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4-Traders Homepage  >  Equities  >  Nyse  >  United Rentals, Inc.    URI

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UNITED RENTALS : DE Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in millions, except per share data, unless otherwise indicated) (form 10-Q)

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07/19/2017 | 10:29pm CEST
Executive Overview
We are the largest equipment rental company in the world, with an integrated
network of 960 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 $10.3 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 86 percent of total revenues for
the six months ended June 30, 2017.
For the past several years, we have executed a strategy focused on improving the
profitability of our core equipment rental business through revenue growth,
margin expansion and operational efficiencies. In particular, we have focused on
customer segmentation, customer service differentiation, rate management, fleet
management and operational efficiency.
In 2017, we expect to continue our disciplined focus on increasing our
profitability and return on invested capital. In particular, our strategy calls
for:
•       A consistently superior standard of service to customers, often provided
        through a single point of contact;


•       The further optimization of our customer mix and fleet mix, with a dual

objective: to enhance our performance in serving our current customer

base, and to focus on the accounts and customer types that are best

suited to our strategy for profitable growth. We believe these efforts

will lead to even better service of our target accounts, primarily large

construction and industrial customers, as well as select local

contractors. Our fleet team's analyses are aligned with these objectives

        to identify trends in equipment categories and define action plans that
        can generate improved returns;


•       The implementation of "Lean" management techniques, including kaizen
        processes focused on continuous improvement. We have trained over 3,100

employees, over 70 percent of our district managers and approximately 55

percent of our branch managers on the Lean kaizen process. We continue to

implement this program across our branch network, with the objectives of:

        reducing the cycle time associated with renting our equipment to
        customers; improving invoice accuracy and service quality; reducing the
        elapsed time for equipment pickup and delivery; and improving the

effectiveness and efficiency of our repair and maintenance operations. We

achieved the anticipated run rate savings from the Lean initiatives in

2016 and expect to continue to generate savings from these initiatives;

• The implementation of Project XL, which is a set of eight specific work

        streams focused on driving profitable growth through revenue
        opportunities and generating incremental profitability through cost
        savings across our business; and

• The continued expansion of our trench, power and pump footprint, as well

as our tools offering, and the cross-selling of these services throughout

our network. We believe that the expansion of our trench, power and pump

business, as well as our tools offering, will further position United

Rentals as a single source provider of total jobsite solutions through

our extensive product and service resources and technology offerings.


For the six months ended June 30, 2017, equipment rental revenue increased 9.1
percent as compared to the same period in 2016, primarily reflecting a 12.4
percent increase in the volume of OEC on rent, which includes the impact of the
NES acquisition discussed in note 2 to the condensed consolidated financial
statements, partially offset by a 1.2 percent rental rate decrease. Rental rate
changes are calculated based on the year-over-year variance in average contract
rates, weighted by the prior period revenue mix. The decreased rental rates
reflected the impact of the NES acquisition and pressure from Canada and the
impact of recent industry fleet expansion. On a pro forma basis including NES'
standalone, pre-acquisition results, equipment rental revenue increased 5.1
percent year-over-year, primarily reflecting a 6.5 percent increase in the
volume of OEC on rent partially offset by a 0.9 percent rental rate decrease. We
believe that the increase in the volume of OEC on rent reflects improving demand
in many of our core markets. In particular, we saw improvement in our trench,
power and pump segment. The volume of OEC on rent increased 25.4 percent in our
trench, power and pump segment, primarily due to continued strength in our
Trench Safety and Power and HVAC regions, and improved performance in our Pump
Solutions

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region. The improvement in the Pump Solutions region primarily reflected growth
in revenue from i) upstream oil and gas customers, which have experienced
significant volatility in recent years, and ii) construction and mining
customers.
Financial Overview
Since January 1, 2016, we have taken the following actions to improve our
financial flexibility and liquidity, and to position us to invest the necessary
capital in our business:
• Redeemed all of our 8 1/4 percent Senior Notes and 7 3/8 percent Senior Notes;


• Redeemed $1.1 billion principal amount of our 7 5/8 percent Senior Notes

due 2022;

• Issued $1.0 billion principal amount of 5 7/8 percent Senior Notes due 2026;

• Issued $1.0 billion principal amount of 5 1/2 percent Senior Notes due 2027;

• Amended and extended our ABL facility; and

• Amended and extended our accounts receivable securitization facility.


As of June 30, 2017, we had available liquidity of $1.04 billion, including cash
and cash equivalents of $338.
Net income. Net income and diluted earnings per share for the three and six
months ended June 30, 2017 and 2016 were as follows:
                                Three Months Ended            Six Months Ended
                                     June 30,                     June 30,
                                  2017           2016          2017          2016
Net income                 $      141$  134$     250$  226
Diluted earnings per share $     1.65$ 1.52$    2.92$ 2.52



Net income and diluted earnings per share for the three and six months ended
June 30, 2017 and 2016 include the after-tax impacts of the items below. The tax
rates applied to the items below reflect the statutory rates in the applicable
entity.

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                                                          Three Months Ended June 30,                                                                          Six Months Ended June 30,
                                             2017                                               2016                                             2017                                            2016
Tax rate applied to
items below                           38.5 %                                                38.4 %                                            38.5 %                                         38.4 %
                                                           Impact on                                         Impact on            Contribution              Impact on                                         Impact on
                              Contribution             diluted earnings           Contribution           diluted earnings         to net income         diluted earnings           Contribution           diluted earnings
                        to net income (after-tax)          per share        to net income (after-tax)        per share             (after-tax)              per share        to net income (after-tax)        per share
Merger related costs
(1)                   $                 (9 )           $         (0.09 )   $                   -         $           -       $                 (10 )    $      (0.11 )      $                   -         $           -
Merger related
intangible asset
amortization (2)                       (24 )                     (0.30 )                     (24 )               (0.28 )                       (48 )           (0.57 )                        (51 )               (0.57 )
Impact on
depreciation related
to acquired RSC and
NES fleet and
property and
equipment (3)                            2                        0.03                         -                     -                           2              0.02                            -                     -
Impact of the fair
value mark-up of
acquired RSC and NES
fleet (4)                              (11 )                     (0.13 )                      (5 )               (0.06 )                       (16 )           (0.19 )                        (11 )               (0.13 )
Impact on interest
expense related to
fair value adjustment
of acquired RSC
indebtedness (5)                         -                           -                         -                     -                           -                 -                            1                  0.01
Restructuring charge
(6)                                    (12 )                     (0.14 )                      (2 )               (0.02 )                       (12 )           (0.14 )                         (3 )               (0.03 )
Asset impairment
charge (7)                               -                           -                         -                     -                           -                 -                           (2 )               (0.02 )
Loss on
repurchase/redemption
of debt securities
and amendment of ABL
facility                                (8 )                     (0.09 )                     (16 )               (0.18 )                        (8 )           (0.09 )                        (16 )               (0.18 )


(1) This reflects transaction costs associated with the NES acquisition discussed

in note 2 to our condensed consolidated financial statements. Merger related

costs only include costs associated with major acquisitions that

significantly impact our operations. For additional information, see "Results

of Operations-Other costs/(income)-merger related costs" below.

(2) This reflects the amortization of the intangible assets acquired in the RSC,

National Pump and NES acquisitions.

(3) This reflects the impact of extending the useful lives of equipment acquired

in the RSC and NES acquisitions, net of the impact of additional depreciation

associated with the fair value mark-up of such equipment.

(4) This reflects additional costs recorded in cost of rental equipment sales

associated with the fair value mark-up of rental equipment acquired in the

RSC and NES acquisitions and subsequently sold.

(5) This reflects a reduction of interest expense associated with the fair value

mark-up of debt acquired in the RSC acquisition.

(6) This primarily reflects severance and branch closure charges associated with

our restructuring programs. For additional information, see note 4 to our

condensed consolidated financial statements.

(7) This reflects write-offs of fixed assets in connection with our restructuring

programs.


EBITDA GAAP Reconciliations. EBITDA represents the sum of net income, provision
for income taxes, interest expense, net, depreciation of rental equipment and
non-rental depreciation and amortization. Adjusted EBITDA represents EBITDA plus
the sum of the merger related costs, restructuring charge, stock compensation
expense, net and the impact of the fair value mark-up of the acquired RSC and
NES fleet. These items are excluded from adjusted EBITDA internally when
evaluating our operating performance and for strategic planning and forecasting
purposes, and allow investors to make a more meaningful comparison between our
core business operating results over different periods of time, as well as with
those of other similar companies. The EBITDA and adjusted EBITDA margins
represent EBITDA or adjusted EBITDA divided by total revenue. Management
believes that EBITDA and adjusted EBITDA, when viewed with the Company's results
under GAAP and the accompanying reconciliations, provide useful information
about operating performance and period-over-period growth,

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and provide additional information that is useful for evaluating the operating
performance of our core business without regard to potential distortions.
Additionally, management believes that EBITDA and adjusted EBITDA help investors
gain an understanding of the factors and trends affecting our ongoing cash
earnings, from which capital investments are made and debt is serviced. However,
EBITDA and adjusted EBITDA are not measures of financial performance or
liquidity under GAAP and, accordingly, should not be considered as alternatives
to net income or cash flow from operating activities as indicators of operating
performance or liquidity.
The table below provides a reconciliation between net income and EBITDA and
adjusted EBITDA:
                                                        Three Months Ended              Six Months Ended
                                                             June 30,                       June 30,
                                                         2017             2016          2017         2016
Net income                                        $     141$   134$      250$   226
Provision for income taxes                               88                  83            140         138
Interest expense, net                                   113                 132            207         239
Depreciation of rental equipment                        266                 242            514         485
Non-rental depreciation and amortization                 64                  64            126         131
EBITDA                                            $     672$   655$    1,237$ 1,219
Merger related costs (1)                                 14                   -             16           -
Restructuring charge (2)                                 19                   2             19           4
Stock compensation expense, net (3)                      24                  13             40          22
Impact of the fair value mark-up of acquired RSC
and NES fleet (4)                                        18                   9             26          18
Adjusted EBITDA                                   $     747$   679$    1,338$ 1,263

The table below provides a reconciliation between net cash provided by operating activities and EBITDA and adjusted EBITDA:

                                                                 Six Months Ended
                                                                     June 30,
                                                               2017            2016
Net cash provided by operating activities                  $     1,337$    1,247
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                                                     (4 )           (4 )
Gain on sales of rental equipment                                   98      

102

Gain on sales of non-rental equipment                                3              1
Merger related costs (1)                                           (16 )            -
Restructuring charge (2)                                           (19 )           (4 )
Stock compensation expense, net (3)                                (40 )    

(22 ) Loss on repurchase/redemption of debt securities and amendment of ABL facility

                                          (12 )          (26 )
Excess tax benefits from share-based payment arrangements            -      

53

Changes in assets and liabilities                                 (346 )         (350 )
Cash paid for interest                                             177      

219

Cash paid for income taxes, net                                     59              3
EBITDA                                                     $     1,237$    1,219
Add back:
Merger related costs (1)                                            16              -
Restructuring charge (2)                                            19              4
Stock compensation expense, net (3)                                 40      

22

Impact of the fair value mark-up of acquired RSC and NES
fleet (4)                                                           26             18
Adjusted EBITDA                                            $     1,338$    1,263



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___________________

(1) This reflects transaction costs associated with the NES acquisition discussed

in note 2 to our condensed consolidated financial statements. Merger related

costs only include costs associated with major acquisitions that

significantly impact our operations. For additional information, see "Results

of Operations-Other costs/(income)-merger related costs" below.

(2) This primarily reflects severance and branch closure charges associated with

our restructuring programs. For additional information, see note 4 to our

condensed consolidated financial statements.

(3) Represents non-cash, share-based payments associated with the granting of

equity instruments.

(4) This reflects additional costs recorded in cost of rental equipment sales

associated with the fair value mark-up of rental equipment acquired in the

RSC and NES acquisitions and subsequently sold.


For the three months ended June 30, 2017, EBITDA increased $17, or 2.6 percent,
and adjusted EBITDA increased $68, or 10.0 percent. For the three months ended
June 30, 2017, EBITDA margin decreased 400 basis points to 42.1 percent, and
adjusted EBITDA margin decreased 100 basis points to 46.8 percent. The decrease
in the EBITDA margin primarily reflects i) a slight decrease in the margins,
excluding depreciation, from equipment rentals, ii) increased selling, general
and administrative ("SG&A") compensation costs, including stock compensation
costs, largely due to the impact of the NES acquisition discussed in note 2 to
the condensed consolidated financial statements, increased revenue, improved
profitability, and increases in our stock price and in the volume of stock
awards, and iii) increased merger related costs and restructuring charges
primarily associated with the NES acquisition. The decrease in the adjusted
EBITDA margin primarily reflects i) a slight decrease in the margins, excluding
depreciation, from equipment rentals and ii) increased SG&A compensation costs
largely due to the impact of the NES acquisition and increased revenue,
partially offset by iii) changes in our revenue mix associated with equipment
rentals accounting for a higher percentage of our revenues. The decrease in the
margins, excluding depreciation, from equipment rentals primarily reflects a 1.2
percent rental rate decrease and increased delivery costs. While equipment
rental revenue increased 13.5 percent and the volume of OEC on rent increased
17.4 percent, including the impact of the NES acquisition, delivery costs
increased 32.5 percent primarily due to the increased volume of OEC on rent and
increased transfers of equipment among locations in response to, and in
anticipation of, customer demand.
For the six months ended June 30, 2017, EBITDA increased $18, or 1.5 percent,
and adjusted EBITDA increased $75, or 5.9 percent. For the six months ended
June 30, 2017, EBITDA margin decreased 270 basis points to 41.9 percent, and
adjusted EBITDA margin decreased 90 basis points to 45.3 percent. The decrease
in the EBITDA margin primarily reflects i) a slight decrease in the margins,
excluding depreciation, from equipment rentals, ii) increased stock compensation
expense primarily due to increases in our stock price and in the volume of stock
awards, and iii) increased merger related costs and restructuring charges
primarily associated with the NES acquisition. The decrease in the adjusted
EBITDA margin primarily reflects a slight decrease in the margins, excluding
depreciation, from equipment rentals. The decrease in the margins, excluding
depreciation, from equipment rentals primarily reflects a 1.2 percent rental
rate decrease and increased delivery costs. While equipment rental revenue
increased 9.1 percent and the volume of OEC on rent increased 12.4 percent,
including the impact of the NES acquisition, delivery costs increased 24.2
percent primarily due to the increased volume of OEC on rent and increased
transfers of equipment among locations in response to, and in anticipation of,
customer demand.

Results of Operations
As discussed in note 3 to our condensed consolidated financial statements, our
reportable segments are general rentals and trench, power and pump. 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, power and pump segment is comprised of i) the Trench Safety region,
which rents trench safety equipment such as trench shields, aluminum hydraulic
shoring systems, slide rails, crossing plates, construction lasers and line
testing equipment for underground work, ii) the Power and HVAC region, which
rents power and HVAC equipment such as portable diesel generators, electrical
distribution equipment, and temperature control equipment including heating and
cooling equipment, and iii) the Pump Solutions region, which rents pumps
primarily used by municipalities, industrial plants, and mining, construction,
and agribusiness customers. The trench, power and pump segment's customers
include construction companies involved in infrastructure projects,
municipalities and industrial companies. The trench, power and pump segment
operates throughout the United States and in Canada.
As discussed in note 3 to our condensed consolidated financial statements, we
aggregate our ten geographic regions-Gulf South, Industrial (which serves the
geographic Gulf region and has a strong industrial presence), Mid-Atlantic,
Mid-Central, Midwest, Northeast, Pacific West, South, Southeast and Western
Canada-into our general rentals reporting segment. We periodically review the
size and geographic scope of our regions, and have occasionally reorganized the
regions to create a more balanced and effective structure. Historically, there
have been variances in the levels of equipment rentals gross margins

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achieved by these regions. For the five year period ended June 30, 2017, one of
our general rentals' regions had an equipment rentals gross margin that varied
by between 10 percent and 12 percent from the equipment rentals gross margins of
the aggregated general rentals' regions over the same period. The rental
industry is cyclical, and there historically have been regions with equipment
rentals gross margins that varied by greater than 10 percent from the equipment
rentals gross margins of the aggregated general rentals' regions, though the
specific regions with margin variances of over 10 percent have fluctuated. We
expect margin convergence going forward given the cyclical nature of the rental
industry, and monitor the margin variances and confirm the expectation of future
convergence on a quarterly basis.
We similarly monitor the margin variances for the regions in the trench, power
and pump segment. The Pump Solutions region is primarily comprised of locations
acquired in the April 2014 National Pump acquisition. As such, there isn't a
long history of the Pump Solutions region's rental margins included in the
trench, power and pump segment. When monitoring for margin convergence, we
include projected future results. We monitor the trench, power and pump segment
margin variances and confirm the expectation of future convergence on a
quarterly basis.
We believe that the regions that are aggregated into our segments have similar
economic characteristics, as each region is capital intensive, offers similar
products to similar customers, uses similar methods to distribute its products,
and is subject to similar competitive risks. The aggregation of our regions also
reflects the management structure that we use for making operating decisions and
assessing performance. Although we believe aggregating these regions into our
reporting segments for segment reporting purposes is appropriate, to the extent
that there are significant margin variances that do not converge, we may be
required to disaggregate the regions into separate reporting segments. Any such
disaggregation would have no impact on our consolidated results of operations.
These segments align our external segment reporting with how management
evaluates 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:

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                                  General
                                  rentals     Trench, power and pump      Total
Three Months Ended June 30, 2017
Equipment rentals                $  1,143    $                    224    $ 1,367
Sales of rental equipment             122                          11        133
Sales of new equipment                 43                           4         47
Contractor supplies sales              18                           3         21
Service and other revenues             26                           3         29
Total revenue                    $  1,352    $                    245    $ 1,597
Three Months Ended June 30, 2016
Equipment rentals                $  1,015    $                    189    $ 1,204
Sales of rental equipment             125                           9        134
Sales of new equipment                 31                           5         36
Contractor supplies sales              17                           5         22
Service and other revenues             22                           3         25
Total revenue                    $  1,210    $                    211    $ 1,421
Six Months Ended June 30, 2017
Equipment rentals                $  2,120    $                    413    $ 2,533
Sales of rental equipment             218                          21        239
Sales of new equipment                 78                           8         86
Contractor supplies sales              32                           7         39
Service and other revenues             50                           6         56
Total revenue                    $  2,498    $                    455    $ 2,953
Six Months Ended June 30, 2016
Equipment rentals                $  1,970    $                    351    $ 2,321
Sales of rental equipment             231                          18        249
Sales of new equipment                 57                           9         66
Contractor supplies sales              33                           8         41
Service and other revenues             48                           6         54
Total revenue                    $  2,339    $                    392    $ 2,731



Equipment rentals. For the three months ended June 30, 2017, equipment rentals
of $1.367 billion increased $163, or 13.5 percent, as compared to the same
period in 2016, primarily reflecting a 17.4 percent increase in the volume of
OEC on rent, which includes the impact of the NES acquisition discussed in note
2 to the condensed consolidated financial statements, partially offset by a 1.2
percent rental rate decrease. The decreased rental rates reflected the impact of
the NES acquisition and pressure from Canada and the impact of recent industry
fleet expansion. On a pro forma basis including NES' standalone, pre-acquisition
results, equipment rental revenue increased 6.2 percent year-over-year,
primarily reflecting a 6.6 percent increase in the volume of OEC on rent
partially offset by a 0.4 percent rental rate decrease. We believe that the
increase in the volume of OEC on rent reflects improving demand in many of our
core markets. Equipment rentals represented 86 percent of total revenues for the
three months ended June 30, 2017.

For the six months ended June 30, 2017, equipment rentals of $2.533 billion
increased $212, or 9.1 percent, as compared to the same period in 2016,
primarily reflecting a 12.4 percent increase in the volume of OEC on rent, which
includes the impact of the NES acquisition, partially offset by a 1.2 percent
rental rate decrease. The decreased rental rates reflected the impact of the NES
acquisition and pressure from Canada and the impact of recent industry fleet
expansion. On a pro forma basis including NES' standalone, pre-acquisition
results, equipment rental revenue increased 5.1 percent year-over-year,
primarily reflecting a 6.5 percent increase in the volume of OEC on rent
partially offset by a 0.9 percent rental rate decrease. We believe that the
increase in the volume of OEC on rent reflects improving demand in many of our
core markets. Equipment rentals represented 86 percent of total revenues for the
six months ended June 30, 2017.

For the three months ended June 30, 2017, general rentals equipment rentals increased $128, or 12.6 percent, as compared to the same period in 2016, primarily reflecting a 16.7 percent increase in the volume of OEC on rent, which

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includes the impact of the NES acquisition, partially offset by decreased rental
rates. The decreased rental rates reflected the impact of the NES acquisition
and pressure from Canada and the impact of recent industry fleet expansion. On a
pro forma basis including NES' standalone, pre-acquisition results, the volume
of OEC on rent increased 5.4 percent. We believe that the increase in the volume
of OEC on rent reflects improving demand in many of our core markets. For the
three months ended June 30, 2017, equipment rentals represented 85 percent of
total revenues for the general rentals segment.

For the six months ended June 30, 2017, general rentals equipment rentals
increased $150, or 7.6 percent, as compared to the same period in 2016,
primarily reflecting an 11.5 percent increase in the volume of OEC on rent,
which includes the impact of the NES acquisition, partially offset by decreased
rental rates. The decreased rental rates reflected the impact of the NES
acquisition and pressure from Canada and the impact of recent industry fleet
expansion. On a pro forma basis including NES' standalone, pre-acquisition
results, the volume of OEC on rent increased 5.4 percent. We believe that the
increase in the volume of OEC on rent reflects improving demand in many of our
core markets. For the six months ended June 30, 2017, equipment rentals
represented 85 percent of total revenues for the general rentals segment.

For the three months ended June 30, 2017, trench, power and pump equipment
rentals increased $35, or 18.5 percent, as compared to the same period in 2016,
primarily reflecting a 28.2 percent increase in the volume of OEC on rent.
Trench, power and pump average OEC for the three months ended June 30, 2017
increased 7.7 percent as compared to the same period in 2016. The increase in
the volume of OEC on rent significantly exceeded the increase in average OEC
primarily due to improved performance in our Pump Solutions region. The
improvement in the Pump Solutions region primarily reflected growth in revenue
from i) upstream oil and gas customers, which have experienced significant
volatility in recent years, and ii) construction and mining customers. For the
three months ended June 30, 2017, equipment rentals represented 91 percent of
total revenues for the trench, power and pump segment.

For the six months ended June 30, 2017, trench, power and pump equipment rentals
increased $62, or 17.7 percent, as compared to the same period in 2016,
primarily reflecting a 25.4 percent increase in the volume of OEC on rent.
Trench, power and pump average OEC for the six months ended June 30, 2017
increased 7.0 percent as compared to the same period in 2016. The increase in
the volume of OEC on rent significantly exceeded the increase in average OEC
primarily due to improved performance in our Pump Solutions region. The
improvement in the Pump Solutions region primarily reflected growth in revenue
from i) upstream oil and gas customers, which have experienced significant
volatility in recent years, and ii) construction and mining customers. For the
six months ended June 30, 2017, equipment rentals represented 91 percent of
total revenues for the trench, power and pump segment.
Sales of rental equipment. For the six months ended June 30, 2017, sales of
rental equipment represented approximately 8 percent of our total revenues. Our
general rentals segment accounted for substantially all of these sales. For the
three and six months ended June 30, 2017, sales of rental equipment did not
change significantly from the same periods in 2016.
Sales of new equipment. For the six months ended June 30, 2017, sales of new
equipment represented approximately 3 percent of our total revenues. Our general
rentals segment accounted for substantially all of these sales. For the three
and six months ended June 30, 2017, sales of new equipment increased 30.6
percent and 30.3 percent, respectively, from the same periods in 2016, primarily
reflecting increased volume and increased sales of larger equipment.
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 six months
ended June 30, 2017, contractor supplies sales represented approximately 1
percent of our total revenues. Our general rentals segment accounted for
substantially all of these sales. Contractor supplies sales for the three and
six months ended June 30, 2017 did not change significantly from the same
periods in 2016.
Service and other revenues. Service and other revenues primarily represent our
revenues earned from providing repair and maintenance services on our customers'
fleet (including parts sales). For the six months ended June 30, 2017, service
and other revenues represented approximately 2 percent of our total revenues.
Our general rentals segment accounted for substantially all of these sales. For
the three months ended June 30, 2017, service and other revenues increased 16.0
percent from the same period in 2016 primarily reflecting the impact of the NES
acquisition discussed in note 2 to the condensed consolidated financial
statements. For the six months ended June 30, 2017, service and other revenues
did not change significantly from the same period in 2016.
Segment Equipment Rentals Gross Profit
Segment equipment rentals gross profit and gross margin were as follows:

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                                  General
                                  rentals       Trench, power and pump       Total
Three Months Ended June 30, 2017
Equipment Rentals Gross Profit   $    465     $                111         $   576
Equipment Rentals Gross Margin       40.7 %                   49.6 %          42.1 %
Three Months Ended June 30, 2016
Equipment Rentals Gross Profit   $    417     $                 89         $   506
Equipment Rentals Gross Margin       41.1 %                   47.1 %          42.0 %
Six Months Ended June 30, 2017
Equipment Rentals Gross Profit   $    825     $                195         $ 1,020
Equipment Rentals Gross Margin       38.9 %                   47.2 %          40.3 %
Six Months Ended June 30, 2016
Equipment Rentals Gross Profit   $    774     $                157         $   931
Equipment Rentals Gross Margin       39.3 %                   44.7 %        

40.1 %



General rentals. For the three months ended June 30, 2017, equipment rentals
gross profit increased by $48 and equipment rentals gross margin decreased by 40
basis points from 2016. The gross margin decrease primarily reflects decreased
rental rates and increased delivery costs partially offset by a 110 basis point
increase in time utilization. The decreased rental rates reflected the impact of
the NES acquisition discussed in note 2 to the condensed consolidated financial
statements and pressure from Canada and the impact of recent industry fleet
expansion. The volume of OEC on rent increased 16.7 percent, including the
impact of the NES acquisition. On a pro forma basis including NES' standalone,
pre-acquisition results, the volume of OEC on rent increased 5.4 percent. We
believe that the increase in the volume of OEC on rent reflects improving demand
in many of our core markets. While the volume of OEC on rent increased 16.7
percent, delivery costs increased 31.2 percent due primarily to the increased
volume of OEC on rent and increased transfers of equipment among locations in
response to, and in anticipation of, customer demand. Time utilization is
calculated by dividing the amount of time an asset is on rent by the amount of
time the asset has been owned during the year. For the three months ended
June 30, 2017 and 2016, time utilization was 70.3 percent and 69.2 percent,
respectively.

For the six months ended June 30, 2017, equipment rentals gross profit increased
by $51 and equipment rentals gross margin decreased by 40 basis points from
2016. The gross margin decrease primarily reflects decreased rental rates and
increased delivery costs partially offset by a 140 basis point increase in time
utilization. The decreased rental rates reflected the impact of the NES
acquisition and pressure from Canada and the impact of recent industry fleet
expansion. The volume of OEC on rent increased 11.5 percent, including the
impact of the NES acquisition. On a pro forma basis including NES' standalone,
pre-acquisition results, the volume of OEC on rent increased 5.4 percent. We
believe that the increase in the volume of OEC on rent reflects improving demand
in many of our core markets. While the volume of OEC on rent increased 11.5
percent, delivery costs increased 24.2 percent due primarily to the increased
volume of OEC on rent and increased transfers of equipment among locations in
response to, and in anticipation of, customer demand. For the six months ended
June 30, 2017 and 2016, time utilization was 68.9 percent and 67.5 percent,
respectively.
Trench, power and pump. For the three months ended June 30, 2017, equipment
rentals gross profit increased by $22 and equipment rentals gross margin
increased by 250 basis points from 2016. The increase in equipment rentals gross
profit primarily reflects increased equipment rentals revenue on a larger fleet.
Year-over-year, trench, power and pump equipment rentals increased 18.5 percent,
average OEC increased 7.7 percent and the volume of OEC on rent increased 28.2
percent. The increase in the volume of OEC on rent significantly exceeded the
increase in average OEC primarily due to improved performance in our Pump
Solutions region. The improvement in the Pump Solutions region primarily
reflected growth in revenue from i) upstream oil and gas customers, which have
experienced significant volatility in recent years, and ii) construction and
mining customers. The increase in equipment rentals gross margin reflected
decreased compensation, depreciation and property costs as a percentage of
revenue. As compared to the equipment rentals revenue increase of 18.5 percent,
compensation costs increased 10.3 percent due primarily to increased headcount
associated with higher rental volume, depreciation of rental equipment increased
6.4 percent and property costs increased 1.4 percent. Capitalizing on the demand
for the higher margin equipment rented by our trench, power and pump segment has
been a key component of our strategy in recent years.
For the six months ended June 30, 2017, equipment rentals gross profit increased
by $38 and equipment rentals gross margin increased by 250 basis points from
2016. The increase in equipment rentals gross profit primarily reflects
increased equipment rentals revenue on a larger fleet. Year-over-year, trench,
power and pump equipment rentals increased 17.7 percent,

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average OEC increased 7.0 percent and the volume of OEC on rent increased 25.4
percent. The increase in the volume of OEC on rent significantly exceeded the
increase in average OEC primarily due to improved performance in our Pump
Solutions region. The improvement in the Pump Solutions region primarily
reflected growth in revenue from i) upstream oil and gas customers, which have
experienced significant volatility in recent years, and ii) construction and
mining customers. The increase in equipment rentals gross margin reflected
decreased compensation, depreciation and property costs as a percentage of
revenue. As compared to the equipment rentals revenue increase of 17.7 percent,
compensation costs increased 10.1 percent due primarily to increased headcount
associated with higher rental volume, depreciation of rental equipment increased
6.8 percent and property costs increased 1.5 percent. Capitalizing on the demand
for the higher margin equipment rented by our trench, power and pump segment has
been a key component of our strategy in recent years.
Gross Margin. Gross margins by revenue classification were as follows:
                              Three Months Ended June 30,        Six Months Ended June 30,
                             2017       2016       Change       2017      2016      Change
Total gross margin          41.0 %      41.5 %    (50) bps     39.6%     39.9%     (30) bps
Equipment rentals           42.1 %      42.0 %     10 bps      40.3%     40.1%      20 bps
Sales of rental equipment   39.1 %      41.0 %    (190) bps    41.0%     41.0%         -
Sales of new equipment      14.9 %      19.4 %    (450) bps    14.0%     18.2%     (420) bps
Contractor supplies sales   28.6 %      31.8 %    (320) bps    28.2%     31.7%     (350) bps
Service and other revenues  48.3 %      60.0 %   (1,170) bps   50.0%     59.3%     (930) bps



For the three months ended June 30, 2017, total gross margin decreased 50 basis
points as compared to the same period in 2016. Equipment rentals gross margin
increased 10 basis points, primarily reflecting a 190 basis point increase in
time utilization partially offset by a 1.2 percent rental rate decrease. The
decreased rental rates reflected the impact of the NES acquisition discussed in
note 2 to the condensed consolidated financial statements and pressure from
Canada and the impact of recent industry fleet expansion. For the three months
ended June 30, 2017 and 2016, time utilization was 69.4 percent and 67.5
percent, respectively. Time utilization for the three months ended June 30, 2017
was a second quarter record. The volume of OEC on rent increased 17.4 percent,
including the impact of the NES acquisition. On a pro forma basis including NES'
standalone, pre-acquisition results, the volume of OEC on rent increased 6.6
percent. We believe that the increase in the volume of OEC on rent reflects
improving demand in many of our core markets. Gross margin from sales of rental
equipment decreased 190 basis points primarily due to decreased margins on sales
of equipment acquired in the NES acquisition. Gross margin from sales of new
equipment decreased 450 basis points. Sales of new equipment increased 30.6
percent, primarily reflecting increased volume and increased sales of larger
equipment, and some of the larger equipment sales were at lower margins. Gross
margin from contractor supplies sales decreased 320 basis points, primarily due
to higher than normal margins in 2016 and the impact of some large volume sales
at lower margins. Gross margin from service and other revenues decreased 1,170
basis points. In 2017, as a result of our increased focus on the service line of
business, we increased the allocation of labor to it. Such labor costs were
formerly included in cost of equipment rentals. We expect that the gross margin
from service and other revenues for 2017 will continue to be less than the
historic margins due to this change. Beyond 2017, we expect that the service and
other margins will increase as a result of certain initiatives we are
undertaking as part of Project XL, which is a set of eight specific work streams
focused on driving profitable growth through revenue opportunities and
generating incremental profitability through cost savings across our business.

For the six months ended June 30, 2017, total gross margin decreased 30 basis
points as compared to the same period in 2016. Equipment rentals gross margin
increased 20 basis points, primarily reflecting a 200 basis point increase in
time utilization partially offset by a 1.2 percent rental rate decrease. The
decreased rental rates reflected the impact of the NES acquisition and pressure
from Canada and the impact of recent industry fleet expansion. For the six
months ended June 30, 2017 and 2016, time utilization was 67.8 percent and 65.8
percent, respectively. The volume of OEC on rent increased 12.4 percent,
including the impact of the NES acquisition. On a pro forma basis including NES'
standalone, pre-acquisition results, the volume of OEC on rent increased 6.5
percent. We believe that the increase in the volume of OEC on rent reflects
improving demand in many of our core markets. Gross margin from sales of new
equipment decreased 420 basis points. Sales of new equipment increased 30.3
percent, primarily reflecting increased volume and increased sales of larger
equipment, and some of the larger equipment sales were at lower margins. Gross
margin from contractor supplies sales decreased 350 basis points, primarily due
to higher than normal margins in 2016 and the impact of some large volume sales
at lower margins. Gross margin from service and other revenues decreased 930
basis points. In 2017, as a result of our increased focus on the service line of
business, we increased the allocation of labor to it. Such labor costs were
formerly included in cost of equipment rentals. We expect that the gross margin
from service and other revenues for 2017 will continue to be less than the
historic margins due to

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this change. Beyond 2017, we expect that the service and other margins will
increase as a result of certain initiatives we are undertaking as part of
Project XL.
Other costs/(income)
The table below includes the other costs/(income) in our condensed consolidated
statements of income, as well as key associated metrics, for the three and six
months ended June 30, 2017 and 2016:
                      Three Months Ended June 30,           Six Months Ended June 30,
                     2017          2016      Change        2017         2016     Change
Selling, general
and
administrative
("SG&A") expense     $218$177       23.2%        $411$354      16.1%
SG&A expense as a
percentage of
revenue             13.7%         12.5%      120 bps       13.9%        13.0%    90 bps
Merger related
costs                 14            -          -%           16            -        -%
Restructuring
charge                19            2        850.0%         19            4      375.0%
Non-rental
depreciation and
amortization          64            64         -%           126          131     (3.8)%
Interest expense,
net                  113           132       (14.4)%        207          239     (13.4)%
Other income, net    (2)           (2)         -%            -           (2)    (100.0)%
Provision for
income taxes          88            83        6.0%          140          138      1.4%
Effective tax
rate                38.4%         38.2%      20 bps        35.9%        37.9%   (200) bps


SG&A expense primarily includes sales force compensation, information technology
costs, third party professional fees, management salaries, bad debt expense and
clerical and administrative overhead. The increase in SG&A expense as a
percentage of revenue for the three months ended June 30, 2017
primarily reflects increased compensation costs, including stock compensation
costs, largely due to the impact of the NES acquisition discussed in note 2 to
the condensed consolidated financial statements, improved profitability, and
increases in our stock price and in the volume of stock awards. The increase in
SG&A expense as a percentage of revenue for the six months ended June 30, 2017
primarily reflects increased stock compensation costs largely due to increases
in our stock price and in the volume of stock awards.
The merger related costs reflect transaction costs associated with the NES
acquisition discussed in note 2 to our condensed consolidated financial
statements. We have made a number of acquisitions in the past and may continue
to make acquisitions in the future. Merger related costs only include costs
associated with major acquisitions that significantly impact our operations. The
historic acquisitions that have included merger related costs are RSC, which had
annual revenues of approximately $1.5 billion prior to the acquisition, and
National Pump, which had annual revenues of over $200 prior to the acquisition.
As discussed in note 2 to our condensed consolidated financial statements, NES
had annual revenues of approximately $369.
The restructuring charges primarily reflect severance and branch closure charges
associated with our restructuring programs. In the second quarter of 2017, we
initiated a restructuring program following the closing of the NES acquisition
discussed in note 2 to the condensed consolidated financial statements. The
restructuring program also includes actions undertaken associated with Project
XL, which is a set of eight specific work streams focused on driving profitable
growth through revenue opportunities and generating incremental profitability
through cost savings across our business. For additional information, see note 4
to our condensed consolidated financial statements.
Non-rental depreciation and amortization includes (i) the amortization of other
intangible assets and (ii) depreciation expense associated with equipment that
is not offered for rent (such as computers and office equipment) and
amortization expense associated with leasehold improvements. Our other
intangible assets consist of customer relationships and non-compete agreements.
Interest expense, net for the three and six months ended June 30, 2017 includes
a loss of $12 associated with the redemption of $250 principal amount of our
7 5/8 percent Senior Notes, as discussed in note 8 to the condensed consolidated
financial statements. Interest expense, net for the three and six months ended
June 30, 2016 includes an aggregate loss of $26 associated with the redemptions
of all of our 8 1/4 percent Senior Notes and $550 principal amount of our
7 3/8 percent Senior Notes, and an extension of our ABL facility. Excluding the
impact of the debt redemption losses, interest expense, net for the three and
six months ended June 30, 2017 decreased primarily due to a lower average cost
of debt.

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The differences between the 2017 and 2016 effective tax rates and the U.S.
federal statutory income tax rate of 35 percent primarily reflect the
geographical mix of income between foreign and domestic operations and the
impact of state and local taxes, and certain nondeductible charges.
Additionally, the effective tax rate for the six months ended June 30, 2017
includes a tax reduction of $8 associated with excess tax benefits from
share-based payment arrangements, as discussed in note 1 to our condensed
consolidated financial statements.
Balance sheet. Rental equipment, net increased by $887, or 14.3 percent, from
December 31, 2016 to June 30, 2017 primarily due to the impact of the NES
acquisition discussed in note 2 to the condensed consolidated financial
statements. Accounts payable increased by $449, or 184.8 percent, from
December 31, 2016 to June 30, 2017 primarily due to a seasonal increase in
capital expenditures.
Liquidity and Capital Resources
We manage our liquidity using internal cash management practices, which are
subject to (i) the policies and cooperation of the financial institutions we
utilize to maintain and provide cash management services, (ii) the terms and
other requirements of the agreements to which we are a party and (iii) the
statutes, regulations and practices of each of the local jurisdictions in which
we operate. See "Financial Overview" above for a summary of recent capital
structure actions taken to improve our financial flexibility and liquidity.
Since 2012, we have repurchased a total of $1.450 billion of Holdings' common
stock under three completed share repurchase programs. Additionally, in July
2015, our Board authorized a new $1 billion share repurchase program which
commenced in November 2015. As of July 17, 2017, we have repurchased $627 of
Holdings' common stock under the $1 billion share repurchase program. In October
2016, we paused repurchases under the program as we evaluated a number of
potential acquisition opportunities. As discussed in note 2 to the condensed
consolidated financial statements, in April 2017, we completed the acquisition
of NES. We intend to complete the share repurchase program; however, we will
re-evaluate the decision to do so as we integrate NES and assess other potential
uses of capital.
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 June 30, 2017,
we had cash and cash equivalents of $338. Cash equivalents at June 30, 2017
consist of direct obligations of financial institutions rated A or better. We
believe that our existing sources of cash will be sufficient to support our
existing operations over the next 12 months. The table below presents financial
information associated with our principal sources of cash as of and for the six
months ended June 30, 2017:
ABL facility:
Borrowing capacity, net of letters of credit               $  689
Outstanding debt, net of debt issuance costs                1,763
Interest rate at June 30, 2017                                2.7 %
Average month-end debt outstanding (1)                      1,234

Weighted-average interest rate on average debt outstanding 2.5 % Maximum month-end debt outstanding (1)

                      1,771
Accounts receivable securitization facility:
Borrowing capacity                                             10
Outstanding debt, net of debt issuance costs                  615
Interest rate at June 30, 2017                                1.9 %
Average month-end debt outstanding                            557

Weighted-average interest rate on average debt outstanding 1.7 % Maximum month-end debt outstanding

                            616


_________________

(1)  The maximum month-end debt outstanding under the ABL facility exceeded the
average month-end amount outstanding during the six months ended June 30, 2017
primarily due to the use of borrowings under the ABL facility to finance the
redemption of $250 principal amount of our 7 5/8 percent Senior Notes discussed
in note 8 to the condensed consolidated financial statements.
We expect that our principal needs for cash relating to our operations over the
next 12 months will be to fund (i) operating activities and working capital,
(ii) the purchase of rental equipment and inventory items offered for sale,
(iii) payments due under operating leases, (iv) debt service, (v) share
repurchases and (vi) acquisitions. We plan to fund such cash requirements from
our existing sources of cash. In addition, we may seek additional financing
through the securitization of some of our real estate, the use of additional
operating leases or other financing sources as market conditions permit.

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To access the capital markets, we rely on credit rating agencies to assign
ratings to our securities as an indicator of credit quality. Lower credit
ratings generally result in higher borrowing costs and reduced access to debt
capital markets. Credit ratings also affect the costs of derivative
transactions, including interest rate and foreign currency derivative
transactions. As a result, negative changes in our credit ratings could
adversely impact our costs of funding. Our credit ratings as of July 17, 2017
were as follows:
                  Corporate Rating   Outlook
Moody's                 Ba3          Positive
Standard & Poor's       BB-           Stable


A security rating is not a recommendation to buy, sell or hold securities. There
is no assurance that any rating will remain in effect for a given period of time
or that any rating will not be revised or withdrawn by a rating agency in the
future.
Loan Covenants and Compliance. As of June 30, 2017, we were in compliance with
the covenants and other provisions of the ABL facility, the accounts receivable
securitization facility and the senior notes. Any failure to be in compliance
with any material provision or covenant of these agreements could have a
material adverse effect on our liquidity and operations.
The only financial maintenance covenant that currently exists under the ABL
facility is the fixed charge coverage ratio. Subject to certain limited
exceptions specified in the ABL facility, the fixed charge coverage ratio
covenant under the ABL facility will only apply in the future if specified
availability under the ABL facility falls below 10 percent of the maximum
revolver amount under the ABL facility. When certain conditions are met, cash
and cash equivalents and borrowing base collateral in excess of the ABL facility
size may be included when calculating specified availability under the ABL
facility. As of June 30, 2017, specified availability under the ABL facility
exceeded the required threshold and, as a result, this financial maintenance
covenant was inapplicable. Under our accounts receivable securitization
facility, we are required, among other things, to maintain certain financial
tests relating to: (i) the default ratio, (ii) the delinquency ratio, (iii) the
dilution ratio and (iv) days sales outstanding. The accounts receivable
securitization facility also requires us to comply with the fixed charge
coverage ratio under the ABL facility, to the extent the ratio is applicable
under the ABL facility.
URNA's payment capacity is restricted under the covenants in the ABL facility
and the indentures governing its outstanding indebtedness. Although this
restricted capacity limits our ability to move operating cash flows to Holdings,
because of certain intercompany arrangements, we do not expect any material
adverse impact on Holdings' ability to meet its cash obligations.
Sources and Uses of Cash. During the six months ended June 30, 2017, we
(i) generated cash from operating activities of $1.337 billion, (ii) generated
cash from the sale of rental and non-rental equipment of $245 and (iii) received
cash from debt proceeds, net of payments, of $400. We used cash during this
period principally to (i) purchase rental and non-rental equipment of $968, (ii)
purchase other companies for $965 and (iii) purchase shares of our common stock
for $24. During the six months ended June 30, 2016, we (i) generated cash from
operating activities of $1.300 billion excluding the excess tax benefits from
share-base payment arrangements and (ii) generated cash from the sale of rental
and non-rental equipment of $256. We used cash during this period principally
to (i) purchase rental and non-rental equipment of $764, (ii) make debt
payments, net of proceeds, of $356 and (iii) purchase shares of our common stock
for $336.
Free Cash Flow GAAP Reconciliation. We define "free cash flow" 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 and
excess tax benefits from share-based payment arrangements. Management believes
that free cash flow provides useful additional information concerning cash flow
available to meet future debt service obligations and working capital
requirements. However, free cash flow is not a measure of financial performance
or liquidity under GAAP. Accordingly, free cash flow should not be considered an
alternative to net income or cash flow from operating activities as an indicator
of operating performance or liquidity. The table below provides a reconciliation
between net cash provided by operating activities and free cash flow.

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                                                                 Six Months Ended
                                                                     June 30,
                                                                 2017        2016
Net cash provided by operating activities                     $  1,337$ 1,247
Purchases of rental equipment                                     (913 )      (722 )
Purchases of non-rental equipment                                  (55 )       (42 )
Proceeds from sales of rental equipment                            239      

249

Proceeds from sales of non-rental equipment                          6      

7

Excess tax benefits from share-based payment arrangements (1) -

    53
Free cash flow                                                $    614$   792

(1) As discussed in note 1 to our condensed consolidated financial statements, we

adopted accounting guidance in the first quarter of 2017 that changed the

cash flow presentation of excess tax benefits from share-based payment

arrangements. In the table above, the excess tax benefits from share-based

payment arrangements for 2017 are presented as a component of net cash

provided by operating activities, while, for 2016, they are presented as a

separate line item. Because we historically included the excess tax benefits

from share-based payment arrangements in the free cash flow calculation, the

adoption of this guidance did not change the calculation of free cash flow.



Free cash flow for the six months ended June 30, 2017 was $614, a decrease of
$178 as compared to $792 for the six months ended June 30, 2016. Free cash flow
decreased primarily due to increased purchases of rental equipment.
Certain Information Concerning Contractual Obligations. The table below provides
certain information concerning the payments coming due under certain categories
of our existing contractual obligations as of June 30, 2017:
                              2017    2018   2019   2020    2021    Thereafter    Total
Debt and capital leases (1) $   629$  27$  16$   5$ 1,773$      5,804$  8,254
Interest due on debt (2)        191    377    376    376      349         1,028     2,697
Operating leases (1):
Real estate                      55     99     79     59       41            51       384
Non-rental equipment             20     39     31     25       16            11       142
Service agreements (3)            8     12      3      -        -             -        23
Purchase obligations (4)        560      -      -      -        -             -       560
Total (5)                   $ 1,463$ 554$ 505$ 465$ 2,179$      6,894$ 12,060



_________________

(1) The payments due with respect to a period represent (i) in the case of debt

and capital leases, the scheduled principal payments due in such period, and

(ii) in the case of operating leases, the minimum lease payments due in such

period under non-cancelable operating leases.

(2) Estimated interest payments have been calculated based on the principal

amount of debt and the applicable interest rates as of June 30, 2017.

(3) These primarily represent service agreements with third parties to provide

     wireless and network services.


(4)  As of June 30, 2017, we had outstanding purchase orders, which were
     negotiated in the ordinary course of business, with our equipment and

inventory suppliers. These purchase commitments can generally be cancelled

by us with 30 days notice and without cancellation penalties. The equipment

and inventory receipts from the suppliers for these purchases and related

payments to the suppliers are expected to be completed throughout 2017.

(5)  This information excludes $4 of unrecognized tax benefits. It is not
     possible to estimate the time period during which these unrecognized tax
     benefits may be paid to tax authorities.


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.

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