United Rentals, Inc.: Form 10-Q for the period ended Jun 30, 2024

Global Economic Conditions

Our operations are impacted by global economic conditions, including inflation, increased interest rates and supply chain constraints, and we take actions to modify our plans to address such economic conditions. In 2022, for example, we intentionally held back on sales of rental equipment to ensure we had sufficient rental capacity for our customers. To date, our supply chain disruptions have been limited, but we may experience more severe supply chain disruptions in the future. Interest rates on our debt instruments have increased recently. For example, in March 2024, United Rentals (North America), Inc. (“URNA”) issued $1.1 billion aggregate principal amount of senior unsecured notes at a 6 1/8 percent interest rate, while URNA's issuance in August 2021 of $750 aggregate principal amount of senior unsecured notes was at a 3 ¾ percent interest rate. Additionally, the weighted average interest rates on our variable debt instruments were 6.6 percent and 1.4 percent for the six months ended June 30, 2024 and the year ended December 31, 2021, respectively. We have experienced and are continuing to experience inflationary pressures. A portion of inflationary cost increases is passed on to customers. The most significant cost increases that are passed on to customers are for fuel and delivery, and there are other costs for which the pass through to customers is less direct, such as repairs and maintenance, and labor. The impact of inflation and increased interest rates may continue to be significant in the future.

We continue to assess the economic environment in which we operate and take appropriate actions to address the economic challenges we face.

Executive Overview

We are the largest equipment rental company in the world, with an integrated network of 1,647 rental locations. We primarily operate in the United States and Canada, and have a limited presence in Europe, Australia and New Zealand. Although the equipment rental industry is highly fragmented and diverse, we believe that we are well positioned to take advantage of this environment because, as a larger company, we have more extensive resources and certain competitive advantages. These include a fleet of rental equipment with a total original equipment cost (“OEC”) of $21.3 billion, and a North American branch network that operates in 49 U.S. states and every Canadian province, and serves 99 of the 100 largest metropolitan areas in the U.S. Our size also gives us greater purchasing power, the ability to provide customers with a broader range of equipment and services, the ability to provide customers with equipment that is more consistently well-maintained and therefore more productive and reliable, and the ability to enhance the earning potential of our assets by transferring equipment among branches to satisfy customer needs.

We offer approximately 4,800 classes of equipment for rent to a diverse customer base that includes construction and industrial companies, manufacturers, utilities, municipalities, homeowners and government entities. Our revenues are derived from the following sources: equipment rentals, sales of rental equipment, sales of new equipment, contractor supplies sales and service and other revenues. Equipment rentals represented 85 percent of total revenues for the six months ended June 30, 2024.

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. Our general strategy focuses on profitability and return on invested capital, and, in particular, calls for:

• A consistently superior standard of service to customers, often provided through a single lead contact who can coordinate the cross-selling of the various services we offer throughout our network. We utilize a proprietary software application, Total Control®, which provides our key customers with a single in-house software application that enables them to monitor and manage all their equipment needs. Total Control® is a unique customer offering that enables us to develop strong, long-term relationships with our larger customers. Our digital capabilities, including our Total Control® platform, allow our sales teams to provide contactless end-to-end customer service;
• The further optimization of our customer mix and fleet mix, with a dual objective: to enhance our performance in serving our current customer base, and to focus on the accounts and customer types that are best suited to our strategy for profitable growth. We believe these efforts will lead to even better service of our target accounts, primarily large construction and industrial customers, as well as select local contractors. Our fleet team's analyses are aligned with these objectives to identify trends in equipment categories and define action plans that can generate improved returns;
• A continued focus on “Lean” management techniques, including kaizen processes focused on continuous improvement. We have a dedicated team responsible for reducing waste in our operational processes, with the objectives of: condensing the cycle time associated with preparing equipment for rent; optimizing our resources for delivery and pickup of equipment; improving the effectiveness and efficiency of our repair and maintenance operations; and implementing customer service best practices;
• The continued expansion and cross-selling of adjacent specialty and services products, which enables us to provide a "one-stop" shop for our customers. We believe that the expansion of our specialty business, as exhibited by our acquisition of Yak Access, LLC, Yak Mat, LLC and New South Access & Environmental Solutions, LLC (collectively, “Yak”) in March 2024, which is discussed in note 3 to our condensed consolidated financial statements, as well as our tools and onsite services offerings, will 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 acquisition of assets of Ahern Rentals, Inc. ("Ahern Rentals") in December 2022. Strategic acquisitions allow us to invest our capital to expand our business, further driving our ability to accomplish our strategic goals.

Financial Overview

Prior to taking actions pertaining to our financial flexibility and liquidity, we assess our available sources and anticipated uses of cash, including, with respect to sources, cash generated from operations and from the sale of rental equipment. In 2024, we have taken the following actions to improve our financial flexibility and liquidity, and to position us to invest the necessary capital in our business:

• Issued $1.1 billion aggregate principal amount of 6 1/8 percent Senior Notes due 2034. The issued debt, together with drawings on our ABL facility, was used to fund the Yak acquisition that is discussed in note 3 to the condensed consolidated financial statements;
• Amended our term loan facility, primarily to extend the maturity date to February 2031 and to increase the facility size to $1.0 billion; and
• Amended our accounts receivable securitization facility, primarily to extend the maturity date and to increase the facility size from $1.3 billion to $1.5 billion. The facility expires in June 2025 and may be extended on a 364-day basis by mutual agreement with the purchasers under the facility.

As of June 30, 2024, we had available liquidity of $3.267 billion, comprised of cash and cash equivalents, and availability under the ABL and accounts receivable securitization facilities.

In October 2022, our Board of Directors authorized a $1.25 billion share repurchase program, which was completed in the first quarter of 2024. In January 2024, our Board of Directors authorized a $1.5 billion share repurchase program, and repurchases under this program began in March 2024, following the completion of the $1.25 billion program. We have repurchased $500 under the $1.5 billion program through June 30, 2024, and intend to repurchase a total of $1.25 billion under the program in 2024 and then complete the program by the end of the first quarter of 2025. A 1 percent excise tax is imposed on “net repurchases” (certain purchases minus certain issuances) of common stock. The repurchases above (as well as the total program sizes and expected 2024 repurchases) do not include the excise tax, which totaled $7 year-to-date through June 30, 2024.

Our Board of Directors also approved our first-ever quarterly dividend program in January 2023, and the first dividend under the program was paid in February 2023. During the six months ended June 30, 2024 and 2023, we paid dividends of $219 ($3.26 per share) and $205 ($2.96 per share), respectively. On July 24, 2024, our Board of Directors declared a quarterly dividend of $1.63 per share, payable on August 28, 2024 to stockholders of record on August 14, 2024.

Net income. Net income and diluted earnings per share are presented below.

Net income and diluted earnings per share include the after-tax impacts of the items below. The tax rates applied to the items below reflect the statutory rates in the applicable entities.

(1) This reflects the amortization of the intangible assets acquired in the major acquisitions that significantly impact our operations (the "major acquisitions," each of which had annual revenues of over $200 prior to acquisition).

(2) This reflects the impact of extending the useful lives of equipment acquired in certain major acquisitions, net of the impact of additional depreciation associated with the fair value mark-up of such equipment.

(3) This reflects additional costs recorded in cost of rental equipment sales associated with the fair value mark-up of rental equipment acquired in certain major acquisitions that was subsequently sold. The decreases in 2024 primarily reflect decreased sales of rental equipment acquired in the Ahern Rentals acquisition.

(4) This primarily reflects severance and branch closure charges associated with our restructuring programs. For additional information on the restructuring charges, which generally involve the closure of a large number of branches over a short period of time, often in periods following a major acquisition, see "Management’s Discussion and Analysis of Financial Condition and Results of Operations-Results of Operations-Other costs/(income)-restructuring charges" below. The amounts above primarily reflect charges associated with a restructuring program initiated following the closing of the Ahern Rentals acquisition.

(5) This reflects write-offs of leasehold improvements and other fixed assets.

EBITDA GAAP Reconciliations. EBITDA represents the sum of net income, provision for income taxes, interest expense, net, depreciation of rental equipment and non-rental depreciation and amortization. Adjusted EBITDA represents EBITDA plus the sum of the restructuring charges, stock compensation expense, net and the impact of the fair value mark-up of the acquired fleet. See below for further detail on each adjusting item. These items are excluded from adjusted EBITDA internally when evaluating our operating performance and for strategic planning and forecasting purposes, and allow investors to make a more meaningful comparison between our core business operating results over different periods of time, as well as with those of other similar companies. The net income and adjusted EBITDA margins represent net income or adjusted EBITDA divided by total revenue. Management believes that EBITDA and adjusted EBITDA, when viewed with the Company’s results under GAAP and the accompanying reconciliations, provide useful information about operating performance and period-over-period growth, and provide additional information that is useful for evaluating the operating performance of our core business without regard to potential distortions. Additionally, management believes that EBITDA and adjusted EBITDA help investors gain an understanding of the factors and trends affecting our ongoing cash earnings, from which capital investments are made and debt is serviced. However, EBITDA and adjusted EBITDA are not measures of financial performance or liquidity under GAAP and, accordingly, should not be considered as alternatives to net income or cash flow from operating activities as indicators of operating performance or liquidity.

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

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

(1) This primarily reflects severance and branch closure charges associated with our restructuring programs. For additional information on the restructuring charges, which generally involve the closure of a large number of branches over a short period of time, often in periods following a major acquisition, see "Management’s Discussion and Analysis of Financial Condition and Results of Operations-Results of Operations-Other costs/(income)-restructuring charges" below. The amounts above primarily reflect charges associated with a restructuring program initiated following the closing of the Ahern Rentals acquisition.

(2) Represents non-cash, share-based payments associated with the granting of equity instruments.

(3) This reflects additional costs recorded in cost of rental equipment sales associated with the fair value mark-up of rental equipment acquired in certain major acquisitions that was subsequently sold. The decreases in 2024 primarily reflect decreased sales of rental equipment acquired in the Ahern Rentals acquisition.

For the three months ended June 30, 2024, net income increased $45, or 7.6 percent, and net income margin increased 30 basis points to 16.9 percent. For the three months ended June 30, 2024, adjusted EBITDA increased $74, or 4.4 percent, and adjusted EBITDA margin decreased 80 basis points to 46.9 percent.

The year-over-year increase in net income margin primarily reflects a 70 basis point increase in gross margin from equipment rentals, primarily due to decreased depreciation expense as a percentage of revenue, and reduced restructuring charges due to 2023 charges associated with the restructuring program initiated following the December 2022 acquisition of Ahern Rentals, partially offset by a 390 basis point decrease in gross margin from used equipment sales, which primarily reflects the continued normalization of the used equipment market, including pricing.

The year-over-year decrease in adjusted EBITDA margin primarily reflects a 550 basis point decrease in gross margin from sales of rental equipment (excluding the adjustment reflected in the table above for the impact of the fair value mark-up of acquired fleet) and a slight decrease in gross margin from equipment rentals (excluding depreciation and stock compensation expense). The decreased gross margin from sales of rental equipment (excluding the adjustment for the impact of the fair value mark-up of acquired fleet) primarily reflects the continued normalization of the used equipment market, including pricing.

For the six months ended June 30, 2024, net income increased $136, or 13.1 percent, and net income margin increased 100 basis points to 16.2 percent. For the six months ended June 30, 2024, adjusted EBITDA increased $158, or 4.9 percent, and adjusted EBITDA margin decreased 60 basis points to 46.2 percent.

The year-over-year increase in net income margin primarily reflects a 90 basis point increase in gross margin from equipment rentals, primarily due to decreased depreciation expense as a percentage of revenue, and reduced restructuring charges due to 2023 charges associated with the restructuring program initiated following the December 2022 acquisition of Ahern Rentals, partially offset by a 200 basis point decrease in gross margin from used equipment sales, which primarily reflects the continued normalization of the used equipment market, including pricing.

The year-over-year decrease in adjusted EBITDA margin primarily reflects a 590 basis point decrease in gross margin from sales of rental equipment (excluding the adjustment reflected in the table above for the impact of the fair value mark-up of acquired fleet), primarily due to the continued normalization of the used equipment market, including pricing.

Revenues are noted below. Fleet productivity is a comprehensive metric that provides greater insight into the decisions made by our managers in support of equipment rental growth and returns. Specifically, we seek to optimize the interplay of rental rates, time utilization and mix to drive rental revenue. Fleet productivity aggregates, in one metric, the impact of changes in rates, utilization and mix on owned equipment rental revenue. We believe that this metric is useful in assessing the effectiveness of our decisions on rates, time utilization and mix, particularly as they support the creation of shareholder value. The table below includes the components of the year-over-year change in rental revenue using the fleet productivity methodology.

(1) Reflects the estimated impact of inflation on the revenue productivity of fleet based on OEC, which is recorded at cost.

(2) Reflects the combined impact of changes in rental rates, time utilization, and mix that contribute to the variance in owned equipment rental revenue. See note 2 to the condensed consolidated financial statements for a discussion of the different types of equipment rentals revenue. Rental rate changes are calculated based on the year-over-year variance in average contract rates, weighted by the prior period revenue mix. Time utilization is calculated by dividing the amount of time an asset is on rent by the amount of time the asset has been owned during the year. Mix includes the impact of changes in customer, fleet, geographic and segment mix.

(3) Reflects the combined impact of changes in the other types of equipment rentals revenue (see note 2 for further detail), excluding owned equipment rental revenue.

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

For the three months ended June 30, 2024, total revenues of $3.773 billion increased 6.2 percent compared with 2023. Equipment rentals and sales of rental equipment are our largest revenue types (together, they accounted for 95 percent of total revenue for the three months ended June 30, 2024). Equipment rentals increased $234, or 7.8 percent, primarily due to a 4.6 percent increase in fleet productivity, which includes the impact of the Yak acquisition discussed above, and a 2.7 percent increase in average OEC. Sales of rental equipment did not change significantly year-over-year.

For the six months ended June 30, 2024, total revenues of $7.258 billion increased 6.1 percent compared with 2023. Equipment rentals and sales of rental equipment are our largest revenue types (together, they accounted for 95 percent of total revenue for the six months ended June 30, 2024). Equipment rentals increased $423, or 7.4 percent, primarily due to a 4.3 percent increase in fleet productivity, which includes the impact of the Yak acquisition, and a 3.1 percent increase in average OEC. Sales of rental equipment did not change significantly year-over-year.

Results of Operations

As discussed in note 4 to our condensed consolidated financial statements, our reportable segments are general rentals and specialty. 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. This segment operates throughout the United States and Canada. The specialty segment rents products (and provides setup and other services on such rented equipment) including i) 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) power and HVAC equipment, such as portable diesel generators, electrical distribution equipment, and temperature control equipment, iii) fluid solutions equipment primarily used for fluid containment, transfer and treatment, iv) mobile storage equipment and modular office space and v) surface protection mats. The specialty segment’s customers include construction companies involved in infrastructure projects, municipalities and industrial companies. This segment primarily operates in the United States and Canada, and has a limited presence in Europe, Australia and New Zealand.

As discussed in note 4 to our condensed consolidated financial statements, we aggregate our four geographic divisions—Central, Northeast, Southeast and West—into our general rentals reporting segment. Historically, there have occasionally been variances in the levels of equipment rentals gross margins achieved by these divisions, though such variances have generally been small (close to or less than 10 percent, measured versus the equipment rentals gross margins of the aggregated general rentals' divisions). For the five year period ended June 30, 2024, there was no general rentals' division with an equipment rentals gross margin that differed materially from the equipment rentals gross margin of the aggregated general rentals' divisions. The rental industry is cyclical, and there historically have occasionally been divisions with equipment rentals gross margins that varied by greater than 10 percent from the equipment rentals gross margins of the aggregated general rentals' divisions, though the specific divisions with margin variances of over 10 percent have fluctuated, and such variances have generally not exceeded 10 percent by a significant amount. We monitor the margin variances and confirm margin similarity between divisions on a quarterly basis.

We believe that the divisions that are aggregated into our segments have similar economic characteristics, as each division 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 divisions also reflects the management structure that we use for making operating decisions and assessing performance. Although we believe aggregating these divisions 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 divisions into separate reporting segments. Any such disaggregation would have no impact on our consolidated results of operations.

These reporting segments align our external segment reporting with how management evaluates business performance and allocates resources. We evaluate segment performance primarily based on segment equipment rentals gross profit. Our revenues, operating results, and financial condition fluctuate from quarter to quarter reflecting the seasonal rental patterns of our customers, with rental activity tending to be lower in the winter.

Revenues by segment were as follows:

Equipment rentals represented 85 percent of total revenues for the three months ended June 30, 2024. For the three months ended June 30, 2024, equipment rentals of $3.215 billion increased $234, or 7.8 percent, as compared to the same period in 2023, primarily due to a 4.6 percent increase in fleet productivity, which includes the impact of the Yak acquisition discussed above, and a 2.7 percent increase in average OEC.

For the three months ended June 30, 2024, equipment rentals represented 83 percent of total revenues for the general rentals segment. For the three months ended June 30, 2024, general rentals equipment rentals increased $20, or 0.9 percent, as compared to the same period in 2023.

For the three months ended June 30, 2024, equipment rentals represented 90 percent of total revenues for the specialty segment. For the three months ended June 30, 2024, specialty equipment rentals increased $214, or 27.0 percent, as compared to the same period in 2023, primarily due to strong demand across our end-markets, the impact of the Yak acquisition and increased average OEC. Specialty equipment rentals increased 18.1 percent year-over-year excluding the revenue from the acquired Yak locations.

For the six months ended June 30, 2024, equipment rentals represented 85 percent of total revenues. For the six months ended June 30, 2024, equipment rentals of $6.144 billion increased $423, or 7.4 percent, as compared to the same period in 2023, primarily due to a 4.3 percent increase in fleet productivity, which includes the impact of the Yak acquisition, and a 3.1 percent increase in average OEC.

For the six months ended June 30, 2024, equipment rentals represented 82 percent of total revenues for the general rentals segment. For the six months ended June 30, 2024, general rentals equipment rentals increased $72, or 1.7 percent, as compared to the same period in 2023.

For the six months ended June 30, 2024, equipment rentals represented 91 percent of total revenues for the specialty segment. For the six months ended June 30, 2024, specialty equipment rentals increased $351, or 23.2 percent, as compared to the same period in 2023, primarily due to strong demand across our end-markets, the impact of the Yak acquisition and increased average OEC. Specialty equipment rentals increased 17.7 percent year-over-year excluding the revenue from the acquired Yak locations.

Sales of rental equipment. For the six months ended June 30, 2024, sales of rental equipment represented approximately 10 percent of our total revenues. For the three and six months ended June 30, 2024, sales of rental equipment did not change significantly year-over-year.

Sales of new equipment. For the six months ended June 30, 2024, sales of new equipment represented approximately 2 percent of our total revenues. For the three and six months ended June 30, 2024, sales of new equipment did not change significantly year-over-year.

Contractor supplies sales represent our revenues associated with selling a variety of supplies, including construction consumables, tools, small equipment and safety supplies. For the six months ended June 30, 2024, contractor supplies sales represented approximately 1 percent of our total revenues. For the three and six months ended June 30, 2024, contractor supplies sales did not change significantly year-over-year.

Service and other revenues primarily represent our revenues earned from providing repair and maintenance services on our customers’ fleet (including parts sales). For the six months ended June 30, 2024, service and other revenues represented approximately 2 percent of our total revenues. For the three and six months ended June 30, 2024, service and other revenues did not change significantly year-over-year.

Segment Equipment Rentals Gross Profit

Segment equipment rentals gross profit and gross margin were as follows:

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General rentals. For the three months ended June 30, 2024, equipment rentals gross profit increased by $14, and equipment rentals gross margin increased by 30 basis points, year-over-year.

For the six months ended June 30, 2024, equipment rentals gross profit increased by $32, and equipment rentals gross margin increased by 20 basis points, year-over-year.

Specialty. For the three months ended June 30, 2024, equipment rentals gross profit increased by $98, and equipment rentals gross margin decreased by 60 basis points, year-over-year. Gross margin decreased primarily due to increased depreciation expense, including the impact of the Yak acquisition.

For the six months ended June 30, 2024, equipment rentals gross profit increased by $180, and equipment rentals gross margin increased by 60 basis points, year-over-year. Gross margin increased primarily due to better cost performance and fixed cost absorption on higher revenue, partially offset by the impact of increased depreciation expense associated with the Yak acquisition.

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

For the three months ended June 30, 2024, total gross margin increased 10 basis points from the same period in 2023. Equipment rentals gross margin increased 70 basis points from 2023, primarily due to decreased depreciation expense as a percentage of revenue. Gross margin from sales of rental equipment decreased 390 basis points from 2023, which primarily reflected the continued normalization of the used equipment market, including pricing. The gross margin fluctuations from sales of new equipment, contractor supplies sales and service and other revenues generally reflect normal variability, and such revenue types did not account for a significant portion of total gross profit (gross profit for these revenue types represented 4 percent of total gross profit for the three months ended June 30, 2024).

For the six months ended June 30, 2024, total gross margin increased 50 basis points from the same period in 2023. Equipment rentals gross margin increased 90 basis points from 2023, primarily due to decreased depreciation expense as a percentage of revenue. Gross margin from sales of rental equipment decreased 200 basis points from 2023, which primarily reflected the continued normalization of the used equipment market, including pricing. The gross margin fluctuations from sales of new equipment, contractor supplies sales and service and other revenues generally reflect normal variability, and such revenue types did not account for a significant portion of total gross profit (gross profit for these revenue types represented 4 percent of total gross profit for the six months ended June 30, 2024).

Other costs/(income)

The table below includes the other costs/(income) in our condensed consolidated statements of income, as well as key associated metrics:

SG&A expense primarily includes sales force compensation, information technology costs, third party professional fees, management salaries, bad debt expense and clerical and administrative overhead. SG&A expense as a percentage of revenue for the three and six months ended June 30, 2024 did not change significantly year-over-year.

The restructuring charges primarily reflect severance and branch closure charges associated with our restructuring programs. We incur severance costs and branch closure charges in the ordinary course of our business. We only include such costs that are part of a restructuring program as restructuring charges. The designated restructuring programs generally involve the closure of a large number of branches over a short period of time, often in periods following a major acquisition, and result in significant costs that we would not normally incur absent a major acquisition or other triggering event that results in the initiation of a restructuring program. The year-over-year decreases in restructuring charges for the three and six months ended June 30, 2024 primarily reflect 2023 charges associated with the restructuring program initiated following the December 2022 acquisition of Ahern Rentals. Since the first such program was initiated in 2008, we have completed seven restructuring programs and have incurred total restructuring charges of $382. We currently have no open restructuring programs, and the total liability associated with our restructuring programs was $19 as of June 30, 2024.

Non-rental depreciation and amortization includes i) the amortization of other intangible assets and ii) depreciation expense associated with equipment that is not offered for rent (such as computers and office equipment) and amortization expense associated with leasehold improvements. Our other intangible assets consist of customer relationships, non-compete agreements and trade names and associated trademarks.

Interest expense, net for the three and six months ended June 30, 2024 increased by 7.5 percent and 7.1 percent year-over-year, respectively, primarily reflecting increased average debt, including the debt issued to partially fund the Yak acquisition discussed above, and higher variable debt interest rates. The weighted average interest rates on our variable debt instruments were 6.6 percent and 6.3 percent for the three months ended June 30, 2024 and 2023, respectively, and 6.6 percent and 6.1 percent for the six months ended June 30, 2024 and 2023, respectively.

Other (income) expense, net primarily includes i) currency gains and losses, ii) finance charges, iii) gains and losses on sales of non-rental equipment and iv) other miscellaneous items.

The effective tax rates for 2024 and 2023 differed from the federal statutory rate of 21 percent primarily due to the geographical mix of income between foreign and domestic operations, the impact of state and local taxes, stock compensation, and other deductible and nondeductible charges.

Balance sheet. Prepaid expenses and other assets increased by $138, or 102.2 percent, from December 31, 2023 to June 30, 2024, primarily due to an increase in income taxes receivable which reflected required tax payments exceeding the estimated tax accruals. Goodwill increased by $809, or 13.6 percent, from December 31, 2023 to June 30, 2024, primarily due to the impact of the Yak acquisition, as discussed in note 3 to the condensed consolidated financial statements. Accounts payable increased by $444, or 49.1 percent, from December 31, 2023 to June 30, 2024, primarily due to seasonal increases in capital expenditures and business activities. See the condensed consolidated statements of cash flows for further information on changes in cash and cash equivalents, the condensed consolidated statements of stockholders’ equity for further information on changes in stockholders’ equity and note 7 to the condensed consolidated financial statements for further information on debt changes.

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.

In October 2022, our Board of Directors authorized a $1.25 billion share repurchase program, which was completed in the first quarter of 2024. In January 2024, our Board of Directors authorized a $1.5 billion share repurchase program, and repurchases under this program began in March 2024, following the completion of the $1.25 billion program. We have repurchased $500 under the $1.5 billion program through June 30, 2024, and intend to repurchase a total of $1.25 billion under the program in 2024 and then complete the program by the end of the first quarter of 2025. A 1 percent excise tax is imposed on “net repurchases” (certain purchases minus certain issuances) of common stock. The repurchases above (as well as the total program sizes and expected 2024 repurchases) do not include the excise tax, which totaled $7 year-to-date through June 30, 2024. Since 2012, we have repurchased a total of $6.722 billion (inclusive of immaterial excise taxes, which were first imposed in 2023) of Holdings' common stock under our share repurchase programs (comprised of eight programs that have ended and the current program).

Our Board of Directors also approved our first-ever quarterly dividend program in January 2023, and the first dividend under the program was paid in February 2023. During the six months ended June 30, 2024 and 2023, we paid dividends totaling $219 ($3.26 per share) and $205 ($2.96 per share), respectively. On July 24, 2024, our Board of Directors declared a quarterly dividend of $1.63 per share, payable on August 28, 2024 to stockholders of record on August 14, 2024.

Our principal existing sources of cash are cash generated from operations and from the sale of rental equipment, and borrowings available under our ABL facility and accounts receivable securitization facility. As of June 30, 2024, we had cash and cash equivalents of $467. We believe that our existing sources of cash will be sufficient to support our existing operations over the next 12 months. The table below presents financial information associated with our principal sources of cash as of and for the six months ended June 30, 2024:

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We expect that our principal short-term (over the next 12 months) and long-term needs for cash relating to our operations 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, (vi) dividends and (vii) 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. The table below presents information on payments coming due under the most significant categories of our needs for cash (excluding operating cash flows pertaining to normal business operations, such as human capital costs, which are not accurately estimable) as of June 30, 2024:

(1) The payments due with respect to a period represent (i) in the case of debt and finance leases, the scheduled principal payments due in such period, and (ii) in the case of operating leases, the payments due in such period for non-cancelable operating leases with initial or remaining terms of one year or more. See note 7 to the condensed consolidated financial statements for further debt information.

(2) Estimated interest payments have been calculated based on the principal amount of debt and the applicable interest rates as of June 30, 2024.

(3) As of June 30, 2024, we had outstanding advance purchase orders, which were negotiated in the ordinary course of business, with our equipment and inventory suppliers. These purchase orders can generally be cancelled by us without cancellation penalties. The equipment and inventory receipts from the suppliers pursuant to these purchase orders and the related payments to the suppliers are expected to be completed primarily throughout 2024.

To access the capital markets, we rely on credit rating agencies to assign ratings to our securities as an indicator of credit quality. Lower credit ratings generally result in higher borrowing costs and reduced access to debt capital markets. Credit ratings also affect the costs of derivative transactions, including interest rate and foreign currency derivative transactions. As a result, negative changes in our credit ratings could adversely impact our costs of funding. Our credit ratings as of July 22, 2024 were as follows:

A security rating is not a recommendation to buy, sell or hold securities. There is no assurance that any rating will remain in effect for a given period of time or that any rating will not be revised or withdrawn by a rating agency in the future.

Loan Covenants and Compliance. As of June 30, 2024, we were in compliance with the covenants and other provisions of the ABL, accounts receivable securitization and term loan facilities and our 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 June 30, 2024, specified availability under the ABL facility exceeded the required threshold and, as a result, this financial covenant was inapplicable. Under our accounts receivable securitization facility, we are required, among other things, to maintain certain financial tests relating to: (i) the default ratio, (ii) the delinquency ratio, (iii) the dilution ratio and (iv) days sales outstanding. 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.

Covenants in the agreements governing our ABL facility, term loan facility and certain other debt instruments impose limitations on our ability to make share repurchases and dividend payments, subject to important exceptions that would allow us to make such repurchases or payments under certain conditions. Based on our current total indebtedness leverage ratio (as defined in the applicable debt agreements) and usage of the ABL facility as of June 30, 2024, we met the criteria under the applicable debt agreements for these exceptions, and as a result we were not restricted in our ability to make share repurchases and dividend payments.

Sources and Uses of Cash. During the six months ended June 30, 2024, we (i) generated cash from operating activities of $2.294 billion, (ii) generated cash from the sale of rental and non-rental equipment of $778 and (iii) received cash from debt proceeds, net of payments, of $1.314 billion. We used cash during this period principally to (i) make payments for purchases of rental and non-rental equipment and intangible assets of $2.031 billion, (ii) purchase other companies for $1.234 billion, (iii) purchase shares of our common stock for $791 and (iv) pay dividends of $219. During the six months ended June 30, 2023, we (i) generated cash from operating activities of $2.228 billion, (ii) generated cash from the sale of rental and non-rental equipment of $798 and (iii) received cash from debt proceeds, net of payments, of $481. We used cash during this period principally to (i) make payments for purchases of rental and non-rental equipment and intangible assets of $2.227 billion, (ii) purchase other companies for $418, (iii) purchase shares of our common stock for $554 and (iv) pay dividends of $205.

Free Cash Flow GAAP Reconciliation. We define “free cash flow” as net cash provided by operating activities less payments for purchases of, and plus proceeds from, equipment and intangible assets. The equipment and intangible asset items are included in cash flows from investing activities. Management believes that free cash flow provides useful additional information concerning cash flow available to meet future debt service obligations and working capital requirements. However, free cash flow is not a measure of financial performance or liquidity under GAAP. Accordingly, free cash flow should not be considered an alternative to net income or cash flow from operating activities as an indicator of operating performance or liquidity. The table below provides a reconciliation between net cash provided by operating activities and free cash flow.

Free cash flow for the six months ended June 30, 2024 was $1.065 billion, an increase of $247 as compared to $818 for the six months ended June 30, 2023. The increase in free cash flow primarily reflected lower payments for purchases of rental equipment, which decreased $182, or 9 percent, year-over-year, and increased net cash provided by operating activities.

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.

Information Regarding Guarantors of URNA Indebtedness

URNA is 100 percent owned by Holdings and has certain outstanding indebtedness that is guaranteed by both Holdings and, with the exception of its U.S. special purpose vehicle which holds receivable assets relating to the Company’s accounts receivable securitization facility (the “SPV”) and a foreign subsidiary holding company acquired in connection with the General Finance acquisition, all of URNA’s U.S. subsidiaries (the “guarantor subsidiaries”). Other than the guarantee by our Canadian subsidiary of URNA's indebtedness under the ABL facility, none of URNA’s indebtedness is guaranteed by URNA's foreign subsidiaries, the SPV, or the foreign subsidiary holding company acquired in connection with the General Finance acquisition (together, the “non-guarantor subsidiaries”). The receivable assets owned by the SPV have been sold or contributed by URNA to the SPV and are not available to satisfy the obligations of URNA or Holdings’ other subsidiaries. Holdings consolidates each of URNA and the guarantor subsidiaries in its consolidated financial statements. URNA and the guarantor subsidiaries are all 100 percent-owned and controlled by Holdings. Holdings’ guarantees of URNA’s indebtedness are full and unconditional, except that the guarantees may be automatically released and relieved upon satisfaction of the requirements for legal defeasance or covenant defeasance under the applicable indenture being met. The Holdings guarantees are also subject to subordination provisions (to the same extent that the obligations of the issuer under the relevant notes are subordinated to other debt of the issuer) and to a standard limitation which provides that the maximum amount guaranteed by Holdings will not exceed the maximum amount that can be guaranteed without making the guarantee void under fraudulent conveyance laws.

The guarantees of Holdings and the guarantor subsidiaries are made on a joint and several basis. The guarantees of the guarantor subsidiaries are not full and unconditional because a guarantor subsidiary can be automatically released and relieved of its obligations under certain circumstances, including sale of the guarantor subsidiary, the sale of all or substantially all of the guarantor subsidiary's assets, the requirements for legal defeasance or covenant defeasance under the applicable indenture being met, designating the guarantor subsidiary as an unrestricted subsidiary for purposes of the applicable covenants or the notes being rated investment grade by both Standard & Poor’s Ratings Services and Moody’s Investors Service, Inc., or, in certain circumstances, another rating agency selected by URNA. Like the Holdings guarantees, the guarantees of the guarantor subsidiaries are subject to subordination provisions (to the same extent that the obligations of the issuer under the relevant notes are subordinated to other debt of the issuer) and to a standard limitation which provides that the maximum amount guaranteed by each guarantor will not exceed the maximum amount that can be guaranteed without making the guarantee void under fraudulent conveyance laws.

All of the existing guarantees by Holdings and the guarantor subsidiaries rank equally in right of payment with all of the guarantors' existing and future senior indebtedness. The secured indebtedness of Holdings and the guarantor subsidiaries (including guarantees of URNA’s existing and future secured indebtedness) will rank effectively senior to guarantees of any unsecured indebtedness to the extent of the value of the assets securing such indebtedness. Future guarantees of subordinated indebtedness will rank junior to any existing and future senior indebtedness of the guarantors. The guarantees of URNA’s indebtedness are effectively junior to any indebtedness of our subsidiaries that are not guarantors, including our foreign subsidiaries. As of June 30, 2024, the indebtedness of our non-guarantors was comprised of (i) $1.289 billion of outstanding borrowings by the SPV in connection with the Company’s accounts receivable securitization facility, (ii) $138 of outstanding borrowings under the ABL facility by non-guarantor subsidiaries and (iii) $10 of finance leases of our non-guarantor subsidiaries.

Covenants in the agreements governing our ABL facility, term loan facility and certain other debt instruments impose limitations on our ability to make share repurchases and dividend payments, subject to important exceptions that would allow us to make such repurchases or payments under certain conditions. Based on our current total indebtedness leverage ratio (as defined in the applicable debt agreements) and usage of the ABL facility as of June 30, 2024, we met the criteria under the applicable debt agreements for these exceptions, and as a result we were not restricted in our ability to make share repurchases and dividend payments.

Based on our understanding of Rule 3-10 of Regulation S-X ("Rule 3-10"), we believe that Holdings’ guarantees of URNA indebtedness comply with the conditions set forth in Rule 3-10, which enables us to present summarized financial information for Holdings, URNA and the consolidated guarantor subsidiaries in accordance with Rule 13-01 of Regulation S-X. The summarized financial information excludes the financial information of the non-guarantor subsidiaries. In accordance with Rule 3-10, separate financial statements of the guarantor subsidiaries have not been presented. Our presentation below excludes the investment in the non-guarantor subsidiaries and the related income from the non-guarantor subsidiaries.

The summarized financial information of Holdings, URNA and the guarantor subsidiaries on a combined basis is as follows:

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Our exposure to market risk primarily consists of (i) interest rate risk associated with our variable and fixed rate debt and (ii) foreign currency exchange rate risk associated with our foreign operations.

Interest Rate Risk. As of June 30, 2024, we had an aggregate of $3.8 billion of indebtedness that bears interest at variable rates, comprised of borrowings under the ABL, accounts receivable securitization and term loan facilities. The amount of variable rate indebtedness outstanding under these facilities may fluctuate significantly. See note 7 to the condensed consolidated financial statements for the amounts outstanding, and the interest rates thereon, as of June 30, 2024 under these facilities. As of June 30, 2024, based upon the amount of our variable rate debt outstanding, our annual after-tax earnings would decrease by approximately $29 for each one percentage point increase in the interest rates applicable to our variable rate debt.

At June 30, 2024, we had an aggregate of $9.0 billion of indebtedness that bears interest at fixed rates. A one percentage point decrease in market interest rates as of June 30, 2024 would increase the fair value of our fixed rate indebtedness by approximately 4 percent. For additional information concerning the fair value of our fixed rate debt, see note 6 (see “Fair Value of Financial Instruments”) to our condensed consolidated financial statements.

Currency Exchange Risk. We primarily operate in the U.S. and Canada, and have a limited presence in Europe, Australia and New Zealand. During the six months ended June 30, 2024, our foreign subsidiaries accounted for $643, or 9 percent, of our total revenue of $7.258 billion, and $114, or 7 percent, of our total pretax income of $1.530 billion. Based on the size of our foreign operations relative to the Company as a whole, we do not believe that a 10 percent change in exchange rates would have a material impact on our earnings. We do not engage in purchasing forward exchange contracts for speculative purposes.

Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

The Company’s management carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a–15(e) and 15d–15(e) of the Exchange Act, as of June 30, 2024. Based on the evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2024.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended June 30, 2024 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Our results of operations and financial condition are subject to numerous risks and uncertainties described in our 2023 Form 10-K, which risk factors are incorporated herein by reference. You should carefully consider the risk factors in our 2023 Form 10-K in conjunction with the other information contained in this report. Should any of these risks materialize, our business, financial condition and future prospects could be negatively impacted.