HERC HOLDINGS INC.
Management's discussion and analysis of financial condition and results of
operations ("MD&A") should be read in conjunction with the consolidated
financial statements and accompanying notes included in Item 8 of this Report,
which include additional information about our accounting policies, practices
and the transactions underlying our financial results. The preparation of our
consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America ("U.S. GAAP") requires us to
make estimates and assumptions that affect the reported amounts in our
consolidated financial statements and the accompanying notes including
receivables allowances, depreciation of rental equipment, the recoverability of
long-lived assets, useful lives and impairment of long-lived tangible and
intangible assets including goodwill and trade name, pension and postretirement
benefits, valuation of stock-based compensation, reserves for litigation and
other contingencies, accounting for income taxes and other matters arising
during the normal course of business. We apply our best judgment, our knowledge
of existing facts and circumstances and our knowledge of actions that we may
undertake in the future in determining the estimates that will affect our
consolidated financial statements. We evaluate our estimates on an ongoing basis
using our historical experience, as well as other factors we believe appropriate
under the circumstances, such as current economic conditions, and adjust or
revise our estimates as circumstances change. As future events and their effects
cannot be determined with precision, actual results may differ from these
estimates.
OVERVIEW OF OUR BUSINESS AND OPERATING ENVIRONMENT
We are engaged principally in the business of renting equipment. Ancillary to our principal business of equipment rental, we also sell used rental equipment, sell new equipment and consumables and offer certain services and support to our customers. Our profitability is dependent upon a number of factors including the volume, mix and pricing of rental transactions and the utilization of equipment. Significant changes in the purchase price or residual values of equipment or interest rates can have a significant effect on our profitability depending on our ability to adjust pricing for these changes. Our business requires significant expenditures for equipment, and consequently we require substantial liquidity to finance such expenditures. See "Liquidity and Capital Resources" below.
Our revenues are primarily derived from rental and related charges and consist of:
•Equipment rental (includes all revenue associated with the rental of equipment including ancillary revenue from delivery, rental protection programs and fueling charges); •Sales of rental equipment and sales of new equipment, parts and supplies; and •Service and other revenue (primarily relating to training and labor provided to customers).
Our expenses primarily consist of:
•Direct operating expenses (primarily wages and related benefits, facility costs
and other costs relating to the operation and rental of rental equipment, such
as delivery, maintenance and fuel costs);
•Cost of sales of rental equipment, new equipment, parts and supplies;
•Depreciation expense relating to rental equipment;
•Selling, general and administrative expenses; and
•Interest expense.
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HERC HOLDINGS INC. AND SUBSIDIARIES
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
2021 Overview Our results for 2021 reflect the strong demand in the rental industry as demonstrated by our equipment rental revenues of$1.9 billion , an increase of 23.8% over the COVID-19 impacted 2020, and 12.3% over 2019. Many of the challenges our business faced with the COVID-19 pandemic eased during 2021 as restrictions on businesses were lifted and many projects that had been delayed resumed throughout the year. Additionally, our pricing increased 2.1% during 2021. Many costs normalized during 2021 with increased volume as the COVID-19 related restrictions eased throughout the year, however, we continued to execute on company-wide initiatives to increase our margins and profitability, resulting in an increase in net income to$224.1 million from$73.7 million in 2020. We invested significantly in our rental equipment as part of our long-term capital expenditure plans, adding rental equipment in high growth markets in response to customer demand and to position ourselves for growth into 2022. Additionally, during 2021, we completed eleven acquisitions totaling a net cash outflow of$431.0 million . These acquisitions support our long-term strategy to achieve greater density and scale in select urban markets acrossNorth America to better serve both our local and national customers.
COVID-19 Update
We continue to monitor the ongoing impact of the COVID-19 pandemic, including the effects of recent notable variants of the virus. The health and safety of our employees, customers, and the communities in which we operate remains our top priority. We remain focused on the safety and well-being of our employees, customers and communities as we maintain a high-level of service to our customers. We continue to communicate frequently throughout the organization to reinforce our health and safety guidelines, informed by theCenter for Disease Control recommendations. Our employees, suppliers, customers and others have been and may continue to be restricted or prevented from conducting normal business activities, including as a result of shutdowns, travel restrictions and other actions that may be requested or mandated by governmental authorities. Although shutdown orders and similar restrictions have been lifted in many jurisdictions in conjunction with the distribution of vaccines, challenges in achieving sufficient vaccination levels and the spread of new variants of COVID-19 have caused some governments to extend or reinstitute restrictions in certain impacted areas. During 2021, customer demand improved as the government rolled out the distribution of vaccines and lifted COVID-19 related restrictions, which opened up local economic activity. Despite the recovery we are seeing, the impact of the COVID-19 pandemic continues to evolve and the economic recovery could be slowed or reversed by a number of factors, including a widespread resurgence in COVID-19 infections, whether due to the spread of variants of the virus or otherwise, the rate of vaccinations, labor constraints, the strength of the global supply chain, and government actions, including the rate in which governments are re-opening businesses or, in certain jurisdictions, reversing re-opening decisions. We cannot predict the extent to which our financial condition, results of operations or cash flows will ultimately be impacted, however, we believe we are well-positioned to operate effectively through the present environment. 25
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HERC HOLDINGS INC. AND SUBSIDIARIES
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
RESULTS OF OPERATIONS
Year Ended December 31,
($ in millions) 2021 2020 $ Change % Change
Equipment rental $ 1,910.4 $ 1,543.7 $ 366.7 23.8 %
Sales of rental equipment 113.1 198.5 (85.4) (43.0)
Sales of new equipment, parts and
supplies 30.1 28.2 1.9 6.7
Service and other revenue 19.5 10.9 8.6 78.9
Total revenues 2,073.1 1,781.3 291.8 16.4
Direct operating 850.3 689.2 161.1 23.4
Depreciation of rental equipment 420.7 403.9 16.8 4.2
Cost of sales of rental equipment 93.3 203.6 (110.3) (54.2)
Cost of sales of new equipment, parts
and supplies 20.3 20.5 (0.2) (1.0)
Selling, general and administrative 310.8 257.4 53.4 20.7
Impairment 3.2 15.4 (12.2) (79.2)
Interest expense, net 86.3 92.6 (6.3) (6.8)
Other expense (income), net (2.2) 4.6 (6.8) (147.8)
Income before income taxes 290.4 94.1 196.3 NM
Income tax provision (66.3) (20.4) (45.9) NM
Net income $ 224.1 $ 73.7 $ 150.4 NM
NM - Not Meaningful
Year Ended
Equipment rental revenue increased
Sales of rental equipment decreased$85.4 million , or 43.0%, during the year endedDecember 31, 2021 when compared with 2020. During 2021, the decline in volume of sales was related to the increase in utilization and the strategic management of our rental equipment to maximize fleet size as part of our long-term strategy. The margin on sales of rental equipment was 17.5% in 2021 compared to a negative margin of 2.6% in 2020. The increase in margin on sale of rental equipment in 2021 was due to a larger proportion of overall volume of sales through higher margin sales channels and better pricing due to the overall strong market for used equipment. Direct operating expenses increased$161.1 million , or 23.4%, primarily related to increases in (i) personnel-related expenses of$62.8 million resulting from increased headcount in 2021, versus limitations on overtime and furloughs in place during the second and third quarters of 2020, (ii) delivery and freight expenses of$29.4 million due to an increased volume of transactions in 2021, (iii) re-rent expense of$25.3 million due to the corresponding increase in re-rent revenue and (iv) maintenance expense of$17.4 million . Selling, general and administrative expenses increased$53.4 million , or 20.7%. The increase was primarily due to selling expense, including commissions and other variable compensation increases, of$29.0 million , general payroll and benefits increases of$16.8 million , which includes an increase in stock compensation expense of$6.9 million , and travel expense of$3.1 million as business travel resumed to a more normal level. These increases were partially offset by a decrease in bad debt expense of$7.0 million due to the continued improvements in collections. 26
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HERC HOLDINGS INC. AND SUBSIDIARIES
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Impairment expense was$3.2 million during 2021 primarily related to certain rental equipment. Impairment expense in 2020 was$15.4 million and consisted of$6.3 million related to the partial impairment of a long-term receivable related to the sale of our former joint venture,$4.8 million related to certain rental equipment,$1.7 million related to a right-of-use ("ROU") asset impairment charge for two locations closed in 2019 as a result of reduced sublease assumptions due to economic conditions surrounding those locations,$1.5 million related to certain assets that were sold during 2020 and$1.1 million related to a financial reporting and consolidation system that was replaced during the fourth quarter of 2020. Interest expense, net decreased$6.3 million , or 6.8%, during 2021 when compared with the same period in 2020. Interest expense was lower during 2021 due to lower average outstanding balances and lower weighted average interest rates on the ABL Credit Facility when compared to 2020.
Income tax provision was
LIQUIDITY AND CAPITAL RESOURCES
Our primary liquidity needs include the payment of operating expenses, purchases of rental equipment to be used in our operations, servicing of debt, funding of acquisitions and payment of dividends. Our primary sources of funding are operating cash flows, cash received from the disposal of equipment and borrowings under our debt arrangements. As ofDecember 31, 2021 , we had approximately$1.9 billion of total nominal indebtedness outstanding. Our liquidity as ofDecember 31, 2021 consisted of cash and cash equivalents of$35.1 million and unused commitments of approximately$1.3 billion under our ABL Credit Facility. See "Borrowing Capacity and Availability" below for further discussion. Our practice is to maintain sufficient liquidity through cash from operations, our ABL Credit Facility and our AR Facility to mitigate the impacts of any adverse financial market conditions on our operations. We believe that cash generated from operations and cash received from the disposal of equipment, together with amounts available under the ABL Credit Facility and the AR Facility or other financing arrangements will be sufficient to meet working capital requirements and anticipated capital expenditures, and other strategic uses of cash, if any, and debt payments, if any, over the next twelve months.
Cash Flows
Significant factors driving our liquidity position include cash flows generated
from operating activities and capital expenditures. Historically, we have
generated and expect to continue to generate positive cash flow from operations.
Our ability to fund our capital needs will be affected by our ongoing ability to
generate cash from operations and access to capital markets.
The following table summarizes the change in cash and cash equivalents for the
periods shown (in millions):
Years Ended December 31,
2021 2020 $ Change
Cash provided by (used in):
Operating activities $ 744.0 $ 610.9 $ 133.1
Investing activities (961.3) (207.5) (753.8)
Financing activities 219.6 (406.0) 625.6
Effect of exchange rate changes (0.2) 2.6 (2.8)
Net change in cash and cash equivalents
2.1
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Year Ended
Operating Activities
During the year endedDecember 31, 2021 , we generated$133.1 million more cash from operating activities compared with the same period in 2020. The increase was primarily related to improved operating results primarily resulting from higher revenues coupled with continued cost control measures. Additionally, the improvement in operating activities was related to timing of payments on accounts payable and other liabilities as compared to the same period in 2020.
Investing Activities
Cash used in investing activities increased$753.8 million during 2021 when compared with the prior-year period. Our primary use of cash in investing activities is for the acquisition of rental equipment, non-rental capital expenditures and acquisitions. Generally, we rotate our equipment and manage our fleet of rental equipment in line with customer demand and continue to invest in our information technology, service vehicles and facilities. Changes in our net capital expenditures are described in more detail in the "Capital Expenditures" section below. Additionally, we closed on eleven acquisitions during the year endedDecember 31, 2021 for a net cash outflow of$431.0 million .
Financing Activities
Cash provided by financing activities increased$625.6 million during 2021 when compared with the prior-year period. Cash provided by financing activities during 2021 primarily represents our changes in debt, which included net borrowings of$251.6 million on our revolving lines of credit and securitization, which were used primarily to fund acquisitions during the year. Net repayments in the prior year period were$396.7 million . In order to reduce future cash interest payments, as well as future amounts due at maturity or upon redemption, we may from time to time repurchase our debt, including our notes, bonds, loans or other indebtedness, in privately negotiated, open market or other transactions and upon such terms and at such prices as we may determine. We will evaluate any such transactions in light of then-existing market conditions, taking into account our current liquidity and prospects for future access to capital. The repurchases may be material and could relate to a substantial proportion of a particular class or series, which could reduce the trading liquidity of such class or series.
Capital Expenditures
Our capital expenditures relate largely to purchases of rental equipment, with
the remaining portion representing purchases of property, equipment and
information technology. The table below sets forth the capital expenditures
related to our rental equipment and related disposals for the periods noted (in
millions).
Years Ended December 31,
2021 2020
Rental equipment expenditures $ 593.8 $ 344.1
Disposals of rental equipment (106.9) (192.5)
Net rental equipment expenditures $ 486.9 $ 151.6
Net capital expenditures for rental equipment increased $335.3 million during
the year ended December 31, 2021 compared to 2020. During 2021, we increased
rental equipment expenditures back to pre-pandemic levels to add select fleet in
high growth markets as part of our long-term capital expenditure plans and
managed disposals to respond to a tightening market to effectively manage our
fleet.
In 2022, we expect our net rental equipment capital expenditures to be in the
range of $820 million to $1,120 million .
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Borrowing Capacity and Availability
Our ABL Credit Facility and AR Facility (together, the "Facilities") provide our borrowing capacity and availability. Creditors under the Facilities have a claim on specific pools of assets as collateral as identified in each credit agreement. Our ability to borrow under the Facilities is a function of, among other things, the value of the assets in the relevant collateral pool. We refer to the amount of debt we can borrow given a certain pool of assets as the "Borrowing Base." In connection with the AR Facility, we sell accounts receivable on an ongoing basis to a wholly-owned special-purpose entity (the "SPE"). The accounts receivable and other assets of the SPE are encumbered in favor of the lenders under our AR Facility. The SPE assets are owned by the SPE and are not available to settle our obligations or any of our other subsidiaries. Substantially all of the remaining assets of Herc and certain of itsU.S. and Canadian subsidiaries are encumbered in favor of our lenders under our ABL Credit Facility. None of such assets are available to satisfy the claims of our general creditors. See Note 11, "Debt" included in Part II, Item 8 "Financial Statements" of this Report for more information. With respect to the Facilities, we refer to "Remaining Capacity" as the maximum principal amount of debt permitted to be outstanding under the Facilities (i.e., the amount of debt we could borrow assuming we possessed sufficient assets as collateral) less the principal amount of debt then-outstanding under the Facility. We refer to "Availability Under Borrowing Base Limitation" as the lower of Remaining Capacity or the Borrowing Base less the principal amount of debt then-outstanding under the Facility (i.e., the amount of debt we could borrow given the collateral we possess at such time).
As of
Availability Under
Remaining Borrowing Base
Capacity Limitation
ABL Credit Facility $ 1,269.2 $ 1,269.2
AR Facility - -
Total $ 1,269.2 $ 1,269.2
As of December 31, 2021 , $24.8 million of standby letters of credit were issued
and outstanding under the ABL Credit Facility, none of which had been drawn
upon. The ABL Credit Facility had $225.2 million available under the letter of
credit facility sublimit, subject to borrowing base restrictions.
Covenants
Our ABL Credit Facility, our AR Facility and our 2027 Notes contain a number of covenants that, among other things, limit or restrict our ability to dispose of assets, incur additional indebtedness, incur guarantee obligations, prepay certain indebtedness, make certain restricted payments (including paying dividends, redeeming stock or making other distributions), create liens, make investments, make acquisitions, engage in mergers, fundamentally change the nature of our business, make capital expenditures, or engage in certain transactions with certain affiliates. Under the terms of our ABL Credit Facility, our AR Facility and our 2027 Notes, we are not subject to ongoing financial maintenance covenants; however, under the ABL Credit Facility, failure to maintain certain levels of liquidity will subject us to a contractually specified fixed charge coverage ratio of not less than 1:1 for the four quarters most recently ended. As ofDecember 31, 2021 , the appropriate levels of liquidity have been maintained, therefore this financial maintenance covenant is not applicable. For further information on the terms of our 2027 Notes, ABL Credit Facility and AR Facility see Note 11, "Debt" included in Part II, Item 8 "Financial Statements and Supplementary Data" of this Report. For a discussion of the risks associated with our significant indebtedness, see Part I, Item 1A "Risk Factors" contained in this Report. 29
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Dividends
OnFebruary 8, 2022 , the Company declared a quarterly dividend of$0.575 per share to record holders as ofFebruary 23, 2022 , with payment date ofMarch 10, 2022 . The declaration of dividends on our common stock is discretionary and will be determined by our board of directors in its sole discretion and will depend on our business conditions, financial condition, earnings, liquidity and capital requirements, contractual restrictions and other factors. The amounts available to pay cash dividends are restricted by our debt agreements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance withU.S. GAAP. The preparation of the consolidated financial statements requires management to make estimates and judgments that affect the reported amounts in our consolidated financial statements and accompanying notes. Certain of our accounting policies, as discussed below, involve a higher degree of judgment and complexity in their application and, therefore, represent the critical accounting policies used in the preparation of our financial statements. If different assumptions or conditions were to prevail, the results could be materially different from our reported results. For additional discussion of our critical accounting policies and estimates, as well as our significant accounting policies, see Note 2, "Basis of Presentation and Significant Accounting Policies" to the notes to our consolidated financial statements included in Part II, Item 8 of this Report.
Revenue Recognition
Equipment rental revenue includes revenue generated from renting equipment to customers and is recognized on a straight-line basis over the length of the rental contract. Also included in equipment rental revenue are fees for equipment delivery and pick-up and fees for our rental protection program, which allows customers to limit risk of financial loss in the event our equipment is damaged or lost. Delivery and pick-up fees are recognized as revenue when the services are performed and fees related to our rental protection program are recognized over the length of the contract term. We recognize revenue from the sale of rental equipment, new equipment, parts and supplies when control of the asset transfers to the customer, which is typically when the asset is picked up by or delivered to the customer and when significant risks and rewards of ownership have passed to the customer. Sales and other tax amounts collected from customers and remitted to government authorities are accounted for on a net basis and, therefore, excluded from revenue. Service and other revenue is recognized as the services are performed.
Rental Equipment
Our principal assets are rental equipment, which represented 59.4% and 63.0% of our total assets as ofDecember 31, 2021 and 2020, respectively. Rental equipment consists of equipment utilized in our equipment rental operations. When rental equipment is acquired, we use historical experience, industry residual value guidebooks and the monitoring of market conditions to set depreciation rates. Generally, we estimate the period that we will hold the asset, primarily based on historical measures of the amount of equipment usage and the targeted age of equipment at the time of disposal. We also estimate the residual value of the applicable rental equipment at the expected time of disposal. The residual value for rental equipment is affected by factors which include equipment age and amount of usage. Depreciation is recorded over the estimated holding period. Depreciation rates are reviewed regularly based on management's ongoing assessment of present and estimated future market conditions, their effect on residual values at the time of disposal and the estimated holding periods. Market conditions for used equipment sales also can be affected by external factors such as the economy, natural disasters, fuel prices, supply of similar used equipment, the market price for similar new equipment and incentives offered by manufacturers. As a result of this ongoing assessment, we make periodic adjustments to depreciation rates of rental equipment in response to changing market conditions.
Defined Benefit Pension Obligations
The Herc Holdings Retirement Plan is aU.S. qualified defined benefit pension plan that has been frozen to new employees since it was established in 2016. Additionally, pursuant to various collective bargaining agreements, certain union-represented employees participate in multiemployer pension plans. 30
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Employee pension costs and obligations are dependent on assumptions used by actuaries in calculating such amounts. These assumptions include discount rates, salary growth, long-term return on plan assets, retirement rates, mortality rates and other factors. Actual results that differ from our assumptions are accumulated and amortized over future periods and, therefore, generally affect our recognized expense in such future periods. While we believe that the assumptions used are appropriate, significant differences in actual experience or significant changes in assumptions would affect our pension costs and obligations. The various employee-related actuarial assumptions (e.g., retirement rates, mortality rates and salary growth) used in determining pension costs and plan liabilities are reviewed periodically by management, assisted by the enrolled actuary, and updated as warranted. The discount rate used to value the pension liabilities and related expenses and the expected rate of return on plan assets are the two most significant assumptions impacting pension expense. The discount rate used is a market-based rate as of the valuation date. For the expected return on assets assumption, we use a forward-looking rate that is based on the expected return for each asset class (including the value added by active investment management), weighted by the target asset allocation. The past annualized long-term performance of the Plan's assets has generally been in line with the long-term rate of return assumption.
Business Combinations
The Company has made several acquisitions and may continue to make acquisitions in the future. The assets acquired and liabilities assumed are recorded based on their respective fair values at the date of acquisition. Long-lived assets (principally rental equipment), goodwill and other intangible assets generally represent the largest components of the acquisitions. Rental equipment is valued utilizing either a cost or market approach, or a combination of these methods, depending on the asset being valued and the availability of market data. The intangible assets that the Company has acquired are non-compete agreements, customer relationships and trade names and associated trademarks. The estimated fair values of these intangible assets reflect various assumptions about discount rates, revenue growth rates, operating margins, terminal values, useful lives and other prospective financial information.Goodwill is calculated as the excess of the cost of the acquired entity over the net of the fair value of the assets acquired and the liabilities assumed. Non-compete agreements, customer relationships and trade names and associated trademarks are valued based on an excess earnings or income approach based on projected cash flows and may be amortized over the useful life if they are determined to be finite-lived intangible assets. Determining the fair value of the assets and liabilities acquired is judgmental in nature and can involve the use of significant estimates and assumptions. As part of an acquisition, the Company will also acquire other assets and assume liabilities. These other assets and liabilities typically include, but are not limited to, parts inventory, accounts receivable, accounts payable and other working capital items. Because of their short-term nature, the fair values of these other assets and liabilities generally approximate the book values on the acquired entities' balance sheets.
On an annual basis and at interim periods when circumstances require, we test the recoverability of our goodwill.Goodwill impairment is deemed to exist if the carrying value of goodwill of a reporting unit exceeds its fair value. A reporting unit is an operating segment or a business one level below that operating segment (the component level) if discrete financial information is prepared and regularly reviewed by segment management. However, components are aggregated as a single reporting unit if they have similar economic characteristics. We have assessed the guidance and performed our analysis using our one reporting unit, North American equipment rental. Pursuant toFinancial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 350, Intangibles-Goodwill and Other, an entity may first assess qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the quantitative goodwill impairment test. Various factors are considered in performing the qualitative test, including macroeconomic conditions, industry and market considerations, the overall financial performance of our reporting unit, our stock price and the excess amount between our reporting unit's fair value and carrying value as indicated on our most recent quantitative assessment. When assessing the fair value of our reporting units using a quantitative approach, we estimate the fair value using a combination of an income approach on the present value of estimated future cash flows and a market approach based on published earnings multiples of comparable entities with similar operations and economic characteristics as well as acquisition multiples paid in recent transactions. The key assumptions used in the discounted cash flow valuation model for impairment testing include discount rates, growth rates, cash flow projections and terminal value rates. Discount rates are set by using the 31
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
weighted average cost of capital, or "WACC," methodology. The WACC methodology considers market and industry data as well as company specific risk factors for each reporting unit in determining the appropriate discount rates to be used. The discount rate utilized for each reporting unit is indicative of the return an investor would expect to receive for investing in such a business. The cash flows represent management's most recent planning assumptions. These assumptions are based on a combination of industry outlooks, views on general economic conditions and our expected pricing plans. Terminal value rate determination follows common methodology of capturing the present value of perpetual cash flow estimates beyond the last projected period assuming a constant WACC and low long-term growth rates. If the carrying value of the reporting unit is greater than its fair value, we recognize an impairment charge for the amount equal to that excess. A significant decline in the projected cash flows or a change in the WACC used to determine fair value could result in a future goodwill impairment charge. Indefinite-lived intangible assets, primarily trademarks, are not amortized but are evaluated annually for impairment and whenever events or changes in circumstances indicate that the carrying amount of this asset may exceed its fair value. If the carrying value of an indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. In connection with our impairment analysis for goodwill and indefinite-lived intangible assets conducted as ofOctober 1, 2021 , we assessed qualitative factors as described above to determine if it is more likely than not that goodwill and indefinite-lived assets may be impaired and concluded that there was no impairment related to such assets.
Finite-Lived Intangible and Long-Lived Assets
Finite-lived intangible assets include technology, customer relationships, trade names and other intangibles. Intangible assets with finite lives are amortized over the estimated economic lives of the assets, which range from five to 14 years. These assets are primarily amortized using the straight-line method, however, certain assets may be amortized using an accelerated method that reflects the economic benefit to us. Long-lived assets, including intangible assets with finite lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss for long-lived assets that management expects to hold and use is based on the estimated fair value of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or estimated fair value less costs to sell.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are determined based on differences between the financial statement carrying amounts and net bases of assets and liabilities and are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates is recognized in the statement of operations in the period that includes the enactment date. Valuation allowances are recorded to reduce deferred tax assets by the amount that is more likely than not to be realized. Subsequent changes to enacted tax rates will result in changes to deferred taxes and any related valuation allowances. We have recorded a deferred tax asset for unutilized net operating loss carryforwards in various tax jurisdictions. The Company has determined not to assert that earnings from foreign operations are permanently reinvested. Therefore, the Company recognizes deferred taxes on foreign earnings as appropriate. The Company has asserted that future earnings associated with the potential stock sale or liquidation of foreign subsidiaries is permanently reinvested. Accordingly, the Company has not recorded any deferred tax liabilities associated with these book-to-tax differences. We regularly review our cash positions and our determination of permanent reinvestment of foreign earnings. If we determine that all or a portion of such foreign earnings are repatriated, we may be subject to additional foreign withholding taxes andU.S. state income taxes. Many foreign jurisdictions impose taxes on distributions to other jurisdictions. Due to the variations and complexities of these laws, we believe it would be impractical to calculate and accrue these taxes beyond the normal earnings and profits standard forU.S. tax purposes. In accordance with ASC Topic 740, Income Taxes, the Company recognizes, in its consolidated financial statements, the impact of the Company's tax positions that are more likely than not to be sustained upon examination. The Company will determine 32
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, the Company presumes that the position will be examined by the appropriate taxing authority with full knowledge of all relevant information. Upon determination that a tax position meets the more-likely-than-not recognition threshold, it is measured to determine the amount of benefit to recognize in the financial statements. The Company recognizes interest and penalties for uncertain tax positions in income tax expense. We are subject to ongoing tax examinations and assessments in various jurisdictions. Accordingly, accruals for tax contingencies are established based on the probable outcomes of such matters. Our ongoing assessments of the probable outcomes of the examinations and related tax accruals require judgment and could increase or decrease our effective tax rate as well as impact our operating results.
Stock Based Compensation
All stock-based compensation award disclosures are measured in terms of common stock ofHerc Holdings . The cost of employee services received in exchange for an award of equity instruments is based on the grant date fair value of the award. That cost is recognized over the period during which the employee is required to provide service in exchange for the award, referred to as the vesting period. In addition to the service vesting condition, the performance stock units have an additional vesting condition, which stipulates the number of units that will be awarded based on achievement of a certain level of return on invested capital or other performance measures as defined in the applicable award agreements, over the applicable measurement period. We estimate the fair value of options issued at the date of grant using a Black-Scholes option-pricing model, which includes assumptions related to volatility, expected term, dividend yield and risk-free interest rate. These factors combined with the stock price on the date of grant result in a fixed expense which is recorded on a straight-line basis over the vesting period. The assumed volatility was calculated based on a blend of peer group volatility and implied volatility as we did not have sufficient stock price data to calculate historical volatility at the date of grant. The assumed dividend yield is zero. The risk-free interest rate is the implied zero-coupon yield forU.S. Treasury securities having a maturity approximately equal to the expected term of the options, as of the grant dates.
RECENT ACCOUNTING PRONOUNCEMENTS
For a discussion of recent accounting pronouncements, see Note 2, "Basis of Presentation and Significant Accounting Policies" to the notes to our consolidated financial statements included in Part II, Item 8 of this Report.
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