indicated)
COVID-19
As discussed in note 1 to our condensed consolidated financial statements, the novel coronavirus ("COVID-19") is a pandemic of respiratory disease spreading from person-to-person that poses a serious public health risk, which has significantly disrupted supply chains and businesses around the world. While visibility into future economic conditions remains limited, based on increased insight into near-term indicators, we reintroduced full-year 2020 guidance inJuly 2020 , after having withdrawn it inApril 2020 . InOctober 2020 , after reporting third quarter results, we raised our full-year 2020 guidance. Prior tomid-March 2020 , our performance was largely in line with expectations. In early-March, we initiated contingency planning ahead of the impact of COVID-19 on our end-markets. This planning has focused on five key work-streams that are the basis for our crisis response plan: 1.Ensuring the safety and well-being of our employees and customers: Above all else, we are committed to ensuring the health, safety and well-being of our employees and customers. We have implemented a variety of COVID-19 safety measures, including ensuring that branches have sufficient and adequate personal protection equipment. We have also implemented appropriate social distancing practices, and increased disinfecting of equipment and facilities. 2.Leveraging our competitive advantages to support the needs of customers: We have made modifications to enhance safety measures in our operating processes and protocols that support the needs of our customers. Additionally, our digital capabilities allow customers to perform fully contactless transactions. 3.Disciplined capital expenditures: We have a substantial degree of flexibility in managing our capital expenditures and fleet capacity. While the current environment remains fluid, we expect that our 2020 capital expenditures will be down significantly year-over-year. 4.Controlling core operating expenses: A significant portion of our cash operating costs are variable in nature. Since March, we have significantly reduced overtime and temporary labor primarily in response to the impact of COVID-19. Furthermore, we continue to leverage our current capacity to reduce the need for third-party delivery and repair services, and minimize other discretionary expenses across general and administrative areas. 5.Proactively managing the balance sheet with a focus on liquidity: We are focused on ensuring that we maintain ample liquidity to meet our business needs as the impact of COVID-19 evolves. As a result, our current$500 share repurchase program was paused in mid-March. AtSeptember 30, 2020 , our total liquidity was$3.430 billion , comprised of cash and cash equivalents, and availability under the ABL and accounts receivable securitization facilities. As discussed below, inOctober 2020 , we redeemed the$750 outstanding principal amount of our 4 5/8 percent Senior Notes due 2025, using borrowings available under our ABL facility. After the redemption of the 4 5/8 percent Senior Notes due 2025, we have no note maturities until 2026. The impact of COVID-19 on our business is discussed throughout this "Management's Discussion and Analysis of Financial Condition and Results of Operations." As discussed below, the response plan above helped mitigate the impact of COVID-19 on our results. Executive Overview We are the largest equipment rental company in the world, with an integrated network of 1,181 rental locations inthe United States ,Canada andEurope . InJuly 2018 , we completed the acquisition ofBakerCorp International Holdings, Inc. ("BakerCorp"), which allowed for our entry into select European markets. Although the equipment rental industry is highly fragmented and diverse, we believe that we are well positioned to take advantage of this environment because, as a larger company, we have more extensive resources and certain competitive advantages. These include a fleet of rental equipment with a total original equipment cost ("OEC") of$14.2 billion , and a North American branch network that operates in 49 U.S. states and every Canadian province, and serves 99 of the 100 largest metropolitan areas in theU.S. TheBakerCorp acquisition discussed above added 11 European locations inFrance ,Germany , theUnited Kingdom andthe Netherlands to our branch network. Our size also gives us greater purchasing power, the ability to provide customers with a broader range of equipment and services, the ability to provide customers with equipment that is more consistently well-maintained and therefore more productive and reliable, and the ability to enhance the earning potential of our assets by transferring equipment among branches to satisfy customer needs. We offer approximately 4,000 classes of equipment for rent to a diverse customer base that includes construction and industrial companies, manufacturers, utilities, municipalities, homeowners and government entities. Our revenues are derived from the following sources: equipment rentals, sales of rental equipment, sales of new equipment, contractor supplies sales and 36 -------------------------------------------------------------------------------- Table of Contents service and other revenues. Equipment rentals represented 85 percent of total revenues for the nine months endedSeptember 30, 2020 . 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 currently managing the impact of COVID-19, as discussed above. 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 contact who 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; •A continued focus on Project XL, which is a set of eight specific work streams focused on driving profitable growth through revenue opportunities and generating incremental profitability through cost savings across our business; •The continued expansion of our trench, power and fluid solutions footprint, as well as our tools and onsite services offerings, and the cross-selling of these services throughout our network, as exhibited by our recent acquisition ofBakerCorp discussed above. We believe that the expansion of our trench, power and fluid solutions business, 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 acquisitions ofNES Rentals Holdings II, Inc. ("NES"),Neff Corporation ("Neff") andVander Holding Corporation and its subsidiaries ("BlueLine"). Strategic acquisitions allow us to invest our capital to expand our business, further driving our ability to accomplish our strategic goals. Financial Overview Prior to taking actions pertaining to our financial flexibility and liquidity, we considered the impact of COVID-19 on liquidity, and assessed 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 2020, 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 4 percent Senior Notes due 2030; •Issued$1.1 billion principal amount of 3 7/8 percent Senior Notes due 2031; •Redeemed all$800 principal amount of our 5 1/2 percent Senior Notes due 2025; •Redeemed all$1.1 billion principal amount of our 6 1/2 percent Senior Notes due 2026; and •Amended and extended our accounts receivable securitization facility, including a reduction in the size of the facility from$975 to$800 . We have also used cash generated from operations to reduce borrowings under the ABL facility, and total debt has decreased$1.377 billion , or 12.0 percent, sinceDecember 31, 2019 . InOctober 2020 , we additionally redeemed all$750 principal amount of our 4 5/8 percent Senior Notes due 2025, using borrowings available under our ABL facility. 37 -------------------------------------------------------------------------------- Table of Contents As ofSeptember 30, 2020 , we had available liquidity of$3.430 billion , comprised of cash and cash equivalents, and availability under the ABL and accounts receivable securitization facilities. As noted above, inOctober 2020 , we redeemed all$750 principal amount of our 4 5/8 percent Senior Notes due 2025, using borrowings available under our ABL facility. Net income. Net income and diluted earnings per share for the three and nine months endedSeptember 30, 2020 and 2019 are presented below. Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 Net income$ 208 $ 391 $ 593 $ 836 Diluted earnings per share$ 2.87 $ 5.08 $ 8.12 $ 10.66 Net income and diluted earnings per share for the three and nine months endedSeptember 30, 2020 and 2019 include the after-tax impacts of the items below. The tax rates applied to the items below reflect the statutory rates in the applicable entities. Three Months EndedSeptember 30 , Nine Months EndedSeptember 30, 2020 2019 2020 2019 Tax rate applied to items below 25.2 % 25.1 % 25.2 % 25.3 % Impact on Impact on Impact on Impact on Contribution diluted Contribution diluted Contribution diluted diluted to net income earnings to net income earnings to net income earnings Contribution earnings (after-tax) per share (after-tax) per share (after-tax) per share to net income (after-tax) per share Merger related costs (1) $ - $ - $ - $ - $ - $ - $ (1) $
(0.01)
Merger related intangible asset amortization (2) (40) (0.55) (47) (0.63) (125) (1.71) (148)
(1.90)
Impact on depreciation related to acquired fleet and property and equipment (3) (5) (0.06) (5) (0.07) (9) (0.12) (26)
(0.33)
Impact of the fair value mark-up of acquired fleet (4) (8) (0.12) (11) (0.14) (25) (0.35) (43)
(0.55)
Restructuring charge (5) (4) (0.06) (2) (0.02) (8) (0.11) (12)
(0.15)
Asset impairment charge (6) (7) (0.10) (2) (0.02) (27) (0.37) (5)
(0.06)
Loss on repurchase/redemption of debt securities and amendment of ABL facility (7) (119) (1.64) - - (119) (1.63) (24) (0.30) (1)This reflects transaction costs associated with theBakerCorp and BlueLine acquisitions that were completed in 2018. Merger related costs only include costs associated with major acquisitions that significantly impact our operations. For additional information, see "Results of Operations-Other costs/(income)-merger related costs" below. (2)This reflects the amortization of the intangible assets acquired in the RSC, National Pump, NES, Neff,BakerCorp and BlueLine acquisitions. (3)This reflects the impact of extending the useful lives of equipment acquired in the RSC, NES, Neff,BakerCorp and BlueLine acquisitions, net of the impact of additional depreciation associated with the fair value mark-up of such equipment. (4)This reflects additional costs recorded in cost of rental equipment sales associated with the fair value mark-up of rental equipment acquired in the RSC, NES, Neff and BlueLine acquisitions that was subsequently sold. (5)This primarily reflects severance and branch closure charges associated with our restructuring programs. For additional information, see note 4 to our condensed consolidated financial statements. 38 -------------------------------------------------------------------------------- Table of Contents (6)This reflects write-offs of leasehold improvements and other fixed assets. The three and nine months endedSeptember 30, 2020 include asset impairment charges of$10 and$36 , respectively, which were not related to COVID-19, primarily associated with the discontinuation of certain equipment programs. (7)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. 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 the 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 under 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: Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 Net income$ 208 $ 391 $ 593 $ 836 Provision for income taxes 67 119 159 245 Interest expense, net 278 147 544 478 Depreciation of rental equipment 395 417 1,216 1,211 Non-rental depreciation and amortization 97 102 292 311 EBITDA$ 1,045 $ 1,176 $ 2,804 $ 3,081 Merger related costs (1) - - - 1 Restructuring charge (2) 6 2 11 16 Stock compensation expense, net (3) 18 14 46 45 Impact of the fair value mark-up of acquired fleet (4) 12 15 34 58 Adjusted EBITDA$ 1,081 $ 1,207 $ 2,895 $ 3,201 Net income margin 9.5 % 15.7 % 9.5 % 12.1 % Adjusted EBITDA margin 49.4 % 48.5 % 46.3 % 46.4 %
The table below provides a reconciliation between net cash provided by operating activities and EBITDA and adjusted EBITDA:
39
--------------------------------------------------------------------------------
Table of Contents Nine Months Ended September 30, 2020 2019 Net cash provided by operating activities$ 2,288 $ 2,582 Adjustments for items included in net cash provided by operating activities but excluded from the calculation of EBITDA: Amortization of deferred financing costs and original issue discounts (11) (11) Gain on sales of rental equipment 230 224 Gain on sales of non-rental equipment 5 3 Insurance proceeds from damaged equipment 34 18 Merger related costs (1) - (1) Restructuring charge (2) (11) (16) Stock compensation expense, net (3) (46) (45)
Loss on repurchase/redemption of debt securities and amendment of ABL facility (5)
(159) (32) Changes in assets and liabilities (203) (217) Cash paid for interest 438 480 Cash paid for income taxes, net 239 96 EBITDA$ 2,804 $ 3,081 Add back: Merger related costs (1) - 1 Restructuring charge (2) 11 16 Stock compensation expense, net (3) 46 45 Impact of the fair value mark-up of acquired fleet (4) 34 58 Adjusted EBITDA$ 2,895 $ 3,201 ___________________ (1)This reflects transaction costs associated with theBakerCorp and BlueLine acquisitions that were completed in 2018. 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 and branch closure charges associated with our restructuring programs. For additional information, see note 4 to our condensed consolidated financial statements. (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 the RSC, NES, Neff and BlueLine 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 three months endedSeptember 30, 2020 , net income decreased$183 , or 46.8 percent, and net income margin decreased 620 basis points to 9.5 percent. For the three months endedSeptember 30, 2020 , adjusted EBITDA decreased$126 , or 10.4 percent, and adjusted EBITDA margin increased 90 basis points to 49.4 percent. The year-over-year decrease in net income margin primarily reflected 1) increased interest expense and 2) decreased gross margin from equipment rentals, partially offset by 3) decreased income tax expense. Net interest expense increased$131 year-over-year primarily due to a loss of$159 associated with the full redemption of our 5 1/2 percent Senior Notes due 2025 and 6 1/2 percent Senior Notes due 2026, partially offset by decreases in average debt and the average cost of debt. Gross margin from equipment rentals decreased 90 basis points year-over-year, with 180 basis points of the margin decline due to depreciation expense, which decreased 5.3 percent, but increased as a percentage of revenue. The 90 basis point increase in equipment rentals gross margin excluding the depreciation impact was primarily due to the combined impact of actions we have taken to manage operating costs, such as leveraging our current capacity to reduce the need for third-party delivery and repair services, and a majority of approximately$20 of non-recurring benefits recognized in the three months endedSeptember 30, 2020 , notably benefits from certain insurance recoveries. Year-over-year, the effective income tax rate was largely flat, but income tax expense decreased as a percentage of revenue. 40 -------------------------------------------------------------------------------- Table of Contents The year-over-year increase in the adjusted EBITDA margin included a 90 basis point increase in gross margin from equipment rentals (excluding depreciation), which reflects the combined impact of actions we have taken to manage operating costs, such as leveraging our current capacity to reduce the need for third-party delivery and repair services, and the majority of the non-recurring benefits discussed above. Adjusted EBITDA margin also benefited from a decrease in selling, general and administrative ("SG&A") expense, which included significant reductions in professional fees and travel and entertainment expenses, as a percentage of revenue. Excluding the$20 of non-recurring benefits discussed above, adjusted EBITDA margin was flat year-over-year. For the nine months endedSeptember 30, 2020 , net income decreased$243 , or 29.1 percent, and net income margin decreased 260 basis points to 9.5 percent. For the nine months endedSeptember 30, 2020 , adjusted EBITDA decreased$306 , or 9.6 percent, and adjusted EBITDA margin decreased 10 basis points to 46.3 percent. The year-over-year decrease in net income margin primarily reflected 1) decreased gross margin from equipment rentals and 2) increased interest expense, partially offset by lower year-over-year 3) income tax expense and 4) SG&A expense as a percentage of revenue. Gross margin from equipment rentals decreased 250 basis points year-over-year, with all of the margin decline due to an increase in depreciation expense as a percentage of revenue. The increase in depreciation expense included a$31 asset impairment charge, which was not related to COVID-19, associated with the discontinuation of certain equipment programs. Excluding the impact of the asset impairment charge, depreciation expense decreased slightly from 2019, but increased as a percentage of revenue, primarily due to COVID-19. See "Results of Operations-Gross Margin" below for further discussion of equipment rentals gross margin. Interest expense, net increased$66 year-over-year. Interest expense, net for the nine months endedSeptember 30, 2020 andSeptember 30, 2019 included debt redemption losses of$159 and$32 , respectively. Excluding the impact of these losses, interest expense, net for nine months endedSeptember 30, 2020 decreased primarily due to decreases in average debt and the average cost of debt. Year-over-year, the effective income tax rate was largely flat, but income tax expense decreased as a percentage of revenue. SG&A expense as a percentage of revenue decreased primarily due to significant reductions in professional fees and travel and entertainment expenses, which were implemented in response to COVID-19, partially offset by an increase in salaries, net of reduced bonuses, as a percentage of revenue, which also reflects the impact of COVID-19. The decrease in the adjusted EBITDA margin primarily reflects 1) lower margins 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) and service and other revenues and 2) a reduction in the proportion of revenues from higher margin (excluding depreciation) equipment rentals, partially offset by 3) the impact of decreased SG&A expenses and 4) approximately$20 of non-recurring benefits, notably including insurance recovery benefits, recognized during the nine months endedSeptember 30, 2020 . Excluding the non-recurring benefits, adjusted EBITDA margin decreased 40 basis points year-over-year. Gross margin from sales of rental equipment (excluding the adjustment reflected in the table above for the impact of the fair value mark-up of acquired fleet) decreased primarily due to changes in pricing and the mix of equipment sold. The decreased gross margin from service and other revenues reflected the impact of COVID-19, which resulted in reduced training revenue without a proportionate reduction in costs. SG&A expense as a percentage of revenue decreased primarily due to significant reductions in professional fees and travel and entertainment expenses, which were implemented in response to COVID-19, partially offset by an increase in salaries, net of reduced bonuses, as a percentage of revenue, which also reflects the impact of COVID-19. Revenues were as below. Fleet productivity is a comprehensive metric that provides greater insight into the decisions made by our managers in support of equipment rental growth and returns. Specifically, we seek to optimize the interplay of rental rates, time utilization and mix to drive rental revenue. Fleet productivity aggregates, in one metric, the impact of changes in rates, utilization and mix on owned equipment rental revenue. We believe that this metric is useful in assessing the effectiveness of our decisions on rates, time utilization and mix, particularly as they support the creation of shareholder value. The table below includes the components of the year-over-year change in rental revenue using the fleet productivity methodology. 41
--------------------------------------------------------------------------------
Table of Contents Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 Change 2020 2019 Change Equipment rentals*$ 1,861 $ 2,147 (13.3) %$ 5,286 $ 5,902 (10.4) % Sales of rental equipment 199 198 0.5 % 583 587 (0.7) % Sales of new equipment 54 67 (19.4) % 169 189 (10.6) % Contractor supplies sales 25 27 (7.4) % 73 78 (6.4) % Service and other revenues 48 49 (2.0) % 140 139 0.7 % Total revenues$ 2,187 $ 2,488 (12.1) %$ 6,251 $ 6,895 (9.3) % *Equipment rentals variance components: Year-over-year change in average OEC (4.6) % (1.1) % Assumed year-over-year inflation impact (1) (1.5) % (1.5) % Fleet productivity (2) (8.0) % (8.0) % Contribution from ancillary and re-rent revenue (3) 0.8 % 0.2 % Total change in equipment rentals (13.3) % (10.4) % ___________________ (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 2 to the condensed consolidated financial statements for a discussion of the different types of equipment rentals revenue. Rental rate changes are calculated based on the year-over-year variance in average contract rates, weighted by the prior period revenue mix. Time utilization is calculated by dividing the amount of time an asset is on rent by the amount of time the asset has been owned during the year. Mix includes the impact of changes in customer, fleet, geographic and segment mix. (3)Reflects the combined impact of changes in the other types of equipment rentals revenue (see note 2 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. Sales of rental equipment represent our revenues from the sale of used rental equipment. Sales of new equipment represent our revenues from the sale of new equipment. Contractor supplies sales represent our sales of supplies utilized by contractors, which include construction consumables, tools, small equipment and safety supplies. Services and other revenues primarily represent our revenues earned from providing repair and maintenance services on our customers' fleet (including parts sales). See note 2 to the condensed consolidated financial statements for a discussion of our revenue recognition accounting. For the three months endedSeptember 30, 2020 , total revenues of$2.187 billion decreased 12.1 percent compared with 2019. Equipment rentals and sales of rental equipment are our largest revenue types (together, they accounted for 94 percent of total revenue for the three months endedSeptember 30, 2020 ). Equipment rentals decreased 13.3 percent. COVID-19 began to impact our operations in March, and, since then, equipment rentals have decreased year-over-year, primarily due to the impact of COVID-19. Fleet productivity decreased 8.0 percent, primarily due to the impact of COVID-19, which resulted in decreased rental volume in response to shelter-in-place orders and other market restrictions. Fleet productivity improved sequentially for the quarter by 560 basis points, primarily reflecting better fleet absorption in the three months endedSeptember 30, 2020 . Average OEC decreased 4.6 percent year-over-year. Sales of rental equipment did not change materially year-over-year. For the nine months endedSeptember 30, 2020 , total revenues of$6.251 billion decreased 9.3 percent compared with 2019. Equipment rentals and sales of rental equipment are our largest revenue types (together, they accounted for 94 percent of total revenue for the nine months endedSeptember 30, 2020 ). Equipment rentals decreased 10.4 percent. COVID-19 began to impact our operations in March. Through February, equipment rentals were up slightly year-over-year. Since March, equipment rentals have decreased year-over-year, primarily due to the impact of COVID-19. Fleet productivity decreased 8.0 percent, primarily due to the impact of COVID-19 since March, when rental volume declined in response to shelter-in-place orders and other market restrictions. Through February, fleet productivity was flat year-over-year and in line with expectations. Sales of rental equipment did not change materially year-over-year. Results of Operations As discussed in note 3 to our condensed consolidated financial statements, our reportable segments are general rentals and trench, power and fluid solutions. The general rentals segment includes the rental of construction, aerial, industrial and 42 -------------------------------------------------------------------------------- Table of Contents homeowner equipment and related services and activities. The general rentals segment's customers include construction and industrial companies, manufacturers, utilities, municipalities, homeowners and government entities. This segment operates throughoutthe United States andCanada . The trench, power and fluid solutions segment is comprised of i) the Trench Safety region, which rents trench safety equipment such as trench shields, aluminum hydraulic shoring systems, slide rails, crossing plates, construction lasers and line testing equipment for underground work, ii) the Power and HVAC region, which rents power and HVAC equipment such as portable diesel generators, electrical distribution equipment, and temperature control equipment including heating and cooling equipment, and iii) the Fluid Solutions and iv) Fluid Solutions Europe regions, both of which rent equipment primarily used for fluid containment, transfer and treatment. The trench, power and fluid solutions segment's customers include construction companies involved in infrastructure projects, municipalities and industrial companies. This segment operates throughoutthe United States and inCanada andEurope . As discussed in note 3 to our condensed consolidated financial statements, we aggregate our 11 geographic regions-Carolinas, Gulf South, Industrial (which serves the geographic Gulf region and has a strong industrial presence), Mid-Atlantic, Mid Central, Midwest, Northeast, Pacific West, South, Southeast andWestern Canada -into our general rentals reporting segment. Historically, there have been variances in the levels of equipment rentals gross margins achieved by these regions. For the five year period endedSeptember 30, 2020 , three of our general rentals' regions had an equipment rentals gross margin that varied by between 10 percent and 25 percent from the equipment rentals gross margins of the aggregated general rentals' regions over the same period. For the five year period endedSeptember 30, 2020 , the general rentals' region with the lowest equipment rentals gross margin wasWestern Canada . TheWestern Canada region's equipment rentals gross margin of 31.3 percent for the five year period endedSeptember 30, 2020 was 25 percent less than the equipment rentals gross margins of the aggregated general rentals' regions over the same period. TheWestern Canada region's equipment rentals gross margin was less than the other general rentals' regions during this period primarily due to declines in the oil and gas business in the region. The rental industry is cyclical, and there historically have been regions with equipment rentals gross margins that varied by greater than 10 percent from the equipment rentals gross margins of the aggregated general rentals' regions, though the specific regions with margin variances of over 10 percent have fluctuated. We expect margin convergence going forward given the cyclical nature of the rental industry, and monitor the margin variances and confirm the expectation of future convergence on a quarterly basis. When monitoring for margin convergence, we include projected future results. We similarly monitor the margin variances for the regions in the trench, power and fluid solutions segment. The trench, power and fluid solutions segment includes the locations acquired in theJuly 2018 BakerCorp acquisition discussed above. As such, there is not a long history of the acquired locations' rental margins included in the trench, power and fluid solutions segment. When monitoring for margin convergence, we include projected future results. We monitor the trench, power and fluid solutions segment margin variances and confirm the expectation of future convergence on a quarterly basis. The historic, pre-acquisition margins for the acquiredBakerCorp locations are lower than the margins achieved at the other locations in the segment. We expect that the margins at the acquired locations will increase as we realize synergies following the acquisition, as a result of which, we expect future margin convergence. We believe that the regions that are aggregated into our segments have similar economic characteristics, as each region is capital intensive, offers similar products to similar customers, uses similar methods to distribute its products, and is subject to similar competitive risks. The aggregation of our regions also reflects the management structure that we use for making operating decisions and assessing performance. Although we believe aggregating these regions into our reporting segments for segment reporting purposes is appropriate, to the extent that there are significant margin variances that do not converge, we may be required to disaggregate the regions into separate reporting segments. Any such disaggregation would have no impact on our consolidated results of operations. These segments align our external segment reporting with how management evaluates business performance and allocates resources. We evaluate segment performance primarily based on segment equipment rentals gross profit. Our revenues, operating results, and financial condition fluctuate from quarter to quarter reflecting the seasonal rental patterns of our customers, with rental activity tending to be lower in the winter. Revenues by segment were as follows: 43
--------------------------------------------------------------------------------
Table of Contents Trench, General power and fluid rentals solutions Total Three Months EndedSeptember 30, 2020 Equipment rentals$ 1,391 $ 470$ 1,861 Sales of rental equipment 182 17 199 Sales of new equipment 47 7 54 Contractor supplies sales 17 8 25 Service and other revenues 42 6 48 Total revenue$ 1,679 $ 508$ 2,187 Three Months EndedSeptember 30, 2019 Equipment rentals$ 1,642 $ 505$ 2,147 Sales of rental equipment 183 15 198 Sales of new equipment 60 7 67 Contractor supplies sales 17 10 27 Service and other revenues 42 7 49 Total revenue$ 1,944 $ 544$ 2,488 Nine Months EndedSeptember 30, 2020 Equipment rentals$ 4,040 $ 1,246$ 5,286 Sales of rental equipment 530 53 583 Sales of new equipment 145 24 169 Contractor supplies sales 48 25 73 Service and other revenues 122 18 140 Total revenue$ 4,885 $ 1,366$ 6,251 Nine Months EndedSeptember 30, 2019 Equipment rentals$ 4,592 $ 1,310$ 5,902 Sales of rental equipment 541 46 587 Sales of new equipment 167 22 189 Contractor supplies sales 53 25 78 Service and other revenues 119 20 139 Total revenue$ 5,472 $ 1,423$ 6,895 Equipment rentals. For the three months endedSeptember 30, 2020 , equipment rentals of$1.861 billion decreased$286 , or 13.3 percent, as compared to the same period in 2019. COVID-19 began to impact our operations in March, and, since then, equipment rentals have decreased year-over-year, primarily due to the impact of COVID-19. As explained further above (see "Financial Overview-Revenues"), fleet productivity is a comprehensive measure of the combined impact of key decisions made daily by our managers regarding rental rates, time utilization and mix on the year-over-year change in owned equipment rental revenue. Fleet productivity decreased 8.0 percent, primarily due to the impact of COVID-19, which resulted in decreased rental volume in response to shelter-in-place orders and other market restrictions. Fleet productivity improved sequentially for the quarter by 560 basis points, primarily reflecting better fleet absorption in the three months endedSeptember 30, 2020 . Average OEC decreased 4.6 percent year-over-year. Equipment rentals represented 85 percent of total revenues for the three months endedSeptember 30, 2020 . For the nine months endedSeptember 30, 2020 , equipment rentals of$5.286 billion decreased$616 , or 10.4 percent, as compared to the same period in 2019. COVID-19 began to impact our operations in March. Through February, equipment rentals were up slightly year-over-year. Since March, equipment rentals have decreased year-over-year, primarily due to the impact of COVID-19. Fleet productivity decreased 8.0 percent, primarily due to the impact of COVID-19 since March, when rental volume declined in response to shelter-in-place orders and other market restrictions. Through February, fleet productivity was flat year-over-year and in line with expectations. Equipment rentals represented 85 percent of total revenues for the nine months endedSeptember 30, 2020 . 44 -------------------------------------------------------------------------------- Table of Contents For the three months endedSeptember 30, 2020 , general rentals equipment rentals decreased$251 , or 15.3 percent, as compared to the same period in 2019, primarily due to COVID-19. As noted above, COVID-19 began to impact our operations in March, and, since then, equipment rentals have decreased year-over-year in response to shelter-in-place orders and other market restrictions. As discussed above, disciplined management of capital expenditures and fleet capacity is a component of our COVID-19 response plan, and average OEC decreased year-over-year. For the three months endedSeptember 30, 2020 , equipment rentals represented 83 percent of total revenues for the general rentals segment. For the nine months endedSeptember 30, 2020 , general rentals equipment rentals decreased$552 , or 12.0 percent, as compared to the same period in 2019, primarily due to COVID-19. As noted above, COVID-19 began to impact our operations in March, when rental volume declined in response to shelter-in-place orders and other market restrictions. For the nine months endedSeptember 30, 2020 , equipment rentals represented 83 percent of total revenues for the general rentals segment. For the three months endedSeptember 30, 2020 , trench, power and fluid solutions equipment rentals decreased$35 , or 6.9 percent, as compared to the same period in 2019, primarily due to COVID-19. As noted above, COVID-19 began to impact our operations in March, and, since then, equipment rentals have decreased year-over-year in response to shelter-in-place orders and other market restrictions. For the three months endedSeptember 30, 2020 , equipment rentals represented 93 percent of total revenues for the trench, power and fluid solutions segment. For the nine months endedSeptember 30, 2020 , trench, power and fluid solutions equipment rentals decreased$64 , or 4.9 percent, as compared to the same period in 2019, primarily due to COVID-19, partially offset by a 4.8 percent increase in average OEC. As noted above, COVID-19 began to impact our operations in March, when rental volume declined in response to shelter-in-place orders and other market restrictions. For the nine months endedSeptember 30, 2020 , equipment rentals represented 91 percent of total revenues for the trench, power and fluid solutions segment. Sales of rental equipment. For the nine months endedSeptember 30, 2020 , sales of rental equipment represented approximately 9 percent of our total revenues. Our general rentals segment accounted for most of these sales. For the three and nine months endedSeptember 30, 2020 , sales of rental equipment did not change materially year-over-year. Sales of new equipment. For the nine months endedSeptember 30, 2020 , sales of new equipment represented approximately 3 percent of our total revenues. Our general rentals segment accounted for most of these sales. For the three and nine months endedSeptember 30, 2020 , sales of new equipment decreased 19.4 percent and 10.6 percent, respectively, from the same periods in 2019 primarily due to the impact of COVID-19. Contractor supplies sales. Contractor supplies sales represent our revenues associated with selling a variety of supplies, including construction consumables, tools, small equipment and safety supplies. For the nine months endedSeptember 30, 2020 , contractor supplies sales represented approximately 1 percent of our total revenues. Our general rentals segment accounted for most of these sales. Contractor supplies sales for the three and nine months endedSeptember 30, 2020 decreased 7.4 percent and 6.4 percent, respectively, from the same periods in 2019 primarily due to the impact of COVID-19. Service and other revenues. Service and other revenues primarily represent our revenues earned from providing repair and maintenance services on our customers' fleet (including parts sales). For the nine months endedSeptember 30, 2020 , service and other revenues represented approximately 2 percent of our total revenues. Our general rentals segment accounted for most of these sales. For the three and nine months endedSeptember 30, 2020 , service and other revenues did not change materially from the same periods in 2019. Segment Equipment Rentals Gross Profit Segment equipment rentals gross profit and gross margin were as follows: 45
--------------------------------------------------------------------------------
Table of Contents General Trench, power and fluid rentals solutions Total Three Months EndedSeptember 30, 2020 Equipment Rentals Gross Profit$ 543 $ 234$ 777 Equipment Rentals Gross Margin 39.0 % 49.8 % 41.8 % Three Months EndedSeptember 30, 2019 Equipment Rentals Gross Profit$ 671 $ 246$ 917 Equipment Rentals Gross Margin 40.9 % 48.7 % 42.7 % Nine Months EndedSeptember 30, 2020 Equipment Rentals Gross Profit$ 1,410 $ 577$ 1,987 Equipment Rentals Gross Margin 34.9 % 46.3 % 37.6 % Nine Months EndedSeptember 30, 2019 Equipment Rentals Gross Profit$ 1,765 $ 602$ 2,367 Equipment Rentals Gross Margin 38.4 % 46.0 % 40.1 % General rentals. For the three months endedSeptember 30, 2020 , equipment rentals gross profit decreased by$128 , and equipment rentals gross margin decreased 190 basis points, from 2019, with 220 basis points of the margin decline due to depreciation expense, which decreased 6.5 percent from 2019, but increased as a percentage of revenue, primarily due to COVID-19. As noted above, COVID-19 began to impact our operations in March, and, since then, equipment rentals have remained down year-over-year in response to shelter-in-place orders and other market restrictions. The 30 basis point increase in equipment rentals gross margin excluding the depreciation impact was primarily due to the combined impact of actions we have taken to manage operating costs, such as leveraging our current capacity to reduce the need for third-party delivery and repair services, and the one-time benefits discussed above (see "Financial Overview"). For the nine months endedSeptember 30, 2020 , equipment rentals gross profit decreased by$355 , and equipment rentals gross margin decreased 350 basis points, from 2019, with 310 basis points of the margin decline due to an increase in depreciation expense as a percentage of revenue. The increase in depreciation expense includes a$27 asset impairment charge, which was not related to COVID-19, associated with the discontinuation of certain equipment programs. Excluding the impact of the asset impairment charge, depreciation expense decreased slightly from 2019, but increased as a percentage of revenue, primarily due to COVID-19. As noted above, COVID-19 began to impact our operations in March, and, since then, equipment rentals have remained down year-over-year in response to shelter-in-place orders and other market restrictions. The remaining 40 basis point decline in equipment rentals gross margin was primarily due to the impact of COVID-19, partially offset by the combined impact of 1) actions we have taken to manage operating costs, such as the reduction of overtime and temporary labor, and the leveraging of our current capacity to reduce the need for third-party delivery and repair services, and 2) the one-time benefits discussed above (see "Financial Overview"). Trench, power and fluid solutions. For the three months endedSeptember 30, 2020 , equipment rentals gross profit decreased by$12 and equipment rentals gross margin increased by 110 basis points from 2019. The increase in the equipment rentals gross margin was primarily due to decreases in certain operating costs, including repairs and labor, partially offset by increases in depreciation expense and certain fixed expenses, such as facility costs, as a percentage of revenue. As noted above, we have reduced overtime and temporary labor primarily in response to the impact of COVID-19, and have leveraged our current capacity to reduce the need for third-party repair services. Depreciation expense was largely flat year-over-year, but increased as a percentage of revenue, primarily due to COVID-19. For the nine months endedSeptember 30, 2020 , equipment rentals gross profit decreased by$25 , and equipment rentals gross margin increased by 30 basis points from 2019. The increased gross margin primarily reflected decreases in certain operating costs, including delivery, repairs and labor, offset by increases in depreciation expense and certain fixed expenses, such as facility costs, as a percentage of revenue. As noted above, we have reduced overtime and temporary labor primarily in response to the impact of COVID-19, and have leveraged our current capacity to reduce the need for third-party delivery and repair services. Depreciation expense was largely flat year-over-year, but increased as a percentage of revenue, primarily due to COVID-19. Gross Margin. Gross margins by revenue classification were as follows: 46
--------------------------------------------------------------------------------
Table of Contents Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 Change 2020 2019 Change Total gross margin 40.5 % 41.5 % (100) bps 37.0% 39.2% (220) bps Equipment rentals 41.8 % 42.7 % (90) bps 37.6% 40.1% (250) bps Sales of rental equipment 38.2 % 38.4 % (20) bps 39.5% 38.2% 130 bps Sales of new equipment 13.0 % 13.4 % (40) bps 13.0% 13.8% (80) bps Contractor supplies sales 28.0 % 33.3 % (530) bps 28.8% 30.8% (200) bps Service and other revenues 39.6 % 44.9 % (530) bps 38.6% 46.0%
(740) bps
For the three months endedSeptember 30, 2020 , total gross margin decreased 100 basis points from the same period in 2019. Equipment rentals gross margin decreased 90 basis points year-over-year, with 180 basis points of the margin decline due to depreciation expense, which decreased 5.3 percent from 2019, but increased as a percentage of revenue, primarily due to COVID-19. The 90 basis point increase in equipment rentals gross margin excluding the depreciation impact was primarily due to the combined impact of actions we have taken to manage operating costs, such as leveraging our current capacity to reduce the need for third-party delivery and repair services, and the one-time benefits discussed above (see "Financial Overview"). The gross margin fluctuations from sales of new equipment, contractor supplies sales and service and other revenues generally reflect normal variability and, to varying degrees, the impact of COVID-19, 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 three months endedSeptember 30, 2020 ). Gross margin from service and other revenues was particularly impacted by COVID-19, which resulted in reduced training revenue without a proportionate reduction in costs. For the nine months endedSeptember 30, 2020 , total gross margin decreased 220 basis points from the same period in 2019. Equipment rentals gross margin decreased 250 basis points year-over-year, with all of the margin decline due to depreciation expense. Depreciation expense included a$31 asset impairment charge, which was not related to COVID-19, associated with the discontinuation of certain equipment programs. Excluding the impact of the asset impairment charge, depreciation expense decreased slightly from 2019, but increased as a percentage of revenue, primarily due to COVID-19. As noted above, COVID-19 began to impact our operations in March, and, since then, equipment rentals have remained down year-over-year in response to shelter-in-place orders and other market restrictions. Excluding the depreciation impact, equipment rentals gross margin was flat year-over-year, primarily reflecting the impact of COVID-19, offset by the combined impact of actions we have taken to manage operating costs, such as leveraging our current capacity to reduce the need for third-party delivery and repair services, and the one-time benefits discussed above (see "Financial Overview"). Gross margin from sales of rental equipment increased 130 basis points from the same period in 2019 primarily due to lower margin sales of fleet acquired in the BlueLine acquisition in 2019. The gross margin fluctuations from sales of new equipment, contractor supplies sales and service and other revenues generally reflect normal variability and, to varying degrees, the impact of COVID-19, 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 nine months endedSeptember 30, 2020 ). Gross margin from service and other revenues was particularly impacted by COVID-19, which resulted in reduced training revenue without a proportionate reduction in costs. Other costs/(income) The table below includes the other costs/(income) in our condensed consolidated statements of income, as well as key associated metrics, for the three and nine months endedSeptember 30, 2020 and 2019: 47
--------------------------------------------------------------------------------
Table of Contents Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 Change 2020 2019 Change Selling, general and administrative ("SG&A") expense$232 $273 (15.0)%$721 $824
(12.5)%
SG&A expense as a percentage of revenue 10.6% 11.0% (40) bps 11.5% 12.0% (50) bps Merger related costs - - -% - 1 (100.0)% Restructuring charge 6 2 200.0% 11 16 (31.3)% Non-rental depreciation and amortization 97 102 (4.9)% 292 311 (6.1)% Interest expense, net 278 147 89.1% 544 478 13.8% Other income, net (2) (1) 100.0% (6) (6) -% Provision for income taxes 67 119 (43.7)% 159 245 (35.1)% Effective tax rate 24.4% 23.3% 110 bps 21.1% 22.7% (160) bps SG&A expense primarily includes sales force compensation, information technology costs, third party professional fees, management salaries, bad debt expense and clerical and administrative overhead. SG&A expense as a percentage of revenue for the three and nine months endedSeptember 30, 2020 decreased from the same periods in 2019 primarily due to significant reductions in professional fees and travel and entertainment expenses, which were implemented in response to COVID-19, partially offset by an increase in salaries, net of reduced bonuses, as a percentage of revenue, which also reflects the impact of COVID-19. The merger related costs reflect transaction costs associated withBakerCorp and BlueLine acquisitions that were completed in 2018. We have made a number of acquisitions in the past and may continue to make acquisitions in the future. Merger related costs only include costs associated with major acquisitions that significantly impact our operations. The historic acquisitions that have included merger related costs are RSC, which had annual revenues of approximately$1.5 billion prior to the acquisition, National Pump, which had annual revenues of over$200 prior to the acquisition, NES, which had annual revenues of approximately$369 prior to the acquisition, Neff, which had annual revenues of approximately$413 prior to the acquisition,BakerCorp , which had annual revenues of approximately$295 prior to the acquisition, and BlueLine, which had annual revenues of approximately$786 prior to the acquisition. The restructuring charges primarily reflect severance and branch closure charges associated with our restructuring programs. In the fourth quarter of 2019, we initiated a restructuring program associated with the consolidation of certain common functions, the relocation of our shared-service facilities and certain other cost reduction measures. For additional information, see note 4 to the condensed consolidated financial statements. 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 three and nine months endedSeptember 30, 2020 increased 89.1 percent and 13.8 percent year-over-year, respectively. Interest expense, net for the three months endedSeptember 30, 2020 included a debt redemption loss of$159 . Interest expense, net for the nine months endedSeptember 30, 2020 andSeptember 30, 2019 included debt redemption losses of$159 and$32 , 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 three and nine months endedSeptember 30, 2020 decreased by 19.0 percent and 13.7 percent year-over-year, respectively, primarily due to decreases in average debt and the average cost of debt. The differences between the 2020 and 2019 effective tax rates and the federal statutory rate of 21 percent primarily reflect the geographical mix of income between foreign and domestic operations, the impact of state and local taxes, certain deductible and nondeductible charges, and releases of valuation allowances on foreign tax credits. InMarch 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 three and nine months endedSeptember 30, 2020 , and is not expected to impact our effective tax rate in 2020, although it will impact the timing of cash payments for taxes. As ofSeptember 30, 2020 , we have deferred employer payroll taxes of$36 48 -------------------------------------------------------------------------------- Table of Contents under the CARES Act, with approximately half of the deferral due in each of 2021 and 2022. We may defer additional future employer payroll taxes under the CARES Act. Balance sheet. Accounts receivable, net decreased by$206 , or 13.5 percent, fromDecember 31, 2019 toSeptember 30, 2020 , primarily due to reduced revenue, which reflected the impact of both COVID-19 and seasonality. Accounts payable increased by$87 , or 19.2 percent, fromDecember 31, 2019 toSeptember 30, 2020 , primarily due to a seasonal increase in capital expenditures. 49 -------------------------------------------------------------------------------- Table of Contents 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 recent 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. OnJanuary 28, 2020 , our Board of Directors authorized a new$500 share repurchase program, which commenced in the first quarter of 2020. ThroughMarch 18, 2020 , when the program was paused due to the COVID-19 pandemic, we repurchased$257 of common stock under the program. We are currently unable to estimate when, or if, the program will be restarted, and we expect to provide an update at a future date. Our principal existing sources of cash are cash generated from operations and from the sale of rental equipment, and borrowings available under our ABL facility and accounts receivable securitization facility. As ofSeptember 30, 2020 , we had cash and cash equivalents of$174 . Cash equivalents atSeptember 30, 2020 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 nine months endedSeptember 30, 2020 :
ABL facility:
Borrowing capacity, net of letters of credit $
3,091
Outstanding debt, net of debt issuance costs (1) 598 Interest rate atSeptember 30, 2020 1.4 % Average month-end principal amount of debt outstanding (1) 730 Weighted-average interest rate on average debt outstanding 2.1 %
Maximum month-end principal amount of debt outstanding (1) 1,494
Accounts receivable securitization facility (2): Borrowing capacity 165 Outstanding debt, net of debt issuance costs 634 Interest rate atSeptember 30, 2020 1.5 % Average month-end principal amount of debt outstanding 671 Weighted-average interest rate on average debt outstanding 1.9 % Maximum month-end principal amount of debt outstanding 811
___________________
(1)The outstanding amount of debt under the ABL facility and the average outstanding amount are less than the maximum outstanding amount primarily due to the use of proceeds (i) from the issuance of 4 percent Senior Notes discussed in note 6 to the condensed consolidated financial statements and (ii) from operations to reduce borrowings under the facility. At the time of the 4 percent Senior Notes offering, we indicated our expectation that we would re-borrow an amount equal to the net proceeds from the offering, along with additional borrowings under the ABL facility, to redeem the$800 principal amount of our 5 1/2 percent Senior Notes due 2025 on or afterJuly 15, 2020 . Prior to redeeming the 5 1/2 percent Senior Notes due 2025, we considered the impact of COVID-19 on liquidity, and assessed 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 August 2020, we redeemed the 5 1/2 percent Senior Notes due 2025. (2)As discussed in note 6 to the condensed consolidated financial statements, inApril 2020 , we amended the accounts receivable securitization facility to adjust, on a temporary basis, the financial tests relating to: (i) the default ratio, (ii) the delinquency ratio, (iii) the dilution ratio and (iv) days sales outstanding. The adjustments to these tests were intended to make compliance with such tests more likely for the calendar months endingApril 30, 2020 andMay 31, 2020 , and we were in compliance with such tests for these months. InJune 2020 , the accounts receivable securitization facility was further amended to (a) extend the maturity date, which may be further extended on a 364-day basis by mutual agreement with the purchasers under the facility, toJune 25, 2021 , (b) reduce the size of the facility from$975 to$800 and (c) adjust, for the calendar months ending on or afterJune 30, 2020 , the financial tests (including the method of calculation) relating to (i) the default ratio, (ii) the delinquency ratio, (iii) the dilution ratio and (iv) days sales outstanding. 50 -------------------------------------------------------------------------------- Table of Contents We expect that our principal needs for cash relating to our operations over the next 12 months will be to fund (i) operating activities and working capital, (ii) the purchase of rental equipment and inventory items offered for sale, (iii) payments due under operating leases, (iv) debt service, (v) share repurchases and (vi) acquisitions. We plan to fund such cash requirements from our existing sources of cash. In addition, we may seek additional financing through the securitization of some of our real estate, the use of additional operating leases or other financing sources as market conditions permit. 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 ofOctober 26, 2020 were as follows: Corporate Rating Outlook Moody's Ba2 Stable Standard & Poor's BB Stable A security rating is not a recommendation to buy, sell or hold securities. There is no assurance that any rating will remain in effect for a given period of time or that any rating will not be revised or withdrawn by a rating agency in the future. Loan Covenants and Compliance. As ofSeptember 30, 2020 , we were in compliance with the covenants and other provisions of the ABL, accounts receivable securitization and term loan facilities and the senior notes. Any failure to be in compliance with any material provision or covenant of these agreements could have a material adverse effect on our liquidity and operations. The only financial covenant that currently exists under the ABL facility is the fixed charge coverage ratio. Subject to certain limited exceptions specified in the ABL facility, the fixed charge coverage ratio covenant under the ABL facility will only apply in the future if specified availability under the ABL facility falls below 10 percent of the maximum revolver amount under the ABL facility. When certain conditions are met, cash and cash equivalents and borrowing base collateral in excess of the ABL facility size may be included when calculating specified availability under the ABL facility. As ofSeptember 30, 2020 , 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 (as noted above, inApril 2020 and inJune 2020 , we amended the accounts receivable securitization facility to adjust these financial tests). 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 the nine months endedSeptember 30, 2020 , we (i) generated cash from operating activities of$2.288 billion and (ii) generated cash from the sale of rental and non-rental equipment of$614 . We used cash during this period principally to (i) purchase rental and non-rental equipment of$930 , (ii) make debt payments, net of proceeds, of$1.578 billion and (ii) purchase shares of our common stock for$281 . During the nine months endedSeptember 30, 2019 , we (i) generated cash from operating activities of$2.582 billion and (ii) generated cash from the sale of rental and non-rental equipment of$613 . We used cash during this period principally to (i) purchase rental and non-rental equipment of$2.131 billion , (ii) purchase other companies for$247 , (iii) make debt payments, net of proceeds, of$144 and (iv) purchase shares of our common stock for$664 . Free Cash Flow GAAP Reconciliation. We define "free cash flow" as net cash provided by operating activities less purchases of, and plus proceeds from, equipment. The equipment purchases and proceeds are included in cash flows from investing activities. Management believes that free cash flow provides useful additional information concerning cash flow available to meet future debt service obligations and working capital requirements. However, free cash flow is not a measure of financial performance or liquidity under GAAP. Accordingly, free cash flow should not be considered an alternative to net income or cash flow from operating activities as an indicator of operating performance or liquidity. The table below provides a reconciliation between net cash provided by operating activities and free cash flow. 51
--------------------------------------------------------------------------------
Table of Contents
Nine Months EndedSeptember 30, 2020 2019
Net cash provided by operating activities
(785) (1,974) Purchases of non-rental equipment (145) (157) Proceeds from sales of rental equipment 583 587 Proceeds from sales of non-rental equipment 31 26 Insurance proceeds from damaged equipment 34 18 Free cash flow$ 2,006 $ 1,082 Free cash flow for the nine months endedSeptember 30, 2020 was$2.006 billion , an increase of$924 as compared to$1.082 billion for the nine months endedSeptember 30, 2019 . Free cash flow increased primarily due to decreased net rental capital expenditures (defined as purchases of rental equipment less the proceeds from sales of rental equipment), partially offset by reduced net cash provided by operating activities. Net rental capital expenditures decreased$1.185 billion , or 85 percent, year-over-year. Certain Information Concerning Contractual Obligations. The table below provides certain information concerning the payments coming due under certain categories of our existing contractual obligations as ofSeptember 30, 2020 : 2020 2021 2022 2023 2024 Thereafter Total Debt and finance leases (1)$ 17 $ 707 $ 43 $ 33 $ 1,371 $ 7,965 $ 10,136 Interest due on debt (2) 97 381 376 375 357 1,202 2,788 Operating leases (1) 53 201 168 134 100 145 801 Service agreements (3) 4 15 33 - - - 52 Purchase obligations (4) 212 5 - - - - 217 Transition tax on unremitted foreign earnings and profits (5) - - - - - 5 5 Total (6)$ 383 $ 1,309 $ 620 $ 542 $ 1,828 $ 9,317 $ 13,999 _________________ (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 6 to the condensed consolidated financial statements for further debt information, and note 7 for further finance lease and operating lease information. As discussed in note 6, inOctober 2020 , we redeemed all$750 principal amount of our 4 5/8 percent Senior Notes due 2025, using borrowings available under our ABL facility. The 4 5/8 percent Senior Notes due 2025 are reflected in the table above using the 2024 maturity date of the ABL facility. (2) Estimated interest payments have been calculated based on the principal amount of debt and the applicable interest rates as ofSeptember 30, 2020 . As discussed above, inOctober 2020 , we redeemed all$750 principal amount of our 4 5/8 percent Senior Notes due 2025, using borrowings available under our ABL facility. Interest on the 4 5/8 percent Senior Notes due 2025 is reflected in the table above using the interest rate on the ABL facility and the 2024 maturity date of the ABL facility. (3) These primarily represent service agreements with third parties to provide wireless and network services. (4) As ofSeptember 30, 2020 , we had outstanding purchase orders, which were negotiated in the ordinary course of business, with our equipment and inventory suppliers. These purchase commitments can generally be cancelled by us with 30 days' notice and without cancellation penalties. The equipment and inventory receipts from the suppliers for these purchases and related payments to the suppliers are primarily expected to be completed in 2020. As ofDecember 31, 2019 , we had$1.552 billion of outstanding purchase orders, which we could generally cancel with 30 days' notice and without cancellation penalties. In 2020, due primarily to COVID-19, we canceled a significant portion of our purchase orders. We will make future purchase order determinations based on our continuing assessment of the impact of COVID-19. (5) The Tax Cuts and Jobs Act, which was enacted inDecember 2017 , included a transition tax on unremitted foreign earnings and profits. We have elected to pay the transition tax amount payable of$55 over an eight-year period. The amount that we expect to pay as reflected in the table above represents the total we owe, net of an overpayment of federal taxes, which we are required to apply to the transition tax. (6) This information excludes$12 of unrecognized tax benefits. It is not possible to estimate the time period during which these unrecognized tax benefits may be paid to tax authorities. Additionally, we are exposed to various claims relating to our business, including those for which we retain portions of the losses through the application of deductibles and self-insured 52 -------------------------------------------------------------------------------- Table of Contents retentions, which we sometimes refer to as "self-insurance." Our self-insurance reserves totaled$121 atSeptember 30, 2020 . Self-insurance liabilities are based on estimates and actuarial assumptions and can fluctuate in both amount and in timing of cash settlement because historical trends are not necessarily predictive of the future, and, accordingly, are not included in the table above. Relationship between Holdings and URNA. Holdings is principally a holding company and primarily conducts its operations through its wholly owned subsidiary, URNA, and subsidiaries of URNA. Holdings licenses its tradename and other intangibles and provides certain services to URNA in connection with its operations. These services principally include: (i) senior management services; (ii) finance and tax-related services and support; (iii) information technology systems and support; (iv) acquisition-related services; (v) legal services; and (vi) human resource support. In addition, Holdings leases certain equipment and real property that are made available for use by URNA and its subsidiaries. 53
--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source