HERC HOLDINGS INC.
Management's discussion and analysis of financial condition and results of
operations ("MD&A") should be read in conjunction with the unaudited condensed
consolidated financial statements and accompanying notes included in Part I,
Item 1 of this Report, which include additional information about our accounting
policies, practices and the transactions underlying our financial results. The
preparation of our unaudited condensed 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 unaudited condensed 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 condensed
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 primarily are 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;
•Non-rental depreciation and amortization; and
•Interest expense.
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. 25
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HERC HOLDINGS INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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. Demand in 2022 remains strong, however, the impact of the COVID-19 pandemic continues to evolve and the economic recovery we are seeing 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 and efficacy of vaccinations, labor constraints, the strength of the global supply chain, and government actions. 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.
Seasonality
Our business is usually seasonal, with demand for our rental equipment tending to be lower in the winter months, particularly in the northernUnited States andCanada . Our equipment rental business, especially in the construction industry, has historically experienced decreased levels of business from December until late spring and heightened activity during our third and fourth quarters until December. We have the ability to manage certain costs to meet market demand, such as fleet capacity, the most significant portion of our cost structure. For instance, to accommodate increased demand, we increase our available fleet and staff during the second and third quarters of the year. A number of our other major operating costs vary directly with revenues or transaction volumes; however, certain operating expenses, including rent, insurance and administrative overhead, remain fixed and cannot be adjusted for seasonal demand, typically resulting in higher profitability in periods when our revenues are higher, and lower profitability in periods when our revenues are lower. To reduce the impact of seasonality, we are focused on expanding our customer base through products that serve different industries with less seasonality and different business cycles. RESULTS OF OPERATIONS Three Months Ended September 30, Nine Months Ended September 30, ($ in millions) 2022 2021 $ Change % Change 2022 2021 $ Change % Change Equipment rental$ 706.2 $ 519.6 $ 186.6 35.9 %$ 1,838.4 $ 1,368.0 $ 470.4 34.4 % Sales of rental equipment 21.5 16.6 4.9 29.5 68.5 91.1 (22.6) (24.8) Sales of new equipment, parts and supplies 10.0 8.6 1.4 16.3 27.1 22.5 4.6 20.4 Service and other revenue 7.4 5.6 1.8 32.1 18.8 13.5 5.3 39.3 Total revenues 745.1 550.4 194.7 35.4 1,952.8 1,495.1 457.7 30.6 Direct operating 277.5 208.9 68.6 32.8 751.0 563.1 187.9 33.4 Depreciation of rental equipment 139.6 105.4 34.2 32.4 389.1 306.9 82.2 26.8 Cost of sales of rental equipment 16.2 13.7 2.5 18.2 48.8 76.8 (28.0) (36.5) Cost of sales of new equipment, parts and supplies 6.3 6.5 (0.2) (3.1) 17.0 15.6 1.4 9.0 Selling, general and administrative 111.5 81.5 30.0 36.8 297.9 221.0 76.9 34.8 Non-rental depreciation and amortization 25.5 17.0 8.5 50.0 68.9 48.8 20.1 41.2 Interest expense, net 33.0 21.4 11.6 54.2 80.7 63.8 16.9 26.5 Other (income) expense, net (0.1) (0.1) - - (0.8) 0.1 (0.9) NM Income before income taxes 135.6 96.1 39.5 41.1 300.2 199.0 101.2 50.9 Income tax provision (34.2) (23.8) (10.4) 43.7 (68.1) (46.7) (21.4) 45.8 Net income$ 101.4 $ 72.3 $ 29.1 40.2 %$ 232.1 $ 152.3 $ 79.8 52.4% NM - Not Meaningful
Three Months Ended
Equipment rental revenue increased$186.6 million , or 35.9%, during the third quarter of 2022 due to higher volume of equipment on rent of 34.9% and positive pricing of 6.2% over the same period in the prior year. 26
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HERC HOLDINGS INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Sales of rental equipment increased$4.9 million , or 29.5%, during the third quarter of 2022 when compared to the third quarter of 2021. The margin on sales of rental equipment was 24.7% in 2022 compared to 17.5% in 2021. The increase in margin on sale of rental equipment in 2022 was due to a larger proportion of overall volume of sales through higher margin sales channels and improved pricing due to the overall strong market for used equipment. Direct operating expenses in the third quarter of 2022 increased$68.6 million , or 32.8%, when compared to the third quarter of 2021 primarily related to increases in (i) personnel-related expenses of$29.8 million primarily resulting from increased headcount and increased wages and benefits, (ii) fleet related expenses including fuel and maintenance expense of$27.9 million related to our increased fleet size and higher volume and average fuel prices in 2022 and (iii) facilities expense of$7.1 million as we have added more locations through acquisitions and opening greenfield locations. Depreciation of rental equipment increased$34.2 million , or 32.4%, during the third quarter of 2022 when compared to the third quarter of 2021 due to the increase in average fleet size. Non-rental depreciation and amortization increased$8.5 million , or 50.0%, primarily due to amortization of intangible assets related to acquisitions. Selling, general and administrative expenses increased$30.0 million , or 36.8%, in the third quarter of 2022 when compared to the third quarter of 2021. The increase was primarily due to selling expense, including commissions and other variable compensation increases, of$13.1 million , general payroll and benefits of$5.1 million and travel expense of$2.2 million .
Interest expense, net increased
Income tax provision was$34.2 million during the third quarter of 2022 compared to$23.8 million in 2021. The provision in each period was driven by the level of pre-tax income, offset partially by certain non-deductible expenses.
Nine Months Ended
Equipment rental revenue increased
Sales of rental equipment decreased$22.6 million , or 24.8%, during the nine months ended of 2022 when compared to the nine months ended of 2021. During the nine months ended of 2022, 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 28.8% in 2022 compared to 15.7% in 2021. The increase in margin on sale of rental equipment in 2022 was due to a larger proportion of overall volume of sales through higher margin sales channels and improved pricing due to the overall strong market for used equipment. Direct operating expenses in the nine months ended of 2022 increased$187.9 million , or 33.4%, when compared to the nine months ended of 2021 primarily related to increases in (i) personnel-related expenses of$84.9 million primarily resulting from increased headcount and increased wages and benefits, (ii) fleet related expenses including fuel and maintenance expense of$64.8 million related to our increased fleet size and higher volume and average fuel prices in 2022, (iii) facilities expense of$17.3 million as we have added more locations through acquisitions and opening greenfield locations (iv) delivery expense of$12.8 million due to increased volume of transactions, and (v) re-rent expense of$12.3 million due to the corresponding increase in re-rent revenue. Depreciation of rental equipment increased$82.2 million , or 26.8%, during the nine months ended of 2022 when compared to the nine months ended of 2021 due to the increase in average fleet size. Non-rental depreciation and amortization increased$20.1 million , or 41.2%, primarily due to amortization of intangible assets related to acquisitions. Selling, general and administrative expenses increased$76.9 million , or 34.8%, in the nine months ended of 2022 when compared to the nine months ended of 2021. The increase was primarily due to selling expense, including commissions and other variable compensation increases, of$37.6 million and general payroll and benefits of$8.9 million . Travel expense and professional fees also increased by$9.0 million and$7.5 million , respectively. 27
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HERC HOLDINGS INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Interest expense, net increased$16.9 million , or 26.5%, during the nine months ended of 2022 when compared with the same period in 2021 due to higher average outstanding balances and weighted average interest rates on the ABL Credit Facility and AR Facility. Income tax provision was$68.1 million during the nine months ended of 2022 compared to$46.7 million in 2021. The provision in each period was driven by the level of pre-tax income, offset primarily by a benefit related to stock-based compensation of$8.2 million and$3.2 million for nine months endedSeptember 30, 2022 and 2021, respectively, and non-deductible expenses.
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 acquisitions, payment of dividends and share repurchases. Our primary sources of funding are operating cash flows, cash received from the disposal of equipment and borrowings under our debt arrangements. As ofSeptember 30, 2022 , we had approximately$2.8 billion of total nominal indebtedness outstanding. Our liquidity as ofSeptember 30, 2022 consisted of cash and cash equivalents of$56.9 million and unused commitments of approximately$1.5 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):
Nine Months Ended September 30,
2022 2021 $ Change
Cash provided by (used in):
Operating activities $ 623.2 $ 503.2 $ 120.0
Investing activities (1,315.7) (613.8) (701.9)
Financing activities 715.1 112.9 602.2
Effect of exchange rate changes (0.8) (0.1) (0.7)
Net change in cash and cash equivalents $ 21.8 $ 2.2 $ 19.6
Operating Activities
During the nine months ended September 30, 2022 , we generated $120.0 million
more cash from operating activities compared with the same period in 2021. The
increase was related to improved operating results primarily resulting from
higher revenues coupled with improved operating leverage on costs.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Investing Activities Cash used in investing activities increased$701.9 million during the nine months endedSeptember 30, 2022 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 16 acquisitions during the nine months endedSeptember 30, 2022 for a net cash outflow of$440.9 million .
Financing Activities
Cash provided by financing activities increased$602.2 million during the nine months endedSeptember 30, 2022 when compared with the prior-year period. Financing activities primarily represents our changes in debt, which included net borrowings of$851.6 million on our revolving lines of credit and securitization, which were used primarily to fund acquisitions during the period. Net borrowings in the prior year period were$127.9 million . In accordance with our share repurchase program that was adopted inMarch 2014 ("Share Repurchase Program"), we may from time to time repurchase shares in the open market or through privately negotiated transactions, in accordance with applicable securities laws. We have repurchased approximately 540,000 shares during 2022 in accordance with our overall capital allocation strategy and as ofSeptember 30, 2022 ,$336.7 million remains available for repurchases. In order to reduce future cash interest payments, as well as future amounts due at maturity or upon redemption, we may from time to time repurchase our debt, including our notes, bonds, loans or other indebtedness, in privately negotiated, open market or other transactions and upon such terms and at such prices as we may determine. We will evaluate any such transactions in light of then-existing market conditions, taking into account our current liquidity and prospects for future access to capital. The repurchases may be material and could relate to a substantial proportion of a particular class or series, which could reduce the trading liquidity of such class or series. Capital Expenditures Our capital expenditures relate largely to purchases of rental equipment, with the remaining portion representing purchases of property, equipment and information technology. The table below sets forth the capital expenditures related to our rental equipment and related disposals for the periods noted (in millions). Nine Months Ended September 30, 2022 2021 Rental equipment expenditures$ 841.2 $ 447.0 Disposals of rental equipment (66.6) (86.1) Net rental equipment expenditures $
774.6
Net capital expenditures for rental equipment increased$413.7 million during the nine months endedSeptember 30, 2022 compared to the same period in 2021 as we manage our fleet by continuing to invest in our fleet in high growth markets as part of our long-term capital expenditure plans and manage disposals to respond to a tightening market.
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." 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 the obligations of the Company or any of its 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 29
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Note 11, "Debt" to the notes to our consolidated financial statements included in Part II, Item 8 "Financial Statements" included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , and Note 8, "Debt" included in Part I, Item 1 "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 $ 2,252.1 $ 1,540.0
AR Facility - -
Total $ 2,252.1 $ 1,540.0
On July 5, 2022 , we entered into an amendment to the ABL Credit Facility that
was executed primarily to increase the aggregate amount of the revolving credit
commitments to $3.5 billion and to extend the maturity date of the ABL Credit
Facility to July 5, 2027 . Additionally, on August 26, 2022 , we amended the AR
Facility to increase the aggregate commitments from $250 million to $300 million
and extend the maturity to August 31, 2023 . See Note 8, "Debt" included in Part
I, Item 1 "Financial Statements" of this Report for more information.
As of September 30, 2022 , $25.8 million of standby letters of credit were issued
and outstanding under the ABL Credit Facility, none of which have been drawn
upon. The ABL Credit Facility had $224.2 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 ofSeptember 30, 2022 , the appropriate levels of liquidity have been maintained, therefore this financial maintenance covenant is not applicable. Additional information on the terms of our 2027 Notes, ABL Credit Facility and AR Facility is included in Note 11, "Debt" to the notes to our consolidated financial statements included in Part II, Item 8 "Financial Statements" included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . For a discussion of the risks associated with our indebtedness, see Part I, Item 1A "Risk Factors" contained in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . 30
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Dividends OnAugust 5, 2022 , the Company declared a quarterly dividend of$0.575 per share to record holders as ofAugust 19, 2022 , with payment date ofSeptember 2, 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.
OFF-BALANCE SHEET COMMITMENTS AND ARRANGEMENTS
As ofSeptember 30, 2022 , there have been no material changes to our indemnification obligations as disclosed in Note 17, "Commitments and Contingencies" in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . For further information, see the discussion on indemnification obligations included in Note 12, "Commitments and Contingencies" in Part I, Item 1 "Financial Statements" of this Report.
For information concerning contingencies, see Note 12, "Commitments and Contingencies" in Part I, Item 1 "Financial Statements" of this Report.
RECENT ACCOUNTING PRONOUNCEMENTS
For a discussion of recent accounting pronouncements, see Note 2, "Basis of Presentation and Significant Accounting Policies" in Part I, Item 1 "Financial Statements" of this Report.
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