 or$66 , 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.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. 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 31
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information. 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. 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, sinceDecember 31, 2021 , our divisions have been our operating segments. We conducted the goodwill impairment test as ofOctober 1, 2022 at the reporting unit level, which is one level below the operating segment level. We conducted the goodwill impairment test as ofOctober 1, 2021 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
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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, 2022 , 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 reporting unit, had
estimated fair values which exceeded their respective carrying amounts by at
least 37 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 reporting unit were acquired in the General
Finance acquisition. The estimated fair value of our Mobile Storage reporting
unit exceeded its carrying amounts by eight percent. As all of the assets in the
Mobile Storage reporting unit were recorded at fair value as of the May 2021
acquisition date, we expected the percentage by which the fair value for this
reporting unit exceeded the carrying value to be significantly less than the
equivalent percentages determined for our other reporting units.
In connection with our goodwill impairment test that was conducted as 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 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.
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. During the years ended
December 31, 2022 , 2021 and 2020, we recorded asset impairment charges of $3 ,
$14 and $36 , respectively, primarily in depreciation of rental equipment in our
consolidated statements of income. These charges were primarily recognized in
our general rentals segment. 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
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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 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 andU.S. state income taxes.
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 throughoutthe United States andCanada . 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 inthe United States andCanada , and has a limited presence inEurope ,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 endedDecember 31, 2022 , 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, 2022
Equipment rentals $ 7,345 $ 2,771 $ 10,116
Sales of rental equipment 835 130 965
Sales of new equipment 73 81 154
Contractor supplies sales 81 45 126
Service and other revenues 250 31 281
Total revenue $ 8,584 $ 3,058 $11,642
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
Equipment rentals. 2022 equipment rentals of $10.1 billion increased 23.3
percent, primarily due to a 13.6 percent increase in average OEC, which includes
the impact of the May 2021 acquisition of General Finance and the December 2022
acquisition of Ahern Rentals , and a 9.4 percent increase in fleet productivity,
which reflects broad-based strength of demand across our end-markets. In March
2020 , we first experienced rental volume declines, in response to
shelter-in-place orders and other market restrictions, associated with COVID-19,
and the COVID-19 impact was most pronounced in 2020. Beginning in 2021 and
continuing through 2022, we have seen evidence of a continuing recovery of
activity across our end-markets. Disciplined management of capital expenditures
and fleet capacity is a component of our COVID-19 response plan, which
contributed to rental capital expenditures in 2020 that were significantly below
historic levels. While capital expenditures were significantly reduced in 2020
due to COVID-19, capital expenditures in 2021 and 2022 exceeded historic
(pre-COVID-19) levels, which contributed to the increased average OEC. Equipment
rentals represented 87 percent of total revenues in 2022.
On a segment basis, equipment rentals represented 86 percent and 91 percent of
total revenues for general rentals and specialty, respectively. General rentals
equipment rentals increased 20.9 percent as compared to 2021, primarily due to
broad-based strength of demand across our end-markets and increased average OEC.
As noted above, the impact of COVID-19 was most pronounced in 2020 and the broad
recovery we saw as 2021 progressed continued through 2022. As discussed above,
capital expenditures were significantly reduced in 2020 due to COVID-19 and then
increased in 2021 and 2022, which contributed to the year-over-year increase in
average OEC, which also includes the impact of the December 2022 acquisition of
Ahern Rentals . Specialty rentals increased 29.9 percent as compared to 2021,
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 25 percent. The increase in equipment rentals reflects
broad-based strength of demand across our end-markets, as well as increased
average OEC, both of which are discussed above.
Sales of rental equipment. For the three years in the period ended December 31,
2022 , sales of rental equipment represented approximately 9 percent of our total
revenues. Our general rentals segment accounted for most of these sales. Revenue
from sales of rental equipment was largely flat year-over-year, however the
number of units sold decreased approximately 17 percent year-over-year, as we
held on to fleet to serve strong customer demand and to ensure greater fleet
availability in the event industry supply chain challenges persist or worsen.
While the volume of sales of rental equipment decreased year-over-year, gross
margin from sales of rental equipment increased 14.2 percentage points primarily
due to strong pricing and improved channel mix.
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Sales of new equipment. For the three years in the period endedDecember 31, 2022 , sales of new equipment represented approximately 2 percent of our total revenues. 2022 sales of new equipment of$154 decreased 24.1 percent from 2021 primarily due to supply chain constraints. 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 endedDecember 31, 2022 , sales of contractor supplies represented approximately 1 percent of our total revenues. Our general rentals segment accounted for most of these sales. 2022 sales of contractor supplies did not change materially from 2021. Service and other revenues. For the three years in the period endedDecember 31, 2022 , service and other revenues represented approximately 2 percent of our total revenues. Our general rentals segment accounted for most of these sales. 2022 service and other revenues increased 22.7 percent from 2021 primarily due to growth initiatives. Fourth Quarter Items. As discussed in note 12 to the consolidated financial statements, in the fourth quarter of 2022, we issued$1.5 billion principal amount of 6 percent Senior Secured Notes due 2029. The issued debt, together with drawings on our ABL facility, was used to fund theDecember 2022 Ahern Rentals acquisition that is discussed in note 4 to the consolidated financial statements. There were no unusual or infrequently occurring items recognized in the fourth quarter of 2021 that had a material impact on our financial statements.
Segment Equipment Rentals Gross Profit
Segment equipment rentals gross profit and gross margin for each of the three
years in the period ended
General
rentals Specialty Total
2022
Equipment Rentals Gross Profit $ 2,905 $ 1,340 $ 4,245
Equipment Rentals Gross Margin 39.6 % 48.4 % 42.0 %
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 %
General rentals. For the three years in the period ended December 31, 2022 ,
general rentals accounted for 70 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, 2022 , general rentals' equipment rentals gross profit increased by
$636 , and equipment rentals gross margin increased by 220 basis points, from
2021, primarily due to better fixed cost absorption on higher revenue. As
discussed above, equipment rental revenue increased 20.9 percent from 2021,
primarily due to increased average OEC, which included the impact of the
December 2022 acquisition of Ahern Rentals , and broad-based strength of demand
across our end-markets.
Specialty. For the year ended December 31, 2022 , equipment rentals gross profit
increased by $342 , and equipment rentals gross margin increased by 160 basis
points from 2021. Gross margin increased primarily due to better cost
performance and fixed cost absorption on higher revenue. As discussed above,
equipment rental revenue increased 29.9 percent from 2021, including the impact
of the May 2021 General Finance acquisition, primarily due to increased average
OEC and broad-based strength of demand across our end-markets.
Gross Margin. Gross margins by revenue classification were as follows:
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Year Ended December 31, Change
2022 2021 2020 2022 2021
Total gross margin 42.9% 39.7% 37.3% 320 bps 240 bps
Equipment rentals 42.0% 39.8% 38.1% 220 bps 170 bps
Sales of rental equipment 58.7% 44.5% 38.7% 1,420 bps 580 bps
Sales of new equipment 19.5% 16.7% 13.4% 280 bps 330 bps Contractor supplies sales 33.3% 28.4% 29.6%
490 bps (120) bps
Service and other revenues 40.2% 39.3% 37.4% 90 bps 190 bps 2022 gross margin of 42.9 percent increased 320 basis points from 2021. Equipment rentals gross margin increased 220 basis points from 2021, primarily due to better fixed cost absorption on higher revenue. As discussed above, equipment rentals increased 23.3 percent from 2021, including the impact of theMay 2021 acquisition of General Finance and theDecember 2022 acquisition ofAhern Rentals , primarily due to increased average OEC and broad-based strength of demand across our end-markets. Gross margin from sales of rental equipment increased 14.2 percentage points from 2021, primarily due to strong pricing and improved channel mix. The gross margin fluctuations from sales of new equipment, contractor supplies sales and service and other revenues generally reflect normal variability, and such 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 endedDecember 31, 2022 ).
Other costs/(income)
The table below includes the other costs/(income) in our consolidated statements of income, as well as key associated metrics, for the three years in the period endedDecember 31, 2022 : Year Ended December 31, Change 2022 2021 2020 2022 2021 Selling, general and administrative ("SG&A") expense$ 1,400 $ 1,199 $ 979 16.8% 22.5%
SG&A expense as a percentage of revenue 12.0 % 12.3 %
11.5 % (30) bps 80 bps
Merger related costs - 3 - (100.0)% -
Restructuring charge - 2 17 (100.0)% (88.2)%
Non-rental depreciation and amortization 364 372 387 (2.2)% (3.9)%
Interest expense, net 445 424 669 5.0% (36.6)%
Other (income) expense, net (15) 7 (8) (314.3)% (187.5)%
Provision for income taxes 697 460 249 51.5% 84.7%
Effective tax rate 24.9 % 24.9 % 21.9 % - bps 300 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 year-over-year decrease in SG&A
expense as a percentage of revenue for the year ended December 31, 2022 was
primarily due to better fixed cost absorption on higher revenue, partially
offset by increases in certain discretionary expenses, including travel and
entertainment. Certain discretionary expenses were reduced significantly in 2020
and early 2021 due to COVID-19, and have increased more recently as rental
volume has increased (as noted above, the broad recovery we saw across our
end-markets as 2021 progressed continued through 2022).
The merger related costs 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 primarily reflect severance and branch closure charges
associated with our restructuring programs. We incur severance costs and branch
closure charges in the ordinary course of our business. We only include such
costs that are part of a restructuring program as restructuring charges. Since
the first such program was initiated in 2008, we have completed six
restructuring programs and have incurred total restructuring charges of $352 . As
of December 31, 2022 , there were no open restructuring programs, and the total
liability associated with the closed restructuring programs was $6 .
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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 endedDecember 31, 2022 and 2021 included aggregate debt redemption losses of$17 and$30 , respectively. The debt redemption losses primarily 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 endedDecember 31, 2022 increased by 8.6 percent year-over-year primarily due to a slight increase in average debt and higher interest rates (as noted above, the weighted average interest rates on our variable debt instruments were 3.3 percent in 2022 and 1.4 percent in 2021). Other (income) expense, 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 theU.S. federal statutory income tax rate is included in note 14 to our consolidated financial statements. The effective income tax rate for the year endedDecember 31, 2022 was flat year-over-year. Balance sheet. Accounts receivable, net increased by$327 , or 19.5 percent, fromDecember 31, 2021 toDecember 31, 2022 primarily due to increased revenue. Prepaid expenses and other assets increased by$215 , or 129.5 percent, fromDecember 31, 2021 toDecember 31, 2022 , primarily due to tax depreciation benefits associated with theAhern Rentals acquisition (see note 6 to the consolidated financial statements for further detail). Rental equipment, net increased by$2.717 billion , or 25.7 percent, fromDecember 31, 2021 toDecember 31, 2022 primarily due to the impact of theAhern Rentals acquisition and increased net rental capital expenditures (purchases of rental equipment less the proceeds from sales of rental equipment). As discussed above, capital expenditures were significantly reduced in 2020 due to COVID-19, while capital expenditures in 2021 and 2022 have exceeded historic (pre-COVID-19) levels. Property and equipment, net increased by$227 , or 37.1 percent, fromDecember 31, 2021 toDecember 31, 2022 primarily due to the impact of theAhern Rentals acquisition. Accounts payable increased by$323 , or 39.6 percent, fromDecember 31, 2021 toDecember 31, 2022 , primarily due to increased business activity, which included the impact of improved economic conditions. Accrued expenses and other liabilities increased$264 , or 30.0 percent, fromDecember 31, 2021 toDecember 31, 2022 , primarily due to the impact of increased business activity (see note 10 to the consolidated financial statements for further detail on accrued expenses and other liabilities). Total debt as ofDecember 31, 2022 increased by$1.685 billion , or 17.4 percent, fromDecember 31, 2021 , primarily due to the$1.5 billion principal amount of debt issued to partially fund theAhern Rentals acquisition. See note 12 to the consolidated financial statements for further detail on short-term and long-term debt. Deferred taxes increased by$517 , or 24.0 percent, fromDecember 31, 2021 toDecember 31, 2022 primarily due to the impact of increased capital expenditures and the equipment acquired in theAhern Rentals acquisition. See note 14 to the 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 2022 capital structure actions taken to improve our financial flexibility and liquidity. OnOctober 24, 2022 , our Board of Directors authorized a$1.25 billion share repurchase program. No repurchases were made as ofDecember 31, 2022 under this program, which was paused through the initial phase of the integration of theAhern Rentals acquisition. We expect to resume repurchases under the program in the first quarter of 2023, and to repurchase$1.0 billion of common stock under the program in 2023. Since 2012, we have repurchased a total of$4.957 billion of Holdings' common stock under our share repurchase programs (comprised of seven programs that have ended). As discussed in note 19 to the consolidated financial statements, our Board of Directors also approved a quarterly dividend program inJanuary 2023 , and the first such dividend under the program is payable inFebruary 2023 . Our principal existing sources of cash are cash generated from operations and from the sale of rental equipment, and borrowings available under our ABL and accounts receivable securitization facilities. As ofDecember 31, 2022 , we had cash and cash equivalents of$106 . Cash equivalents atDecember 31, 2022 consist of direct obligations of financial institutions rated A or better. We believe that our existing sources of cash will be sufficient to support our existing operations over the next 12 months. The table below presents financial information associated with our principal sources of cash as of and for the yearDecember 31, 2022 : 38
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ABL facility:
Borrowing capacity, net of letters of credit $ 2,650
Outstanding debt, net of debt issuance costs 1,523
Interest rate at December 31, 2022 5.4 %
Average month-end principal amount of debt outstanding (1) 1,107
Weighted-average interest rate on average debt outstanding 3.2 %
Maximum month-end principal amount of debt outstanding (1) 1,621
Accounts receivable securitization facility:
Borrowing capacity 140
Outstanding debt, net of debt issuance costs 959
Interest rate at December 31, 2022 5.3 %
Average month-end principal amount of debt outstanding 928
Weighted-average interest rate on average debt outstanding 2.7 %Maximum month-end principal amount of debt outstanding 1,097
___________________ (1)As discussed in note 12 to the consolidated financial statements, in May 2022, we redeemed$500 principal amount of our 5 1/2 percent Senior Notes, using cash and borrowings under the ABL facility. The maximum outstanding amount of debt under the ABL facility exceeded the average outstanding amount primarily due to the use of borrowings under the ABL facility to fund the partial redemption of the 5 1/2 percent Senior Notes. We expect that our principal short-term (over the next 12 months) and long-term needs for cash relating to our operations will be to fund (i) operating activities and working capital, (ii) the purchase of rental equipment and inventory items offered for sale, (iii) payments due under operating leases, (iv) debt service, (v) share repurchases, (vi) dividends and (vii) acquisitions. We plan to fund such cash requirements from our existing sources of cash. In addition, we may seek additional financing through the securitization of some of our real estate, the use of additional operating leases or other financing sources as market conditions permit. The table below presents information on payments coming due under the most significant categories of our needs for cash (excluding operating cash flows pertaining to normal business operations, such as human capital costs, which are not accurately estimable) as ofDecember 31, 2022 : 2023 2024 2025 2026 2027 Thereafter Total Debt and finance leases (1)$ 161 $ 1,007 $ 960 $ 7 $ 2,786 $ 6,526 $ 11,447 Interest due on debt (2) 564 536 501 453 389 584 3,027 Operating leases (1) 237 207 171 133 84 95 927 Purchase obligations (3) 5,149 112 1 2 - - 5,264 _________________ (1) The payments due with respect to a period represent (i) in the case of debt and finance leases, the scheduled principal payments due in such period, and (ii) in the case of operating leases, the payments due in such period for non-cancelable operating leases with initial or remaining terms of one year or more. See note 12 to the consolidated financial statements for further debt information, and note 13 for further finance lease and operating lease information. (2) Estimated interest payments have been calculated based on the principal amount of debt and the applicable interest rates as ofDecember 31, 2022 . (3) As ofDecember 31, 2022 , 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 primarily throughout 2023 and 2024. 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 and accounts receivable securitization facilities. Net rental capital expenditures (defined as purchases of rental equipment less the proceeds from sales of rental equipment) were$2.471 billion ,$2.030 billion and$103 in 2022, 2021 and 2020, respectively. 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. While capital expenditures were significantly reduced in 2020 due to COVID-19, capital expenditures in 2021 and 2022 exceeded historic (pre-COVID-19) levels. 39
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To access the capital markets, we rely on credit rating agencies to assign ratings to our securities as an indicator of credit quality. Lower credit ratings generally result in higher borrowing costs and reduced access to debt capital markets. Credit ratings also affect the costs of derivative transactions, including interest rate and foreign currency derivative transactions. As a result, negative changes in our credit ratings could adversely impact our costs of funding. Our credit ratings as ofJanuary 23, 2023 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 ofDecember 31, 2022 , we were in compliance with the covenants and other provisions of the ABL, accounts receivable securitization, term loan and repurchase facilities and the senior notes. Any failure to be in compliance with any material provision or covenant of these agreements could have a material adverse effect on our liquidity and operations. The only financial covenant that currently exists under the ABL facility is the fixed charge coverage ratio. Subject to certain limited exceptions specified in the ABL facility, the fixed charge coverage ratio covenant under the ABL facility will only apply in the future if specified availability under the ABL facility falls below 10 percent of the maximum revolver amount under the ABL facility. When certain conditions are met, cash and cash equivalents and borrowing base collateral in excess of the ABL facility size may be included when calculating specified availability under the ABL facility. As ofDecember 31, 2022 , 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 2022, we (i) generated cash from operating activities of$4.433 billion , (ii) generated cash from the sale of rental and non-rental equipment of$989 and (iii) received cash from debt proceeds, net of payments, of$1.644 billion . We used cash during this period principally to (i) purchase rental and non-rental equipment and intangible assets of$3.690 billion , (ii) purchase other companies for$2.340 billion and (iii) purchase shares of our common stock for$1.068 billion . 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 .
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.
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Year Ended December 31,
2022 2021 2020
Net cash provided by operating activities $ 4,433 $ 3,689 $ 2,658
Purchases of rental equipment (3,436) (2,998) (961)
Purchases of non-rental equipment and intangible
assets (254) (200) (197)
Proceeds from sales of rental equipment 965 968 858
Proceeds from sales of non-rental equipment 24 30 42
Insurance proceeds from damaged equipment 32 25 40
Free cash flow $ 1,764 $ 1,514 $ 2,440
Free cash flow for the year ended December 31, 2022 was $1.764 billion , an
increase of $250 as compared to $1.514 billion for the year ended December 31,
2021 . Free cash flow increased primarily due to increased net cash provided by
operating activities, partially offset by increased net rental capital
expenditures (purchases of rental equipment less the proceeds from sales of
rental equipment) and increased purchases of non-rental equipment and intangible
assets. Net rental capital expenditures increased $441 , or 22 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 and 2022 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 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 itsU.S. special purpose vehicle which holds receivable assets relating to the Company's accounts receivable securitization facility (the "SPV"), captive insurance subsidiary and immaterial subsidiaries acquired in connection with the General Finance acquisition, all of URNA'sU.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 subsidiary 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 bothStandard & 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. 41
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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 ofDecember 31, 2022 , the indebtedness of our non-guarantors was comprised of (i)$959 of outstanding borrowings by the SPV in connection with the Company's accounts receivable securitization facility, (ii)$133 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 ofDecember 31, 2022 , the amount available for distribution under the most restrictive of these covenants was$1.392 billion . The Company's total available capacity for making share repurchases and dividend payments includes the intercompany receivable balance of Holdings. As ofDecember 31, 2022 , 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$6.153 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 the financial information of the non-guarantor subsidiaries. In accordance with Rule 3-10, separate financial statements of the guarantor subsidiaries have not been presented. Our presentation below excludes the investment in the non-guarantor subsidiaries and the related income from the non-guarantor subsidiaries.
The summarized financial information of Holdings, URNA and the guarantor subsidiaries on a combined basis is as follows:
December 31, 2022 Current receivable from non-guarantor subsidiaries$26 Other current assets 615 Total current assets 641 Long-term receivable from non-guarantor subsidiaries 100 Other long-term assets 19,618 Total long-term assets 19,718 Total assets 20,359 Current liabilities 2,139 Long-term liabilities 13,349 Total liabilities 15,488 Year EndedDecember 31, 2022 Total revenues$10,482 Gross profit 4,536 Net income 1,870
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