Item 6. Selected Financial Data

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Item 6. Selected Financial Data

The following selected financial data reflects the results of operations and balance sheet data as of and for the years ended December 31, 2011 to 2015. On April 30, 2012, we acquired RSC Holdings Inc. ("RSC"). RSC has been included in our results of operations since that date. RSC was one of the largest equipment rental providers in North America and had total revenue of $1.5 billion for 2011. The data below should be read in conjunction with, and is qualified by reference to, our Management’s Discussion and Analysis and our consolidated financial statements and notes thereto contained elsewhere in this report.

Year Ended December 31,
20152014201320122011
(in millions, except per share data)
Income statement data:
Total revenues$5,817$5,685$4,955$4,117$2,611
Total cost of revenues3,3373,2532,9682,5301,713
Gross profit2,4802,4321,9871,587898
Selling, general and administrative expenses714758642588407
Merger related costs(26)11911119
Restructuring charge6(1)129919
Non-rental depreciation and amortization26827324619857
Operating income1,5181,3911,078591396
Interest expense, net567555475512228
Interest expense-subordinated convertible debentures——347
Other income, net(12)(14)(5)(13)(3)
Income before provision for income taxes96385060588164
Provision for income taxes3783102181363
Net income58554038775101
Basic earnings per share$6.14$5.54$4.14$0.91$1.62
Diluted earnings per share$6.07$5.15$3.64$0.79$1.38
December 31,
20152014201320122011
(in millions)
Balance sheet data:
Total assets (1)$12,083$12,129$10,876$10,648$3,976
Total debt (1)8,1627,9627,0787,1962,924
Subordinated convertible debentures———5555
Stockholders’ equity1,4761,7961,8281,54364

(1) In 2015, we adopted accounting guidance on the presentation of debt issuance costs. This guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. Adopting this guidance resulted in reductions to both total assets and total debt, which are presented for all periods above in accordance with this new guidance. In 2015, we also adopted accounting guidance that requires that deferred tax liabilities and assets be classified as non-current in the balance sheet. Adopting this guidance resulted in a reduction to total assets, which are presented for all periods above in accordance with this new guidance.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in millions, except per share data and unless otherwise indicated)

Executive Overview

United Rentals is the largest equipment rental company in the world. Our customer service network consists of 897 rental locations in the United States and Canada as well as centralized call centers and online capabilities. 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 compelling competitive advantages. These include a fleet of rental equipment with a total original equipment cost (“OEC”), based on the initial consideration paid, of $8.7 billion, and a national branch network that operates in 49 U.S. states and every Canadian province, and serves 99 of the 100 largest 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 construction and industrial companies, manufacturers, utilities, municipalities, homeowners, government entities and other customers. Our revenues are derived from the following sources: equipment rentals, sales of rental equipment, sales of new equipment, contractor supplies sales and service and other revenues. In 2015, equipment rental revenues represented 85 percent of our total revenues.

For the past several years, we have executed a strategy focused on improving the profitability of our core equipment rental business through revenue growth, margin expansion and operational efficiencies. In particular, we have focused on customer segmentation, customer service differentiation, rate management, fleet management and operational efficiency.

In 2016, 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, through a program we call Operation United 2. As of December 31, 2015, we have trained over 3,100 employees, over 70 percent of our district managers and over 60 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. As discussed in note 5 to our consolidated financial statements, in the fourth quarter of 2015, we initiated a restructuring program focused on cost savings throughout the organization partially due to the Lean initiatives not fully generating the anticipated cost savings due to lower than expected rental volume in 2015. The savings generated from Lean initiatives are partially dependent on rental volume, and, though we have not yet achieved the anticipated level of Lean savings, we expect to continue to achieve savings through the Lean initiatives; 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 plan to open at least 14 specialty rental branches/tool hubs in 2016 and continue to invest in specialty rental fleet to further position United Rentals as a single source provider of total jobsite solutions through our extensive product and service resources and technology offerings.

In 2016, based on our analyses of industry forecasts and macroeconomic indicators, we expect that the majority of our end markets will continue to recover and drive demand for equipment rental services. Specifically, we expect that North American industry equipment rental revenue will increase approximately 6 percent. The expected industry growth reflects growth of approximately 7 percent and 1 percent in the U.S. and Canada, respectively, on a constant currency basis.

In April 2014, we acquired certain assets of the following four entities: National Pump & Compressor, Ltd., Canadian Pump and Compressor Ltd., GulfCo Industrial Equipment, LP and LD Services, LLC (collectively “National Pump”). The results of National Pump's operations have been included in our consolidated financial statements since the acquisition date. National Pump was the second largest specialty pump rental company in North America, and was a leading supplier of pumps

for energy and petrochemical customers, with upstream oil and gas customers representing about half of its revenue. For additional information concerning the National Pump acquisition, see note 3 to our consolidated financial statements.

We use the American Rental Association criteria for reporting rental rates, time utilization and OEC. For the full year 2015 we achieved:

•A year-over-year increase of 0.5 percent in rental rates;
•A year-over-year increase of 3.2 percent in the volume of OEC on rent;
•Time utilization of 67.3 percent decreased 150 basis points year-over-year. In 2015, time utilization was impacted by volume and pricing pressure on our general rental business and our Pump Solutions region associated with upstream oil and gas customers. Excluding the branches with the most exposure to upstream oil and gas, time utilization decreased 40 basis points year-over-year;
•64 percent of equipment rental revenue derived from key accounts, which was flat with 2014. Key accounts are each managed by a single point of contact to enhance customer service; and
•An increase of 12 rental locations in our higher margin trench, power and pump (also referred to as "specialty") segment in 2015, comprised of nine locations in the United States and three in Canada.

Financial Overview

In 2015 and 2014, we took a number of positive actions related to our capital structure, and have significantly improved our financial flexibility and liquidity. These actions, which are discussed in note 12 to our consolidated financial statements, include:

•In January 2014, we redeemed all of our 10 1/4 percent Senior Notes.
•In March 2014, we issued $525 aggregate principal amount of 6 1/8 percent Senior Notes as an add on to our existing 6 1/8 percent Senior Notes.
•In March 2014, we issued $850 aggregate principal amount of 5 3/4 percent Senior Notes.
•In April 2014, we redeemed all of our 9 1/4 percent Senior Notes.
•In September 2014 and September 2015, we amended and extended our accounts receivable securitization facility. The September 2015 amendment included an increase in the size of the facility from $550 to $625.
•In March 2015, we issued $1 billion principal amount of 4 5/8 percent Senior Secured Notes.
•In March 2015, we issued $800 principal amount of 5 1/2 percent Senior Notes.
•In March 2015, we amended and extended our ABL facility, and increased the size of the facility to $2.5 billion.
•In April 2015, we redeemed all of our 5 3/4 percent Senior Secured Notes and 8 3/8 percent Senior Subordinated Notes.
•In April 2015, we redeemed $350 principal amount of our 8 1/4 percent Senior Notes.

These actions have improved our financial flexibility and liquidity and positioned us to invest the necessary capital in our business to take advantage of opportunities in the economic recovery. As of December 31, 2015, we had available liquidity of $1.10 billion, including cash of $179.

Net income. Net income and diluted earnings per share for each of the three years in the period ended December 31, 2015 were as follows:

Year Ended December 31,
201520142013
Net income$585$540$387
Diluted earnings per share$6.07$5.15$3.64

Net income and diluted earnings per share for each of the three years in the period ended December 31, 2015 include the after-tax impacts of the following items:

Year Ended December 31,
201520142013
Contribution to net income (after-tax)Impact on diluted earnings per shareContribution to net income (after-tax)Impact on diluted earnings per shareContribution to net income (after-tax)Impact on diluted earnings per share
Merger related costs (1)$17$0.17$(7)$(0.06)$(5)$(0.05)
Merger related intangible asset amortization (2)(111)(1.15)(115)(1.10)(100)(0.94)
Impact on depreciation related to acquired RSC fleet and property and equipment (3)20.0230.0340.04
Impact of the fair value mark-up of acquired RSC fleet (4)(18)(0.19)(22)(0.21)(27)(0.25)
Impact on interest expense related to fair value adjustment of acquired RSC indebtedness (5)20.0230.0340.04
Restructuring charge (6)(4)(0.04)10.01(7)(0.07)
Asset impairment charge (7)————(2)(0.02)
Loss on extinguishment of debt securities, including subordinated convertible debentures, and ABL amendment(75)(0.78)(48)(0.46)(2)(0.02)
(1)This reflects transaction costs associated with the RSC and National Pump acquisitions. The income for the year ended December 31, 2015 reflects a decline in the fair value of the contingent cash consideration component of the National Pump purchase price. For additional information concerning the National Pump acquisition, see note 3 to our consolidated financial statements.
(2)This reflects the amortization of the intangible assets acquired in the RSC and National Pump acquisitions.
(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)This reflects a reduction of interest expense associated with the fair value mark-up of debt acquired in the RSC acquisition. See note 12 to our consolidated financial statements for additional detail on the acquired debt.
(6)As discussed in note 5 to our consolidated financial statements, this reflects severance costs and branch closure charges associated with our closed restructuring programs and our current restructuring program.
(7)This charge primarily reflects write-offs of leasehold improvements and other fixed assets in connection with our closed restructuring programs.

In addition to the matters discussed above, our 2015 performance reflects increased gross profit from equipment rentals.

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 merger related costs, restructuring charge, stock compensation expense, net, the impact of the fair value mark-up of the acquired RSC fleet, and the loss on sale of software subsidiary. 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 U.S. generally accepted accounting principles (“GAAP”) and the accompanying reconciliations, provide useful information about operating performance and period-over-period growth, and provide additional information that is useful for evaluating the operating performance of our core business without regard to potential distortions. Additionally, management believes that EBITDA and adjusted EBITDA help investors gain an understanding of the factors and trends affecting our ongoing cash earnings, from which capital investments are made and debt is serviced. However, EBITDA and adjusted EBITDA are not measures of financial performance or liquidity under GAAP and, accordingly, should not be considered as alternatives to net income or cash flow from operating activities as indicators of operating performance or liquidity.

The table below provides a reconciliation between net income and EBITDA and adjusted EBITDA:

Year Ended December 31,
201520142013
Net income$585$540$387
Provision for income taxes378310218
Interest expense, net567555475
Interest expense—subordinated convertible debentures——3
Depreciation of rental equipment976921852
Non-rental depreciation and amortization268273246
EBITDA2,7742,5992,181
Merger related costs (1)(26)119
Restructuring charge (2)6(1)12
Stock compensation expense, net (3)497446
Impact of the fair value mark-up of acquired RSC fleet (4)293544
Loss on sale of software subsidiary——1
Adjusted EBITDA$2,832$2,718$2,293

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

Year Ended December 31,
201520142013
Net cash provided by operating activities$1,995$1,801$1,551
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(10)(17)(21)
Gain on sales of rental equipment227229176
Gain on sales of non-rental equipment8116
Loss on sale of software subsidiary (5)——(1)
Merger related costs (1)26(11)(9)
Restructuring charge (2)(6)1(12)
Stock compensation expense, net (3)(49)(74)(46)
Loss on extinguishment of debt securities(123)(80)(1)
Loss on retirement of subordinated convertible debentures——(2)
Excess tax benefits from share-based payment arrangements5——
Changes in assets and liabilities19418231
Cash paid for interest, including subordinated convertible debentures447457461
Cash paid for income taxes, net6010048
EBITDA2,7742,5992,181
Add back:
Merger related costs (1)(26)119
Restructuring charge (2)6(1)12
Stock compensation expense, net (3)497446
Impact of the fair value mark-up of acquired RSC fleet (4)293544
Loss on sale of software subsidiary——1
Adjusted EBITDA$2,832$2,718$2,293
(1)This reflects transaction costs associated with the RSC and National Pump acquisitions. The income for the year ended December 31, 2015 reflects a decline in the fair value of the contingent cash consideration component of the National

Pump purchase price. For additional information concerning the National Pump acquisition, see note 3 to our consolidated financial statements.

(2)As discussed in note 5 to our consolidated financial statements, this reflects severance costs and branch closure charges associated with our closed restructuring programs and our current restructuring program.
(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 acquisition and subsequently sold.

For the year ended December 31, 2015, EBITDA increased $175, or 6.7 percent, and adjusted EBITDA increased $114, or 4.2 percent. The EBITDA increase primarily reflects increased profit from equipment rentals, decreased selling, general and administrative expense and reduced merger costs associated with a decline in the fair value of the contingent cash consideration component of the National Pump purchase price due to lower than expected financial performance compared to agreed upon financial targets, as discussed in note 11 to our consolidated financial statements. The adjusted EBITDA increase primarily reflects increased profit from equipment rentals. For the year ended December 31, 2015, EBITDA margin increased 200 basis points to 47.7 percent, and adjusted EBITDA margin increased 90 basis points to 48.7 percent. The increase in the EBITDA margin primarily reflects increased margins from equipment rentals, improved selling, general and administrative leverage, and reduced merger costs. The increase in the adjusted EBITDA margin primarily reflects increased margins from equipment rentals and improved selling, general and administrative leverage.

For the year ended December 31, 2014, EBITDA increased $418, or 19.2 percent, and adjusted EBITDA increased $425, or 18.5 percent. The EBITDA and adjusted EBITDA increases include the impact of the National Pump acquisition discussed above. The EBITDA and adjusted EBITDA increases primarily reflect increased profit from equipment rentals and sales of rental equipment, partially offset by increased selling, general and administrative expense. For the year ended December 31, 2014, EBITDA margin increased 170 basis points to 45.7 percent, and adjusted EBITDA margin increased 150 basis points to 47.8 percent. The increases in the EBITDA and adjusted EBITDA margins primarily reflect increased margins from equipment rentals and sales of rental equipment.

Revenues. Revenues for each of the three years in the period ended December 31, 2015 were as follows:

Year Ended December 31,Change
20152014201320152014
Equipment rentals*$4,949$4,819$4,1962.7%14.8%
Sales of rental equipment538544490(1.1)%11.0%
Sales of new equipment1571491045.4%43.3%
Contractor supplies sales798587(7.1)%(2.3)%
Service and other revenues9488786.8%12.8%
Total revenues$5,817$5,685$4,9552.3%14.7%
*Equipment rentals metrics:
Year-over-year increase in rental rates (1)0.5%4.5%
Year-over-year increase in the volume of equipment on rent3.2%9.6%
Time utilization (2)67.3%68.8%68.2%(150) bps60 bps
(1)Rental rate changes are calculated based on the year-over-year variance in average contract rates, weighted by the prior period revenue mix.
(2)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.

Equipment rentals include our revenues from renting equipment, as well as revenue related to the fees we charge customers: for equipment delivery and pick-up; to protect the customer against liability for damage to our equipment while on rent; and for fuel. Collectively, these "ancillary fees" represented about 12 percent of equipment rental revenue in 2015. Delivery and pick-up revenue, which represented about seven percent of equipment rental revenue in 2015, is recognized when the service is performed. Customers have the option of purchasing a damage waiver when they rent our equipment to protect against potential loss or damage; we refer to the fee we charge for the waiver as Rental Protection Plan (or "RPP") revenue. RPP revenue, which represented about two percent of equipment rental revenue in 2015, is recognized ratably over the contract term. Fees related to the consumption of fuel by our customers are recognized when the equipment is returned by the customer

(and consumption, if any, can be measured). Sales of rental equipment represent our revenues from the sale of used rental equipment. Sales of new equipment represent our revenues from the sale of new equipment. Contractor supplies sales represent our sales of supplies utilized by contractors, which include construction consumables, tools, small equipment and safety supplies. Services and other revenues primarily represent our revenues earned from providing repair and maintenance services on our customers’ fleet (including parts sales).

2015 total revenues of $5.8 billion increased 2.3 percent compared with 2014. As discussed above, in April 2014, we acquired National Pump, and the results of National Pump's operations have been included in our consolidated financial statements since the acquisition date. The revenue increase primarily reflects a 2.7 percent increase in equipment rentals, which was primarily due to a 3.2 percent increase in the volume of OEC on rent, which included the adverse impact of currency, and a 0.5 percent rental rate increase, partially offset by the adverse impact of inflation related to replacement fleet purchases. Excluding the adverse impact from currency, rental revenue would have increased 4.3 percent year-over-year.

2014 total revenues of $5.7 billion increased 14.7 percent compared with 2013. As discussed above, in April 2014, we acquired National Pump, and the results of National Pump's operations have been included in our consolidated financial statements since the acquisition date. The revenue increase reflects a 14.8 percent increase in equipment rentals, which was primarily due to increases in the volume of OEC on rent and rental rates, and changes in rental mix, partially offset by fluctuations in the exchange rate between the U.S. and Canadian dollars. 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 2014, the favorable impact of changes in the mix of equipment rented, including the impact of the acquisition of National Pump, was partially offset by an increase in the proportion of equipment rentals generated 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. We believe that the rate and volume improvements for 2014 reflected improvements in our operating environment and the execution of our strategy. Additionally, sales of rental equipment increased 11.0 percent, primarily reflecting increased volume and improved pricing.

Critical Accounting Policies

We prepare our consolidated financial statements in accordance with GAAP. A summary of our significant accounting policies is contained in note 2 to our consolidated financial statements. In applying many accounting principles, we make assumptions, estimates and/or judgments. These assumptions, estimates and/or judgments are often subjective and may change based on changing circumstances or changes in our analysis. Material changes in these assumptions, estimates and/or judgments have the potential to materially alter our results of operations. We have identified below our accounting policies that we believe could potentially produce materially different results if we were to change underlying assumptions, estimates and/or judgments. Although actual results may differ from those estimates, we believe the estimates are reasonable and appropriate.

Revenue Recognition. We recognize revenues from renting equipment on a straight-line basis. Our rental contract periods are hourly, daily, weekly or monthly. By way of example, if a customer were to rent a piece of equipment and the daily, weekly and monthly rental rates for that particular piece were (in actual dollars) $100, $300 and $900, respectively, we would recognize revenue of $32.14 per day. The daily rate for recognition purposes is calculated by dividing the monthly rate of $900 by the monthly term of 28 days. This daily rate assumes that the equipment will be on rent for the full 28 days, as we are unsure of when the customer will return the equipment and therefore unsure of which rental contract period will apply.

As part of this straight-line methodology, when the equipment is returned, we recognize as incremental revenue the excess, if any, between the amount the customer is contractually required to pay, which is based on the rental contract period applicable to the actual number of days the equipment was out on rent, over the cumulative amount of revenue recognized to date. In any given accounting period, we will have customers return equipment and be contractually required to pay us more than the cumulative amount of revenue recognized to date under the straight-line methodology. For instance, continuing the above example, if the customer rented the above piece of equipment on December 29 and returned it at the close of business on January 1, we would recognize incremental revenue on January 1 of $171.44 (in actual dollars, representing the difference between the amount the customer is contractually required to pay, or $300 at the weekly rate, and the cumulative amount recognized to date on a straight-line basis, or $128.56, which represents four days at $32.14 per day).

We record amounts billed to customers in excess of recognizable revenue as deferred revenue on our balance sheet. We had deferred revenue of $32 and $36 as of December 31, 2015 and 2014, respectively. Equipment rentals include our revenues from renting equipment, as well as revenue related to the fees we charge customers: for equipment delivery and pick-up; to protect the customer against liability for damage to our equipment while on rent; and for fuel. Delivery and pick-up revenue is recognized when the service is performed. Customers have the option of purchasing a damage waiver when they rent our equipment to protect against potential loss or damage; we refer to the fee we charge for the waiver as Rental Protection Plan (or

"RPP") revenue. RPP revenue is recognized ratably over the contract term. Fees related to the consumption of fuel by our customers are recognized when the equipment is returned by the customer (and consumption, if any, can be measured).

Revenues from the sale of rental equipment and new equipment are recognized at the time of delivery to, or pick-up by, the customer and when collectibility is reasonably assured. Sales of contractor supplies are also recognized at the time of delivery to, or pick-up by, the customer. Service revenue is recognized as the services are performed.

Allowance for Doubtful Accounts. We maintain allowances for doubtful accounts. These allowances reflect our estimate of the amount of our receivables that we will be unable to collect based on historical write-off experience. Our estimate could require change based on changing circumstances, including changes in the economy or in the particular circumstances of individual customers. Accordingly, we may be required to increase or decrease our allowances. Trade receivables that have contractual maturities of one year or less are written-off when they are determined to be uncollectible based on the criteria necessary to qualify as a deduction for federal tax purposes. Write-offs of such receivables require management approval based on specified dollar thresholds.

Useful Lives and Salvage Values of Rental Equipment and Property and Equipment. We depreciate rental equipment and property and equipment over their estimated useful lives, after giving effect to an estimated salvage value which ranges from zero percent to 10 percent of cost. Rental equipment is depreciated whether or not it is out on rent. Costs we incur in connection with refurbishment programs that extend the life of our equipment are capitalized and amortized over the remaining useful life of the equipment. The costs incurred under these refurbishment programs were $30, $39 and $44 for the years ended December 31, 2015, 2014 and 2013, respectively, and are included in purchases of rental equipment in our consolidated statements of cash flows.

The useful life of an asset is determined based on our estimate of the period over which the asset will generate revenues; such periods are periodically reviewed for reasonableness. In addition, the salvage value, which is also reviewed periodically for reasonableness, is determined based on our estimate of the minimum value we will realize from the asset after such period. We may be required to change these estimates based on changes in our industry or other changing circumstances. If these estimates change in the future, we may be required to recognize increased or decreased depreciation expense for these assets.

To the extent that the useful lives of all of our rental equipment were to increase or decrease by one year, we estimate that our annual depreciation expense would decrease or increase by approximately $92 or $117, respectively. Similarly, to the extent the estimated salvage values of all of our rental equipment were to increase or decrease by one percentage point, we estimate that our annual depreciation expense would change by approximately $10. Any change in depreciation expense as a result of a hypothetical change in either useful lives or salvage values would generally result in a proportional increase or decrease in the gross profit we would recognize upon the ultimate sale of the asset. To the extent that the useful lives of all of our depreciable property and equipment were to increase or decrease by one year, we estimate that our annual non-rental depreciation expense would decrease or increase by approximately $18 or $27, respectively.

Purchase Price Allocation. We have made a number of acquisitions in the past (including the National Pump acquisition discussed in note 3 to our consolidated financial statements) and may continue to make acquisitions in the future. The assets acquired and liabilities assumed are recorded based on their respective fair values at the date of acquisition. Long-lived assets (principally rental equipment), goodwill and other intangible assets generally represent the largest components of our acquisitions. The intangible assets that we have acquired are non-compete agreements, customer relationships and trade names and associated trademarks. Goodwill is calculated as the excess of the cost of the acquired entity over the net of the fair value of the assets acquired and the liabilities assumed. Non-compete agreements, customer relationships and trade names and associated trademarks are valued based on an excess earnings or income approach based on projected cash flows.

When we make an acquisition, we also acquire other assets and assume liabilities. These other assets and liabilities typically include, but are not limited to, parts inventory, accounts receivable, accounts payable and other working capital items. Because of their short-term nature, the fair values of these other assets and liabilities generally approximate the book values on the acquired entities' balance sheets.

Evaluation of Goodwill Impairment. Goodwill is tested for impairment annually or more frequently if an event or circumstance indicates that an impairment loss may have been incurred. Application of the goodwill impairment test requires judgment, including: the identification of reporting units; assignment of assets and liabilities to reporting units; assignment of goodwill to reporting units; determination of the fair value of each reporting unit; and an assumption as to the form of the transaction in which the reporting unit would be acquired by a market participant (either a taxable or nontaxable transaction).

We estimate the fair value of our reporting units (which are our regions) using a combination of an income approach based on the present value of estimated future cash flows and a market approach based on market price data of shares of our Company and other corporations engaged in similar businesses as well as acquisition multiples paid in recent transactions within our industry

(including our own acquisitions). We believe this approach, which utilizes multiple valuation techniques, yields the most appropriate evidence of fair value. We review goodwill for impairment utilizing a two-step process. The first step of the impairment test requires a comparison of the fair value of each of our reporting units' net assets to the respective carrying value of net assets. If the carrying value of a reporting unit's net assets is less than its fair value, no indication of impairment exists and a second step is not performed. If the carrying amount of a reporting unit's net assets is higher than its fair value, there is an indication that an impairment may exist and a second step must be performed. In the second step, the impairment is calculated by comparing the implied fair value of the reporting unit's goodwill (as if purchase accounting were performed on the testing date) with the carrying amount of the goodwill. If the carrying amount of the reporting unit's goodwill is greater than the implied fair value of its goodwill, an impairment loss must be recognized for the excess and charged to operations.

Inherent in our preparation of cash flow projections are assumptions and estimates derived from a review of our operating results, business plans, expected growth rates, cost of capital and tax rates. We also make certain forecasts about future economic conditions, interest rates and other market data. Many of the factors used in assessing fair value are outside the control of management, and these assumptions and estimates may change in future periods. Changes in assumptions or estimates could materially affect the estimate of the fair value of a reporting unit, and therefore could affect the likelihood and amount of potential impairment. The following assumptions are significant to our income approach:

Business Projections- We make assumptions about the level of equipment rental activity in the marketplace and cost levels. These assumptions drive our planning assumptions for pricing and utilization and also represent key inputs for developing our cash flow projections. These projections are developed using our internal business plans over a ten-year planning period that are updated at least annually;

Long-term Growth Rates- Beyond the planning period, we also utilize an assumed long-term growth rate representing the expected rate at which a reporting unit's cash flow stream is projected to grow. These rates are used to calculate the terminal value of our reporting units, and are added to the cash flows projected during our ten-year planning period; and

Discount Rates- Each reporting unit's estimated future cash flows are then discounted at a rate that is consistent with a weighted-average cost of capital that is likely to be expected by market participants. The weighted-average cost of capital is an estimate of the overall after-tax rate of return required by equity and debt holders of a business enterprise.

The market approach is one of the other methods used for estimating the fair value of our reporting units' business enterprise. This approach takes two forms: The first is based on the market value (market capitalization plus interest-bearing liabilities) and operating metrics (e.g., revenue and EBITDA) of companies engaged in the same or similar line of business. The second form is based on multiples paid in recent acquisitions of companies within our industry, including our own acquisitions.

Financial Accounting Standards Board ("FASB") guidance permits entities to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test.

In connection with our goodwill impairment test that was conducted as of October 1, 2014, we bypassed the qualitative assessment for each of our reporting units and proceeded directly to the first step of the goodwill impairment test. Our goodwill impairment testing as of this date indicated that all of our reporting units, excluding our Pump Solutions reporting unit, had estimated fair values which exceeded their respective carrying amounts by at least 63 percent. All of the assets in the Pump Solutions reporting unit were acquired in the April 2014 National Pump acquisition discussed above. The estimated fair value of our Pump Solutions reporting unit exceeded its carrying amount by 13 percent. As all of the assets in the Pump Solutions reporting unit were recorded at fair value as of the April 2014 acquisition date, we expected the percentage by which the Pump Solutions reporting unit’s fair value exceeded its carrying value to be significantly less than the equivalent percentages determined for our other reporting units. In connection with this impairment testing, we generally utilized a discount rate of 9.0 percent and a long-term terminal growth rate of 3.0 percent beyond our planning period.

In connection with our goodwill impairment test that was conducted as of October 1, 2015, we bypassed the qualitative assessment for each of our reporting units and proceeded directly to the first step of the goodwill impairment test. Our goodwill impairment testing as of this date indicated that all of our reporting units, excluding our Pump Solutions reporting unit, had estimated fair values which exceeded their respective carrying amounts by at least 51 percent. In connection with this impairment testing, we generally utilized discount rates of 10.0 percent for our general rentals segment, and Trench Safety and Power and HVAC reporting units, and 13.5 percent for our Pump Solutions reporting unit, as well as a long-term terminal growth rate for all reporting units of 3.0 percent beyond our planning period.

Most of the assets in the Pump Solutions reporting unit were acquired in the April 2014 National Pump acquisition discussed above. Based on the October 1, 2015 test, the Pump Solutions reporting unit’s estimated fair value exceeded its carrying amount

by 3.3 percent. In light of continuing pressures on the Pump Solutions reporting unit related primarily to upstream oil and gas customers, we continued to monitor the Pump Solutions reporting unit for impairment through the end of 2015, and performed another impairment test as of November 30, 2015. As of the November 30, 2015 testing date, the estimated fair value of the Pump Solutions reporting unit exceeded its carrying amount by 1 percent. No additional impairment indicators were noted as of December 31, 2015. As of December 31, 2015, there was $311 of goodwill in the Pump Solutions reporting unit.

Given the narrow margin by which the estimated fair value of the Pump Solutions reporting unit exceeded its carrying amount, we also performed a sensitivity analysis related to the discount rate and long-term growth rate used in the November 30, 2015 test. Specifically, we performed the sensitivity analysis by: (i) increasing the discount rate by 50 basis points and (ii) reducing the long-term growth rate by 25 basis points. The Pump Solutions reporting unit failed step one of the goodwill impairment test under the sensitivity test, and would have required step two testing to determine potential goodwill impairment.

The November 30, 2015 impairment test assumed earnings growth for the Pump Solutions reporting unit over the next three years. Should this growth not occur, if the reporting unit otherwise fails to meet its current financial plans, or if there were changes to any other key assumption used in the test, the Pump Solutions reporting unit could fail step one of the goodwill impairment test in a future period. We will continue to monitor the Pump Solutions reporting unit for impairment.

Impairment of Long-lived Assets (Excluding Goodwill). We review the recoverability of our long-lived assets, including rental equipment and property and equipment, when events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable. The assessment of possible impairment is based on our ability to recover the carrying value of the asset from the expected future pre-tax cash flows (undiscounted and without interest charges). If these cash flows are less than the carrying value of such asset, an impairment loss is recognized for the difference between the estimated fair value and carrying value. We recognized immaterial asset impairment charges during the years ended December 31, 2015, 2014 and 2013. As of December 31, 2015 and 2014, there were no held-for-sale assets in our consolidated balance sheets.

In addition to the impairment reviews we conduct in connection with branch consolidations and other changes in the business, each quarter we conduct an impairment review of rental assets. As part of this impairment review, we estimate the future rental revenues from our rental assets based on current and expected utilization levels, the age of the assets and their remaining useful lives. Additionally, we estimate when the assets are expected to be removed or retired from our rental fleet as well as the expected proceeds to be realized upon disposition. Based on our most recently completed quarterly review, there was no impairment associated with our rental assets.

Income Taxes. We recognize deferred tax assets and liabilities for certain future deductible or taxable temporary differences expected to be reported in our income tax returns. These deferred tax assets and liabilities are computed using the tax rates that are expected to apply in the periods when the related future deductible or taxable temporary difference is expected to be settled or realized. In the case of deferred tax assets, the future realization of the deferred tax benefits and carryforwards are determined with consideration to historical profitability, projected future taxable income, the expected timing of the reversals of existing temporary differences, and tax planning strategies. After consideration of all these factors, we recognize deferred tax assets when we believe that it is more likely than not that we will realize them. The most significant positive evidence that we consider in the recognition of deferred tax assets is the expected reversal of cumulative deferred tax liabilities resulting from book versus tax depreciation of our rental equipment fleet that is well in excess of the deferred tax assets.

We use a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return regarding uncertainties in income tax positions. The first step is recognition: we determine whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, we presume that the position will be examined by the appropriate taxing authority with full knowledge of all relevant information. The second step is measurement: a tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.

We are subject to ongoing tax examinations and assessments in various jurisdictions. Accordingly, accruals for tax contingencies are established based on the probable outcomes of such matters. Our ongoing assessments of the probable outcomes of the examinations and related tax accruals require judgment and could increase or decrease our effective tax rate as well as impact our operating results.

Reserves for Claims. We are exposed to various claims relating to our business, including those for which we retain portions of the losses through the application of deductibles and self-insured retentions, which we sometimes refer to as “self-insurance.” These claims include (i) workers' compensation claims and (ii) claims by third parties for injury or property damage involving our equipment or personnel. These types of claims may take a substantial amount of time to resolve and, accordingly, the ultimate liability associated with a particular claim may not be known for an extended period of time. Our methodology for

developing self-insurance reserves is based on management estimates, which incorporate periodic actuarial valuations. Our estimation process considers, among other matters, the cost of known claims over time, cost inflation and incurred but not reported claims. These estimates may change based on, among other things, changes in our claims history or receipt of additional information relevant to assessing the claims. Further, these estimates may prove to be inaccurate due to factors such as adverse judicial determinations or settlements at higher than estimated amounts. Accordingly, we may be required to increase or decrease our reserve levels.

Legal Contingencies. We are involved in a variety of claims, lawsuits, investigations and proceedings, as described in note 14 to our consolidated financial statements and elsewhere in this report. We determine whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. We assess our potential liability by analyzing our litigation and regulatory matters using available information. We develop our views on estimated losses in consultation with outside counsel handling our defense in these matters, which involves an analysis of potential results, assuming a combination of litigation and settlement strategies. Should developments in any of these matters cause a change in our determination such that we expect an unfavorable outcome and result in the need to recognize a material accrual, or should any of these matters result in a final adverse judgment or be settled for a significant amount, they could have a material adverse effect on our results of operations in the period or periods in which such change in determination, judgment or settlement occurs.

Results of Operations

As discussed in note 4 to our consolidated financial statements, our two reportable segments are i) general rentals and ii) 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 energy and petrochemical customers. The trench, power and pump segment’s customers include construction companies involved in infrastructure projects, municipalities and industrial companies. This segment operates throughout the United States and in Canada.

As discussed in note 4 to our consolidated financial statements, we aggregate our nine geographic regions—Industrial (which serves the geographic Gulf region and has a strong industrial presence), Mid-Atlantic, Midwest, Northeast, Pacific West, South-Central, 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. In 2015, we reorganized certain of our regions to arrive at the current general rentals' region structure. 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 December 31, 2015, one of our general rentals' regions had an equipment rentals gross margin that varied by between 10 percent and 13 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, which impacts each region differently, and our continued focus on fleet sharing. We 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 discussed below. 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 business performance 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 rentalsTrench, power and pumpTotal
Year Ended December 31, 2015
Equipment rentals$4,241$708$4,949
Sales of rental equipment50434538
Sales of new equipment13720157
Contractor supplies sales671279
Service and other revenues831194
Total revenue$5,032$785$5,817
Year Ended December 31, 2014
Equipment rentals$4,222$597$4,819
Sales of rental equipment51925544
Sales of new equipment11336149
Contractor supplies sales731285
Service and other revenues751388
Total revenue$5,002$683$5,685
Year ended December 31, 2013
Equipment rentals$3,869$327$4,196
Sales of rental equipment47416490
Sales of new equipment977104
Contractor supplies sales79887
Service and other revenues72678
Total revenue$4,591$364$4,955

Equipment rentals. 2015 equipment rentals of $4.9 billion increased $0.1 billion, or 2.7 percent, as compared to 2014. As discussed above, in April 2014, we acquired National Pump, and the results of National Pump's operations have been included in our consolidated financial statements since the acquisition date. The equipment rentals increase was primarily due to a 3.2 percent increase in the volume of OEC on rent, which included the adverse impact of currency, and a 0.5 percent rental rate increase, partially offset by the adverse impact of inflation related to replacement fleet purchases. Excluding the adverse impact from currency, rental revenue would have increased 4.3 percent year-over-year. Equipment rentals represented 85 percent of total revenues in 2015. On a segment basis, equipment rentals represented 84 percent and 90 percent of total revenues for general rentals and trench, power and pump, respectively. General rentals equipment rentals increased slightly year-over-year, primarily reflecting a 2.3 percent increase in the volume of OEC on rent, which included the adverse impact of currency, partially offset by the adverse impact of inflation related to replacement fleet purchases. Excluding the adverse impact from currency, general rentals' rental revenue would have increased 1.7 percent year-over-year. Trench, power and pump equipment rentals increased $111, or 18.6 percent, primarily reflecting increased average OEC, partially offset by decreased time utilization due to the impact of the acquisition of National Pump discussed in note 3 to the consolidated financial statements. The locations acquired in the National Pump acquisition experienced volume and pricing pressure associated with upstream oil and gas customers. Trench, power and pump average OEC for 2015 increased 34 percent, including the impact of the acquisition of National Pump discussed above, as compared to 2014.

2014 equipment rentals of $4.8 billion increased $0.6 billion, or 14.8 percent, as compared to 2013. As discussed above, in April 2014, we acquired National Pump, and the results of National Pump's operations have been included in our consolidated financial statements since the acquisition date. The equipment rentals increase was primarily due to a 9.6 percent increase in the volume of OEC on rent, a 4.5 percent rental rate increase and changes in rental mix, partially offset by fluctuations in the exchange rate between the U.S. and Canadian dollars. In 2014, the favorable impact of changes in the mix of equipment rented, including the impact of the acquisition of National Pump, was partially offset by an increase in the

proportion of equipment rentals generated 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. We believe that the rate and volume improvements for 2014 reflected improvements in our operating environment and the execution of our strategy. Equipment rentals represented 85 percent of total revenues in 2014. On a segment basis, equipment rentals represented 84 percent and 87 percent of total revenues for general rentals and trench, power and pump, respectively. General rentals equipment rentals increased $0.4 billion, or 9.1 percent, primarily reflecting a 6.7 percent increase in the volume of OEC on rent, increased rental rates and changes in rental mix, partially offset by fluctuations in the exchange rate between the U.S. and Canadian dollars. In 2014, the favorable impact of changes in the mix of general rentals equipment rented was partially offset by an increase in the proportion of equipment rentals generated from monthly rental contracts. Trench, power and pump equipment rentals increased $270, or 82.6 percent, primarily reflecting an increase in the volume of OEC on rent and increased rental rates. Trench, power and pump average OEC for 2014 increased 75 percent, including the impact of the acquisition of National Pump discussed above, as compared to 2013. Capitalizing on the demand for the higher margin equipment rented by our trench, power and pump segment was a key component of our strategy in 2014 and 2013.

Sales of rental equipment. For the three years in the period ended December 31, 2015, sales of rental equipment represented approximately 10 percent of our total revenues. Our general rentals segment accounted for substantially all of these sales. 2015 sales of rental equipment of $538 decreased slightly from 2014. 2014 sales of rental equipment of $544 increased $54, or 11.0 percent, from 2013 primarily reflecting increased volume and improved pricing.

Sales of new equipment. For the three years in the period ended December 31, 2015, sales of new equipment represented approximately 2 percent of our total revenues. Our general rentals segment accounted for substantially all of these sales. 2015 sales of new equipment of $157 increased slightly from 2014. 2014 sales of new equipment of $149 increased $45, or 43.3 percent, from 2013 primarily reflecting increased volume, including the impact of the acquisition of National Pump discussed above, improved pricing and changes in mix.

Sales of contractor supplies. For the three years in the period ended December 31, 2015, sales of contractor supplies represented approximately 2 percent of our total revenues. Our general rentals segment accounted for substantially all of these sales. 2015 sales of contractor supplies decreased slightly from 2014, and 2014 sales of contractor supplies were flat with 2013.

Service and other revenues. For the three years in the period ended December 31, 2015, service and other revenues represented approximately 2 percent of our total revenues. Our general rentals segment accounted for substantially all of these sales. 2015 service and other revenues of $94 increased slightly from 2014. 2014 service and other revenues of $88 increased $10, or 12.8 percent, from 2013 primarily reflecting the impact of the National Pump acquisition discussed above.

Fourth Quarter 2015 Items. The fourth quarter of 2015 includes a decrease in stock compensation, net of $14 as compared to the fourth quarter of 2014 primarily due to lower than expected revenue and profitability. Additionally, as discussed in note 5 to our consolidated financial statements, in the fourth quarter of 2015, we initiated a restructuring program in response to recent challenges in our operating environment. Though we expect solid industry growth in 2016, the restructuring program was initiated in an effort to reduce costs in an environment with continuing pressures on volume and pricing. We expect to complete the restructuring program in 2016, and recognized $4 of costs for the program in the fourth quarter of 2015. Additionally, during the fourth quarter of 2015, we reached agreement on a settlement that will provide us with a $5 refund on previously paid property taxes. We recognized a reduction of $5 in cost of equipment rentals, excluding depreciation, associated with the settlement during the fourth quarter of 2015. Additionally, our provision for income taxes for the fourth quarter of 2015 includes the impact of a $5 increase in valuation allowances resulting from the enactment of Connecticut state limitations on net operating loss utilization. During the nine months ended September 30, 2015, we recognized $57 of excess tax benefits from share-based payment arrangements in our consolidated statements of cash flows. The excess tax benefits from share-based payment arrangements resulted from stock-based compensation windfall deductions in excess of the amounts reported for financial reporting purposes. Such benefits are recognized as a credit to additional paid-in capital, and are reported as financing cash flows. Our consolidated statements of cash flows for the nine months ended September 30, 2015 included a $57 increase to financing cash flows and a corresponding decrease to operating cash flows associated with the excess tax benefits from share-based payment arrangements. During the fourth quarter of 2015, $52 of the previously recognized excess tax benefits from share-based payment arrangements were reversed due to the impact on taxable income of a bonus tax depreciation bill that passed in the fourth quarter of 2015. The reversal of the previously recognized excess tax benefits from share-based payment arrangements resulted in a $52 increase to operating cash flows and a corresponding decrease to financing cash flows during the fourth quarter of 2015.

Fourth Quarter 2014 Items. The fourth quarter of 2014 includes an increase in bad debt expense of $8 as compared to the fourth quarter of 2013 primarily due to improved receivable aging which reduced the expense in the fourth quarter of 2013. Additionally, the fourth quarter of 2014 includes an increase in stock compensation, net of $14 as compared to the fourth quarter of 2013 primarily due to improved profitability which resulted in increased performance-based stock compensation.

Segment Equipment Rentals Gross Profit

Segment equipment rentals gross profit and gross margin for each of the three years in the period ended December 31, 2015 were as follows:

General rentalsTrench, power and pumpTotal
2015
Equipment Rentals Gross Profit$1,819$328$2,147
Equipment Rentals Gross Margin42.9%46.3%43.4%
2014
Equipment Rentals Gross Profit$1,790$302$2,092
Equipment Rentals Gross Margin42.4%50.6%43.4%
2013
Equipment Rentals Gross Profit$1,557$153$1,710
Equipment Rentals Gross Margin40.2%46.8%40.8%

General rentals. For the three years in the period ended December 31, 2015, general rentals accounted for 87 percent of our total equipment rentals gross profit. This contribution percentage is consistent with general rentals’ equipment rental revenue contribution over the same period. General rentals’ equipment rentals gross profit in 2015 increased $29 and equipment rentals gross margin increased 50 basis points, primarily reflecting cost improvements, partially offset by a 90 basis point decrease in time utilization. As compared to the equipment rentals revenue increase of 0.5 percent, delivery costs decreased 3.2 percent and compensation costs decreased 3.4 percent. Time utilization was 68.6 percent and 69.5 percent for the years ended December 31, 2015 and 2014, respectively. During the year ended December 31, 2015, our locations with significant exposure to upstream oil and gas experienced volume and pricing pressure associated with upstream oil and gas customers, which was a primary driver of the decrease in time utilization. General rentals’ equipment rentals gross profit in 2014 increased $233 and equipment rentals gross margin increased 220 basis points, primarily reflecting increased rental rates, a 70 basis point increase in time utilization on a significantly larger fleet, and decreased compensation and depreciation costs as a percentage of revenue. As compared to the equipment rentals revenue increase of 9.1 percent, compensation costs increased 5.0 percent due primarily to increased headcount associated with higher rental volume, and depreciation of rental equipment increased 4.3 percent. Time utilization was 69.5 percent and 68.8 percent for the years ended December 31, 2014 and 2013, respectively.

Trench, power and pump. For the year ended December 31, 2015, equipment rentals gross profit increased by $26 and equipment rentals gross margin decreased 430 basis points from 2014. The increase in equipment rentals gross profit primarily reflects increased equipment rentals revenue on a significantly larger fleet at our locations excluding the Pump Solutions region discussed below. At our locations excluding the Pump Solutions region, as compared to 2014, equipment rentals revenue increased approximately 21 percent, average OEC increased approximately 28 percent and equipment rentals gross profit increased approximately 24 percent. The decrease in equipment rentals gross margin primarily reflects decreased margins in the Pump Solutions region which experienced volume and pricing pressure associated with upstream oil and gas customers. The aggregate equipment rentals gross margin in the trench, power and pump segment excluding the Pump Solutions region increased by approximately 130 basis points from 2014. For the year ended December 31, 2014, equipment rentals gross profit increased by $149 and equipment rentals gross margin increased 380 basis points from 2013 primarily reflecting increased equipment rentals revenue due to an increase in the volume of OEC on rent and increased rental rates, and decreased compensation costs as a percentage of revenue. Trench, power and pump average OEC for the year ended December 31, 2014 increased 75 percent, including the impact of the acquisition of National Pump discussed above, as compared to 2013. As compared to the equipment rentals revenue increase of 82.6 percent, compensation costs increased 57.4 percent.

Gross Margin. Gross margins by revenue classification were as follows:

Year Ended December 31,Change
20152014201320152014
Total gross margin42.6%42.8%40.1%(20) bps270 bps
Equipment rentals43.4%43.4%40.8%—260 bps
Sales of rental equipment42.2%42.1%35.9%10 bps620 bps
Sales of new equipment16.6%19.5%19.2%(290) bps30 bps
Contractor supplies sales30.4%30.6%32.2%(20) bps(160) bps
Service and other revenues59.6%63.6%67.9%(400) bps(430) bps

2015 gross margin of 42.6 percent decreased slightly as compared to 2014. Equipment rentals gross margin was flat with 2014, primarily reflecting a 0.5 percent rental rate increase and compensation cost improvements offset by a 150 basis point decrease in time utilization. Time utilization was 67.3 percent and 68.8 percent for the years ended December 31, 2015 and 2014, respectively. During the year ended December 31, 2015, the locations acquired in the National Pump acquisition, and our other locations with significant exposure to upstream oil and gas, experienced volume and pricing pressure associated with upstream oil and gas customers, which was a primary driver of the decrease in time utilization. As compared to the equipment rentals revenue increase of 2.7 percent, compensation costs were flat with 2014. Gross margin from sales of new equipment decreased 290 basis points primarily due to changes in the mix of equipment sold. Gross margin from service and other revenues decreased 400 basis points primarily due to increased revenue from training activities, which generate lower margins than our other service revenues.

2014 gross margin of 42.8 percent increased 270 basis points as compared to 2013, primarily reflecting increased gross margins from equipment rentals and sales of rental equipment. Equipment rentals gross margin increased 260 basis points, primarily reflecting a 4.5 percent rental rate increase, a 60 basis point increase in time utilization on a significantly larger fleet, and decreased compensation and depreciation costs as a percentage of revenue. Time utilization was 68.8 percent and 68.2 percent for the years ended December 31, 2014 and 2013, respectively. As compared to the equipment rentals revenue increase of 14.8 percent, compensation costs increased 8.7 percent due primarily to increased headcount associated with higher rental volume, and depreciation of rental equipment increased 8.1 percent. Gross margin from sales of rental equipment increased 620 basis points primarily due to improvements in pricing. Gross margins from sales of rental equipment may change in future periods if the mix of the channels (primarily retail and auction) that we use to sell rental equipment changes.

Other costs/(income)

The table below includes the other costs/(income) in our consolidated statements of income, as well as key associated metrics, for the three years in the period ended December 31, 2015:

Year Ended December 31,Change
20152014201320152014
Selling, general and administrative ("SG&A") expenses$714$758$642(5.8)%18.1%
SG&A expense as a percentage of revenue12.3%13.3%13.0%(100) bps30 bps
Merger related costs(26)119(336.4)%22.2%
Restructuring charge6(1)12(700.0)%(108.3)%
Non-rental depreciation and amortization268273246(1.8)%11.0%
Interest expense, net5675554752.2%16.8%
Interest expense—subordinated convertible debentures——3—(100.0)%
Other income, net(12)(14)(5)(14.3)%180.0%
Provision for income taxes37831021821.9%42.2%
Effective tax rate39.3%36.5%36.0%280 bps50 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 decrease in SG&A expense for the year ended December 31, 2015 primarily reflects decreased incentive compensation costs associated with lower than expected revenue and profitability. The impact of increased bad debt expense was largely offset by cost improvements throughout SG&A. Bad debt expense increased primarily due to improved receivable aging in 2014 which reduced the expense for year ended December 31, 2014. The improvement in SG&A expense as a percentage of revenue for the year ended December 31, 2015 primarily reflects decreased incentive compensation costs.

The increase in SG&A expense for the year ended December 31, 2014 primarily reflects increased compensation costs due to i) increased variable compensation costs associated with higher revenues and improved profitability and ii) increased headcount. The increase in SG&A as a percentage of revenue for the year ended December 31, 2014 primarily reflects increased compensation costs as a percentage of revenue.

The merger related costs primarily include financial and legal advisory fees, and branding costs associated with the National Pump acquisition, as well as changes subsequent to the acquisition date to the fair value of the contingent cash consideration we paid associated with the National Pump acquisition as discussed in note 11 to our consolidated financial statements. The income for the year ended December 31, 2015 reflects a decline in the fair value of the contingent cash consideration component of the National Pump purchase price due to lower than expected financial performance compared to agreed upon financial targets, as discussed in note 11 to our consolidated financial statements.

The restructuring charges for the years ended December 31, 2015, 2014 and 2013 reflect severance costs and branch closure charges associated with our closed restructuring programs and the restructuring program that commenced in the fourth quarter of 2015. The branch closure charges primarily reflect continuing lease obligations at vacant facilities. The income for the year ended December 31, 2014 primarily reflects buyouts or settlements of real estate leases for less than the recognized reserves. We do not expect to incur significant additional charges in connection with the closed restructuring programs, and the remaining costs expected to be incurred in connection with the current restructuring program are not currently estimable. See note 5 to our consolidated financial statements for additional information.

Non-rental depreciation and amortization includes (i) the amortization of other intangible assets and (ii) depreciation expense associated with equipment that is not offered for rent (such as computers and office equipment) and amortization expense associated with leasehold improvements. Our other intangible assets consist of customer relationships, non-compete agreements and trade names and associated trademarks. Non-rental depreciation and amortization for the year ended December 31, 2014 increased primarily due to the 2014 acquisition of National Pump discussed in note 3 to our consolidated financial statements.

Interest expense, net for the years ended December 31, 2015 and 2014 includes aggregate losses of $123 and $80, respectively, associated with debt redemptions and the amendment of our ABL facility. Excluding the impact of these losses, interest expense, net, for the year ended December 31, 2015 decreased primarily due to a lower average cost of debt, partially offset by the impact of increased average outstanding debt. Excluding the impact of the debt redemption losses, interest expense, net, for the year ended December 31, 2014 was flat with 2013.

The increase in other income, net for the year ended December 31, 2014 primarily reflects increased gains on sales of non-rental equipment.

A detailed reconciliation of the effective tax rates to the U.S. federal statutory income tax rate is included in note 13 to our consolidated financial statements.

Balance sheet. Accrued expenses and other liabilities decreased by $220, or 38.3 percent, from December 31, 2014 to December 31, 2015 primarily due to payments made associated with the National Pump acquisition discussed in note 3 to our consolidated financial statements and decreased incentive compensation accruals associated with lower than expected revenue and profitability.

Liquidity and Capital Resources.

We manage our liquidity using internal cash management practices, which are subject to (i) the policies and cooperation of the financial institutions we utilize to maintain and provide cash management services, (ii) the terms and other requirements of the agreements to which we are a party and (iii) the statutes, regulations and practices of each of the local jurisdictions in which we operate. See "Financial Overview" above for a summary of the capital structure actions taken in 2015 and 2014 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, as previously announced, in July 2015, our Board authorized a new $1 billion share repurchase program which commenced in November 2015. We intend to complete the $1 billion program within 18 months of its initiation in November 2015. As of January 25, 2016, we have repurchased $166 of Holdings' common stock under the $1 billion share repurchase program that commenced in November 2015.

Our principal existing sources of cash are cash generated from operations and from the sale of rental equipment, and borrowings available under the ABL facility and accounts receivable securitization facility. As of December 31, 2015, we had cash and cash equivalents of $179. Cash equivalents at December 31, 2015 consist of direct obligations of financial institutions

rated A or better. We believe that our existing sources of cash will be sufficient to support our existing operations over the next 12 months. The table below presents financial information associated with our principal sources of cash as of and for the year December 31, 2015:

ABL facility:
Borrowing capacity, net of letters of credit$873
Outstanding debt, net of debt issuance costs1,579
Interest rate at December 312.3%
Average debt outstanding during the year (1)1,470
Weighted-average interest rate on average debt outstanding during the year1.9%
Maximum month-end debt outstanding during the year (1)1,829
Accounts receivable securitization facility:
Borrowing capacity48
Outstanding debt, net of debt issuance costs571
Interest rate at December 311.1%
Average debt outstanding during the year516
Weighted-average interest rate on average debt outstanding during the year0.8%
Maximum month-end debt outstanding during the year608
(1)The maximum month-end amount outstanding under the ABL facility exceeded the average amount outstanding during the year ended December 31, 2015 primarily due to the repayment of a portion of the outstanding borrowings under the ABL facility in March 2015 using the net proceeds from the debt issuances discussed in the "Financial Overview" above.

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) share repurchases. 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. For information on the scheduled principal and interest payments coming due on our outstanding debt and on the payments coming due under our existing operating leases, see “Certain Information Concerning Contractual Obligations.”

To access the capital markets, we rely on credit rating agencies to assign ratings to our securities as an indicator of credit quality. Lower credit ratings generally result in higher borrowing costs and reduced access to debt capital markets. Credit ratings also affect the costs of derivative transactions, including interest rate and foreign currency derivative transactions. As a result, negative changes in our credit ratings could adversely impact our costs of funding. Our credit ratings as of January 25, 2016 were as follows:

Corporate RatingOutlook
Moody’sBa3Stable
Standard & Poor’sBB-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 prospects. We expect that we will fund such expenditures from cash generated from operations, proceeds from the sale of rental and non-rental equipment and, if required, borrowings available under the ABL facility and accounts receivable securitization facility. Net rental capital expenditures (defined as purchases of rental equipment less the proceeds from sales of rental equipment) were $1.00 billion and $1.16 billion in 2015 and 2014, respectively.

Loan Covenants and Compliance. As of December 31, 2015, 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 covenant that currently exists under the ABL facility is the fixed charge coverage ratio. Subject to certain limited exceptions specified in the ABL facility, the fixed charge coverage ratio covenant under the ABL facility will only apply in the future if specified availability under the ABL facility falls below 10 percent of the maximum revolver amount under the ABL facility. When certain conditions are met, cash and cash equivalents and borrowing base collateral in excess of

the ABL facility size may be included when calculating specified availability under the ABL facility. As of December 31, 2015, specified availability under the ABL facility exceeded the required threshold and, as a result, this maintenance covenant is 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 2015, we (i) generated cash from operating activities of $1,995, (ii) generated cash from the sale of rental and non-rental equipment of $555 and (iii) received cash from debt proceeds, net of payments, of $84. We used cash during this period principally to (i) purchase rental and non-rental equipment of $1,636, (ii) purchase other companies for $86, (iii) purchase shares of our common stock for $789 and (iv) pay $52 of contingent consideration associated with the National Pump acquisition as discussed in note 11 to our consolidated financial statements. During 2015, cash also decreased by $29 due to the effect of foreign exchange rates. During 2014, we (i) generated cash from operating activities of $1,801, (ii) generated cash from the sale of rental and non-rental equipment of $577 and (iii) received cash from debt proceeds, net of payments, of $787. We used cash during this period principally to (i) purchase rental and non-rental equipment of $1,821, (ii) purchase other companies for $756 and (iii) purchase shares of our common stock for $613.

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.

Year Ended December 31,
201520142013
Net cash provided by operating activities$1,995$1,801$1,551
Purchases of rental equipment(1,534)(1,701)(1,580)
Purchases of non-rental equipment(102)(120)(104)
Proceeds from sales of rental equipment538544490
Proceeds from sales of non-rental equipment173326
Excess tax benefits from share-based payment arrangements5——
Free cash flow$919$557$383

Free cash flow for the year ended December 31, 2015 was $919, an increase of $362 as compared to $557 for the year ended December 31, 2014. Free cash flow for the years ended December 31, 2015 and 2014 includes aggregate cash payments of $5 and $17, respectively, related to merger and restructuring activity. Free cash flow increased primarily due to increased net cash provided by operating activities and decreased purchases of rental equipment. Free cash flow for the year ended December 31, 2014 was $557, an increase of $174 as compared to $383 for the year ended December 31, 2013. Free cash flow for the years ended December 31, 2014 and 2013 includes aggregate cash payments of $17 and $38, respectively, related to merger and restructuring activity. Free cash flow increased primarily due to increased net cash provided by operating activities and increased proceeds from sales of rental equipment partially offset by 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 December 31, 2015:

20162017201820192020ThereafterTotal
Debt and capital leases (1)$607$24$17$9$2,343$5,206$8,206
Interest due on debt (2)4214164154143527802,798
Operating leases (1):
Real estate1008263452644360
Non-rental equipment3836292323—149
Service agreements (3)17124———33
Purchase obligations (4)671—————671
Total (5)$1,854$570$528$491$2,744$6,030$12,217
(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 December 31, 2015.
(3)These primarily represent service agreements with third parties to provide wireless and network services.
(4)As of December 31, 2015, we had outstanding purchase orders, which were negotiated in the ordinary course of business, with our equipment and inventory suppliers. These purchase commitments can be cancelled by us, generally 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 2016.
(5)This information excludes $3 of unrecognized tax benefits, which are discussed further in note 13 to our consolidated financial statements. 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.

Holdings receives royalties from URNA and its subsidiaries based upon a percent of revenue. During the year ended December 31, 2015, the royalty percent of revenue (the "royalty rate") increased from two and a half percent to eight percent. The increased royalty rate was applied retroactively to January 1, 2015, resulting in Holdings receiving increased royalties from URNA during the year ended December 31, 2015 (see note 18 to our consolidated financial statements). The royalty rate increased as a result of a reassessment of the benefit provided by Holdings' trademark and its business support to URNA and its subsidiaries. The increase in the royalty rate will result in increased intercompany receivables for Holdings. Our total available capacity for making share repurchases and dividend payments includes the intercompany receivable balance of Holdings. As of December 31, 2015, following the retroactive application of the increase in the royalty rate, our total available capacity for making share repurchases and dividend payments, which includes URNA’s capacity to make restricted payments and the intercompany receivable balance of Holdings, was $499.

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