News Column

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

July 16, 2014

Executive Overview We are the largest equipment rental company in the world, with an integrated network of 883 rental locations in the United States and Canada. Although the equipment rental industry is highly fragmented and diverse, we believe that we are well positioned to take advantage of this environment because, as a larger company, we have more extensive resources and certain competitive advantages. These include a fleet of rental equipment with a total original equipment cost ("OEC") of $8.4 billion, and a national branch network that operates in 49 U.S. states and every Canadian province, and serves 99 of the largest 100 metropolitan areas in the United States. In addition, our size gives us greater purchasing power, the ability to provide customers with a broader range of equipment and services, the ability to provide customers with equipment that is more consistently well-maintained and therefore more productive and reliable, and the ability to enhance the earning potential of our assets by transferring equipment among branches to satisfy customer needs. We offer approximately 3,400 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, 2014. For the past several years, we have executed a strategy focused on improving the profitability of our core 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 cost control. In 2014, we will intensify our disciplined focus on profitability and return on invested capital. In particular, our strategy calls for: An increasing proportion of revenue derived from key accounts, a group that includes national accounts and strategic accounts, among others; A consistently superior standard of service to customers, often provided



through a single point of contact;

A targeted presence in industrial and specialty rental markets. We expect

to continue to expand our trench safety, power and HVAC, and pump

solutions (also referred to as "specialty") footprint, as well as our

tools offering, and to cross-sell these services throughout our network.

We believe that the expansion of our specialty business will further

position United Rentals as a single source provider of total jobsite

solutions through our extensive product and service resources and

technology offerings. As discussed in note 2 to the condensed

consolidated financial statements, in April 2014 we acquired National

Pump. The acquisition is expected to expand our product offering, and supports our strategy of expanding our presence in industrial and specialty rental markets; 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 teams will use similar analyses to identify trends

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



The implementation of "Lean" management techniques, including kaizen

processes focused on continuous improvement, through a program we call

Operation United 2. Having completed eight branch pilots in late 2013, we

are now in the early stages of launching this program across our branch

network, with the objectives of: reducing the cycle time associated with renting our equipment to customers; improving invoice accuracy and service quality; reducing the elapsed time for equipment pickup and



delivery; and improving the effectiveness and efficiency of our repair

and maintenance operations.

During the six months ended June 30, 2014, year over year, our rental rates increased 4.6 percent and the volume of OEC on rent increased 9.0 percent, which we believe reflects improvements in our operating environment and the execution of our strategy. Financial Overview As discussed further in note 8 to the condensed consolidated financial statements, during the six months ended June 30, 2014, we took the following actions that have improved our financial flexibility and liquidity: In January 2014, we redeemed all of our 10 1/4 percent Senior Notes.



In March 2014, URNA issued $525 principal amount of 6 1/8 percent Senior

Notes as an add on to our existing 6 1/8 percent Senior Notes. 32



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In March 2014, URNA issued $850 principal amount of 5 3/4 percent Senior

Notes.

In April 2014, we redeemed all of our 9 1/4 percent Senior Notes.

These actions have improved our financial flexibility and liquidity and positioned us to invest the necessary capital in our business to take advantage of opportunities in the economic recovery. As of June 30, 2014, we had available liquidity of $1.2 billion, including cash of $170. Net income. Net income and diluted earnings per share for the three and six months ended June 30, 2014 and 2013 were as follows: Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 Net income $ 94$ 83$ 154$ 104 Diluted earnings per share $ 0.90$ 0.78$ 1.46$ 0.98



Net income and diluted earnings per share for the three and six months ended June 30, 2014 and 2013 include the impacts of the following special items (amounts presented on an after-tax basis):

Three Months Ended June 30, Six Months Ended June 30, 2014 2013 2014 2013 Impact on Impact on Impact on Impact on Contribution diluted earnings Contribution diluted earnings Contribution diluted earnings Contribution diluted earnings to net income (after-tax) per share to net income (after-tax) per share to net income (after-tax) per share to net income (after-tax) per share Merger related costs (1) $ (5 ) $ (0.05 ) $ (1 ) $ (0.01 ) $ (6 ) $ (0.05 ) $ (5 ) $ (0.05 ) Merger related intangible asset amortization (2) (31 ) (0.29 ) (25 ) (0.24 ) (55 ) (0.52 ) (51 ) (0.49 ) Impact on depreciation related to acquired RSC fleet and property and equipment (3) 1 0.01 2 0.01 1 0.01 3 0.03 Impact of the fair value mark-up of acquired RSC fleet (4) (6 ) (0.06 ) (8 ) (0.07 ) (11 ) (0.11 ) (16 ) (0.15 ) Impact on interest expense related to fair value adjustment of acquired RSC indebtedness (5) 1 0.01 1 0.01 2 0.01 2 0.02 Restructuring charge (6) 1 0.01 (2 ) (0.03 ) - - (6 ) (0.06 ) Asset impairment charge (7) - - (1 ) (0.01 ) - - (2 ) (0.02 ) Loss on repurchase/redemption of debt securities and retirement of subordinated convertible debentures (40 ) (0.38 ) - - (46 ) (0.43 ) (1 ) (0.01 )



(1) This reflects transaction costs associated with the 2012 acquisition of RSC

Holdings Inc. ("RSC") and the April 2014 acquisition of National Pump

discussed in note 2 to the condensed consolidated financial statements.

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

and National Pump acquisitions.

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

in the RSC acquisition, net of the impact of additional depreciation

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

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

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

RSC acquisition and subsequently sold. 33



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(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 below (see "Restructuring charges"), this primarily reflects

severance costs and branch closure charges associated with the RSC

acquisition.

(7) This charge primarily reflects write-offs of leasehold improvements and other

fixed assets in connection with the RSC acquisition.

In addition to the matters discussed above, our 2014 performance reflects increased gross profit from equipment rentals. EBITDA GAAP Reconciliations. EBITDA represents the sum of net income, provision for income taxes, interest expense, net, interest expense-subordinated convertible debentures, depreciation of rental equipment and non-rental depreciation and amortization. Adjusted EBITDA represents EBITDA plus the sum of the merger related costs, restructuring charge, stock compensation expense, net, the impact of the fair value mark-up of the acquired RSC fleet and the gain/loss on sale of software subsidiary. These items are excluded from adjusted EBITDA internally when evaluating our operating performance and allow investors to make a more meaningful comparison between our core business operating results over different periods of time, as well as with those of other similar companies. Management believes that EBITDA and adjusted EBITDA, when viewed with the Company's results under GAAP and the accompanying reconciliations, provide useful information about operating performance and period-over-period growth, and provide additional information that is useful for evaluating the operating performance of our core business without regard to potential distortions. Additionally, management believes that EBITDA and adjusted EBITDA permit investors to gain an understanding of the factors and trends affecting our ongoing cash earnings, from which capital investments are made and debt is serviced. However, EBITDA and adjusted EBITDA are not measures of financial performance or liquidity under GAAP and, accordingly, should not be considered as alternatives to net income or cash flow from operating activities as indicators of operating performance or liquidity. The table below provides a reconciliation between net income and EBITDA and adjusted EBITDA: Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 Net income $ 94$ 83$ 154$ 104 Provision for income taxes 48 48 82 57 Interest expense, net 187 118 312 236 Interest expense - subordinated convertible debentures - 1 - 3 Depreciation of rental equipment 229 208 446 410 Non-rental depreciation and amortization 70 62 130 126 EBITDA $ 628$ 520$ 1,124$ 936 Merger related costs (1) 8 2 9 8 Restructuring charge (2) (1 ) 5 - 11 Stock compensation expense, net (3) 19 10 31 19 Impact of the fair value mark-up of acquired RSC fleet (4) 9 11 18 25 (Gain) loss on sale of software subsidiary (5) - 1 - 1 Adjusted EBITDA $ 663$ 549$ 1,182$ 1,000



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

34



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Table of Contents Six Months Ended June 30, 2014 2013 Net cash provided by operating activities $ 1,054$ 878 Adjustments for items included in net cash provided by operating activities but excluded from the calculation of EBITDA: Amortization of deferred financing costs and original issue discounts (10 ) (11 ) Gain on sales of rental equipment 103



84

Gain on sales of non-rental equipment 4



2

Gain (loss) on sale of software subsidiary (5) - (1 ) Merger related costs (1) (9 ) (8 ) Restructuring charge (2) - (11 ) Stock compensation expense, net (3) (31 ) (19 ) Loss on extinguishment of debt securities (75 )



-

Loss on retirement of subordinated convertible debentures - (2 ) Changes in assets and liabilities (172 )



(236 ) Cash paid for interest, including subordinated convertible debentures

224



229

Cash paid for income taxes, net 36 31 EBITDA $ 1,124$ 936 Add back: Merger related costs (1) 9 8 Restructuring charge (2) - 11 Stock compensation expense, net (3) 31



19

Impact of the fair value mark-up of acquired RSC fleet (4) 18

25

(Gain) loss on sale of software subsidiary (5) - 1 Adjusted EBITDA $ 1,182$ 1,000 ___________________



(1) This reflects transaction costs associated with the 2012 RSC acquisition and

the April 2014 acquisition of National Pump discussed in note 2 to the

condensed consolidated financial statements.

(2) As discussed below (see "Restructuring charges"), this primarily reflects

severance costs and branch closure charges associated with the RSC

acquisition.

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

equity instruments.

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

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

RSC acquisition and subsequently sold.

(5) This reflects a gain/loss recognized upon the sale of a former subsidiary

that developed and marketed software.

For the three months ended June 30, 2014, EBITDA increased $108, or 20.8 percent, and adjusted EBITDA increased $114, or 20.8 percent. The EBITDA and adjusted EBITDA increases primarily reflect increased profit from equipment rentals and sales of rental equipment, partially offset by increased selling, general and administrative expense. For the three months ended June 30, 2014, EBITDA margin increased 1.8 percentage points to 44.9 percent, and adjusted EBITDA margin increased 1.9 percentage points to 47.4 percent. The increase in EBITDA margin primarily reflects increased margins from equipment rentals and sales of rental equipment, partially offset by increased selling, general and administrative expense. The increase in adjusted EBITDA margin primarily reflects increased margins from equipment rentals and sales of rental equipment. For the six months ended June 30, 2014, EBITDA increased $188, or 20.1 percent, and adjusted EBITDA increased $182, or 18.2 percent. The EBITDA and adjusted EBITDA increases primarily reflect increased profit from equipment rentals and sales of rental equipment, partially offset by increased selling, general and administrative expense. For the six months ended June 30, 2014, EBITDA margin increased 3.0 percentage points to 43.6 percent, and adjusted EBITDA margin increased 2.5 percentage points to 45.9 percent. The increases in the EBITDA and adjusted EBITDA margins primarily reflect increased margins from equipment rentals and sales of rental equipment. 35



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Results of Operations As discussed in note 3 to our condensed consolidated financial statements, our reportable segments are general rentals and trench safety, power and HVAC ("heating, ventilating and air conditioning"), and pump solutions. The general rentals segment includes the rental of construction, aerial, industrial and homeowner equipment and related services and activities. The general rentals segment's customers include construction and industrial companies, manufacturers, utilities, municipalities, homeowners and government entities. The general rentals segment operates throughout the United States and Canada. The trench safety, power and HVAC, and pump solutions segment is comprised of the Trench Safety region, which rents trench safety equipment such as trench shields, aluminum hydraulic shoring systems, slide rails, crossing plates, construction lasers and line testing equipment for underground work, 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 the Pump Solutions region, which rents pumps primarily used by energy and petrochemical customers. The trench safety, power and HVAC, and pump solutions segment's customers include construction companies involved in infrastructure projects, municipalities and industrial companies. The trench safety, power and HVAC, and pump solutions segment operates throughout the United States and in Canada. As discussed in note 3 to our condensed consolidated financial statements, we aggregate our 12 geographic regions-Eastern Canada, Gulf South, Industrial (which serves the geographic Gulf region and has a strong industrial presence), Mid-Atlantic, Mid-Central, Midwest, Mountain West, Northeast, Pacific West, South, Southeast and Western Canada-into our general rentals reporting segment. Historically, there have been variances in the levels of equipment rentals gross margins achieved by these regions. For instance, for the five year period ended June 30, 2014, certain of our regions had equipment rentals gross margins that varied by between 10 percent and 17 percent from the equipment rentals gross margins of the aggregated general rentals' regions over the same period. For the six months ended June 30, 2014, the aggregate general rentals' equipment rentals gross margin increased 2.4 percentage points to 39.4 percent as compared to the same period in 2013, primarily reflecting increased rental rates, a 0.2 percentage point increase in time utilization, which is calculated by dividing the amount of time equipment is on rent by the amount of time we have owned the equipment, and cost improvements. As compared to the equipment rentals revenue increase of 9.3 percent, compensation costs increased 3.9 percent due primarily to increased headcount associated with higher rental volume, aggregate repair and maintenance and delivery costs increased 4.3 percent and depreciation increased 5.9 percent. Our equipment rental revenue increased more than our costs because rates-which were a significant driver of the year-over-year revenue improvement-result in fewer variable costs compared to utilization. For the five year period ended June 30, 2014, the general rentals' region with the lowest equipment rentals gross margin was the Pacific West. The Pacific West region's equipment rentals gross margin of 33.0 percent for the five year period ended June 30, 2014 was 14 percent less than the equipment rentals gross margins of the aggregated general rentals' regions over the same period. The Pacific West region's equipment rentals gross margin was less than the other general rentals' regions during this period due to weaker end markets. For the six months ended June 30, 2014, the Pacific West region's equipment rentals gross margin increased 5.2 percentage points to 39.2 percent as compared to the same period in 2013, primarily reflecting a 5.6 percent rental rate increase, a 2.4 percentage point increase in time utilization, and cost improvements. As compared to the equipment rentals revenue increase of 8.5 percent, compensation costs, deprecation, and aggregate repair and maintenance and delivery costs were flat. Rental rate changes are calculated based on the year over year variance in average contract rates, weighted by the prior period revenue mix. For the five year period ended June 30, 2014, the general rentals' region with the highest equipment rentals gross margin was Western Canada. The Western Canada region's equipment rentals gross margin of 43.7 percent for the five year period ended June 30, 2014 was 17 percent more than the equipment rentals gross margins of the aggregated general rentals' regions over the same period. The Western Canada region's equipment rentals gross margin was more than the other general rentals' regions during this period as the region benefited from strong demand for natural resources which have been more resistant to the economic pressures experienced in other regions. For the six months ended June 30, 2014, the Western Canada region's equipment rentals gross margin decreased 2.7 percentage points to 41.6 percent as compared to the same period in 2013 primarily due to depreciation, compensation and delivery costs, which increased slightly as a percentage of revenue. Although the margins for certain of our general rentals' regions exceeded a 10 percent variance level for the five year period ended June 30, 2014, we expect convergence going forward given the cyclical nature of the construction industry, which impacts each region differently, and our continued focus on cost cutting, improved processes and fleet sharing. Additionally, the margins for the five year period ended June 30, 2014 include the significant impact of the economic downturn in 2009 that impacted all our regions. Although we believe aggregating these regions into our general rentals reporting segment for segment reporting purposes is appropriate, to the extent that the margin variances persist and the equipment rentals gross margins do not converge, we may be required to disaggregate the regions into separate reporting segments. Any such disaggregation would have no impact on our consolidated results of operations. 36



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These segments align our external segment reporting with how management evaluates and allocates resources. We evaluate segment performance based on segment equipment rentals gross profit. Our revenues, operating results, and financial condition fluctuate from quarter to quarter reflecting the seasonal rental patterns of our customers, with rental activity tending to be lower in the winter. Revenues by segment were as follows: Trench safety, General power and HVAC, and pump rentals solutions Total Three Months Ended June 30, 2014 Equipment rentals $ 1,028 $ 151 $ 1,179 Sales of rental equipment 132 6 138 Sales of new equipment 25 12 37 Contractor supplies sales 19 3 22 Service and other revenues 17 6 23 Total revenue $ 1,221 $ 178 $ 1,399 Three Months Ended June 30, 2013 Equipment rentals $ 932 $ 77 $ 1,009 Sales of rental equipment 126 5 131 Sales of new equipment 22 2 24 Contractor supplies sales 21 2 23 Service and other revenues 17 2 19 Total revenue $ 1,118 $ 88 $ 1,206 Six Months Ended June 30, 2014 Equipment rentals $ 1,952 $ 232 $ 2,184 Sales of rental equipment 238 10 248 Sales of new equipment 49 14 63 Contractor supplies sales 36 5 41 Service and other revenues 34 7 41 Total revenue $ 2,309 $ 268 $ 2,577 Six Months Ended June 30, 2013 Equipment rentals $ 1,786 $ 139 $ 1,925 Sales of rental equipment 245 9 254 Sales of new equipment 42 3 45 Contractor supplies sales 39 4 43 Service and other revenues 36 3 39 Total revenue $ 2,148 $ 158 $ 2,306 Equipment rentals. For the three months ended June 30, 2014, equipment rentals of $1,179 increased $170, or 16.8 percent, as compared to the same period in 2013, primarily reflecting a 10.3 percent increase in the volume of OEC on rent and a 4.9 percent rental rate increase, partially offset by fluctuations in the exchange rate between the U.S. and Canadian dollars, and changes in rental mix. There are two components of rental mix that impact equipment rentals: 1) the type of equipment rented and 2) the duration of the rental contract (daily, weekly and monthly). In 2014, we increased the portion of equipment rentals from monthly rental contracts, which results in equipment rentals increasing at a lesser rate than the volume of OEC on rent, but produces higher margins as there are less transaction costs. We believe that the rate and volume improvements for the three months ended June 30, 2014 reflect improvements in our operating environment and the execution of our strategy. Equipment rentals represented 84 percent of total revenues for the three months ended June 30, 2014. On a segment basis, equipment rentals represented 84 percent and 85 percent of total revenues for the three months ended June 30, 2014 for general rentals and trench safety, power and HVAC, and pump solutions, respectively. General rentals equipment rentals increased $96, or 10.3 percent, primarily reflecting a 6.9 percent increase in the volume of OEC on rent and increased rental rates, partially offset by fluctuations in the exchange rate between the U.S. and Canadian dollars, and an increase in the portion of equipment rentals from monthly rental contracts, which results in equipment rentals increasing at a lesser rate than the volume of OEC on 37



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rent. Trench safety, power and HVAC, and pump solutions equipment rentals increased $74, or 96.1 percent, primarily reflecting an increase in the volume of OEC on rent and increased rental rates. Trench safety, power and HVAC, and pump solutions average OEC for the three months ended June 30, 2014 increased 90 percent as compared to the same period in 2013, including the impact of the acquisition of National Pump discussed in note 2 to the condensed consolidated financial statements. Capitalizing on the demand for the higher margin equipment rented by our trench safety, power and HVAC, and pump solutions segment has been a key component of our strategy in 2014 and 2013. For the six months ended June 30, 2014, equipment rentals of $2,184 increased $259, or 13.5 percent, as compared to the same period in 2013, primarily reflecting a 9.0 percent increase in the volume of OEC on rent and a 4.6 percent rental rate increase, partially offset by fluctuations in the exchange rate between the U.S. and Canadian dollars, and changes in rental mix. In 2014, we increased the portion of equipment rentals from monthly rental contracts, which results in equipment rentals increasing at a lesser rate than the volume of OEC on rent, but produces higher margins as there are less transaction costs. We believe that the rate and volume improvements for the six months ended June 30, 2014 reflect improvements in our operating environment and the execution of our strategy. Equipment rentals represented 85 percent of total revenues for the six months ended June 30, 2014. On a segment basis, equipment rentals represented 85 percent and 87 percent of total revenues for the six months ended June 30, 2014 for general rentals and trench safety, power and HVAC, and pump solutions, respectively. General rentals equipment rentals increased $166, or 9.3 percent, primarily reflecting a 7.0 percent increase in the volume of OEC on rent and increased rental rates, partially offset by fluctuations in the exchange rate between the U.S. and Canadian dollars, and an increase in the portion of equipment rentals from monthly rental contracts, which results in equipment rentals increasing at a lesser rate than the volume of OEC on rent. Trench safety, power and HVAC, and pump solutions equipment rentals increased $93, or 66.9 percent, primarily reflecting an increase in the volume of OEC on rent and increased rental rates. Trench safety, power and HVAC, and pump solutions average OEC for the six months ended June 30, 2014 increased 58 percent as compared to the same period in 2013, including the impact of the acquisition of National Pump discussed in note 2 to the condensed consolidated financial statements. Sales of rental equipment. For the six months ended June 30, 2014, sales of rental equipment represented approximately 10 percent of our total revenues. Our general rentals segment accounted for substantially all of these sales. Sales of rental equipment for the three and six months ended June 30, 2014 didn't change significantly from the same periods in 2013. Sales of new equipment. For the six months ended June 30, 2014, sales of new equipment represented approximately 2 percent of our total revenues. Our general rentals segment accounted for substantially all of these sales. For the three and six months ended June 30, 2014, sales of new equipment increased 54.2 percent and 40.0 percent, respectively, as compared to the same periods in 2013, primarily reflecting increased volume, including the impact of the acquisition of National Pump discussed in note 2 to the condensed consolidated financial statements, improved pricing and changes in mix. Contractor supplies sales. Contractor supplies sales represent our revenues associated with selling a variety of supplies, including construction consumables, tools, small equipment and safety supplies. For the six months ended June 30, 2014, contractor supplies sales represented approximately 2 percent of our total revenues. Our general rentals segment accounted for substantially all of these sales. Contractor supplies sales for the three and six months ended June 30, 2014 didn't change significantly from the same periods in 2013. Service and other revenues. Service and other revenues primarily represent our revenues earned from providing repair and maintenance services on our customers' fleet (including parts sales). For the six months ended June 30, 2014, service and other revenues represented approximately 2 percent of our total revenues. Our general rentals segment accounted for substantially all of these sales. For the three and six months ended June 30, 2014, service and other revenues increased 21.1 percent and 5.1 percent, respectively, as compared to the same periods in 2013. The increase for the three months ended June 30, 2014 primarily reflects increased revenue from repair and maintenance services performed on our customers' fleet due primarily to the impact of the acquisition of National Pump discussed in note 2 to the condensed consolidated financial statements. Segment Equipment Rentals Gross Profit Segment equipment rentals gross profit and gross margin were as follows: 38



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Table of Contents Trench safety, General power and HVAC, and pump rentals solutions Total Three Months Ended June 30, 2014 Equipment Rentals Gross Profit $ 426 $ 77 $ 503 Equipment Rentals Gross Margin 41.4 % 51.0 % 42.7 % Three Months Ended June 30, 2013 Equipment Rentals Gross Profit $ 366 $ 36 $ 402 Equipment Rentals Gross Margin 39.3 % 46.8 % 39.8 % Six Months Ended June 30, 2014 Equipment Rentals Gross Profit $ 770 $ 112 $ 882 Equipment Rentals Gross Margin 39.4 % 48.3 % 40.4 % Six Months Ended June 30, 2013 Equipment Rentals Gross Profit $ 661 $ 62 $ 723 Equipment Rentals Gross Margin 37.0 % 44.6 % 37.6 % General rentals. For the three months ended June 30, 2014, equipment rentals gross profit increased by $60 and equipment rentals gross margin increased by 2.1 percentage points from 2013, primarily reflecting increased rental rates, a 0.1 percentage point increase in time utilization and cost improvements. As compared to the equipment rentals revenue increase of 10.3 percent, compensation costs increased 6.2 percent due primarily to increased headcount associated with higher rental volume, aggregate repair and maintenance and delivery costs increased 3.2 percent and depreciation increased 5.6 percent. Equipment rental revenue increased more than costs because rates-which were a significant driver of the year-over-year revenue improvement-result in fewer variable costs compared to utilization. For the three months ended June 30, 2014 and 2013, time utilization was 68.8 percent and 68.7 percent, respectively. For the six months ended June 30, 2014, equipment rentals gross profit increased by $109 and equipment rentals gross margin increased by 2.4 percentage points from 2013, primarily reflecting increased rental rates, a 0.2 percentage point increase in time utilization and cost improvements. As compared to the equipment rentals revenue increase of 9.3 percent, compensation costs increased 3.9 percent due primarily to increased headcount associated with higher rental volume, aggregate repair and maintenance and delivery costs increased 4.3 percent and depreciation increased 5.9 percent. Equipment rental revenue increased more than costs because rates-which were a significant driver of the year-over-year revenue improvement-result in fewer variable costs compared to utilization. For the six months ended June 30, 2014 and 2013, time utilization was 67.0 percent and 66.8 percent, respectively. Trench safety, power and HVAC, and pump solutions. For the three months ended June 30, 2014, equipment rentals gross profit increased by $41 and equipment rentals gross margin increased by 4.2 percentage points from 2013, primarily reflecting increased equipment rentals revenue due to an increase in the volume of OEC on rent and increased rental rates, and a decrease in compensation costs as a percentage of revenue. Equipment rentals revenue increased 96.1 percent, and average OEC increased 90 percent, as compared to the same period in 2013, including the impact of the acquisition of National Pump discussed in note 2 to the condensed consolidated financial statements. As compared to the equipment rentals revenue increase of 96.1 percent, compensation costs increased 65.3 percent as compared to the same period in 2013. For the six months ended June 30, 2014, equipment rentals gross profit increased by $50 and equipment rentals gross margin increased by 3.7 percentage points from 2013, primarily reflecting increased equipment rentals revenue due to an increase in the volume of OEC on rent and increased rental rates, and a decrease in compensation costs as a percentage of revenue. Equipment rentals revenue increased 66.9 percent, and average OEC increased 58 percent, as compared to the same period in 2013, including the impact of the acquisition of National Pump discussed in note 2 to the condensed consolidated financial statements. As compared to the equipment rentals revenue increase of 66.9 percent, compensation costs increased 45.2 percent as compared to the same period in 2013. Gross Margin. Gross margins by revenue classification were as follows: 39



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Table of Contents Three Months Ended June 30, Six Months Ended June 30, 2014 2013 2014 2013 Total gross margin 42.1 % 39.1 % 40.2 % 37.1 % Equipment rentals 42.7 % 39.8 % 40.4 % 37.6 % Sales of rental equipment 42.0 % 33.6 % 41.5 % 33.1 % Sales of new equipment 16.2 % 20.8 % 19.0 % 20.0 % Contractor supplies sales 31.8 % 30.4 % 31.7 % 32.6 % Service and other revenues 65.2 % 68.4 % 65.9 % 66.7 % For the three months ended June 30, 2014, total gross margin increased 3.0 percentage points as compared to the same period in 2013, primarily reflecting increased gross margins from equipment rentals and sales of rental equipment. Equipment rentals gross margin increased 2.9 percentage points, primarily reflecting a 4.9 percent rental rate increase, a 0.2 percentage point increase in time utilization and cost improvements. As compared to the equipment rentals revenue increase of 16.8 percent, compensation costs, aggregate repair and maintenance and delivery costs, and depreciation each increased approximately 10 percent. Our equipment rental revenue increased more than our costs because rates-which were a significant driver of the year-over-year revenue improvement-result in fewer variable costs compared to utilization. For the three months ended June 30, 2014 and 2013, time utilization was 68.1 percent and 67.9 percent, respectively. Gross margin from sales of rental equipment increased 8.4 percentage points primarily due to improvements in pricing and channel mix. Gross margins from sales of rental equipment may change in future periods if the mix of the channels (primarily retail and auction) that we use to sell rental equipment changes. For the six months ended June 30, 2014, total gross margin increased 3.1 percentage points as compared to the same period in 2013, primarily reflecting increased gross margins from equipment rentals and sales of rental equipment. Equipment rentals gross margin increased 2.8 percentage points, primarily reflecting a 4.6 percent rental rate increase, a 0.3 percentage point increase in time utilization and cost improvements. As compared to the equipment rentals revenue increase of 13.5 percent, compensation costs increased 6.6 percent due primarily to increased headcount associated with higher rental volume, aggregate repair and maintenance and delivery costs increased 8.5 percent and depreciation increased 8.8 percent. Our equipment rental revenue increased more than our costs because rates-which were a significant driver of the year-over-year revenue improvement-result in fewer variable costs compared to utilization. For the six months ended June 30, 2014 and 2013, time utilization was 66.4 percent and 66.1 percent, respectively. Gross margin from sales of rental equipment increased 8.4 percentage points primarily due to improvements in pricing and channel mix. Selling, general and administrative expenses ("SG&A"). SG&A expense information for the three and six months ended June 30, 2014 and 2013 was as follows: Three Months Ended June 30,



Six Months Ended June 30,

2014 2013 2014 2013 Total SG&A expenses $ 187$ 152$ 355$ 312 SG&A as a percentage of revenue 13.4 % 12.6 % 13.8 % 13.5 % SG&A expense primarily includes sales force compensation, bad debt expense, information technology costs, advertising and marketing expenses, third-party professional fees, management salaries and clerical and administrative overhead. For the three months ended June 30, 2014, SG&A expense of $187 increased $35 as compared to 2013. As a percentage of revenue, SG&A increased 0.8 percentage points year over year. The increase in SG&A as a percentage of revenue primarily reflects increased bonus/incentive compensation associated with improved profitability and margins. For the six months ended June 30, 2014, SG&A expense of $355 increased $43 as compared to 2013. As a percentage of revenue, SG&A increased 0.3 percentage points year over year. The increase in SG&A as a percentage of revenue primarily reflects increased bonus/incentive compensation associated with improved profitability and margins. Merger related costs for the three and six months ended June 30, 2014 and 2013 were as follows: Three Months Ended June 30, Six Months Ended June 30, 2014 2013 2014 2013 Merger related costs $ 8 $ 2 $ 9 $ 8 40



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In the second quarter of 2012, we completed the acquisition of RSC. As discussed in note 2 to the condensed consolidated financial statements, in April 2014, we completed the acquisition of National Pump. The acquisition-related costs primarily relate to financial and legal advisory fees, and branding costs associated with the RSC and National Pump acquisitions. Restructuring charges for the three and six months ended June 30, 2014 and 2013 were as follows: Three Months Ended June 30,



Six Months Ended June 30,

2014 2013 2014 2013 Restructuring charge $ (1 ) $ 5 $ - $ 11 The restructuring charges for the three and six months ended June 30, 2014 and 2013 primarily reflect severance costs and branch closure charges associated with the RSC acquisition. The branch closure charges primarily reflect continuing lease obligations at vacant facilities. We do not expect to incur significant additional charges in connection with the restructuring, which was complete as of June 30, 2013 (the end of the restructuring period). Non-rental depreciation and amortization for the three and six months ended June 30, 2014 and 2013 was as follows: Three Months Ended June 30,



Six Months Ended June 30,

2014 2013 2014 2013



Non-rental depreciation and amortization $ 70 $ 62 $ 130 $ 126

Non-rental depreciation and amortization for the three and six months ended June 30, 2014 increased $8, or 12.9 percent, and $4, or 3 percent, as compared to 2013, respectively. The increase for the three months ended June 30, 2014 primarily reflects the amortization of the intangible assets associated with the acquisition of National Pump discussed in note 2 to the condensed consolidated financial statements. Interest expense, net for the three and six months ended June 30, 2014 and 2013 was as follows: Three Months Ended June 30, Six Months Ended June 30, 2014 2013 2014 2013 Interest expense, net $ 187 $ 118 $ 312 $ 236 Interest expense, net for the three and six months ended June 30, 2014 increased $69, or 58 percent, and $76, or 32 percent, as compared to 2013, respectively. Interest expense, net for the three and six months ended June 30, 2014 includes aggregate losses of $64 and $75, respectively, associated with redemptions of our 10 1/4 percent Senior Notes, 9 1/4 percent Senior Notes and 4 percent Convertible Notes (see note 8 to our condensed consolidated financial statements for additional detail). Income taxes. The following table summarizes our provision for income taxes and the related effective tax rates for the three and six months ended June 30, 2014 and 2013: Three Months Ended June 30,



Six Months Ended June 30,

2014 2013 2014 2013



Income before provision for income taxes $ 142$ 131

$ 236$ 161 Provision for income taxes 48 48 82 57 Effective tax rate 33.8 % 36.6 % 34.7 % 35.4 % The differences between the 2014 and 2013 effective tax rates and the U.S. federal statutory income tax rate of 35 percent primarily relate to the geographical mix of income between foreign and domestic operations, as well as the impact of state and local taxes, and certain nondeductible charges. Balance sheet. The asset increases from December 31, 2013 to June 30, 2014 reflect the significant impact of the National Pump acquisition discussed in note 2 to the condensed consolidated financial statements. Accounts payable increased by $333, or 114.0 percent, from December 31, 2013 to June 30, 2014 primarily due to increased capital expenditures and a seasonal increase in business activity. Accrued expenses and other liabilities increased by $110, or 28.2 percent, from December 31, 2013 to June 30, 2014 primarily due to contingent cash consideration we expect to pay associated with the National Pump acquisition. 41



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Liquidity and Capital Resources Liquidity and Capital Markets Activity. We manage our liquidity using internal cash management practices, which are subject to (i) the policies and cooperation of the financial institutions we utilize to maintain and provide cash management services, (ii) the terms and other requirements of the agreements to which we are a party and (iii) the statutes, regulations and practices of each of the local jurisdictions in which we operate. As discussed further in note 8 to the condensed consolidated financial statements, during the six months ended June 30, 2014, we took the following actions that have improved our financial flexibility and liquidity: In January 2014, we redeemed all of our 10 1/4 percent Senior Notes.



In March 2014, URNA issued $525 principal amount of 6 1/8 percent Senior

Notes as an add on to our existing 6 1/8 percent Senior Notes.

In March 2014, URNA issued $850 principal amount of 5 3/4 percent Senior

Notes.

In April 2014, we redeemed all of our 9 1/4 percent Senior Notes.

As previously announced, in 2013, the Company's Board of Directors authorized a $500 share repurchase program. The Company's current intention is to complete such program by April 2015. As of July 14, 2014, we have repurchased $261 of Holdings' common stock under such program. 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, 2014, we had (i) $1.0 billion of borrowing capacity, net of $52 of letters of credit, available under the ABL facility, (ii) $38 of borrowing capacity available under the accounts receivable securitization facility and (iii) cash and cash equivalents of $170. Cash equivalents at June 30, 2014 consist of direct obligations of financial institutions rated A or better. We believe that our existing sources of cash will be sufficient to support our existing operations over the next 12 months. As of June 30, 2014, $1.2 billion and $496 were outstanding under the ABL facility and the accounts receivable securitization facility, respectively. The interest rates applicable to the ABL facility and the accounts receivable securitization facility at June 30, 2014 were 2.2 percent and 0.8 percent, respectively. During the six months ended June 30, 2014, the monthly average amounts outstanding under the ABL facility and the accounts receivable securitization facility were $1.0 billion and $404, respectively, and the weighted-average interest rates thereon were 2.4 percent and 0.8 percent, respectively. The maximum month-end amounts outstanding under the ABL facility and the accounts receivable securitization facility during the six months ended June 30, 2014 were $1.3 billion and $496, respectively. The maximum amount outstanding under the ABL facility exceeded the average amount outstanding during the six months ended June 30, 2014 primarily due to a significant paydown of the outstanding balance in March 2014 using the net proceeds from the debt issued in connection with the National Pump acquisition discussed in note 8 to the condensed consolidated financial statements. In April 2014, borrowings under the ABL facility were used to redeem all our outstanding 9 1/4 percent Senior Notes and to finance in part the cash purchase price of the National Pump acquisition. 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) acquisitions and (vi) share repurchases. We plan to fund such cash requirements from our existing sources of cash. In addition, we may seek additional financing through the securitization of some of our real estate, the use of additional operating leases or other financing sources as market conditions permit. 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 14, 2014 were as follows: Corporate Rating Outlook Moody's B1 Stable



Standard & Poor's BB- Stable

A security rating is not a recommendation to buy, sell or hold securities. There is no assurance that any rating will remain in effect for a given period of time or that any rating will not be revised or withdrawn by a rating agency in the future. The amount of our future capital expenditures will depend on a number of factors, including general economic conditions and growth prospects. Net rental capital expenditures (defined as purchases of rental equipment less the proceeds from sales of rental equipment) were $780 and $771 during the six months ended June 30, 2014 and 2013, respectively. For the full year 42



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2014, we expect net rental capital expenditures of approximately $1.2 billion, after gross purchases of approximately $1.7 billion. We expect that we will fund such expenditures from cash generated from operations, proceeds from the sale of rental and non-rental equipment and, if required, borrowings available under the ABL facility and accounts receivable securitization facility. Loan Covenants and Compliance. As of June 30, 2014, 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. In October 2011, we amended the ABL facility. The only material financial covenants which currently exist relate to the fixed charge coverage ratio and the senior secured leverage ratio under the ABL facility. Since the October 2011 amendment of the ABL facility and through June 30, 2014, availability under the ABL facility has exceeded the required threshold and, as a result, these maintenance covenants have been inapplicable. Subject to certain limited exceptions specified in the amended ABL facility, the fixed charge coverage ratio and the senior secured leverage ratio under the amended ABL facility will only apply in the future if availability under the amended ABL facility falls below the greater of 10 percent of the maximum revolver amount under the amended ABL facility and $150. Under our accounts receivable securitization facility, we are required, among other things, to maintain certain financial tests relating to: (i) the default ratio, (ii) the delinquency ratio, (iii) the dilution ratio and (iv) days sales outstanding. URNA's payment capacity is restricted under the covenants in the indentures governing its outstanding indebtedness. Although this restricted capacity limits our ability to move operating cash flows to Holdings, because of certain intercompany arrangements, we do not expect any material adverse impact on Holdings' ability to meet its cash obligations. Sources and Uses of Cash. During the six months ended June 30, 2014, we (i) generated cash from operating activities of $1,054, (ii) generated cash from the sale of rental and non-rental equipment of $266 and (iii) received cash from debt proceeds, net of payments, of $754. We used cash during this period principally to (i) purchase rental and non-rental equipment of $1,080, (ii) purchase other companies for $756 and (iii) purchase shares of our common stock for $247. During the six months ended June 30, 2013, we (i) generated cash from operating activities of $878, (ii) generated cash from the sale of rental and non-rental equipment of $265 and (iii) received cash from debt proceeds, net of payments, $32. We used cash during this period principally to (i) purchase rental and non-rental equipment of $1,066 and (ii) purchase shares of our common stock for $84. 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. 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. Six Months Ended June 30, 2014 2013



Net cash provided by operating activities $ 1,054$ 878 Purchases of rental equipment

(1,028 ) (1,025 ) Purchases of non-rental equipment (52 ) (41 ) Proceeds from sales of rental equipment 248 254 Proceeds from sales of non-rental equipment 18 11 Free cash flow $ 240$ 77 Free cash flow for the six months ended June 30, 2014 was $240, an increase of $163 as compared to $77 for the six months ended June 30, 2013. Free cash flow increased primarily due to increased net cash provided by operating activities. Free cash flow for the six months ended June 30, 2014 and 2013 includes the impact of the merger and restructuring costs discussed above. We expect free cash flow in the range of $450 to $500 in 2014 and intend to use this primarily to fund our share repurchase activity in 2014. Certain Information Concerning Contractual Obligations. The table below provides certain information concerning the payments coming due under certain categories of our existing contractual obligations as of June 30, 2014: 43



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2014 2015 2016 2017 2018 Thereafter Total Debt and capital leases (1) $ 515$ 137$ 1,275$ 15$ 758$ 5,258$ 7,958 Interest due on debt (2) 230 457 446 423 403 1,172 3,131 Operating leases (1): Real estate 52 96 81 61 42 69 401 Non-rental equipment 18 32 29 27 20 25 151 Service agreements (3) 9 - - - - - 9 Purchase obligations (4) 371 - - - - - 371 Total (5) $ 1,195$ 722$ 1,831$ 526$ 1,223$ 6,524$ 12,021 _________________



(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. Our 4 percent Convertible

Senior Notes mature in November 2015, but are reflected as short-term debt

in our consolidated balance sheet because they were redeemable at June 30,

2014. The 4 percent Convertible Senior Notes are reflected in the table

above based on the contractual maturity date in 2015.

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

amount of debt and the applicable interest rates as of June 30, 2014. As

discussed above, our 4 percent Convertible Senior Notes mature in November

2015, but are reflected as short-term debt in our consolidated balance sheet

because they were redeemable at June 30, 2014. Interest on the 4 percent

Convertible Senior Notes is reflected in the table above based on the contractual maturity date in 2015.



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

wireless and network services. (4) As of June 30, 2014, we had outstanding purchase orders, which were negotiated in the ordinary course of business, with our equipment and inventory suppliers. These purchase commitments can be cancelled by us, generally with 30 days notice and without cancellation penalties. The



equipment and inventory receipts from the suppliers for these purchases and

related payments to the suppliers are expected to be completed throughout

2014. (5) This information excludes $7 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. 44



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