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, 2013 to 2017. The following acquired companies are reflected in our results of operations for all periods subsequent to the noted acquisition dates:

•In April 2014, we acquired certain assets of the following entities: National Pump & Compressor, Ltd., Canadian Pump and Compressor Ltd., GulfCo Industrial Equipment, LP and LD Services, LLC (collectively “National Pump”). National Pump had annual revenues of approximately $210;
•In April 2017, we completed the acquisition of NES Rentals Holdings II, Inc. (“NES”). NES had annual revenues of approximately $369; and
•In October 2017, we completed the acquisition of Neff Corporation ("Neff"). Neff had annual revenues of approximately $413.

See note 3 to the consolidated financial statements for additional detail on the NES and Neff acquisitions. 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,
20172016201520142013
(in millions, except per share data)
Income statement data:
Total revenues$6,641$5,762$5,817$5,685$4,955
Total cost of revenues3,8723,3593,3373,2532,968
Gross profit2,7692,4032,4802,4321,987
Selling, general and administrative expenses903719714758642
Merger related costs50—(26)119
Restructuring charge50146(1)12
Non-rental depreciation and amortization259255268273246
Operating income1,5071,4151,5181,3911,078
Interest expense, net464511567555475
Interest expense-subordinated convertible debentures————3
Other income, net(5)(5)(12)(14)(5)
Income before (benefit) provision for income taxes1,048909963850605
(Benefit) provision for income taxes (1)(298)343378310218
Net income (1)1,346566585540387
Basic earnings per share (1)$15.91$6.49$6.14$5.54$4.14
Diluted earnings per share (1)$15.73$6.45$6.07$5.15$3.64

(1)2017 includes the significant impact of the enactment of the Tax Cuts and Jobs Act discussed further in note 13 to the consolidated financial statements.

December 31,
20172016201520142013
(in millions)
Balance sheet data:
Total assets$15,030$11,988$12,083$12,129$10,876
Total debt9,4407,7908,1627,9627,078
Stockholders’ equity3,1061,6481,4761,7961,828
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 997 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 $11.5 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 3,400 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 2017, equipment rental revenues represented 86 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 2018, 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;
•A continued focus on “Lean” management techniques, including kaizen processes focused on continuous improvement. We continue to implement Lean kaizen processes across our branch network, with the objectives of: reducing the cycle time associated with renting our equipment to customers; improving invoice accuracy and service quality; reducing the elapsed time for equipment pickup and delivery; and improving the effectiveness and efficiency of our repair and maintenance operations. We achieved the anticipated run rate savings from the Lean initiatives, including those included in the Project XL work streams discussed below, in 2017 and 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;
•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 18 specialty rental branches/tool hubs in 2018 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; and
•The pursuit of strategic acquisitions to continue to expand our core equipment rental business, as exhibited by our recently completed acquisitions of NES and Neff. Strategic acquisitions allow us to invest our capital to expand our business, further driving our ability to accomplish our strategic goals.

In 2018, based on our analyses of industry forecasts and macroeconomic indicators, we expect that the majority of our end markets will continue to experience solid demand for equipment rental services. Specifically, we expect that North American industry equipment rental revenue will increase approximately 4 percent, with slightly higher growth, on a constant currency basis, in the U.S. than Canada.

We use the American Rental Association criteria for reporting rental rates, time utilization and OEC. As discussed above, we completed the acquisitions of NES and Neff in April 2017 and October 2017, respectively. The pro forma metrics below include the standalone, pre-acquisition results of NES and Neff. For the full year 2017:

•Rental rates decreased 0.2 percent and increased 0.4 percent year-over-year, on an actual and a pro forma basis, respectively;
•The volume of OEC on rent increased 18.2 percent and 7.1 percent year-over-year, on an actual and a pro forma basis, respectively;
•Time utilization was 69.5 percent and 69.1 percent on an actual and a pro forma basis, respectively, reflecting increases of 160 basis points and 150 basis points year-over-year, respectively. Time utilization was a full-year record on both an actual and a pro forma basis;
•69 percent of equipment rental revenue was derived from key accounts, as compared to 70 percent in 2016. Key accounts are each managed by a single point of contact to enhance customer service; and
•The number of rental locations in our higher margin trench, power and pump (also referred to as "specialty") segment increased by thirteen year-over-year due to cold starts.

Financial Overview

In 2017 and 2016, we took a number of positive actions related to our capital structure that have significantly improved our financial flexibility and liquidity, including:

•Redeemed all of our 8 1/4 percent Senior Notes, 7 5/8 percent Senior Notes, 7 3/8 percent Senior Notes and 6 1/8 percent Senior Notes;
•Issued $750 principal amount of 4 5/8 percent Senior Notes due 2025;
•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;
•Issued $1.675 billion principal amount of 4 7/8 percent Senior Notes due 2028, comprised of separate and distinct issuances of $925 in August 2017 and $750 in September 2017;
•Amended and extended our ABL facility, including an increase in the facility size to $3.0 billion; and
•Amended and extended our accounts receivable securitization facility, including an increase in the facility size to $775.

These actions have improved our financial flexibility and liquidity and positioned us to invest the necessary capital to take advantage of business opportunities. As of December 31, 2017, we had available liquidity of $1.71 billion, including cash of $352.

Net income. Net income and diluted earnings per share for each of the three years in the period ended December 31, 2017 are presented below. Net income and diluted earnings per share for the year ended December 31, 2017 include a substantial benefit associated with the enactment of the Tax Cuts and Jobs Act (the "Act"). The enactment of the Act resulted in an estimated net income increase of $689, or $8.05 per diluted share, primarily due to a one-time revaluation of our net deferred tax liability based on a U.S. federal tax rate of 21 percent, which was partially offset by the impact of a one-time transition tax on our unremitted foreign earnings and profits, which we will elect to pay over an eight-year period. We expect to meaningfully benefit from the Act in future periods, primarily due to the impact of the lower U.S. federal tax rate.

Year Ended December 31,
201720162015
Net income$1,346$566$585
Diluted earnings per share$15.73$6.45$6.07

Net income and diluted earnings per share for each of the three years in the period ended December 31, 2017 include the after-tax impacts of the items below. The tax rates applied to the adjustments items below reflect the statutory rates in the applicable entity.

Year Ended December 31,
201720162015
Tax rate applied to items below38.5%38.2%38.6%
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)$(31)$(0.36)$—$—$17$0.17
Merger related intangible asset amortization (2)(99)(1.15)(99)(1.12)(111)(1.15)
Impact on depreciation related to acquired fleet and property and equipment (3)(5)(0.05)——20.02
Impact of the fair value mark-up of acquired fleet (4)(50)(0.59)(22)(0.25)(18)(0.19)
Impact on interest expense related to fair value adjustment of acquired RSC indebtedness (5)——10.0120.02
Restructuring charge (6)(31)(0.36)(9)(0.11)(4)(0.04)
Asset impairment charge (7)(1)(0.01)(2)(0.03)——
Loss on extinguishment of debt securities and amendment of ABL facility(33)(0.39)(62)(0.70)(75)(0.78)
(1)This reflects transaction costs associated with the NES and Neff acquisitions discussed in note 3 to the consolidated financial statements, and the April 2014 National Pump acquisition. 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. Merger related costs only include costs associated with major acquisitions that significantly impact our operations. For additional information, see "Results of Operations-Other costs/(income)-merger related costs" below.
(2)This reflects the amortization of the intangible assets acquired in the RSC, National Pump, NES and Neff acquisitions.
(3)This reflects the impact of extending the useful lives of equipment acquired in the RSC, NES and Neff acquisitions, net of the impact of additional depreciation associated with the fair value mark-up of such equipment.
(4)This reflects additional costs recorded in cost of rental equipment sales associated with the fair value mark-up of rental equipment acquired in the RSC, NES and Neff acquisitions that was 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)As discussed in note 5 to our consolidated financial statements, this primarily reflects severance costs and branch closure charges associated with our restructuring programs.
(7)This reflects write-offs of leasehold improvements and other fixed assets in connection with our restructuring programs.

EBITDA GAAP Reconciliations. EBITDA represents the sum of net income, (benefit) provision for income taxes, interest expense, net, depreciation of rental equipment and non-rental depreciation and amortization. Adjusted EBITDA represents EBITDA plus the sum of the merger related costs, restructuring charge, stock compensation expense, net, and the impact of the fair value mark-up of acquired fleet. These items are excluded from adjusted EBITDA internally when evaluating our operating performance and for strategic planning and forecasting purposes, and allow investors to make a more meaningful comparison between our core business operating results over different periods of time, as well as with those of other similar companies. The 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 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,
201720162015
Net income$1,346$566$585
(Benefit) provision for income taxes(298)343378
Interest expense, net464511567
Depreciation of rental equipment1,124990976
Non-rental depreciation and amortization259255268
EBITDA2,8952,6652,774
Merger related costs (1)50—(26)
Restructuring charge (2)50146
Stock compensation expense, net (3)874549
Impact of the fair value mark-up of acquired fleet (4)823529
Adjusted EBITDA$3,164$2,759$2,832

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

Year Ended December 31,
201720162015
Net cash provided by operating activities$2,230$1,953$1,995
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(9)(9)(10)
Gain on sales of rental equipment220204227
Gain on sales of non-rental equipment448
Merger related costs (1)(50)—26
Restructuring charge (2)(50)(14)(6)
Stock compensation expense, net (3)(87)(45)(49)
Loss on extinguishment of debt securities and amendment of ABL facility(54)(101)(123)
Excess tax benefits from share-based payment arrangements—585
Changes in assets and liabilities129101194
Cash paid for interest357415447
Cash paid for income taxes, net2059960
EBITDA2,8952,6652,774
Add back:
Merger related costs (1)50—(26)
Restructuring charge (2)50146
Stock compensation expense, net (3)874549
Impact of the fair value mark-up of acquired fleet (4)823529
Adjusted EBITDA$3,164$2,759$2,832
(1)This reflects transaction costs associated with the NES and Neff acquisitions discussed in note 3 to the consolidated financial statements, and the April 2014 National Pump acquisition. 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. 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)As discussed in note 5 to our consolidated financial statements, this primarily reflects severance costs and branch closure charges associated with our restructuring programs.
(3)Represents non-cash, share-based payments associated with the granting of equity instruments.
(4)This reflects additional costs recorded in cost of rental equipment sales associated with the fair value mark-up of rental equipment acquired in the RSC, NES and Neff acquisitions that was subsequently sold.

For the year ended December 31, 2017, EBITDA increased $230, or 8.6 percent, and adjusted EBITDA increased $405, or 14.7 percent. The EBITDA increase primarily reflects increased profit from equipment rentals, partially offset by i) increased selling, general and administrative ("SG&A") compensation costs, including stock compensation costs, largely due to the impact of the NES and Neff acquisitions, increased revenue, improved profitability, and increases in our stock price and in the volume of stock awards, and ii) increased merger related costs and restructuring charges associated with the NES and Neff acquisitions. The adjusted EBITDA increase primarily reflects increased profit from equipment rentals and sales of rental equipment, partially offset by increased SG&A compensation costs, largely due to the impact of the NES and Neff acquisitions, increased revenue and improved profitability. For the year ended December 31, 2017, EBITDA margin decreased 270 basis points to 43.6 percent, and adjusted EBITDA margin decreased 30 basis points to 47.6 percent. The decrease in the EBITDA margin primarily reflects i) increased SG&A compensation costs, including stock compensation costs, largely due to the impact of the NES and Neff acquisitions, increased revenue, improved profitability, and increases in our stock price and in the volume of stock awards, and ii) increased merger related costs and restructuring charges associated with the NES and Neff acquisitions. The decrease in the adjusted EBITDA margin primarily reflects increased SG&A compensation costs largely due to the impact of the NES and Neff acquisitions, increased revenue and improved profitability, partially offset by increased profit from sales of rental equipment.

For the year ended December 31, 2016, EBITDA decreased $109, or 3.9 percent, and adjusted EBITDA decreased $73, or 2.6 percent. The EBITDA decrease primarily reflects decreased profit from equipment rentals and sales of rental equipment, and the impact of the merger credit recognized during the year ended December 31, 2015 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. The adjusted EBITDA decrease primarily reflects decreased profit from equipment rentals and sales of rental equipment. For the year ended December 31, 2016, EBITDA margin decreased 140 basis points to 46.3 percent, and adjusted EBITDA margin decreased 80 basis points to 47.9 percent. The decrease in the EBITDA margin primarily reflects decreased margins from equipment rentals and the impact of the National Pump merger credit recognized during the year ended December 31, 2015. The decrease in the adjusted EBITDA margin primarily reflects decreased margins from equipment rentals.

Revenues. Revenues for each of the three years in the period ended December 31, 2017 were as follows:

Year Ended December 31,Change
20172016201520172016
Equipment rentals*$5,715$4,941$4,94915.7%(0.2)%
Sales of rental equipment55049653810.9%(7.8)%
Sales of new equipment17814415723.6%(8.3)%
Contractor supplies sales8079791.3%—%
Service and other revenues1181029415.7%8.5%
Total revenues$6,641$5,762$5,81715.3%(0.9)%
*Equipment rentals metrics:
Year-over-year decrease in rental rates (1)(0.2)%(2.2)%
Year-over-year increase in the volume of equipment on rent18.2%3.1%
Time utilization (2)69.5%67.9%67.3%160 bps60 bps
*Pro forma equipment rentals information (3):
Equipment rentals variance7.6%
Year-over-year increase in rental rates (1)0.4%
Year-over-year increase in the volume of equipment on rent7.1%
Time utilization (2)69.1%67.6%150 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.
(3)As discussed in note 3 to the consolidated financial statements, we completed the acquisitions of NES and Neff in April 2017 and October 2017, respectively. The pro forma information includes the standalone, pre-acquisition results of NES and Neff.

Equipment rentals include our revenues from renting equipment, as well as revenue related to the fees we charge customers: for equipment delivery and pick-up; to protect the customer against liability for damage to our equipment while on rent; for fuel; and for environmental costs. Collectively, these "ancillary fees" represented approximately 12 percent of equipment rental revenue in 2017. Delivery and pick-up revenue, which represented approximately seven percent of equipment rental revenue in 2017, is the most significant ancillary revenue component. Sales of rental equipment represent our revenues from the sale of used rental equipment. Sales of new equipment represent our revenues from the sale of new equipment. Contractor supplies sales represent our sales of supplies utilized by contractors, which include construction consumables, tools, small equipment and safety supplies. Services and other revenues primarily represent our revenues earned from providing repair and maintenance services on our customers’ fleet (including parts sales). See note 2 to our consolidated financial statements for further discussion of our revenue recognition accounting.

2017 total revenues of $6.6 billion increased 15.3 percent compared with 2016. On a pro forma basis including the standalone, pre-acquisition results of NES and Neff, 2017 total revenues increased 7.7 percent. The revenue increase primarily reflects a 15.7 percent increase in equipment rental revenue, primarily due to an 18.2 percent increase in the volume of OEC on rent, which includes the impact of the NES and Neff acquisitions, partially offset by a 0.2 percent rental rate decrease. On the pro forma basis including the standalone, pre-acquisition results of NES and Neff, equipment rental revenue increased 7.6 percent year-over-year, primarily reflecting a 7.1 percent increase in the volume of OEC on rent and a 0.4 percent rental rate increase. We believe that the increase in the volume of OEC on rent reflects improving demand in many of our core markets. Sales of rental equipment increased 10.9 percent primarily due to increased volume. Sales of new equipment increased 23.6 percent primarily due to increased volume and increased sales of larger equipment.

2016 total revenues of $5.8 billion decreased 0.9 percent compared with 2015. The revenue decrease primarily reflects a 7.8 percent decrease in sales of rental equipment due primarily to a decrease in the volume of equipment sold through wholesale channels. Rental revenue decreased 0.2 percent, primarily due to a 2.2 percent rental rate decrease, partially offset by a 3.1 percent increase in the volume of OEC on rent, which included the adverse impact of currency. Excluding the adverse impact from currency, rental revenue would have increased 0.2 percent year-over-year.

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. We account for such rentals as operating leases. 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 $38 and $33 as of December 31, 2017 and 2016, respectively. Equipment rentals include our revenues from renting equipment, as well as revenue related to the "ancillary fees" we charge customers: for equipment delivery and pick-up; to protect the customer against liability for damage to our equipment while on rent; for fuel; and for environmental costs. Delivery and pick-up revenue is the most significant ancillary revenue component and is recognized when the service is performed.

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.

See note 2 to our consolidated financial statements for further discussion of our revenue recognition accounting.

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. During the years ended December 31, 2017, 2016 and 2015, we recognized expenses of $40, $24 and $32, respectively, within selling, general and administrative expenses in our consolidated statements of income, associated with our allowances for doubtful accounts.

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 $10, $18 and $30 for the years ended December 31, 2017, 2016 and 2015, 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 $127 or $160, 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 $14. 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 $23 or $35, respectively.

Acquisition Accounting. We have made a number of acquisitions in the past and may continue to make acquisitions in the future. The assets acquired and liabilities assumed are recorded based on their respective fair values at the date of acquisition. Long-lived assets (principally rental equipment), goodwill and other intangible assets generally represent the largest components of our acquisitions. The intangible assets that we have acquired are non-compete agreements and customer relationships. 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 and customer relationships 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. 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 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.

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. As discussed in note 2 to our consolidated financial statements, we expect to adopt accounting guidance that eliminates the second step from the goodwill impairment test when it becomes effective (for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019).

In connection with our goodwill impairment test that was conducted as of October 1, 2016, we bypassed the qualitative assessment for each reporting unit 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 53 percent. The estimated fair value of our Pump Solutions reporting unit exceeded its carrying amount by approximately 15 percent. Given the relatively small percent by which the Pump Solutions reporting unit’s fair value exceeded its carrying amount, we further tested the Pump Solution reporting unit for impairment by performing a sensitivity test that included a reduction in the long-term growth rate and an increase in the discount rate. The Pump Solutions reporting unit passed step one of the goodwill impairment test under the sensitivity test. We continue to monitor the Pump Solutions reporting unit for impairment, and the Pump Solution reporting unit’s operating results improved significantly in 2017, as evidenced in its fair value exceeding its carrying value by 62 percent in the goodwill impairment test that was conducted as of October 1, 2017.

In connection with our goodwill impairment test that was conducted as of October 1, 2017, we bypassed the qualitative assessment for each reporting unit 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 had estimated fair values which exceeded their respective carrying amounts by at least 45 percent.

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, 2017, 2016 and 2015.

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.

The Tax Cuts and Jobs Act, which was enacted in December 2017, had a substantial impact on our income tax benefit for the year ended December 31, 2017. We expect to meaningfully benefit from its enactment in future periods. See note 13 to the consolidated financial statements for further detail.

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, vehicles 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 eleven geographic regions—Carolinas, Gulf South, Industrial (which serves the geographic Gulf region and has a strong industrial presence), Mid-Atlantic, Mid Central, Midwest, Northeast, Pacific West, South, Southeast 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 achieved by these regions. For the five year period ended December 31, 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 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, 2017
Equipment rentals$4,727$988$5,715
Sales of rental equipment50941550
Sales of new equipment15919178
Contractor supplies sales651580
Service and other revenues10513118
Total revenue$5,565$1,076$6,641
Year Ended December 31, 2016
Equipment rentals$4,166$775$4,941
Sales of rental equipment45937496
Sales of new equipment12816144
Contractor supplies sales641579
Service and other revenues9111102
Total revenue$4,908$854$5,762
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

Equipment rentals. 2017 equipment rentals of $5.7 billion increased $774, or 15.7 percent, as compared to 2016, primarily reflecting an 18.2 percent increase in the volume of OEC on rent, which includes the impact of the NES and Neff acquisitions, partially offset by a 0.2 percent rental rate decrease. On a pro forma basis including the standalone, pre-acquisition results of NES and Neff, equipment rental revenue increased 7.6 percent year-over-year, primarily reflecting a 7.1 percent increase in the volume of OEC on rent and a 0.4 percent rental rate increase. 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 in 2017. On a segment basis, equipment rentals represented 85 percent and 92 percent of total revenues for general rentals and trench, power and pump, respectively. General rentals equipment rentals increased $561, or 13.5 percent, as compared to 2016, primarily reflecting a 16.9 percent increase in the volume of OEC on rent, which includes the impact of the NES and Neff acquisitions. On a pro forma basis including the standalone, pre-acquisition results of NES and Neff, the volume of OEC on rent increased 5.5 percent. We believe that the increase in the volume of OEC on rent reflects improving demand in many of our core markets. Trench, power and pump equipment rentals increased $213, or 27.5 percent, primarily reflecting a 34.9 percent increase in the volume of OEC on rent. Trench, power and pump average OEC increased 14.3 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.

2016 equipment rentals of $4.9 billion decreased $8, or 0.2 percent, as compared to 2015. The equipment rentals decrease was primarily due to a 2.2 percent rental rate decrease, partially offset by a 3.1 percent increase in the volume of OEC on rent, which included the adverse impact of currency. Excluding the adverse impact from currency, rental revenue would have increased 0.2 percent year-over-year. Equipment rentals represented 86 percent of total revenues in 2016. On a segment basis, equipment rentals represented 85 percent and 91 percent of total revenues for general rentals and trench, power and pump, respectively. General rentals equipment rentals decreased $75, or 1.8 percent, as compared to 2015, primarily reflecting decreased rental rates partially offset by a 2.9 percent increase in the volume of OEC on rent, which included the adverse impact of currency. Trench, power and pump equipment rentals increased $67, or 9.5 percent, primarily reflecting increased average OEC. Trench, power and pump average OEC for 2016 increased 6.7 percent as compared to 2015.

Sales of rental equipment. For the three years in the period ended December 31, 2017, sales of rental equipment represented approximately 9 percent of our total revenues. Our general rentals segment accounted for most of these sales. 2017

sales of rental equipment of $550 increased 10.9 percent from 2016 primarily reflecting increased volume. 2016 sales of rental equipment of $496 decreased slightly from 2015.

Sales of new equipment. For the three years in the period ended December 31, 2017, sales of new equipment represented approximately 3 percent of our total revenues. Our general rentals segment accounted for most of these sales. 2017 sales of new equipment of $178 increased 23.6 percent from 2016 primarily reflecting increased volume and increased sales of larger equipment. 2016 sales of new equipment of $144 decreased slightly from 2015.

Sales of contractor supplies. For the three years in the period ended December 31, 2017, sales of contractor supplies represented approximately 1 percent of our total revenues. Our general rentals segment accounted for most of these sales. 2017 sales of contractor supplies were flat with 2016, and 2016 sales of contractor supplies were flat with 2015.

Service and other revenues. For the three years in the period ended December 31, 2017, service and other revenues represented approximately 2 percent of our total revenues. Our general rentals segment accounted for most of these sales. 2017 service and other revenues of $118 increased 15.7 percent from 2016 primarily reflecting the impact of the NES acquisition discussed in note 3 to the consolidated financial statements and an increased emphasis on this line of business. 2016 service and other revenues of $102 increased slightly from 2015.

Fourth Quarter 2017 Items. The fourth quarter of 2017 includes an estimated benefit of $689 associated with the enactment of the Tax Cuts and Jobs Act discussed further in note 13 to our consolidated financial statements. The fourth quarter of 2017 also includes $18 of merger related costs and $22 of restructuring charges primarily associated with the NES and Neff acquisitions discussed in note 3 to our consolidated financial statements. Additionally, in the fourth quarter of 2017, we redeemed the remaining $225 principal amount of our 7 5/8 percent Senior Notes due 2022. Upon the redemption of these notes, we recognized a loss of $11 in interest expense, net. The loss represented the difference between the net carrying amount and the total purchase price of the redeemed notes. The fourth quarter of 2017 also reflects a year-over-year increase of $11 in stock compensation expense primarily due to the impact of increased revenue, improved profitability, and increases in our stock price and in the volume of stock awards.

Fourth Quarter 2016 Items. The fourth quarter of 2016 includes $6 of restructuring charges associated with the restructuring program we initiated in the fourth quarter of 2015 and closed in the fourth quarter of 2016, which is discussed further in note 5 to our consolidated financial statements. Additionally, in the fourth quarter of 2016, we redeemed $850 principal amount of our 7 5/8 percent Senior Notes due 2022 and issued $750 principal amount of 5 1/2 percent Senior Notes due 2027. Upon the partial redemption of the 7 5/8 percent Senior Notes due 2022, we recognized a loss of $65 in interest expense, net. The loss represented the difference between the net carrying amount and the total purchase price of the redeemed notes.

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, 2017 were as follows:

General rentalsTrench, power and pumpTotal
2017
Equipment Rentals Gross Profit$1,950$490$2,440
Equipment Rentals Gross Margin41.3%49.6%42.7%
2016
Equipment Rentals Gross Profit$1,725$364$2,089
Equipment Rentals Gross Margin41.4%47.0%42.3%
2015
Equipment Rentals Gross Profit$1,819$328$2,147
Equipment Rentals Gross Margin42.9%46.3%43.4%

General rentals. For the three years in the period ended December 31, 2017, general rentals accounted for 82 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 2017 increased $225 and equipment rentals gross margin decreased 10 basis points. Time utilization increased 90 basis points, and was 70.2 percent and 69.3 percent for the years ended December 31, 2017 and 2016, respectively. In 2017, we saw improving demand in many of our core markets, as evidenced by a 16.9 percent increase in the volume of OEC on rent, which includes the impact of the NES and

Neff acquisitions. On a pro forma basis including the standalone, pre-acquisition results of NES and Neff, the volume of OEC on rent increased 5.5 percent.

General rentals’ equipment rentals gross profit in 2016 decreased $94 and equipment rentals gross margin decreased 150 basis points, primarily reflecting decreased rental rates partially offset by a 70 basis point increase in time utilization. Time utilization was 69.3 percent and 68.6 percent for the years ended December 31, 2016 and 2015, respectively. The decreased rental rates reflected continued pressure from oil and gas and from Canada, and the impact of recent industry fleet expansion. Although we experienced rate pressures during 2016, we also saw improving demand in many of our core markets, as evidenced by a 2.9 percent increase in the volume of OEC on rent.

Trench, power and pump. For the year ended December 31, 2017, equipment rentals gross profit increased by $126 and equipment rentals gross margin increased 260 basis points from 2016, primarily reflecting increased equipment rentals revenue on a larger fleet. Year-over-year, trench, power and pump equipment rentals increased 27.5 percent, average OEC increased 14.3 percent and the volume of OEC on rent increased 34.9 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.

For the year ended December 31, 2016, equipment rentals gross profit increased by $36 and equipment rentals gross margin increased 70 basis points from 2015. The increase in equipment rentals gross profit primarily reflects increased equipment rentals revenue on a larger fleet across a larger network of branches. Year-over-year, trench, power and pump equipment rentals increased 9.5 percent and average OEC increased 6.7 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:

Year Ended December 31,Change
20172016201520172016
Total gross margin41.7%41.7%42.6%—(90) bps
Equipment rentals42.7%42.3%43.4%40 bps(110) bps
Sales of rental equipment40.0%41.1%42.2%(110) bps(110) bps
Sales of new equipment14.6%17.4%16.6%(280) bps80 bps
Contractor supplies sales30.0%30.4%30.4%(40) bps—
Service and other revenues50.0%59.8%59.6%(980) bps20 bps

2017 gross margin of 41.7 percent was flat with 2016. Equipment rentals gross margin increased 40 basis points, primarily reflecting a 160 basis point increase in time utilization partially offset by a 0.2 percent rental rate decrease. Time utilization was 69.5 percent and 67.9 percent for the years ended December 31, 2017 and 2016, respectively. Time utilization for 2017 was a full-year record. The volume of OEC on rent increased 18.2 percent, including the impact of the NES and Neff acquisitions. On a pro forma basis including the standalone, pre-acquisition results of NES and Neff, the volume of OEC on rent increased 7.1 percent and rental rates increased 0.4 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 280 basis points. Sales of new equipment increased 23.6 percent, primarily reflecting increased volume and increased sales of larger equipment, some of which were at lower margins. Gross margin from service and other revenues decreased 980 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.

2016 gross margin of 41.7 percent decreased 90 basis points as compared to 2015, primarily reflecting decreased gross margins from equipment rentals and sales of rental equipment. Equipment rentals gross margin decreased 110 basis points as compared to 2015, primarily reflecting a 2.2 percent rental rate decrease partially offset by a 60 basis point increase in time utilization. Time utilization was 67.9 percent and 67.3 percent for the years ended December 31, 2016 and 2015, respectively. The decreased rental rates reflected continued pressure from oil and gas and from Canada, and the impact of recent industry fleet expansion. Although we experienced rate pressures during 2016, we also saw improving demand in many of our core markets, as evidenced by a 3.1 percent increase in the volume of OEC on rent. Gross margin from sales of rental equipment decreased 110 basis points primarily due to decreased pricing.

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, 2017:

Year Ended December 31,Change
20172016201520172016
Selling, general and administrative ("SG&A") expense$903$719$71425.6%0.7%
SG&A expense as a percentage of revenue13.6%12.5%12.3%110 bps20 bps
Merger related costs50—(26)—(100.0)%
Restructuring charge50146257.1%133.3%
Non-rental depreciation and amortization2592552681.6%(4.9)%
Interest expense, net464511567(9.2)%(9.9)%
Other income, net(5)(5)(12)—%(58.3)%
(Benefit) provision for income taxes(298)343378(186.9)%(9.3)%
Effective tax rate(28.4)%37.7%39.3%(6,610) bps(160) bps

SG&A expense primarily includes sales force compensation, information technology costs, third party professional fees, management salaries, bad debt expense and clerical and administrative overhead. The increase in SG&A expense as a percentage of revenue for the year ended December 31, 2017 primarily reflects increased compensation costs, including stock compensation costs, largely due to the impact of the NES and Neff acquisitions discussed in note 3 to the consolidated financial statements, improved profitability, and increases in our stock price and in the volume of stock awards.

SG&A expense for the year ended December 31, 2016 did not change significantly year-over-year.

The merger related costs reflect transaction costs associated with the NES and Neff acquisitions discussed in note 3 to the consolidated financial statements, and the April 2014 National Pump acquisition. 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 3 to the consolidated financial statements, NES had annual revenues of approximately $369 and Neff had annual revenues of approximately $413. The merger related costs for the year ended December 31, 2017 include a termination fee we paid associated with a merger agreement Neff entered into with a prior bidder. 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.

The restructuring charges for the years ended December 31, 2017, 2016 and 2015 primarily reflect severance costs 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 3 to the 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, and the Neff acquisition that is discussed in note 3 to the consolidated financial statements. 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 and non-compete agreements.

Interest expense, net for the years ended December 31, 2017, 2016 and 2015 includes aggregate losses of $54, $101 and $123, respectively, associated with debt redemptions and the amendments of our ABL facility. Excluding the impact of these losses, interest expense, net, for the year ended December 31, 2017 was flat year-over-year as the impact of higher average debt was offset by a lower average cost of debt. Excluding the impact of these losses, interest expense, net, for the year ended December 31, 2016 decreased primarily due to lower average debt and a lower average cost of debt.

The decrease in other income, net for the year ended December 31, 2016 primarily reflects decreased 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. As discussed further in note 13, the income tax benefit for the year ended December 31, 2017 includes the substantial impact of the enactment of the Tax Cuts and Jobs Act.

Balance sheet. Accounts receivable, net increased by $313, or 34.0 percent, from December 31, 2016 to December 31, 2017 primarily due to increased revenue, which included the impact of the NES and Neff acquisitions discussed in note 3 to the consolidated financial statements. Rental equipment, net increased by $1.635 billion, or 26.4 percent, from December 31, 2016 to December 31, 2017 primarily due to the impact of the NES and Neff acquisitions and increased capital expenditures in response to a strong operating environment. Accounts payable increased by $166, or 68.3 percent, from December 31, 2016 to December 31, 2017 primarily due to increased capital expenditures in response to a strong operating environment. Accrued expenses and other liabilities increased by $192, or 55.8 percent, from December 31, 2016 to December 31, 2017 primarily due to (i) increased incentive compensation accruals associated with improved profitability and (ii) increased accrued interest expense primarily due to the debt issued to partially finance the acquisitions of NES and Neff, as discussed in note 12 to the consolidated financial statements. See notes 12 and 13 to the consolidated financial statements for discussions addressing our debt and deferred tax liability, respectively.

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 2017 and 2016 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. In October 2016, we paused repurchases under the program as we evaluated potential acquisition opportunities. As discussed in note 3 to the consolidated financial statements, we completed the acquisitions of NES in April 2017 and Neff in October 2017. In October 2017, our Board authorized the resumption of the share repurchase program, and we intend to complete the program in 2018. As of January 22, 2018, we have repurchased $701 of Holdings' common stock under the $1 billion share repurchase program.

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, 2017, we had cash and cash equivalents of $352. Cash equivalents at December 31, 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 year December 31, 2017:

ABL facility:
Borrowing capacity, net of letters of credit$1,282
Outstanding debt, net of debt issuance costs1,670
Interest rate at December 31, 20173.0%
Average month-end debt outstanding (1)1,321
Weighted-average interest rate on average debt outstanding2.6%
Maximum month-end debt outstanding (1)1,802
Accounts receivable securitization facility:
Borrowing capacity80
Outstanding debt, net of debt issuance costs695
Interest rate at December 31, 20172.3%
Average month-end debt outstanding605
Weighted-average interest rate on average debt outstanding1.9%
Maximum month-end debt outstanding695
(1)The maximum month-end amount outstanding under the ABL facility exceeded the average amount outstanding during the year ended December 31, 2017 primarily due to the use of borrowings under the ABL facility to partially finance the debt redemptions discussed in note 12 to the 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. 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 22, 2018 were as follows:

Corporate RatingOutlook
Moody’sBa2Stable
Standard & Poor’sBB-Positive

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 $1.22 billion and $750 in 2017 and 2016, respectively.

Loan Covenants and Compliance. As of December 31, 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 December 31, 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 2017, we (i) generated cash from operating activities of $2.23 billion, (ii) generated cash from the sale of rental and non-rental equipment of $566 and (iii) received cash from debt proceeds, net of payments, of $1.59 billion. We used cash during this period principally to (i) purchase rental and non-rental equipment of $1.89 billion, (ii) purchase other companies for $2.38 billion, (iii) purchase shares of our common stock for $56 and (iv) pay financing costs of $44. During 2016, we (i) generated cash from operating activities of $1.95 billion and (ii) generated cash from the sale of rental and non-rental equipment of $510. We used cash during this period principally to (i) purchase rental and non-rental equipment of $1.34 billion, (ii) purchase shares of our common stock for $528 and (iii) make debt payments, net of proceeds, of $471.

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,
201720162015
Net cash provided by operating activities$2,230$1,953$1,995
Purchases of rental equipment(1,769)(1,246)(1,534)
Purchases of non-rental equipment(120)(93)(102)
Proceeds from sales of rental equipment550496538
Proceeds from sales of non-rental equipment161417
Excess tax benefits from share-based payment arrangements—585
Free cash flow$907$1,182$919

Free cash flow for the year ended December 31, 2017 was $907, a decrease of $275 as compared to $1.18 billion for the year ended December 31, 2016. Free cash flow decreased primarily due to increased purchases of rental equipment partially offset by increased cash provided by operating activities. As discussed in note 2 to our consolidated financial statements, we adopted accounting guidance in 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 and 2015, 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 year ended December 31, 2016 was $1.18 billion, an increase of $263 as compared to $919 for the year ended December 31, 2015. Free cash flow increased primarily due to decreased purchases of rental equipment.

In 2018, we expect free cash flow of approximately $1.3 billion to $1.4 billion. As discussed further in note 13 to the consolidated financial statements, the Tax Cuts and Jobs Act (the “Act”) was enacted in December 2017. We expect that our future free cash flow will meaningfully benefit from the Act primarily due to (i) the lower U.S. federal tax rate of 21 percent and (ii) the full expensing of capital spending, the combined impact of which we expect to materially exceed the impact of (iii) the repeal of Like-Kind Exchange provisions, which had allowed for the deferral of taxable gains on the sale of used 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, 2017:

20182019202020212022ThereafterTotal
Debt and capital leases (1)$723$20$11$1,683$1$7,078$9,516
Interest due on debt (2)4324204203923691,1963,229
Operating leases (1):
Real estate1179977583539425
Non-rental equipment43373122159157
Service agreements (3)1542———21
Purchase obligations (4)1,549—————1,549
Transition tax on unremitted foreign earnings and profits (5)545453457
Total (6)$2,884$584$546$2,159$425$8,356$14,954
(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, 2017.
(3)These primarily represent service agreements with third parties to provide wireless and network services.
(4)As of December 31, 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 2018.
(5)As discussed further in note 13 to the consolidated financial statements, the Tax Cuts and Jobs Act, which was enacted in December 2017, includes a transition tax on unremitted foreign earnings and profits. We will elect to pay the estimated amount above over an eight-year period.
(6)This information excludes $6 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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