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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 ___________________________________
FORM 10-Q
___________________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2013
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number 1-14387
Commission File Number 1-13663
___________________________________ 
United Rentals, Inc.
United Rentals (North America), Inc.
(Exact Names of Registrants as Specified in Their Charters)
 ___________________________________
Delaware
Delaware
 
06-1522496
86-0933835
(States of Incorporation)
 
(I.R.S. Employer Identification Nos.)
 
 
Five Greenwich Office Park,
Greenwich, Connecticut
 
06831
(Address of Principal Executive Offices)
 
(Zip Code)
Registrants’ Telephone Number, Including Area Code: (203) 622-3131  
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     x   Yes     ¨   No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
 
x
Accelerated Filer
 
¨
 
 
Non-Accelerated Filer
 
¨
Smaller Reporting Company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     ¨   Yes     x    No
As of April 12, 2013 , there were 94,234,996 shares of United Rentals, Inc. common stock, $0.01 par value, outstanding. There is no market for the common stock of United Rentals (North America), Inc., all outstanding shares of which are owned by United Rentals, Inc.
This combined Form 10-Q is separately filed by (i) United Rentals, Inc. and (ii) United Rentals (North America), Inc. (which is a wholly owned subsidiary of United Rentals, Inc.). United Rentals (North America), Inc. meets the conditions set forth in General Instruction (H)(1)(a) and (b) of Form 10-Q and is therefore filing this report with the reduced disclosure format permitted by such instruction.

Table of Contents

UNITED RENTALS, INC.
UNITED RENTALS (NORTH AMERICA), INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2013
INDEX
 
 
 
Page
PART I
 
 
 
 
Item 1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2
 
 
 
Item 3
 
 
 
Item 4
 
 
 
PART II
 
 
 
 
Item 1
 
 
 
Item 1A
 
 
 
Item 2
 
 
 
Item 6
 
 
 
 

2
Table of Contents


CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Such statements can be identified by the use of forward-looking terminology such as “believe,” “expect,” “may,” “will,” “should,” “seek,” “on-track,” “plan,” “project,” “forecast,” “intend” or “anticipate,” or the negative thereof or comparable terminology, or by discussions of strategy or outlook. You are cautioned that our business and operations are subject to a variety of risks and uncertainties, many of which are beyond our control, and, consequently, our actual results may differ materially from those projected.

Factors that could cause actual results to differ materially from those projected include, but are not limited to, the following:

•
the possibility that RSC Holdings Inc. ("RSC") or other companies that we have acquired or may acquire could have undiscovered liabilities or involve other unexpected costs, may strain our management capabilities or may be difficult to integrate;
•
our highly leveraged capital structure requires us to use a substantial portion of our cash flow for debt service and can constrain our flexibility in responding to unanticipated or adverse business conditions;
•
a change in the pace of the recovery in our end markets. Our business is cyclical and highly sensitive to North American construction and industrial activities. Although we have recently experienced an upturn in rental activity, there is no certainty this trend will continue. If the pace of the recovery slows or construction activity declines, our revenues and, because many of our costs are fixed, our profitability, may be adversely affected;
•
inability to benefit from government spending, including spending associated with infrastructure projects;
•
restrictive covenants in our debt instruments, which can limit our financial and operational flexibility;
•
noncompliance with financial or other covenants in our debt agreements, which could result in our lenders terminating our credit facilities and requiring us to repay outstanding borrowings;
•
inability to access the capital that our businesses or growth plans may require;
•
inability to manage credit risk adequately or to collect on contracts with a large number of customers;
•
incurrence of impairment charges;
•
the outcome or other potential consequences of regulatory matters and commercial litigation;
•
increases in our loss reserves to address business operations or other claims and any claims that exceed our established levels of reserves;
•
incurrence of additional expenses (including indemnification obligations) and other costs in connection with litigation, regulatory and investigatory matters;
•
increases in our maintenance and replacement costs and decreases in the residual value of our equipment;
•
inability to sell our new or used fleet in the amounts, or at the prices, we expect;
•
turnover in our management team and inability to attract and retain key personnel;
•
rates we charge and time utilization we achieve being less than anticipated;
•
costs we incur being more than anticipated, and the inability to realize expected savings in the amounts or time frames planned;
•
dependence on key suppliers to obtain equipment and other supplies for our business on acceptable terms;
•
competition from existing and new competitors;
•
disruptions in our information technology systems;
•
the costs of complying with environmental and safety regulations;
•
labor disputes, work stoppages or other labor difficulties, which may impact our productivity, and potential enactment of new legislation or other changes in law affecting our labor relations or operations generally; and
•
shortfalls in our insurance coverage.

For a more complete description of these and other possible risks and uncertainties, please refer to our Annual Report on Form 10-K for the year ended December 31, 2012, as well as to our subsequent filings with the SEC. Our forward-looking statements contained herein speak only as of the date hereof, and we make no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances or changes in expectations.


3
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PART I. FINANCIAL INFORMATION
 
Item 1.
Financial Statements

UNITED RENTALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
 
 
March 31, 2013
 
December 31, 2012
 
(unaudited)
 
ASSETS
 
 
 
Cash and cash equivalents
$
147

 
$
106

Accounts receivable, net of allowance for doubtful accounts of $65 at March 31, 2013 and $64 at December 31, 2012
725

 
793

Inventory
103

 
68

Prepaid expenses and other assets
81

 
111

Deferred taxes
255

 
265

Total current assets
1,311

 
1,343

Rental equipment, net
4,963

 
4,966

Property and equipment, net
420

 
428

Goodwill, net
2,963

 
2,970

Other intangible assets, net
1,151

 
1,200

Other long-term assets
113

 
119

Total assets
$
10,921

 
$
11,026

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Short-term debt and current maturities of long-term debt
$
567

 
$
630

Accounts payable
406

 
286

Accrued expenses and other liabilities
396

 
435

Total current liabilities
1,369

 
1,351

Long-term debt
6,580

 
6,679

Subordinated convertible debentures
17

 
55

Deferred taxes
1,293

 
1,302

Other long-term liabilities
67

 
65

Total liabilities
9,326

 
9,452

Temporary equity (note 6)
29

 
31

Common stock—$0.01 par value, 500,000,000 shares authorized, 97,487,189 and 94,232,796 shares issued and outstanding, respectively, at March 31, 2013 and 95,891,809 and 92,984,016 shares issued and outstanding, respectively, at December 31, 2012
1

 
1

Additional paid-in capital
2,037

 
1,997

Accumulated deficit
(403
)
 
(424
)
Treasury stock at cost—3,254,393 and 2,907,793 shares at March 31, 2013 and December 31, 2012, respectively
(133
)
 
(115
)
Accumulated other comprehensive income
64

 
84

Total stockholders’ equity
1,566

 
1,543

Total liabilities and stockholders’ equity
$
10,921

 
$
11,026

See accompanying notes.

4
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UNITED RENTALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In millions, except per share amounts)
 
 
Three Months Ended
 
 
March 31,
 
 
2013

2012
 
Revenues:
 
 
 
 
Equipment rentals
$
916

 
$
523

 
Sales of rental equipment
123

 
76

 
Sales of new equipment
21

 
18

 
Contractor supplies sales
20

 
18

 
Service and other revenues
20

 
21

 
Total revenues
1,100

 
656

 
Cost of revenues:
 
 
 
 
Cost of equipment rentals, excluding depreciation
393

 
246

 
Depreciation of rental equipment
202

 
115

 
Cost of rental equipment sales
83

 
47

 
Cost of new equipment sales
17

 
15

 
Cost of contractor supplies sales
13

 
12

 
Cost of service and other revenues
7

 
8

 
Total cost of revenues
715

 
443

 
Gross profit
385

 
213

 
Selling, general and administrative expenses
160

 
102

 
RSC merger related costs
6

 
10

 
Restructuring charge
6

 
—

 
Non-rental depreciation and amortization
64

 
14

 
Operating income
149

 
87

 
Interest expense, net
118

 
68

 
Interest expense—subordinated convertible debentures
2

 
1

 
Other income, net
(1
)
 
(1
)
 
Income before provision for income taxes
30

 
19

 
Provision for income taxes
9

 
6

 
Net income
$
21

 
$
13

 
Basic earnings per share
$
0.22

 
$
0.21

 
Diluted earnings per share
$
0.19

 
$
0.17

 
See accompanying notes.

5
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UNITED RENTALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In millions)
 
 
Three Months Ended
 
 
March 31,
 
 
2013
 
2012
 
 Net income
$
21


$
13

 
 Other comprehensive (loss) income, net of tax:
 
 
 
 
 Foreign currency translation adjustments
(20
)

9

 
 Fixed price diesel swaps
—


1

 
 Other comprehensive (loss) income
(20
)
 
10

 
 Comprehensive income
$
1

 
$
23

 


See accompanying notes.


6
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UNITED RENTALS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)
(In millions)
 
 
Common Stock
 
Additional
 
 
 
Treasury Stock
 
Accumulated
Other
 
Number of
Shares (1)
 
Amount
 
Paid-in
Capital
 
Accumulated
Deficit
 
Number of
Shares
 
Amount
 
Comprehensive
Income
Balance at December 31, 2012
93

 
$
1

 
$
1,997

 
$
(424
)
 
3

 
$
(115
)
 
$
84

Net income
 
 
 
 
 
 
21

 
 
 
 
 
 
Foreign currency translation adjustments
 
 
 
 
 
 
 
 
 
 
 
 
(20
)
Stock compensation expense, net
 
 
 
 
9

 
 
 
 
 
 
 
 
Exercise of common stock options
 
 
 
 
3

 
 
 
 
 
 
 
 
Conversion of subordinated convertible debentures
1

 
 
 
38

 
 
 
 
 
 
 
 
4 percent Convertible Senior Notes
 
 
 
 
2

 
 
 
 
 
 
 
 
Shares repurchased and retired
 
 
 
 
(12
)
 
 
 
 
 
 
 
 
Repurchase of common stock
 
 
 
 
 
 
 
 
—

 
(18
)
 
 
Balance at March 31, 2013
94

 
$
1

 
$
2,037

 
$
(403
)
 
3

 
$
(133
)
 
$
64

 
(1) An aggregate of 30 million net shares were issued during the year ended December 31, 2012. The shares were primarily issued in connection with the acquisition of RSC Holdings Inc. discussed in in note 1 to the condensed consolidated financial statements.


See accompanying notes.

7
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UNITED RENTALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In millions)
 
Three Months Ended
 
March 31,
 
2013
 
2012
Cash Flows From Operating Activities:
 
 
 
Net income
$
21

 
$
13

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
266

 
129

Amortization of deferred financing costs and original issue discounts
6

 
5

Gain on sales of rental equipment
(40
)
 
(29
)
Gain on sales of non-rental equipment
(1
)
 
(1
)
Stock compensation expense, net
9

 
4

RSC merger related costs
6

 
10

Restructuring charge
6

 
—

Loss on retirement of subordinated convertible debentures
1

 
—

Increase in restricted cash- RSC merger related debt interest
—

 
(25
)
Increase in deferred taxes
3

 
1

Changes in operating assets and liabilities, net of amounts acquired:
 
 
 
Decrease in accounts receivable
65

 
50

Increase in inventory
(34
)
 
(41
)
Decrease in prepaid expenses and other assets
30

 
11

Increase in accounts payable
121

 
172

Decrease in accrued expenses and other liabilities
(50
)
 
(45
)
Net cash provided by operating activities
409

 
254

Cash Flows From Investing Activities:
 
 
 
Purchases of rental equipment
(289
)
 
(390
)
Purchases of non-rental equipment
(14
)
 
(36
)
Proceeds from sales of rental equipment
123

 
76

Proceeds from sales of non-rental equipment
5

 
7

Purchases of other companies
—

 
(57
)
Net cash used in investing activities
(175
)
 
(400
)
Cash Flows From Financing Activities:
 
 
 
Proceeds from debt
631

 
3,351

Payments of debt, including subordinated convertible debentures
(795
)
 
(385
)
Increase in restricted cash- proceeds from RSC merger related debt
—

 
(2,825
)
Proceeds from the exercise of common stock options
3

 
5

Common stock repurchased
(30
)
 
(8
)
Payments of financing costs
—

 
(3
)
Net cash (used in) provided by financing activities
(191
)
 
135

Effect of foreign exchange rates
(2
)
 
1

Net increase (decrease) in cash and cash equivalents
41

 
(10
)
Cash and cash equivalents at beginning of period
106

 
36

Cash and cash equivalents at end of period
$
147

 
$
26

Supplemental disclosure of cash flow information:
 
 
 
Cash paid for income taxes, net
$
15

 
$
12

Cash paid for interest, including subordinated convertible debentures
90

 
40

See accompanying notes.

8

UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data, unless otherwise indicated)
1 . Organization, Description of Business and Basis of Presentation
United Rentals, Inc. (“Holdings,” “URI” or the “Company”) is principally a holding company and conducts its operations primarily through its wholly owned subsidiary, United Rentals (North America), Inc. (“URNA”), and subsidiaries of URNA. Holdings’ primary asset is its sole ownership of all issued and outstanding shares of common stock of URNA. URNA’s various credit agreements and debt instruments place restrictions on its ability to transfer funds to its shareholder.
We rent equipment to a diverse customer base that includes construction and industrial companies, manufacturers, utilities, municipalities, homeowners and government entities in the United States and Canada. In addition to renting equipment, we sell new and used rental equipment, as well as related contractor supplies, parts and service.
On April 30, 2012 (“the acquisition date”), we acquired 100 percent of the outstanding common shares and voting interest of RSC Holdings Inc. (“RSC”). The results of RSC's operations have been included in our condensed consolidated financial statements since the acquisition date. RSC was one of the largest equipment rental providers in North America, and had a network of 440 rental locations in 43 U.S. states and three Canadian provinces as of December 31, 2011. Our total revenues were $1,100 for the three months ended March 31, 2013 . Pro forma total revenues for the three months ended March 31, 2012 , comprised of United Rentals and RSC historic revenues, were $1,064 .
We have prepared the accompanying unaudited condensed consolidated financial statements in accordance with the accounting policies described in our annual report on Form 10-K for the year ended December 31, 2012 (the “2012 Form 10-K”) and the interim reporting requirements of Form 10-Q. Accordingly, certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the 2012 Form 10-K.
In our opinion, all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of financial condition, operating results and cash flows for the interim periods presented have been made. Interim results of operations are not necessarily indicative of the results of the full year.
2 . Segment Information
Our reportable segments are general rentals and trench safety, power and HVAC (“heating, ventilating and air conditioning”). The general rentals segment includes the rental of construction, infrastructure, 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. The general rentals segment comprises 12 geographic regions—Eastern Canada, Gulf South, Industrial (which serves the geographic Gulf region and has a strong industrial presence), Mid-Atlantic, Mid-Central, Midwest, Mountain West, Northeast, Pacific West, South, Southeast and Western Canada—and operates throughout the United States and Canada. The trench safety, power and HVAC segment includes the rental of specialty construction products and related services. The trench safety, power and HVAC segment is comprised of 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, and 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. The trench safety, power and HVAC segment’s customers include construction companies involved in infrastructure projects, municipalities and industrial companies. This segment operates throughout the United States and in Canada. These segments align our external segment reporting with how management evaluates and allocates resources. We evaluate segment performance based on segment equipment rentals gross profit.
 
The following tables set forth financial information by segment.  

9
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share data, unless otherwise indicated)


 
General
rentals
 
Trench safety,
power and  HVAC
 
Total
Three Months Ended March 31, 2013
 
 
 
 
 
Equipment rentals
$
854

 
$
62

 
$
916

Sales of rental equipment
119

 
4

 
123

Sales of new equipment
20

 
1

 
21

Contractor supplies sales
18

 
2

 
20

Service and other revenues
19

 
1

 
20

Total revenue
1,030

 
70

 
1,100

Depreciation and amortization expense
252

 
14

 
266

Equipment rentals gross profit
295

 
26

 
321

Capital expenditures
288

 
15

 
303

Three Months Ended March 31, 2012
 
 
 
 
 
Equipment rentals
$
475

 
$
48

 
$
523

Sales of rental equipment
74

 
2

 
76

Sales of new equipment
17

 
1

 
18

Contractor supplies sales
16

 
2

 
18

Service and other revenues
20

 
1

 
21

Total revenue
602

 
54

 
656

Depreciation and amortization expense
119

 
10

 
129

Equipment rentals gross profit
144

 
18

 
162

Capital expenditures
413

 
13

 
426

 
March 31,
2013
 
December 31,
2012
Total reportable segment assets
 
 
 
General rentals
$
10,448

 
$
10,545

Trench safety, power and HVAC
473

 
481

Total assets
$
10,921

 
$
11,026

 
Equipment rentals gross profit is the primary measure management reviews to make operating decisions and assess segment performance. The following is a reconciliation of equipment rentals gross profit to income before provision for income taxes:  

Three Months Ended

 
March 31,

 
2013

2012

Total equipment rentals gross profit
$
321

 
$
162

 
Gross profit from other lines of business
64

 
51

 
Selling, general and administrative expenses
(160
)
 
(102
)
 
RSC merger related costs
(6
)
 
(10
)
 
Restructuring charge
(6
)
 
—

 
Non-rental depreciation and amortization
(64
)
 
(14
)
 
Interest expense, net
(118
)
 
(68
)
 
Interest expense- subordinated convertible debentures
(2
)
 
(1
)
 
Other income, net
1

 
1

 
Income before provision for income taxes
$
30

 
$
19




10
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share data, unless otherwise indicated)


3 . Restructuring and Asset Impairment Charges
Closed Restructuring Program
Between 2008 and 2011 and in recognition of the very challenging economic environment, we were intensely focused on redu cing our operating costs. During this period, we reduced our employee headcount from approximately 10,900 at January 1, 2008 (the beginning of the restructuring period) to approximately 7,500 at December 31, 2011 (the end of the restructuring period). Additionally, we reduced our branch network from 697 locations at January 1, 2008 to 529 locations at December 31, 2011. For the three months ended March 31, 2013 , the restructuring charges primarily reflected branch closure charges due to continuing lease obligations at vacant facilities.
Current Restructuring Program
In the second quarter of 2012, we initiated a new restructuring program related to severance costs and branch closure charges associated with the RSC acquisition. The branch closure charges principally relate to continuing lease obligations at vacant facilities closed subsequent to the RSC acquisition. As of March 31, 2013 , our employee headcount is approximately 11,400 and our branch network has 830 rental locations. Subsequent to March 31, 2013 , we expect to incur approximately $5 of additional charges in connection with the restructuring, which is expected to be substantially complete by June 30, 2013 .
The table below provides certain information concerning our restructuring charges for the three months ended March 31, 2013 :
 
 
 
Reserve Balance at
 
Charged to
Costs and
Expenses(1)
 
Payments
and Other
 
Reserve Balance at
Description 
 
December 31, 2012
 
 
 
March 31, 2013
Closed Restructuring Program
 
 
 
 
 
 
 
 
Branch closure charges
 
$
19

 
$
1

 
$
(3
)
 
$
17

Severance costs
 
—

 
—

 
—

 
—

Total
 
$
19

 
$
1

 
$
(3
)
 
$
17

Current Restructuring Program
 
 
 
 
 
 
 
 
Branch closure charges
 
$
33

 
$
3

 
$
(7
)
 
$
29

Severance costs
 
9

 
2

 
(4
)
 
7

Total
 
$
42

 
$
5

 
$
(11
)
 
$
36

Total
 
 
 
 
 
 
 
 
Branch closure charges
 
$
52

 
$
4

 
$
(10
)
 
$
46

Severance costs
 
9

 
2

 
(4
)
 
7

Total
 
$
61

 
$
6

 
$
(14
)
 
$
53

 
_________________
(1)
Reflected in our condensed consolidated statements of income as “Restructuring charge.” These charges are not allocated to our reportable segments.
  Asset Impairment Charges
In addition to the restructuring charges discussed above, during the three months ended March 31, 2013 and 2012 , we recorded asset impairment charges of $1 and $0 , respectively, in our general rentals segment. The asset impairment charges are primarily reflected in non-rental depreciation and amortization in the accompanying consolidated statements of income and principally relate to write-offs of leasehold improvements and other fixed assets in connection with the restructuring activity discussed above.
4 . Derivatives
We recognize all derivative instruments as either assets or liabilities at fair value, and recognize changes in the fair value of the derivative instruments based on the designation of the derivative. For derivative instruments that are designated and qualify as hedging instruments, we designate the hedging instrument, based upon the exposure being hedged, as either a fair value hedge or a cash flow hedge. As of March 31, 2013 , we do not have any outstanding derivative instruments designated as fair value hedges. The effective portion of the changes in fair value of derivatives that are designated as cash flow hedges is recorded as a component of accumulated other comprehensive income. Amounts included in accumulated other comprehensive

11
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share data, unless otherwise indicated)


income for cash flow hedges are reclassified into earnings in the same period that the hedged item is recognized in earnings. The ineffective portion of changes in the fair value of derivatives designated as cash flow hedges is recorded currently in earnings. For derivative instruments that do not qualify for hedge accounting, we recognize gains or losses due to changes in fair value in our condensed consolidated statements of income during the period in which the changes in fair value occur.
We are exposed to certain risks related to our ongoing business operations. During the three months ended March 31, 2013 , the primary risks we managed using derivative instruments were diesel price risk and foreign currency exchange rate risk. At March 31, 2013 , we had outstanding fixed price swap contracts on diesel purchases which were entered into to mitigate the price risk associated with forecasted purchases of diesel. During the three months ended March 31, 2013 , we entered into forward contracts to purchase Canadian dollars to mitigate the foreign currency exchange rate risk associated with certain Canadian dollar denominated intercompany loans. At March 31, 2013 and December 31, 2012 , there were no outstanding forward contracts to purchase Canadian dollars. The outstanding forward contracts on diesel purchases were designated and qualify as cash flow hedges and the forward contracts to purchase Canadian dollars represented derivative instruments not designated as hedging instruments.
Fixed Price Diesel Swaps
The fixed price swap contracts on diesel purchases that were outstanding at March 31, 2013 were designated and qualify as cash flow hedges and the effective portion of the gain or loss on these contracts is reported as a component of accumulated other comprehensive income and is reclassified into earnings in the period during which the hedged transaction affects earnings (i.e., when the hedged gallons of diesel are used). The remaining gain or loss on the fixed price swap contracts in excess of the cumulative change in the present value of future cash flows of the hedged item, if any (i.e., the ineffective portion), is recognized in our condensed consolidated statements of income during the current period. As of March 31, 2013 , we had outstanding fixed price swap contracts covering 8.6 million gallons of diesel which will be purchased throughout 2013 and 2014 .
Foreign Currency Forward Contracts
The forward contracts to purchase Canadian dollars, which were all settled as of March 31, 2013 , represented derivative instruments not designated as hedging instruments and gains or losses due to changes in the fair value of the forward contracts were recognized in our condensed consolidated statements of income during the period in which the changes in fair value occurred. During the three months ended March 31, 2013 , forward contracts were used to purchase $70 Canadian dollars, representing the total amount due at maturity for certain Canadian dollar denominated intercompany loans that were settled during the three months ended March 31, 2013 . Upon maturity, the proceeds from the forward contracts were used to pay down the Canadian dollar denominated intercompany loans.
Financial Statement Presentation
As of March 31, 2013 and December 31, 2012 , $1 and less than $1 were reflected in prepaid expenses and other assets, respectively, less than $1 was reflected in accrued expenses and other liabilities, and less than $1 was refle cted in accumulated other comprehensive income in our condensed consolidated balance sheets associated with the outstanding fixed price swap contracts that were designated and qualify as cash flow hedges.
The effect of our derivative instruments on our condensed consolidated statements of income for the three months ended March 31, 2013 and 2012 was as follows:
 

12
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share data, unless otherwise indicated)


 
 
 
Three Months Ended March 31, 2013
 
Three Months Ended March 31, 2012
 
Location of income
(expense)
recognized on
derivative/hedged item
 
Amount of  income
(expense)
recognized
on derivative
 
Amount of  income
(expense)
recognized
on hedged item
 
Amount of  income
(expense)
recognized
on derivative
 
Amount of  income
(expense)
recognized
on hedged item
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
Fixed price diesel swaps
Other income
(expense), net (1)
 
 $ *

 
 
 
 $ *

 
 
 
Cost of equipment
rentals, excluding
depreciation (2),
(3)
 
 *

 
$
(9
)
 
 *

 
$
(5
)
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
Foreign currency forward contracts (4)
Other income
(expense), net
 
(2
)
 
2

 
—

 
—

*
Amounts are insignificant (less than $1 ).
(1)
Represents the ineffective portion of the fixed price diesel swaps.
(2)
Amounts recognized on derivative represent the effective portion of the fixed price diesel swaps.
(3)
Amounts recognized on hedged item reflect the use of 2.2 million and 1.2 million gallons of diesel covered by the fixed price swaps during the three months ended March 31, 2013 and 2012 , respectively. These amounts are reflected, net of cash received from the counterparties to the fixed price swaps, in operating cash flows in our condensed consolidated statement of cash flows.
(4)
Insignificant amounts were reflected in our condensed consolidated statement of cash flows associated with the forward contracts to purchase Canadian dollars, as the cash impact of the loss recognized on the derivative was offset by the gain recognized on the hedged item.

5 . Fair Value Measurements
We account for certain assets and liabilities at fair value. We categorize each of our fair value measurements in one of the following three levels based on the lowest level input that is significant to the fair value measurement in its entirety:
Level 1- Inputs to the valuation methodology are unadjusted quoted prices in active markets for identical assets.
Level 2- Observable inputs other than quoted prices in active markets for identical assets and liabilities include:
a)
quoted prices for similar assets in active markets;
b)
quoted prices for identical or similar assets in inactive markets;
c)
inputs other than quoted prices that are observable for the asset;
d)
inputs that are derived principally from or corroborated by observable market data by correlation or other means.
If the asset has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset.
Level 3- Inputs to the valuation methodology are unobservable (i.e., supported by little or no market activity) and significant to the fair value measure.
Assets and Liabilities Measured at Fair Value
As of March 31, 2013 and December 31, 2012 , our only assets and liabilities measured at fair value were our fixed price diesel swaps contracts, which are Level 2 derivatives measured at fair value on a rec urring basis. As of March 31, 2013 and December 31, 2012 , $1 and less than $1 were reflected in prepaid expenses and other assets, respectively, and less than $1 was reflected in accrued expenses and other liabilities in our condensed consolidated balance sheets, respectively, reflecting the fair

13

values of the fixed price diesel swaps contracts. As discussed in note 4 to the condensed consolidated financial statements, we entered into the fixed price swap contracts on diesel purchases to mitigate the price risk associated with forecasted purchases of diesel. Fair value is determined based on observable market data. As of March 31, 2013 , we have fixed price swap contracts that mature thro ughout 2013 and 2014 c overing 8.6 million gallons of diesel which we will buy at the average contract price of $3.87 per gallon, while the average forward price for the hedged gallons was $3.93 per gallon as of March 31, 2013 .
 
Fair Value of Financial Instruments
The carrying amounts reported in our condensed consolidated balance sheets for accounts receivable, accounts payable and accrued expenses and other liabilities approximate fair value due to the immediate to short-term maturity of these financial instruments. The fair values of our ABL facility, accounts receivable securitization facility and capital leases approximate their book values as of March 31, 2013 and December 31, 2012 . The estimated fair values of our financial instruments as of March 31, 2013 and December 31, 2012 have been calculated based upon available market information, and are presented below by level in the fair value hierarchy:  
 
March 31, 2013
 
December 31, 2012
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Level 1:
 
 
 
 
 
 
 
Subordinated convertible debentures
$
17

 
$
22

 
$
55

 
$
63

Senior and senior subordinated notes
5,386

 
5,921

 
5,387

 
5,881

Level 2:
 
 
 
 
 
 
 
4 percent Convertible Senior Notes (1)
139

 
155

 
137

 
155

___________________ 
(1)
The fair value of the 4 percent Convertible Senior Notes is based on the market value of comparable notes. Consistent with the carrying amount, the fair value excludes the equity component of the notes. To exclude the equity component and calculate the fair value, we used an effective interest rate of 6.7 percent.

6 . Debt and Subordinated Convertible Debentures
Debt consists of the following:  
 
March 31, 2013
 
December 31, 2012
URNA and subsidiaries debt:
 
 
 
Accounts Receivable Securitization Facility (1)
$
390

 
$
453

$1.9 billion ABL Facility (2)
1,091

 
1,184

5  3 / 4  percent Senior Secured Notes
750

 
750

10  1 / 4  percent Senior Notes
222

 
223

9  1 / 4  percent Senior Notes
494

 
494

7  3 / 8  percent Senior Notes
750

 
750

8  3 / 8  percent Senior Subordinated Notes
750

 
750

8  1 / 4  percent Senior Notes
695

 
695

7 5 / 8  percent Senior Notes
1,325

 
1,325

6  1 / 8  percent Senior Notes
400

 
400

Capital leases
141

 
148

Total URNA and subsidiaries debt
7,008

 
7,172

Holdings:
 
 
 
4 percent Convertible Senior Notes (3)
139

 
137

Total debt (4)
7,147

 
7,309

Less short-term portion (5)
(567
)
 
(630
)
Total long-term debt
$
6,580

 
$
6,679

 ___________________


14
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share data, unless otherwise indicated)


(1)
In February 2013 , we amended our accounts receivable securitization facility to increase the facility size from $ 475 to $ 550 . An additional purchaser was also added to the facility, and the facility was not otherwise amended. At March 31, 2013 , $60 was available under our accounts receivable securitization facility. The interest rate applicable to the accounts receivable securitization facility was 0.8 percent at March 31, 2013 . During the three months ended March 31, 2013 , the monthly average amount outstanding under the accounts receivable securitization facility, including the former facility and the amended facility, was $412 , and the weighted-average interest rate thereon was 0.8 percent . The maximum month-end amount outstanding under the accounts receivable securitization facility, including the former facility and the amended facility, during the three months ended March 31, 2013 was $435 . Borrowings under the accounts receivable securitization facility are permitted only to the extent that the face amount of the receivables in the collateral pool, net of applicable reserves, exceeds the outstanding loans. As of March 31, 2013 , there were $ 451 of receivables, net of applicable reserves, in the collateral pool.
(2)
At March 31, 2013 , $748 was available under our ABL facility, net of $61 of letters of credit. The interest rate applicable to the ABL facility was 2.3 percent at March 31, 2013 . During the three months ended March 31, 2013 , the monthly average amount outstanding under the ABL facility was $1,014 , and the weighted-average interest rate thereon was 2.3 percent . The maximum month-end amount outstanding under the ABL facility during the three months ended March 31, 2013 was $1,091 .
(3)
The difference between the March 31, 2013 carrying value of the 4 percent Convertible Senior Notes and the $168 principal amount reflects the $29 unamortized portion of the original issue discount recognized upon issuance of the notes, which is being amortized through the maturity date of November 15, 2015. Because the 4 percent Convertible Senior Notes were redeemable at March 31, 2013 , an amount equal to the $29 unamortized portion of the original issue discount is separately classified in our condensed consolidated balance sheets and referred to as “temporary equity.” Based on the price of our common stock during the first quarter of 2013, holders of the 4 percent Convertible Senior Notes have the right to redeem the notes during the second quarter of 2013 at a conversion price of $11.11 per share of common stock. Since April 1, 2013 (the beginning of the second quarter), none of the 4 percent Convertible Senior Notes were redeemed.
(4)
In August 1998, a subsidiary trust of Holdings (the “Trust”) issued and sold $300 of 6  1 / 2 percent Convertible Quarterly Income Preferred Securities (“QUIPS”) in a private offering. The Trust used the proceeds from the offering to purchase 6  1 / 2 percent subordinated convertible debentures due 2028 (the “Debentures”), which resulted in Holdings receiving all of the net proceeds of the offering. The QUIPS are non-voting securities, carry a liquidation value of $50 (fifty dollars) per security and are convertible into Holdings’ common stock. During the three months ended March 31, 2013 , an aggregate of $38 of QUIPS was converted into Holdings' common stock. In connection with this transaction, we retired $38 principal amount of our subordinated convertible debentures and recognized a loss of $1 , inclusive of the write-off of capitalized debt issuance costs. This loss is reflected in interest expense-subordinated convertible debentures in our condensed consolidated statements of income. Since April 1, 2013 (the beginning of the second quarter), an additional $ 2 of QUIPS was converted into Holdings' common stock. Total debt at March 31, 2013 and December 31, 2012 excludes $17 and $55 of these Debentures, respectively, which are separately classified in our condensed consolidated balance sheets and referred to as “subordinated convertible debentures.” The subordinated convertible debentures reflect the obligation to our subsidiary that has issued the QUIPS. This subsidiary is not consolidated in our financial statements because we are not the primary beneficiary of the Trust.
(5)
As of March 31, 2013 , our short-term debt primarily reflects $390 of borrowings under our accounts receivable securitization facility and $139 of 4 percent Convertible Senior Notes. The 4 percent Convertible Senior Notes mature in 2015, but are reflected as short-term debt because they are redeemable at March 31, 2013 .
Convertible Note Hedge Transactions
In connection with the November 2009 issuance of $173 aggregate principal amount of 4 percent Convertible Senior Notes, Holdings entered into convertible note hedge transactions with option counterparties. The convertible note hedge transactions cost $26 , and decreased additional paid-in capital by $17 , net of taxes, in our accompanying condensed consolidated statements of stockholders’ equity. The convertible note hedge transactions cover, subject to anti-dilution adjustments, 15.1 million shares of our common stock. The convertible note hedge transactions are intended to reduce, subject to a limit, the potential dilution with respect to our common stock upon conversion of the 4 percent Convertible Senior Notes. The effect of the convertible note hedge transactions is to increase the effective conversion price to $15.56 per share, equal to an approximately 75 percent premium over the $8.89 closing price of our common stock at issuance. The effective conversion price is subject to change in certain circumstances, such as if the 4 percent Convertible Senior Notes are converted prior to May 15, 2015 . In the event the market value of our common stock exceeds the effective conversion price per share, the settlement amount received from such transactions will only partially offset the potential dilution. For example, if, at the time of exercise

15
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share data, unless otherwise indicated)


of the conversion right, the price of our common stock was $50.00 or $55.00 per share, assuming an effective conversion price of $15.56 per share, on a net basis, we would issue 10.4 million or 10.8 million shares, respectively.
Loan Covenants and Compliance
As of March 31, 2013 , we were in compliance with the covenants and other provisions of the ABL facility, the accounts receivable securitization facility, the senior notes and the QUIPS. 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.
In October 2011, we amended the ABL facility. The only material financial covenants which currently exist relate to the fixed charge coverage ratio and the senior secured leverage ratio under the ABL facility. Since the October 2011 amendment of the ABL facility and through March 31, 2013 , availability under the ABL facility has exceeded the required threshold and, as a result, these maintenance covenants have been inapplicable. Subject to certain limited exceptions specified in the amended ABL facility, the fixed charge coverage ratio and the senior secured leverage ratio under the amended ABL facility will only apply in the future if availability under the amended ABL facility falls below the greater of 10 percent of the maximum revolver amount under the amended ABL facility and $150 . 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.

7 . Legal and Regulatory Matters
In addition to the disclosures provided in note 15 to our consolidated financial statements for the year ended December 31, 2012 filed on Form 10-K on January 23, 2013, we are also subject to a number of claims and proceedings that generally arise in the ordinary conduct of our business. These matters include, but are not limited to, general liability claims (including personal injury, product liability, and property and auto claims), indemnification and guarantee obligations, employee injuries and employment-related claims, self-insurance obligations and contract and real estate matters. Based on advice of counsel and available information, including current status or stage of proceeding, and taking into account accruals for matters where we have established them, we currently believe that any liabilities ultimately resulting from these ordinary course claims and proceedings will not, individually or in the aggregate, have a material adverse effect on our consolidated financial condition, results of operations or cash flows .

16
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share data, unless otherwise indicated)


8 . Earnings Per Share
Basic earnings per share is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding. Diluted earnings per share is computed by dividing net income available to common stockholders by the weighted-average number of common shares plus the effect of dilutive potential common shares outstanding during the period. Diluted earnings per share for the three months ended March 31, 2013 and 2012 excludes the impact of approximately 1.2 million and 1.3 million common stock equivalents, respectively, since the effect of including these securities would be anti-dilutive. The following table sets forth the computation of basic and diluted earnings per share (shares in thousands):
 
 
Three Months Ended
 
 
March 31,
 
 
2013
 
2012
 
Numerator:
 
 
 
 
Net income
$
21

 
$
13

 
Convertible debt interest—1  7 / 8  percent notes
—

 
—

 
Net income available to common stockholders
$
21

 
$
13

 
Denominator:
 
 
 
 
Denominator for basic earnings per share—weighted-average common shares
93,310

 
63,131

 
Effect of dilutive securities:
 
 
 
 
Employee stock options and warrants
619

 
709

 
Convertible subordinated notes—1  7 / 8  percent
—

 
1,015

 
Convertible subordinated notes—4 percent
11,866

 
10,794

 
Restricted stock units
585

 
617

 
Denominator for diluted earnings per share—adjusted weighted-average common shares
106,380

 
76,266

 
Basic earnings per share
$
0.22

 
$
0.21

 
Diluted earnings per share
$
0.19

 
$
0.17

 


17
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share data, unless otherwise indicated)


9 . Condensed Consolidating Financial Information of Guarantor Subsidiaries
URNA is 100 percent owned by Holdings (“Parent”) and has outstanding (i) certain indebtedness that is guaranteed by Parent, (ii) certain indebtedness that is guaranteed by both Parent and, with the exception of its U.S. special purpose vehicle which holds receivable assets relating to the Company’s accounts receivable securitization (the “SPV”), all of URNA’s U.S. subsidiaries (the “guarantor subsidiaries”) and (iii) certain indebtedness that is guaranteed by the guarantor subsidiaries. However, this indebtedness is not guaranteed by URNA’s foreign subsidiaries and the SPV (together, the “non-guarantor subsidiaries”). The guarantor subsidiaries are all 100 percent -owned and the guarantees are made on a joint and several basis. The guarantees 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 subsidiary guarantor, the sale of all or substantially all of the subsidiary guarantor's assets, the requirements for legal defeasance or covenant defeasance under the applicable indenture being met or designating the subsidiary guarantor as an unrestricted subsidiary for purposes of the applicable covenants. The 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 each guarantor will not exceed the maximum amount that can be guaranteed without making the guarantee void under fraudulent conveyance laws. Based on our understanding of Rule 3-10 of Regulation S-X ("Rule 3-10"), we believe that the guarantees of the guarantor subsidiaries comply with the conditions set forth in Rule 3-10 and therefore continue to utilize Rule 3-10 to present condensed consolidating financial information for Holdings, URNA, the guarantor subsidiaries and the non-guarantor subsidiaries. Separate consolidated financial statements of the guarantor subsidiaries have not been presented because management believes that such information would not be material to investors. However, condensed consolidating financial information is presented. The condensed consolidating financial information of Parent and its subsidiaries is as follows:

18
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share data, unless otherwise indicated)


CONDENSED CONSOLIDATING BALANCE SHEET
March 31, 2013  
 
Parent
 
URNA
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Total
 
Foreign
 
SPV
 
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
—

 
$
24

 
$
—

 
$
123

 
$
—

 
$
—

 
$
147

Accounts receivable, net
—

 
34

 
—

 
127

 
564

 
—

 
725

Intercompany receivable (payable)
200

 
(152
)
 
(42
)
 
(156
)
 
—

 
150

 
—

Inventory
—

 
94

 
—

 
9

 
—

 
—

 
103

Prepaid expenses and other assets
—

 
58

 
—

 
23

 
—

 
—

 
81

Deferred taxes
—

 
253

 
—

 
2

 
—

 
—

 
255

Total current assets
200

 
311

 
(42
)
 
128

 
564

 
150

 
1,311

Rental equipment, net
—

 
4,376

 
—

 
587

 
—

 
—

 
4,963

Property and equipment, net
45

 
322

 
16

 
37

 
—

 
—

 
420

Investments in subsidiaries
1,528

 
1,055

 
934

 
—

 
—

 
(3,517
)
 
—

Goodwill, net
—

 
2,708

 
—

 
255

 
—

 
—

 
2,963

Other intangible assets, net
—

 
1,052

 
—

 
99

 
—

 
—

 
1,151

Other long-term assets
2

 
111

 
—

 
—

 
—

 
—

 
113

Total assets
$
1,775

 
$
9,935

 
$
908

 
$
1,106

 
$
564

 
$
(3,367
)
 
$
10,921

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term debt and current maturities of long-term debt
$
139

 
$
38

 
$
—

 
$
—

 
$
390

 
$
—

 
$
567

Accounts payable
—

 
358

 
—

 
48

 
—

 
—

 
406

Accrued expenses and other liabilities
3

 
332

 
30

 
31

 
—

 
—

 
396

Total current liabilities
142

 
728

 
30

 
79

 
390

 
—

 
1,369

Long-term debt
—

 
6,426

 
147

 
7

 
—

 
—

 
6,580

Subordinated convertible debentures
17

 
—

 
—

 
—

 
—

 
—

 
17

Deferred taxes
21

 
1,189

 
—

 
83

 
—

 
—

 
1,293

Other long-term liabilities
—

 
64

 
—

 
3

 
—

 
—

 
67

Total liabilities
180

 
8,407

 
177

 
172

 
390

 
—

 
9,326

Temporary equity (note 6)
29

 
—

 
—

 
—

 
—

 
—

 
29

Total stockholders’ equity (deficit)
1,566

 
1,528

 
731

 
934

 
174

 
(3,367
)
 
1,566

Total liabilities and stockholders’ equity (deficit)
$
1,775

 
$
9,935

 
$
908

 
$
1,106

 
$
564

 
$
(3,367
)
 
$
10,921






19
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share data, unless otherwise indicated)



CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2012
 
 
Parent
 
URNA
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Total
 
Foreign
 
SPV
 
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
—

 
$
20

 
$
—

 
$
86

 
$
—

 
$
—

 
$
106

Accounts receivable, net
—

 
43

 
—

 
146

 
604

 
—

 
793

Intercompany receivable (payable)
168

 
(108
)
 
(49
)
 
(163
)
 
—

 
152

 
—

Inventory
—

 
60

 
—

 
8

 
—

 
—

 
68

Prepaid expenses and other assets
—

 
87

 
10

 
14

 
—

 
—

 
111

Deferred taxes
—

 
263

 
—

 
2

 
—

 
—

 
265

Total current assets
168

 
365

 
(39
)
 
93

 
604

 
152

 
1,343

Rental equipment, net
—

 
4,357

 
—

 
609

 
—

 
—

 
4,966

Property and equipment, net
41

 
333

 
16

 
38

 
—

 
—

 
428

Investments in subsidiaries
1,575

 
1,029

 
932

 
—

 
—

 
(3,536
)
 
—

Goodwill, net
—

 
2,710

 
—

 
260

 
—

 
—

 
2,970

Other intangible assets, net
—

 
1,094

 
—

 
106

 
—

 
—

 
1,200

Other long-term assets
4

 
115

 
—

 
—

 
—

 
—

 
119

Total assets
$
1,788

 
$
10,003

 
$
909

 
$
1,106

 
$
604

 
$
(3,384
)
 
$
11,026

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term debt and current maturities of long-term debt
$
137

 
$
40

 
$
—

 
$
—

 
$
453

 
$
—

 
$
630

Accounts payable
—

 
243

 
—

 
43

 
—

 
—

 
286

Accrued expenses and other liabilities
1

 
361

 
33

 
40

 
—

 
—

 
435

Total current liabilities
138

 
644

 
33

 
83

 
453

 
—

 
1,351

Long-term debt
—

 
6,522

 
150

 
7

 
—

 
—

 
6,679

Subordinated convertible debentures
55

 
—

 
—

 
—

 
—

 
—

 
55

Deferred taxes
21

 
1,199

 
—

 
82

 
—

 
—

 
1,302

Other long-term liabilities
—

 
63

 
—

 
2

 
—

 
—

 
65

Total liabilities
214

 
8,428

 
183

 
174

 
453

 
—

 
9,452

Temporary equity (note 6)
31

 
—

 
—

 
—

 
—

 
—

 
31

Total stockholders’ equity (deficit)
1,543

 
1,575

 
726

 
932

 
151

 
(3,384
)
 
1,543

Total liabilities and stockholders’ equity (deficit)
$
1,788

 
$
10,003

 
$
909

 
$
1,106

 
$
604

 
$
(3,384
)
 
$
11,026


20
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share data, unless otherwise indicated)



CONDENSED CONSOLIDATING STATEMENT OF INCOME AND COMPREHENSIVE INCOME
For the Three Months Ended March 31, 2013
 
 
Parent
 
URNA
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Total
Foreign
 
SPV
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
Equipment rentals
$
—

 
$
781

 
$
—

 
$
135

 
$
—

 
$
—

 
$
916

Sales of rental equipment
—

 
112

 
—

 
11

 
—

 
—

 
123

Sales of new equipment
—

 
16

 
—

 
5

 
—

 
—

 
21

Contractor supplies sales
—

 
16

 
—

 
4

 
—

 
—

 
20

Service and other revenues
—

 
15

 
—

 
5

 
—

 
—

 
20

Total revenues
—

 
940

 
—

 
160

 
—

 
—

 
1,100

Cost of revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of equipment rentals, excluding depreciation
—

 
333

 
—

 
60

 
—

 
—

 
393

Depreciation of rental equipment
—

 
178

 
—

 
24

 
—

 
—

 
202

Cost of rental equipment sales
—

 
76

 
—

 
7

 
—

 
—

 
83

Cost of new equipment sales
—

 
13

 
—

 
4

 
—

 
—

 
17

Cost of contractor supplies sales
—

 
10

 
—

 
3

 
—

 
—

 
13

Cost of service and other revenues
—

 
6

 
—

 
1

 
—

 
—

 
7

Total cost of revenues
—

 
616

 
—

 
99

 
—

 
—

 
715

Gross profit
—

 
324

 
—

 
61

 
—

 
—

 
385

Selling, general and administrative expenses
19

 
118

 
—

 
22

 
1

 
—

 
160

RSC merger related costs
—

 
6

 
—

 
—

 
—

 
—

 
6

Restructuring charge
—

 
6

 
—

 
—

 
—

 
—

 
6

Non-rental depreciation and amortization
4

 
55

 
—

 
5

 
—

 
—

 
64

Operating (loss) income
(23
)
 
139

 
—

 
34

 
(1
)
 
—

 
149

Interest expense (income), net
2

 
114

 
1

 
1

 
1

 
(1
)
 
118

Interest expense-subordinated convertible debentures
2

 
—

 
—

 
—

 
—

 
—

 
2

Other (income) expense, net
(30
)
 
45

 
—

 
3

 
(19
)
 
—

 
(1
)
Income (loss) before provision (benefit) for income taxes
3

 
(20
)
 
(1
)
 
30

 
17

 
1

 
30

Provision (benefit) for income taxes
1

 
(8
)
 
—

 
9

 
7

 
—

 
9

Income (loss) before equity in net earnings (loss) of subsidiaries
2

 
(12
)
 
(1
)
 
21

 
10

 
1

 
21

Equity in net earnings (loss) of subsidiaries
19

 
31

 
21

 
—

 
—

 
(71
)
 
—

Net income (loss)
21

 
19

 
20

 
21

 
10

 
(70
)
 
21

Other comprehensive (loss) income
(20
)
 
(20
)
 
(20
)
 
(15
)
 
—

 
55

 
(20
)
Comprehensive income (loss)
$
1

 
$
(1
)
 
$
—

 
$
6

 
$
10

 
$
(15
)
 
$
1






21
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share data, unless otherwise indicated)


CONDENSED CONSOLIDATING STATEMENT OF INCOME AND COMPREHENSIVE INCOME
For the Three Months Ended March 31, 2012
 
 
Parent
 
URNA
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Total
 
Foreign
 
SPV
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
Equipment rentals
$
—

 
$
250

 
$
183

 
$
90

 
$
—

 
$
—

 
$
523

Sales of rental equipment
—

 
39

 
26

 
11

 
—

 
—

 
76

Sales of new equipment
—

 
8

 
5

 
5

 
—

 
—

 
18

Contractor supplies sales
—

 
8

 
5

 
5

 
—

 
—

 
18

Service and other revenues
—

 
11

 
5

 
5

 
—

 
—

 
21

Total revenues
—

 
316

 
224

 
116

 
—

 
—

 
656

Cost of revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of equipment rentals, excluding depreciation
—

 
115

 
88

 
43

 
—

 
—

 
246

Depreciation of rental equipment
—

 
59

 
37

 
19

 
—

 
—

 
115

Cost of rental equipment sales
—

 
24

 
16

 
7

 
—

 
—

 
47

Cost of new equipment sales
—

 
7

 
4

 
4

 
—

 
—

 
15

Cost of contractor supplies sales
—

 
4

 
4

 
4

 
—

 
—

 
12

Cost of service and other revenues
—

 
6

 
2

 
—

 
—

 
—

 
8

Total cost of revenues
—

 
215

 
151

 
77

 
—

 
—

 
443

Gross profit
—

 
101

 
73

 
39

 
—

 
—

 
213

Selling, general and administrative expenses
10

 
34

 
36

 
17

 
5

 
—

 
102

RSC merger related costs
—

 
10

 
—

 
—

 
—

 
—

 
10

Restructuring charge
—

 
—

 
—

 
—

 
—

 
—

 
—

Non-rental depreciation and amortization
4

 
4

 
4

 
2

 
—

 
—

 
14

Operating (loss) income
(14
)
 
53

 
33

 
20

 
(5
)
 
—

 
87

Interest expense (income), net
3

 
51

 
1

 
1

 
13

 
(1
)
 
68

Interest expense-subordinated convertible debentures
1

 
—

 
—

 
—

 
—

 
—

 
1

Other (income) expense, net
(18
)
 
16

 
9

 
3

 
(11
)
 
—

 
(1
)
(Loss) income before (benefit) provision for income taxes
—

 
(14
)
 
23

 
16

 
(7
)
 
1

 
19

(Benefit) provision for income taxes
—

 
(22
)
 
28

 
3

 
(3
)
 
—

 
6

Income (loss) before equity in net earnings (loss) of subsidiaries
—

 
8

 
(5
)
 
13

 
(4
)
 
1

 
13

Equity in net earnings (loss) of subsidiaries
13

 
5

 
14

 
—

 
—

 
(32
)
 
—

Net income (loss)
13

 
13

 
9

 
13

 
(4
)
 
(31
)
 
13

Other comprehensive income (loss)
10

 
10

 
9

 
5

 
—

 
(24
)
 
10

Comprehensive (loss) income
$
23

 
$
23

 
$
18

 
$
18

 
$
(4
)
 
$
(55
)
 
$
23

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

22
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share data, unless otherwise indicated)


CONDENSED CONSOLIDATING CASH FLOW INFORMATION
For the Three Months Ended March 31, 2013
 
 
Parent
 
URNA
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Total
Foreign
 
SPV
 
Net cash provided by (used in) operating activities
$
16

 
$
294

 
$
(1
)
 
$
50

 
$
50

 
$
—

 
$
409

Net cash used in investing activities
(16
)
 
(148
)
 
—

 
(11
)
 
—

 
—

 
(175
)
Net cash (used in) provided by financing activities
—

 
(142
)
 
1

 
—

 
(50
)
 
—

 
(191
)
Effect of foreign exchange rates
—

 
—

 
—

 
(2
)
 
—

 
—

 
(2
)
Net increase in cash and cash equivalents
—

 
4

 
—

 
37

 
—

 
—

 
41

Cash and cash equivalents at beginning of period
—

 
20

 
—

 
86

 
—

 
—

 
106

Cash and cash equivalents at end of period
$
—

 
$
24

 
$
—

 
$
123

 
$
—

 
$
—

 
$
147

CONDENSED CONSOLIDATING CASH FLOW INFORMATION
For the Three Months Ended March 31, 2012
 
 
Parent
 
URNA
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Total
 
 
 
 
 
 
 
Foreign
 
SPV
 
 
 
 
Net cash provided by operating activities
$
3

 
$
85

 
$
109

 
$
28

 
$
29

 
$
—

 
$
254

Net cash used in investing activities
(4
)
 
(252
)
 
(110
)
 
(34
)
 
—

 
—

 
(400
)
Net cash provided by (used in) financing activities
1

 
164

 
1

 
(2
)
 
(29
)
 
—

 
135

Effect of foreign exchange rates
—

 
—

 
—

 
1

 
—

 
—

 
1

Net decrease in cash and cash equivalents
—

 
(3
)
 
—

 
(7
)
 
—

 
—

 
(10
)
Cash and cash equivalents at beginning of period
—

 
6

 
—

 
30

 
—

 
—

 
36

Cash and cash equivalents at end of period
$
—

 
$
3

 
$
—

 
$
23

 
$
—

 
$
—

 
$
26



23

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in millions, except per share data, unless otherwise indicated)
Executive Overview
We are the largest equipment rental company in the world, with an integrated network of 830 rental locations in the United States and Canada. Although the equipment rental industry is highly fragmented and diverse, we believe that we are well positioned to take advantage of this environment because, as a larger company, we have more extensive resources and certain competitive advantages. These include a fleet of rental equipment with a total original equipment cost (“OEC”) of $ 7.2 billion , and a national branch network that operates in 49 U.S. states and every Canadian province, and serves 99 of the largest 100 metropolitan areas in the United States. In addition, our size gives us greater purchasing power, the ability to provide customers with a broader range of equipment and services, the ability to provide customers with equipment that is 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 3,300 classes of equipment for rent to a diverse customer base that includes construction and industrial companies, manufacturers, utilities, municipalities, homeowners and government entities. Our revenues are derived from the following sources: equipment rentals, sales of rental equipment, sales of new equipment, contractor supplies sales and service and other revenues. Equipment rentals represented 83 percent of total revenues for the three months ended March 31, 2013 .
For the past several years, we have focused on optimizing the profitability of our core rental business through revenue growth and margin expansion. To achieve this objective, we have developed a strategy focused on customer service differentiation, customer segmentation, rate management, fleet management and disciplined cost control. This strategy calls for a superior standard of service to customers, often provided through a single point of contact; an increasing proportion of revenues derived from larger accounts; a targeted presence in industrial and specialty markets; and the profitable deployment of our rental assets for optimal return on investment.
On April 30, 2012, we acquired 100 percent of the outstanding common shares and voting interest (“the acquisition”) of RSC Holdings Inc. (“RSC”). The results of RSC's operations have been included in our condensed consolidated financial statements since that date. RSC, which had total revenues of $1.5 billion in 2011, was one of the largest equipment rental providers in North America, and as of December 31, 2011 had a network of 440 rental locations in 43 U.S. states and three Canadian provinces. The acquisition has created a leading North American equipment rental company with a more attractive business mix, greater scale and enhanced growth prospects, and we believe that the acquisition will provide us with financial benefits including reduced operating expenses and additional revenue opportunities going forward. Since the acquisition date, significant amounts of fleet have been moved between United Rentals locations and the acquired RSC locations, and it is not practicable to reasonably estimate the amounts of revenue and earnings of RSC since the acquisition date. Our total revenues were $1,100 for the three months ended March 31, 2013 . Pro forma total revenues for the three months ended March 31, 2012 , comprised of United Rentals and RSC historic revenues, were $1,064 . The impact of the RSC acquisition on our equipment rentals revenue is primarily reflected in the 78.2 percent increase in the volume of OEC on rent for the three months ended March 31, 2013 .
During the three months ended March 31, 2013 , year over year, our rental rates increased 5.4 percent and the volume of OEC on rent increased 78.2 percent, which we believe reflects, in addition to the impact of the RSC acquisition, modest improvements in our operating environment and a secular shift from ownership to the rental of construction-related equipment. Although there is no certainty that these trends will continue, we believe that our strategy will strengthen our leadership position in a recovery. Rental rate calculations are only available on a pro forma basis (that is, including the results of operations of RSC for the three months ended March 31, 2012 ).
Financial Overview
Net income. Net income and diluted earnings per share for the three months ended March 31, 2013 and 2012 were as follows:  
 
Three Months Ended
 
 
March 31,
 
 
2013
 
2012
 
Net income
$
21

 
$
13

 
Diluted earnings per share
$
0.19

 
$
0.17

 

Net income and diluted earnings per share for the three months ended March 31, 2013 and 2012 include the impacts of the following special items (amounts presented on an after-tax basis):

24
Table of Contents

 
Three Months Ended March 31,

 
2013

2012

 
Contribution
to net income (after-tax)

Impact on
diluted earnings per share

Contribution
to net income (after-tax)

Impact on
diluted earnings per share

RSC merger related costs (1)
$
(4
)

$
(0.03
)

$
(6
)

$
(0.09
)

RSC merger related intangible asset amortization (2)
(26
)

(0.24
)

—


—


Impact on depreciation related to acquired RSC fleet and property and equipment (3)
1


0.01


—


—


Impact of the fair value mark-up of acquired RSC fleet (4)
(8
)

(0.08
)

—


—


Pre-close RSC merger related interest expense (5)
—


—


(8
)

(0.10
)

Impact on interest expense related to fair value adjustment of acquired RSC indebtedness (6)
1


0.01


—


—


Restructuring charge (7)
(4
)

(0.04
)

—


—


Asset impairment charge (8)
(1
)

(0.01
)

—


—


Loss on repurchase/redemption of debt securities and retirement of subordinated convertible debentures
(1
)

(0.01
)

—


—



(1)
This reflects transaction costs associated with the acquisition of RSC.
(2)
This reflects the amortization of the intangible assets acquired in the RSC acquisition.
(3)
This reflects the impact of extending the useful lives of equipment acquired in the RSC acquisition, 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 acquisition and subsequently sold.
(5)
In March 2012 , we issued $ 2,825 of debt in connection with the RSC acquisition. The pre-close RSC merger related interest expense reflects the interest expense recorded on this debt prior to the acquisition date.
(6)
This reflects a reduction of interest expense associated with the fair value mark-up of debt acquired in the RSC acquisition.
(7)
As discussed below (see “Restructuring charge”), this primarily reflects severance costs and branch closure charges associated with the RSC acquisition.
(8)
This charge primarily reflects write-offs of leasehold improvements and other fixed assets in connection with the RSC acquisition.
In addition to the matters discussed above, our 2013 performance reflects increased gross profit from equipment rentals and sales of rental equipment.
EBITDA GAAP Reconciliations. EBITDA represents the sum of net income, provision for income taxes, interest expense, net, interest expense-subordinated convertible debentures, depreciation of rental equipment and non-rental depreciation and amortization. Adjusted EBITDA represents EBITDA plus the sum of the RSC merger related costs, restructuring charge, stock compensation expense, net and the impact of the fair value mark-up of the acquired RSC fleet. These items are excluded from adjusted EBITDA internally when evaluating our operating performance and allow investors to make a more meaningful comparison between our core business operating results over different periods of time, as well as with those of other similar companies. Management believes that EBITDA and adjusted EBITDA, when viewed with the Company’s results under 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 permit investors to gain an understanding of the factors and trends affecting our ongoing cash earnings, from which capital investments are made and debt is serviced. However, EBITDA and adjusted EBITDA are not measures of financial performance or liquidity under GAAP and, accordingly, should not be considered as alternatives to net income 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:  

25
Table of Contents

 
Three Months Ended
 
 
March 31,
 
 
2013

2012
 
Net income
$
21

 
$
13

 
Provision for income taxes
9

 
6

 
Interest expense, net
118

 
68

 
Interest expense – subordinated convertible debentures
2

 
1

 
Depreciation of rental equipment
202

 
115

 
Non-rental depreciation and amortization
64

 
14

 
EBITDA
$
416

 
$
217

 
RSC merger related costs (1)
6

 
10

 
Restructuring charge (2)
6

 
—

 
Stock compensation expense, net (3)
9

 
4

 
Impact of the fair value mark-up of acquired RSC fleet (4)
14

 
—

 
Adjusted EBITDA
$
451

 
$
231

 

The table below provides a reconciliation between net cash provided by operating activities and EBITDA and adjusted EBITDA:
 
Three Months Ended
 
March 31,
 
2013
 
2012
Net cash provided by operating activities
$
409

 
$
254

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
(6
)
 
(5
)
Gain on sales of rental equipment
40

 
29

Gain on sales of non-rental equipment
1

 
1

RSC merger related costs (1)
(6
)
 
(10
)
Restructuring charge (2)
(6
)
 
—

Stock compensation expense, net (3)
(9
)
 
(4
)
Loss on retirement of subordinated convertible debentures
(1
)
 
—

Increase in restricted cash- RSC merger related debt interest
—

 
25

Changes in assets and liabilities
(111
)
 
(125
)
Cash paid for interest, including subordinated convertible debentures
90

 
40

Cash paid for income taxes, net
15

 
12

EBITDA
$
416

 
$
217

Add back:
 
 
 
RSC merger related costs (1)
6

 
10

Restructuring charge (2)
6

 
—

Stock compensation expense, net (3)
9

 
4

Impact of the fair value mark-up of acquired RSC fleet (4)
14

 
—

Adjusted EBITDA
$
451

 
$
231

 ___________________
(1)
This reflects transaction costs associated with the RSC acquisition discussed above.
(2)
As discussed below (see “Restructuring charge”), this primarily reflects severance costs and branch closure charges associated with the RSC acquisition.
(3)
Represents non-cash, share-based payments associated with the granting of equity instruments.

26
Table of Contents

(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 acquisition and subsequently sold.
For the three months ended March 31, 2013 , EBITDA increased $ 199 , or 91.7 percent, and adjusted EBITDA increased $220 , or 95.2 percent. The EBITDA increase primarily reflects increased profit from equipment rentals, partially offset by increased selling, general and administrative expense, and the adjusted EBITDA increase primarily reflects increased profit from equipment rentals and sales of rental equipment, partially offset by increased selling, general and administrative expense. For the three months ended March 31, 2013 , EBITDA margin increased 4.7 percentage points to 37.8 percent, and adjusted EBITDA margin increased 5.8 percentage points to 41.0 percent. The increase in EBITDA margin primarily reflects increased margins from equipment rentals, improved selling, general and administrative leverage and decreased RSC merger related costs. The increase in adjusted EBITDA margin primarily reflects increased margins from equipment rentals and sales of rental equipment, and improved selling, general and administrative leverage.

Results of Operations
As discussed in note 2 to our condensed consolidated financial statements, our reportable segments are general rentals and trench safety, power and HVAC (“heating, ventilating and air conditioning”). 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. The general rentals segment operates throughout the United States and Canada. The trench safety, power and HVAC segment is comprised of 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, and 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. The trench safety, power and HVAC segment’s customers include construction companies involved in infrastructure projects, municipalities and industrial companies. The trench safety, power and HVAC segment operates throughout the United States and in Canada.
As discussed in note 2 to our condensed consolidated financial statements, we aggregate our 12 geographic regions—Eastern Canada, Gulf South, Industrial (which serves the geographic Gulf region and has a strong industrial presence), Mid-Atlantic, Mid-Central, Midwest, Mountain West, Northeast, Pacific West, South, Southeast and Western Canada—into our general rentals reporting segment. Historically, there have been variances in the levels of equipment rentals gross margins achieved by these regions. For instance, for the five year period ended March 31, 2013 , certain of our regions had equipment rentals gross margins that varied by between 10 percent and 29 percent from the equipment rentals gross margins of the aggregated general rentals' regions over the same period. For the three months ended March 31, 2013 , the aggregate general rentals' equipment rentals gross margin increased 4.2 percentage points to 34.5 percent, primarily reflecting increased rental rates, a 1.7 percentage point increase in time utilization, which is calculated by dividing the amount of time equipment is on rent by the amount of time we have owned the equipment, and cost improvements. As compared to the equipment rentals revenue increase of 79.8 percent, (i) aggregate repairs and maintenance and delivery costs increased 62.9 percent due primarily to higher rental volume, (ii) compensation costs increased 64.4 percent due primarily to increased headcount associated with higher rental volume and the RSC acquisition and (iii) building and property costs increased 56.6 percent due primarily to the impact of the RSC acquisition. The revenue and cost increases all reflect the impact of the RSC acquisition since the April 30, 2012 acquisition date. Our equipment rental revenue increased more than our costs because rates—which were a significant driver of the year-over-year revenue improvement—result in fewer variable costs compared to utilization.
For the five year period ended March 31, 2013 , the general rentals' region with the lowest equipment rentals gross margin was the Southeast . The Southeast region's equipment rentals gross margin of 27.1 percent for the five year period ended March 31, 2013 was 23 percent less than the equipment rentals gross margins of the aggregated general rentals' regions over the same period. The Southeast region's equipment rentals gross margin was less than the other general rentals' regions during this period as it experienced more significant declines in its end markets than the other regions, which led to more competitive pricing pressure and lower fleet investment. For the three months ended March 31, 2013 , the Southeast region's equipment rentals gross margin increased 6.1 percentage points to 34.6 percent, primarily reflecting a 6.3 percent rental rate increase, a 1.9 percentage point increase in time utilization and cost improvements. As compared to equipment rentals revenue, which increased 72.9 percent, (i) aggregate repairs and maintenance and delivery costs increased 49.0 percent due primarily to higher rental volume, (ii) compensation costs increased 59.3 percent (iii) and building and property costs increased 37.5 percent. Rental rate changes are calculated based on the year over year variance in average contract rates, weighted by the prior period revenue mix.
For the five year period ended March 31, 2013 , the general rentals' region with the highest equipment rentals gross margin was Western Canada . The Western Canada region's equipment rentals gross margin of 43.7 percent for the five year period ended March 31, 2013 was 29 percent more than the equipment rentals gross margins of the aggregated general rentals'

27
Table of Contents

regions over the same period. The Western Canada region's equipment rentals gross margin was more than the other general rentals' regions during this period as the region benefited from strong demand for natural resources which have been more resistant to the economic pressures experienced in other regions. For the three months ended March 31, 2013 , the Western Canada region's equipment rentals gross margin increased 4.9 percentage points to 46.8 percent, primarily reflecting a 6.6 percent rental rate increase, a 5.1 percentage point increase in time utilization and cost improvements. As compared to equipment rentals revenue, which increased 94.8 percent, (i) aggregate repairs and maintenance and delivery costs increased 71.4 percent due primarily to higher rental volume, (ii) compensation costs increased 82.3 percent and (iii) depreciation of rental equipment increased 69.7 percent.
Although the margins for certain of our general rentals' regions exceeded a 10 percent variance level for the five year period ended March 31, 2013 , we expect convergence going forward given the cyclical nature of the construction industry, which impacts each region differently, and our continued focus on cost cutting, improved processes and fleet sharing. Additionally, the margins for the five year period ended March 31, 2013 include the significant impact of the economic downturn in 2009 that impacted all our regions. Although we believe aggregating these regions into our general rentals reporting segment for segment reporting purposes is appropriate, to the extent that the margin variances persist and the equipment rentals gross margins do not converge, we may be required to disaggregate the regions into separate reporting segments. Any such disaggregation would have no impact on our consolidated results of operations.
These segments align our external segment reporting with how management evaluates and allocates resources. We evaluate segment performance based on segment 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:
 
 
General
rentals
 
Trench safety,
power and HVAC
 
Total
Three Months Ended March 31, 2013
 
 
 
 
 
Equipment rentals
$
854

 
$
62

 
$
916

Sales of rental equipment
119

 
4

 
123

Sales of new equipment
20

 
1

 
21

Contractor supplies sales
18

 
2

 
20

Service and other revenues
19

 
1

 
20

Total revenue
$
1,030

 
$
70

 
$
1,100

Three Months Ended March 31, 2012
 
 
 
 
 
Equipment rentals
$
475

 
$
48

 
$
523

Sales of rental equipment
74

 
2

 
76

Sales of new equipment
17

 
1

 
18

Contractor supplies sales
16

 
2

 
18

Service and other revenues
20

 
1

 
21

Total revenue
$
602

 
$
54

 
$
656


Equipment rentals . For the three months ended March 31, 2013 , equipment rentals of $ 916 increased $ 393 , or 75.1 percent, as compared to the same period in 2012, primarily reflecting a 78.2 percent increase in the volume of OEC on rent and a 5.4 percent rental rate increase, partially offset by changes in rental mix. There are two components of rental mix that impact equipment rentals: 1) the type of equipment rented and 2) the duration of the rental contract (daily, weekly and monthly). In 2013, we increased the portion of equipment rentals from monthly rental contracts, which results in equipment rentals increasing at a lesser rate than the volume of OEC on rent, but produces higher margins as there are less transaction costs. As discussed above, we acquired RSC on April 30, 2012 , and the results of RSC's operations have been included in our condensed consolidated financial statements since that date. The impact of the RSC acquisition on equipment rentals is primarily reflected in the increase in the volume of OEC on rent. Equipment rentals represented 83 percent of total revenues for the three months ended March 31, 2013 . On a segment basis, equipment rentals represented 83 percent and 89 percent of total revenues for the three months ended March 31, 2013 for general rentals and trench safety, power and HVAC, respectively. General rentals equipment rentals increased $ 379 , or 79.8 percent, primarily reflecting a 79.6 percent increase in the volume of OEC on rent and increased rental rates, partially offset by an increase in the portion of equipment rentals from monthly rental contracts, which results in equipment rentals increasing at a lesser rate than the volume of OEC on rent. Trench safety, power and HVAC

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equipment rentals increased $ 14 , or 29.2 percent, primarily reflecting an increase in the volume of OEC on rent and increased rental rates. Trench safety, power and HVAC average OEC for the three months ended March 31, 2013 increased 24 percent as compared to the same period in 2012. Capitalizing on the demand for the higher margin equipment rented by our trench safety, power and HVAC segment has been a key component of our strategy in 2013 and 2012.

We believe that the rate and volume improvements for the three months ended March 31, 2013 reflect, in addition to the impact of the RSC acquisition, a modest improvement in our operating environment and a shift from customer ownership to the rental of construction equipment. As discussed above, the results of RSC's operations have been included in our condensed consolidated financial statements since the April 30, 2012 acquisition date. The RSC acquisition contributed significantly to the volume improvements for the three months ended March 31, 2013 . The total OEC of our fleet of rental equipment was $ 7.2 billion , including the acquired RSC fleet, as of March 31, 2013 as compared to $4.3 billion as of March 31, 2012 .
Sales of rental equipment . For the three months ended March 31, 2013 , sales of rental equipment represented approximately 11 percent of our total revenues. Our general rentals segment accounted for substantially all of these sales. For the three months ended March 31, 2013 , sales of rental equipment increased 61.8 percent as compared to the same period in 2012, primarily reflecting increased volume, including the impact of the RSC acquisition, and improved pricing in a stronger retail market.
Sales of new equipment. For the three months ended March 31, 2013 , sales of new equipment represented approximately 2 percent of our total revenues. Our general rentals segment accounted for substantially all of these sales. For the three months ended March 31, 2013 , sales of new equipment increased 16.7 percent as compared to the same period in 2012, primarily reflecting increased volume, including the impact of the RSC acquisition.
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 three months ended March 31, 2013 , contractor supplies sales represented approximately 2 percent of our total revenues. Our general rentals segment accounted for substantially all of these sales. For the three months ended March 31, 2013 , contractor supplies sales increased 11.1 percent as compared to the same period in 2012, primarily reflecting the impact of the RSC acquisition.
Service and other revenues . Service and other revenues primarily represent our revenues earned from providing repair and maintenance services (including parts sales). For the three months ended March 31, 2013 , service and other revenues represented approximately 2 percent of our total revenues. Our general rentals segment accounted for substantially all of these sales. Service and other revenues for the three months ended March 31, 2013 didn't change significantly from the same period in 2012.
Segment Equipment Rentals Gross Profit
Segment equipment rentals gross profit and gross margin were as follows:
 
 
General
rentals
 
Trench safety,
power and HVAC
 
Total
Three Months Ended March 31, 2013
 
 
 
 
 
Equipment Rentals Gross Profit
$
295

 
$
26

 
$
321

Equipment Rentals Gross Margin
34.5
%
 
41.9
%
 
35.0
%
Three Months Ended March 31, 2012
 
 
 
 
 
Equipment Rentals Gross Profit
$
144

 
$
18

 
$
162

Equipment Rentals Gross Margin
30.3
%
 
37.5
%
 
31.0
%

General rentals . For the three months ended March 31, 2013 , equipment rentals gross profit increased by $ 151 and equipment rentals gross margin increased by 4.2 percentage points from 2012, primarily reflecting increased rental rates, a 1.7 percentage point increase in time utilization and cost improvements. As compared to the equipment rentals revenue increase of 79.8 percent, (i) aggregate repairs and maintenance and delivery costs increased 62.9 percent due primarily to higher rental volume, (ii) compensation costs increased 64.4 percent due primarily to increased headcount associated with higher rental volume and the RSC acquisition and (iii) building and property costs increased 56.6 percent due primarily to the impact of the RSC acquisition. The revenue and cost increases all reflect the impact of the RSC acquisition in April 2012. Equipment rental revenue increased more than costs because rates—which were a significant driver of the year-over-year revenue improvement—result in fewer variable costs compared to utilization. For the three months ended March 31, 2013 and 2012, time utilization was 64.8 percent and 63.1 percent, respectively.

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Trench safety, power and HVAC . For the three months ended March 31, 2013 , equipment rentals gross profit increased by $8 and equipment rentals gross margin increased by 4.4 percentage points from 2012, primarily reflecting increased rental rates and cost improvements. As compared to the equipment rentals revenue increase of 29.2 percent, (i) depreciation increased 25.0 percent due to increased OEC, (ii) aggregate repairs and maintenance and delivery costs increased 21.7 percent due primarily to higher rental volume and (iii) compensation costs increased 18.7 percent due primarily to increased headcount associated with higher rental volume.
Gross Margin . Gross margins by revenue classification were as follows:
  
 
Three Months Ended March 31,
 
 
2013
 
2012
 
Total gross margin
35.0
%
 
32.5
%
 
Equipment rentals
35.0
%
 
31.0
%
 
Sales of rental equipment
32.5
%
 
38.2
%
 
Sales of new equipment
19.0
%
 
16.7
%
 
Contractor supplies sales
35.0
%
 
33.3
%
 
Service and other revenues
65.0
%
 
61.9
%
 

For the three months ended March 31, 2013 , total gross margin increased 2.5 percentage points as compared to the same period in 2012, primarily reflecting increased gross margins from equipment rentals partially offset by decreased gross margins from sales of rental equipment. Equipment rentals gross margin increased 4.0 percentage points, primarily reflecting a 5.4 percent rental rate increase, a 1.9 percentage point increase in time utilization and cost improvements. As compared to the equipment rentals revenue increase of 75.1 percent, (i) aggregate repairs and maintenance and delivery costs increased 59.5 percent due primarily to higher rental volume, (ii) compensation costs increased 60.6 percent due primarily to increased headcount associated with higher rental volume and the RSC acquisition and (iii) building and property costs increased 54.7 percent primarily due to the impact of the RSC acquisition. The revenue and cost increases all reflect the impact of the RSC acquisition in April 2012. Our equipment rental revenue increased more than our costs because rates—which were a significant driver of the year-over-year revenue improvement—result in fewer variable costs compared to utilization. For the three months ended March 31, 2013 and 2012, time utilization was 64.2 percent and 62.3 percent, respectiv ely. The 64.2 percent time utilization for the three months ended March 31, 2013 is a first quarter record for the Company. Gross margin from sales of rental equipment decreased 5.7 percentage points primarily due to fair value adjustments to equipment acquired in the RSC acquisition and subsequently sold.

Selling, general and administrative expenses (“SG&A”) . SG&A expense information for the three months ended March 31, 2013 and 2012 was as follows:
 
 
Three Months Ended March 31,
 
 
2013
 
2012
 
Total SG&A expenses
$
160

 
$
102

 
SG&A as a percentage of revenue
14.5
%
 
15.5
%
 

SG&A expense primarily includes sales force compensation, bad debt expense, information technology costs, advertising and marketing expenses, third-party professional fees, management salaries and clerical and administrative overhead. For the three months ended March 31, 2013 , SG&A expense of $160 increased $58 as compared to 2012. The increase in SG&A primarily reflects increased compensation costs associated with higher revenues, improved profitability and increased headcount following the RSC acquisition. Additionally, travel and entertainment, professional and office expenses have increased following the RSC acquisition. As a percentage of revenue, SG&A decreased 1.0  percentage points year over year.
RSC merger related costs. As discussed above, in the second quarter of 2012, we completed the acquisition of RSC. The three months ended March 31, 2013 and 2012 include acquisition-related costs of $6 and $10 , respectively, primarily related to financial and legal advisory fees, and branding costs.
Restructuring charge. For the three months ended March 31, 2013 , the restructuring charges of $6 primarily reflect severance costs and branch closure charges associated with the RSC acquisition. The branch closure charges primarily reflect

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continuing lease obligations at vacant facilities. We expect to incur approximately $5 of additional charges in connection with the restructuring, which is expected to be substantially complete by June 30, 2013 .
Non-rental depreciation and amortization for the three months ended March 31, 2013 and 2012 was as follows:
 
 
Three Months Ended March 31,
 
 
2013
 
2012
 
Non-rental depreciation and amortization
$
64

 
$
14

 

Non-rental depreciation and amortization for the three months ended March 31, 2013 increased $50 , or 357 percent, as compared to 2012, primarily due to the April 2012 acquisition of RSC discussed above.
Interest expense, net for the three months ended March 31, 2013 and 2012 was as follows:
 
 
Three Months Ended March 31,
 
 
2013
 
2012
 
Interest expense, net
$
118

 
$
68

 

Interest expense, net for the three months ended March 31, 2013 increased $ 50 , or 74 percent, as compared to 2012. In March 2012 , we issued $2,825 of debt ("the merger financing notes") in connection with the RSC acquisition. Upon completion of the RSC acquisition, we also assumed RSC's debt that remained after repayment of certain of RSC's senior debt. Interest expense, net for the three months ended March 31, 2012 includes $13 of interest recorded on the merger financing notes prior to the closing of the acquisition. Interest expense, net for the three months ended March 31, 2013 increased primarily due to increased average outstanding debt, including the debt issued and assumed in connection with the RSC acquisition, as compared to 2012.
Income taxes. The following table summarizes our provision for income taxes and the related effective tax rates for the three months ended March 31, 2013 and 2012:  
 
Three Months Ended March 31,
 
 
2013
 
2012
 
Income before provision for income taxes
$
30

 
$
19

 
Provision for income taxes
9

 
6

 
Effective tax rate
30.0
%
 
31.6
%
 
 
The differences between the 2013 and 2012 effective tax rates and the U.S. federal statutory income tax rate of 35 percent primarily relate to the geographical mix of income between foreign and domestic operations, as well as the impact of state and local taxes, and certain nondeductible charges.
Balance sheet. Inventory increased by $ 35 , or 51.5 percent, from December 31, 2012 to March 31, 2013 primarily due to increased equipment inventory due to significant capital expenditures in the quarter. We expect to transfer most of the increased inventory to our rental fleet during the remainder of 2013. Prepaid expenses and other assets decreased by $ 30 , or 27.0 percent, from December 31, 2012 to March 31, 2013 primarily due to the collection of receivables due from certain vendors for advertising expenses related to capital expenditures. Accounts payable increased by $ 120 , or 42.0 percent, from December 31, 2012 to March 31, 2013 primarily due to increased capital expenditures. Subordinated convertible debentures decreased by $ 38 , or 69.1 percent, from December 31, 2012 to March 31, 2013 due to the retirement of $38 principal amount of subordinated convertible debentures discussed in note 6 to our condensed consolidated financial statements.
Liquidity and Capital Resources
Liquidity and Capital Markets Activity. We manage our liquidity using internal cash management practices, which are subject to (i) the policies and cooperation of the financial institutions we utilize to maintain and provide cash management services, (ii) the terms and other requirements of the agreements to which we are a party and (iii) the statutes, regulations and practices of each of the local jurisdictions in which we operate.
As discussed in note 6 to our condensed consolidated financial statements, in February 2013 , we amended our accounts receivable securitization facility and the size of the facility was increased to $550 . Additionally, as discussed in note 6 to our

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condensed consolidated financial statements, during the three months ended March 31, 2013 , we retired $38 principal amount of our subordinated convertible debentures.
As previously announced, in connection with the RSC acquisition, our Board authorized a stock buyback of up to $200 of Holdings' common stock. As of April 12, 2013 , we have repurchased $ 133 of Holdings' common stock and our intent is to complete the stock buyback within 18 months after the April 30, 2012 closing of the RSC acquisition.
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 of March 31, 2013 , we had (i) $ 748 of borrowing capacity, net of $ 61 of letters of credit, available under the ABL facility, (ii) $ 60 of borrowing capacity available under the accounts receivable securitization facility and (iii) cash and cash equivalents of $ 147 . Cash equivalents at March 31, 2013 consist of direct obligations of financial institutions rated A or better. We believe that our existing sources of cash will be sufficient to support our existing operations over the next 12 months.
As of March 31, 2013 , $ 1,091 and $390 were outstanding under the ABL facility and the accounts receivable securitization facility, respectively. The interest rates applicable to the ABL facility and the accounts receivable securitization facility at March 31, 2013 were 2.3 percent and 0.8 percent , respectively. During the three months ended March 31, 2013 , the monthly average amounts outstanding under the ABL facility and the accounts receivable securitization facility, including the former facility and the amended facility, were $1,014 and $412 , respectively, and the weighted-average interest rates thereon were 2.3 percent and 0.8 percent , respectively. The maximum month-end amounts outstanding under the ABL facility and the accounts receivable securitization facility, including the former facility and the amended facility, during the three months ended March 31, 2013 were $1,091 and $435 , respectively.
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, and (v) 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 of April 12, 2013 were as follows:  
 
Corporate Rating
  
Outlook
Moody’s
B2
  
Stable
Standard & Poor’s
B+
  
Stable
A security rating is not a recommendation to buy, sell or hold securities. There is no assurance that any rating will remain in effect for a given period of time or that any rating will not be revised or withdrawn by a rating agency in the future.
The amount of our future capital expenditures will depend on a number of factors, including general economic conditions and growth pro spects. Net rental capital expenditures (defined as purchases of rental equipment less the proceeds from sales of rental equipment) were $ 166 and $ 314 during the three months ended March 31, 2013 and 2012, respectively. For the full year 2013, we expect net rental capital expenditures of approximately $ 1.05 billion , after gross purchases of approximately $ 1.5 billion. 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 ava ilable under the ABL facility and accounts receivable securitization facility.
Loan Covenants and Compliance. As of March 31, 2013 , we were in compliance with the covenants and other provisions of the ABL facility, the accounts receivable securitization facility, the senior notes and the QUIPS. 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.
In October 2011, we amended the ABL facility. The only material financial covenants which currently exist relate to the fixed charge coverage ratio and the senior secured leverage ratio under the ABL facility. Since the October 2011 amendment of the ABL facility and through March 31, 2013 , availability under the ABL facility has exceeded the required threshold and, as a result, these maintenance covenants have been inapplicable. Subject to certain limited exceptions specified in the amended ABL facility, the fixed charge coverage ratio and the senior secured leverage ratio under the amended ABL facility will only apply in the future if availability under the amended ABL facility falls below the greater of 10 percent of the maximum revolver amount under the amended ABL facility and $150 . Under our accounts receivable securitization facility, we are required,

32
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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 of March 31, 2013 , URNA had limited restricted payment capacity under the most restrictive restricted payment covenants in the indentures governing its outstanding indebtedness. Although this limited capacity restricts our ability to move operating cash flows to Holdings, we do not expect any material adverse impact on Holdings’ ability to meet its cash obligations due to certain intercompany arrangements.
Sources and Uses of Cash. During the three months ended March 31, 2013 , we (i) generated cash from operating activities of $ 409 and (ii) generated cash from the sale of rental and non-rental equipment of $ 128 . We used cash during this period principally to (i) purchase rental and non-rental equipment of $ 303 , (ii) make debt payments, net of proceeds, of $ 164 and (iii) purchase shares of our common stock for $30 . During the three months ended March 31, 2012 , we (i) generated cash from operating activities of $ 254 , (ii) generated cash from the sale of rental and non-rental equipment of $ 83 and (iii) received cash from debt proceeds, net of payments and $2,825 of proceeds from new debt issuances associated with the RSC acquisition, of $141 . We used cash during this period principally to (i) purchase rental and non-rental equipment of $ 426 and (ii) purchase other companies for $ 57 .
Free Cash Flow GAAP Reconciliation. We define “free cash flow (usage)” as (i) net cash provided by operating activities less (ii) purchases of rental and non-rental equipment plus (iii) proceeds from sales of rental and non-rental equipment. 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 (usage) is not a measure of financial performance or liquidity under GAAP. Accordingly, free cash flow (usage) 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 (usage).  
 
Three Months Ended
 
March 31,
 
2013
 
2012
Net cash provided by operating activities
$
409

 
$
254

Purchases of rental equipment
(289
)
 
(390
)
Purchases of non-rental equipment
(14
)
 
(36
)
Proceeds from sales of rental equipment
123

 
76

Proceeds from sales of non-rental equipment
5

 
7

Free cash flow (usage)
$
234

 
$
(89
)

Free cash flow for the three months ended March 31, 2013 was $ 234 , an increase of $ 323 as compared to free cash usage of $ 89 for the three months ended March 31, 2012 . Free cash flow increased primarily due to increased net cash provided by operating activities, decreased purchases of rental and non-rental equipment and increased proceeds from sales of rental equipment. Free cash flow for the three months ended March 31, 2013 and 2012 includes the impact of the RSC merger costs discussed 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.


33
Table of Contents

Item 3.
Quantitative and Qualitative Disclosures about Market Risk
Our exposure to market risk primarily consists of (i) interest rate risk associated with our variable and fixed rate debt, (ii) foreign currency exchange rate risk associated with our Canadian operations and (iii) equity price risk associated with our convertible debt.
Interest Rate Risk. As of March 31, 2013 , we had an aggregate of $ 1,481 of indebtedness that bears interest at variable rates, comprised of $ 1,091 of borrowings under the ABL facility and $390 of borrowings under our accounts receivable securitization facility. The amount of variable rate indebtedness outstanding under the ABL facility and accounts receivable securitization facility may fluctuate significantly. The interest rates applicable to our variable rate debt on March 31, 2013 were 2.3 percent for the ABL facility and 0.8 percent for the accounts receivable securitization facility. As of March 31, 2013 , based upon the amount of our variable rate debt outstanding, our annual after-tax earnings would decrease by approximately $ 9 for each one percentage point increase in the interest rates applicable to our variable rate debt.
At March 31, 2013 , we had an aggregate of $ 5.7 billion of indebtedness that bears interest at fixed rates, including our subordinated convertible debentures. A one percentage point decrease in market interest rates as of March 31, 2013 would increase the fair value of our fixed rate indebtedness by approximately six percent . For additional information concerning the fair value of our fixed rate debt, see note 5 (see “Fair Value of Financial Instruments”) to our condensed consolidated financial statements.
Currency Exchange Risk . The functional currency for our Canadian operations is the Canadian dollar. As a result, our future earnings could be affected by fluctuations in the exchange rate between the U.S. and Canadian dollars. Based upon the level of our Canadian operations during 2012 relative to the Company as a whole, a 10 percent change in this exchange rate would cause our annual after-tax earnings to change by approximately $10. We do not engage in purchasing forward exchange contracts for speculative purposes.
Equity Price Risk . In connection with the November 2009 4 percent Convertible Notes offering, Holdings entered into convertible note hedge transactions with option counterparties. The convertible note hedge transactions cost $26, and decreased additional paid-in capital by $17, net of taxes, in our accompanying condensed consolidated statements of stockholders’ equity. The convertible note hedge transactions cover, subject to anti-dilution adjustments, 15.1 million shares of our common stock. The convertible note hedge transactions are intended to reduce, subject to a limit, the potential dilution with respect to our common stock upon conversion of the 4 percent Convertible Notes. The effect of the convertible note hedge transactions is to increase the effective conversion price to $15.56 per share, equal to an approximately 75 percent premium over the $8.89 closing price of our common stock at issuance. The effective conversion price is subject to change in certain circumstances, such as if the 4 percent Convertible Notes are converted prior to May 15, 2015. In the event the market value of our common stock exceeds the effective conversion price per share, the settlement amount received from such transactions will only partially offset the potential dilution. For example, if, at the time of exercise of the conversion right, the price of our common stock was $ 50.00 or $ 55.00 per share, assuming an effective conversion price of $15.56 per share, on a net basis, we would issue 10.4 million or 10.8 million shares, respectively. Based on the price of our common stock during the first quarter of 2012, holders of the 4 percent Convertible Notes have the right to redeem the notes during the second quarter of 2012 at a conversion price of $11.11 per share of common stock. Since April 1, 2013 (the beginning of the second quarter), none of the 4 percent Convertible Senior Notes were redeemed.
If the total $168 outstanding principal amount of the 4 percent Convertible Notes was converted, the total cost to settle the notes would be $830 , assuming a conversion price of  $54.97 (the closing price of our common stock on March 31, 2013 ) per share of common stock. The $168 principal amount would be settled in cash, and the remaining $662 could be settled in cash, shares of our common stock, or a combination thereof, at our discretion. Based on the March 31, 2013 closing stock price, approximately 12 million shares of stock, excluding any stock we would receive from the option counterparties as discussed below, would be issued if we settled the entire $662 of conversion value in excess of the principal amount in stock. The total cost to settle would change approximately $ 15 for each $1 (actual dollars) change in our stock price. If the full principal amount was converted at our March 31, 2013 closing stock price, we estimate that we would receive approximately $ 59 in either cash or stock from the option counterparties, after which the effective conversion price would be approximately $15.05 . 

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Item 4.
Controls and Procedures
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
The Company’s management carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a–15(e) and 15d–15(e) of the Exchange Act, as of March 31, 2013 . Based on the evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2013 .
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended March 31, 2013 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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Table of Contents

PART II. OTHER INFORMATION
 
Item 1.
Legal Proceedings
The information set forth under note 7 to our unaudited condensed consolidated financial statements of this quarterly report on Form 10-Q is incorporated by reference in answer to this item. Such information is limited to certain recent developments and should be read in conjunction with note 15 to our consolidated financial statements for the year ended December 31, 2012 filed on Form 10-K on January 23, 2013 .

Item 1A.
Risk Factors
Our results of operations and financial condition are subject to numerous risks and uncertainties described in our 2012 Form 10-K, which risk factors are incorporated herein by reference. You should carefully consider these risk factors in conjunction with the other information contained in this report. Should any of these risks materialize, our business, financial condition and future prospects could be negatively impacted.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
(c) The following table provides information about purchases of Holdings’ common stock by Holdings during the first quarter of 2013:   
Period
Total Number of
Shares Purchased
 
Average Price
Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)
 
Maximum Dollar Amount of Shares That May Yet Be Purchased Under the Program (2)
January 1, 2013 to January 31, 2013
72,513

(1)
$
49.31

 
—

 
—

February 1, 2013 to February 28, 2013
153,158

(1)
$
52.50

 
128,400

 
—

March 1, 2013 to March 31, 2013
353,566

(1)
$
52.92

 
218,200

 
—

Total
579,237

 
$
52.35

 
346,600

 
$
67,142,454


(1)
In January 2013 , February 2013 and March 2013 , 72,513 , 24,758 and 135,366 shares, respectively, were withheld by Holdings to satisfy tax withholding obligations upon the vesting of restricted stock unit awards. These shares were not acquired pursuant to any repurchase plan or program.
(2)
In December 2011, in connection with the RSC acquisition, our Board announced its intention to authorize a stock buyback of up to $200 million of Holdings' common stock, which we intend to complete within 18 months after the April 30, 2012 closing of the RSC acquisition. Our Board announced its authorization of the stock buyback in April 2012.


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Item 6.
Exhibits

3(a)
Restated Certificate of Incorporation of United Rentals, Inc., dated March 16, 2009 (incorporated by reference to Exhibit 3.1 of the United Rentals, Inc. Report on Form 8-K filed on March 17, 2009)
 
 
3(b)
By-laws of United Rentals, Inc., amended as of December 20, 2010 (incorporated by reference to Exhibit 3.1 of the United Rentals, Inc. Report on Form 8-K filed on December 23, 2010)
 
 
3(c)
Restated Certificate of Incorporation of United Rentals (North America), Inc., dated February 17, 2012 (incorporated by reference to Exhibit 3(c) of the United Rentals, Inc. Report on Form 10-Q for the quarter ended June 30, 2012)
 
 
3(d)
By-laws of United Rentals (North America), Inc. dated February 17, 2012 (incorporated by reference to Exhibit 3(d) of the United Rentals, Inc. Report on Form 10-Q for the quarter ended June 30, 2012)
 
 
10(a)
Assignment and Acceptance Agreement and Amendment No. 1 to Third Amended and Restated Receivables Purchase Agreement, dated as of February 1, 2013, among United Rentals Receivables LLC II, United Rentals, Inc., Liberty Street Funding LLC, Market Street Funding LLC, Gotham Funding Corporation, The Bank of Nova Scotia, PNC Bank, National Association, The Bank of Tokyo-Mitsubishi UFJ, Ltd., New York Branch and Bank of America, N.A. (incorporated by reference to Exhibit 10.1 of the United Rentals, Inc. Report on Form 8-K filed on February 4, 2013)

 
 
10(b)*
Second Amendment, effective as of April 3, 2013, to the Employment Agreement between United Rentals, Inc. and Dale Asplund
 
 
12*
Computation of Ratio of Earnings to Fixed Charges
 
 
31(a)*
Rule 13a-14(a) Certification by Chief Executive Officer
 
 
31(b)*
Rule 13a-14(a) Certification by Chief Financial Officer
 
 
32(a)**
Section 1350 Certification by Chief Executive Officer
 
 
32(b)**
Section 1350 Certification by Chief Financial Officer
 
 
101***
The following materials from the Quarterly Report on Form 10-Q for the Company and URNA, for the quarter ended March 31, 2013, filed on April 16, 2013, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Income, (iii) Condensed Consolidated Statements of Comprehensive Income, (iv) Condensed Consolidated Statement of Stockholders' Equity, (v) Condensed Consolidated Statements of Cash Flows, and (vi) Notes to the Unaudited Condensed Consolidated Financial Statements.

*
Filed herewith.
**
Furnished (and not filed) herewith pursuant to Item 601(b)(32)(ii) of Regulation S-K under the Exchange Act.
***
Submitted pursuant to Rule 406T of Regulation S-T.



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Table of Contents

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
UNITED RENTALS, INC.
 
 
 
 
Dated:
April 15, 2013
By:
 
/ S /    J OHN  J. F AHEY        
 
 
 
 
John J. Fahey
Vice President, Controller
 
 
 
 
and Principal Accounting Officer
 
 
 
 
 
UNITED RENTALS (NORTH AMERICA), INC.
 
 
 
 
Dated:
April 15, 2013
By:
 
/ S /    J OHN  J. F AHEY        
 
 
 
 
John J. Fahey
Vice President, Controller
 
 
 
 
and Principal Accounting Officer


38


Exhibit 10(b)
SECOND AMENDMENT TO THE
EMPLOYMENT AGREEMENT

This Second Amendment to the Employment Agreement between UNITED RENTALS, INC. (the “Company”) and DALE ASPLUND (“Employee”) is hereby entered into as of the date signed by the parties below.
RECITALS:

WHEREAS , the parties entered into an Amended Employment Agreement, dated April 28, 2008 (the “Employment Agreement”);

WHEREAS , the parties desire to amend the Employment Agreement to modify the provisions identified below;

AND WHEREAS , all other provisions of the Employment Agreement shall remain unchanged;

NOW THEREFORE , in consideration of the mutual promises contained herein and other good and valuable consideration, the receipt and sufficiency of which are acknowledged, the parties mutually agree that:

1.      The 12 month period described in Section 3(a) and Section 3(b) of the Agreement shall be amended to “24 months.”

2.      In the event Employee ever intends to resign his employment with the Company, Employee shall notify the Company of his intent to resign one year prior to such resignation, and Employee shall continue to fully perform and transition his duties throughout the one year notice period and will be entitled to compensation during such period on such terms as may be agreed-upon between the Company and Employee.

3.      In the event Employee receives the payments described in Section 3.1(a) of the Agreement, then, for a period of 12 months following termination of employment, the Company shall provide Company-paid medical and dental coverage under the Consolidated Omnibus Budget Reconciliation Act (“COBRA”), provided that Employee is then actively enrolled in such medical and dental coverage and provided Employee makes a timely COBRA election to continue such medical and dental coverage.

The terms and conditions of all other sections of the Employment Agreement shall remain unchanged and in full force and effect, and Employee hereby reaffirms those provisions.

IN WITNESS WHEREOF , the parties have executed this Amendment to be effective as of the date identified below.

UNITED RENTALS, INC .                      EMPLOYEE


BY: /s/Michael J. Kneeland                      /s/Dale Asplund
                                
NAME: Michael J. Kneeland                      Dale Asplund

TITLE: President and Chief Executive Officer             

DATE: April 3, 2013                          April 2, 2013






Exhibit 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In millions, except ratios)
 
 
Year Ended December 31,  
 
 
Three Months Ended March 31,
 
2008
2009
2010
2011
2012
 
2013
Earnings:
 
 
 
 
 
 
 
(Loss) income from continuing operations before (benefit) provision for income taxes
$
(813
)
$
(107
)
$
(63
)
$
164

$
88

 
$
30

Add:
 
 
 
 
 
 
 
Fixed charges, net of capitalized interest
277

288

279

271

504

 
131

Total earnings available for fixed charges
(536
)
181

216

435

592

 
161

Fixed charges (1):
 
 
 
 
 
 
 
Interest expense, net
174

226

255

228

512

 
118

Add back interest income, which is netted in interest expense
6

1

1

1

2

 
—

Add back gains (losses) on bond repurchases/retirement of subordinated convertible debentures, included in interest expense
41

20

(28
)
(5
)
(72
)
 
(1
)
Interest expense—subordinated convertible debentures, net
9

(4
)
8

7

4

 
2

Capitalized interest
1

1

—

—

—

 
—

Interest component of rent expense
47

45

43

40

58

 
12

Fixed charges
$
278

$
289

$
279

$
271

$
504

 
$
131

Ratio of earnings to fixed charges
 —(2)(3)

    —  (2)

—  (2)

1.6x

1.2x

 
1.2x

 
_________________
(1)
Fixed charges consist of interest expense, which includes amortization of deferred finance charges, interest expense-subordinated debentures, capitalized interest and imputed interest on our lease obligations. The interest component of rent was determined based on an estimate of a reasonable interest factor at the inception of the leases.
(2)
Due to our losses for the years ended December 31, 2010, 2009 and 2008, the ratio coverage was less than 1:1 for these years. We would have had to have generated additional earnings of $63, $108 and $814 for the years ended December 31, 2010, 2009 and 2008, respectively, to have achieved coverage ratios of 1:1.
(3)
The loss for the year ended December 31, 2008 includes the effect of an $1,147 pretax non-cash goodwill impairment charge. The effect of this charge was to reduce the ratio of earnings to fixed charges. Had this charge been excluded from the calculation, the ratio of earnings to fixed charges would have been 2.2x for the year ended December 31, 2008.





Exhibit 31(a)
CERTIFICATIONS
I, Michael J. Kneeland, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of United Rentals, Inc. and United Rentals (North America), Inc. for the quarterly period ended March 31, 2013 ;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrants as of, and for, the periods presented in this report;
4.
The registrants' other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrants and have:
a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrants, including their consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
evaluated the effectiveness of the registrants' disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and.
d)
disclosed in this report any change in the registrants' internal control over financial reporting that occurred during the registrants' most recent fiscal quarter (the registrants' fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants' internal control over financial reporting; and
5.
The registrants' other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants' auditors and the audit committee of the registrants' board of directors (or persons performing the equivalent functions):
a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants' ability to record, process, summarize and report financial information; and
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants' internal control over financial reporting.
 
April 15, 2013
 
/ S /    M ICHAEL  J. K NEELAND        
Michael J. Kneeland
Chief Executive Officer





Exhibit 31(b)
CERTIFICATIONS
I, William B. Plummer, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of United Rentals, Inc. and United Rentals (North America), Inc. for the quarterly period ended March 31, 2013 ;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrants as of, and for, the periods presented in this report;
4.
The registrants' other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrants and have:
a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrants, including their consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
evaluated the effectiveness of the registrants' disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and.
d)
disclosed in this report any change in the registrants' internal control over financial reporting that occurred during the registrants' most recent fiscal quarter (the registrants' fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants' internal control over financial reporting; and
5.
The registrants' other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants' auditors and the audit committee of the registrants' board of directors (or persons performing the equivalent functions):
a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants' ability to record, process, summarize and report financial information; and
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants' internal control over financial reporting.
 
April 15, 2013
 
/ S /    W ILLIAM  B. P LUMMER        
William B. Plummer
Chief Financial Officer





Exhibit 32(a)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of United Rentals, Inc. and United Rentals (North America), Inc. (the “Companies”) on Form 10-Q for the quarterly period ended March 31, 2013 as filed with the Securities and Exchange Commission (the “Report”), I, Michael J. Kneeland, Chief Executive Officer of the Companies, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
1.
the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended (15 U.S.C. 78m); and
2.
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Companies.
 
/ S /    M ICHAEL  J. K NEELAND        
Michael J. Kneeland
Chief Executive Officer
April 15, 2013





Exhibit 32(b)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of United Rentals, Inc. and United Rentals (North America), Inc. (the “Companies”) on Form 10-Q for the quarterly period ended March 31, 2013 as filed with the Securities and Exchange Commission (the “Report”), I, William B. Plummer, Chief Financial Officer of the Companies, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
1.
the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended (15 U.S.C. 78m); and
2.
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Companies.
 
/ S /    W ILLIAM  B. P LUMMER        
William B. Plummer
Chief Financial Officer
April 15, 2013