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; and
•Interest expense.
20--------------------------------------------------------------------------------
Table of Contents
HERC HOLDINGS INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
COVID-19 Update InDecember 2019 , a novel strain of coronavirus (COVID-19) was identified and has spread globally. InMarch 2020 , theWorld Health Organization characterized COVID-19 as a pandemic. SinceMarch 2020 , federal, state, provincial and local governments have implemented various measures in an effort to contain the virus, including physical distancing, travel restrictions, border closures, limitations on public gatherings, work from home, supply chain logistical changes and closure of non-essential businesses. 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, based on theCenter for Disease Control recommendations. As the administration of vaccine programs continues and cases decline, we continue to evaluate our plans regarding the remote work environment and resumption of business travel for our employees. We have seen economic recovery within our industry and our business since the second quarter of 2020 and we have positioned ourselves for growth in 2021 by opening greenfield locations and returning to more normalized rental equipment capital expenditures by adding fleet in high growth regions. Despite the recovery we are seeing, the impact of the COVID-19 pandemic continues to evolve and the 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, and 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.
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. 21
--------------------------------------------------------------------------------
Table of Contents
HERC HOLDINGS INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
Three Months Ended June 30, Six Months Ended June 30,
($ in millions) 2021 2020 $ Change % Change 2021 2020 $ Change % Change
Equipment rental $ 448.0 $ 327.6 $ 120.4 36.8 % $ 848.4 $ 714.1 $ 134.3 18.8 %
Sales of rental equipment 30.3 31.4 (1.1) (3.5) 74.5 71.4 3.1 4.3
Sales of new equipment, parts and
supplies 7.8 7.0 0.8 11.4 13.9 14.0 (0.1) (0.7)
Service and other revenue 4.8 2.0 2.8 140.0 7.9 4.7 3.2 68.1
Total revenues 490.9 368.0 122.9 33.4 944.7 804.2 140.5 17.5
Direct operating 203.0 144.7 58.3 40.3 386.0 333.9 52.1 15.6
Depreciation of rental equipment 101.1 101.4 (0.3) (0.3) 201.5 201.8 (0.3) (0.1)
Cost of sales of rental equipment 24.7 29.6 (4.9) (16.6) 63.1 72.0 (8.9) (12.4)
Cost of sales of new equipment,
parts and supplies 4.9 5.1 (0.2) (3.9) 9.1 10.2 (1.1) (10.8)
Selling, general and
administrative 74.0 56.8 17.2 30.3 139.5 126.6 12.9 10.2
Impairment 0.4 3.2 (2.8) (87.5) 0.4 9.5 (9.1) (95.8)
Interest expense, net 21.0 23.3 (2.3) (9.9) 42.4 47.7 (5.3) (11.1)
Other expense (income), net - 3.8 (3.8) (100.0) (0.2) 5.0 (5.2) (104.0)
Income before income taxes 61.8 0.1
61.7 NM 102.9 (2.5) 105.4 NM
Income tax provision (14.7) 1.9 (16.6) NM (22.9) 0.8 (23.7) NM
Net income (loss) $ 47.1 $ 2.0 $ 45.1 NM $ 80.0 $ (1.7) $ 81.7 NM
NM - not meaningful
Three Months Ended
Equipment rental revenue increased$120.4 million , or 36.8%, during the second quarter of 2021 when compared to the second quarter of 2020 primarily due to higher volume of equipment on rent and positive pricing of 1.9% during the second quarter of 2021 over the same period in the prior year. Sales of rental equipment decreased$1.1 million , or 3.5%, during the second quarter of 2021 when compared to the second quarter of 2020. During the second quarter of 2021, the decline in volume of sales was related to the increase in utilization of rental equipment and management of the mix of rental equipment as part of our long-term strategy. The corresponding cost of sales of rental equipment as a percentage of the related revenue was 81.5% in the second quarter of 2021 compared to 94.3% in the second quarter of 2020. The increase in margin on sale of rental equipment in the second quarter of 2021 was due to a larger proportion of overall volume of sales through higher margin sales channels. Direct operating expenses in the second quarter of 2021 increased$58.3 million , or 40.3%, when compared to the second quarter of 2020 primarily related to increases in (i) personnel-related expenses of$20.4 million as there were furloughs and limitations on overtime in place during the second quarter of 2020, (ii) delivery and freight expenses of$10.4 million due to an increased volume of transactions in the second quarter of 2021, (iii) maintenance expense of$9.2 million related to initiatives to service more equipment with in-house resources and (iv) re-rent expense of$8.0 million due to the corresponding increase in re-rent revenue. Selling, general and administrative expenses increased$17.2 million , or 30.3%, in the second quarter of 2021 when compared to the second quarter of 2020. The increase was primarily due to selling expense, including commissions and bonus incentives, of$7.0 million , stock compensation expense of$5.3 million and travel expense of$2.3 million as business travel resumes. The increase was partially offset by a decrease in bad debt expense of$3.3 million due to the continued improvements in collections. 22
--------------------------------------------------------------------------------
Table of Contents
HERC HOLDINGS INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Impairment expense in the second quarter of 2021 was$0.4 million related to a right-of-use ("ROU") asset impairment charge for a previously closed location. In 2020, impairment expense was$3.2 million including$1.5 million related to certain assets that were deemed held for sale atJune 30, 2020 and$1.7 million related to an ROU asset impairment charge for two previously closed locations. Interest expense, net decreased$2.3 million , or 9.9%, during the second quarter of 2021 when compared with the same period in 2020 due to lower average outstanding balances and lower weighted average interest rates on the ABL Credit Facility.
Income tax provision was
Six Months Ended
Equipment rental revenue increased$134.3 million , or 18.8%, during the first half of 2021 when compared to the first half of 2020 primarily due to higher volume of equipment on rent and positive pricing of 0.9% over the same period in the prior year. Sales of rental equipment increased$3.1 million , or 4.3%, during the first half of 2021 when compared to the first half of 2020. During the first half of 2021, the volume of sales was driven by the increase in utilization of rental equipment and selling certain classes of equipment to continue to improve our equipment mix. The corresponding cost of sales of rental equipment as a percentage of the related revenue was 84.7% in the first half of 2021 compared to 100.8% in the first half of 2020. The increase in margin on sale of rental equipment in the first half of 2021 was due to a larger proportion of overall volume of sales through higher margin sales channels. Direct operating expenses in the first half of 2021 increased$52.1 million , or 15.6%, when compared to the first half of 2020 primarily related to (i) personnel-related expenses of$14.8 million as there were furloughs and limitations on overtime in place during the second quarter of 2020, (ii) delivery and freight expenses of$14.5 million due to an increased volume of transactions in the first half of 2021 compared to the first half of 2020, (iii) maintenance expense of$7.2 million related to initiatives to service more equipment with in-house resources and (iv) re-rent expense of$5.4 million due to the corresponding increase in re-rent revenue. Selling, general and administrative expenses increased$12.9 million , or 10.2%, in the first half of 2021 when compared to the first half of 2020. The increase was primarily due to selling expense, including commissions and bonus incentives, of$7.4 million and stock compensation expense of$7.4 million , partially offset by a decrease in bad debt expense of$7.1 million due to the continued improvements in collections. Impairment expense in the first half of 2021 was$0.4 million related to a ROU asset impairment charge for a previously closed location. Impairment expense was$9.5 million during the first half of 2020 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,$1.7 million related to an ROU asset impairment charge for two previously closed locations and$1.5 million related to certain assets that were deemed held for sale atJune 30, 2020 . Interest expense, net decreased$5.3 million , or 11.1%, during the first half of 2021 when compared with the same period in 2020 due to lower average outstanding balances and lower weighted average interest rates on the ABL Credit Facility.
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 and funding acquisitions. Our primary sources of funding are operating cash flows, cash received from the disposal of equipment and borrowings under our debt arrangements. As ofJune 30, 2021 , we had approximately$1.6 23
--------------------------------------------------------------------------------
Table of Contents
HERC HOLDINGS INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
billion of total nominal indebtedness outstanding. A substantial portion of our liquidity needs arise from debt service on our indebtedness and from the funding of our costs of operations and capital expenditures. Our liquidity as ofJune 30, 2021 consisted of cash and cash equivalents of$34.6 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):
Six Months Ended June 30,
2021 2020 $ Change
Cash provided by (used in):
Operating activities $ 327.9 $ 280.4 $ 47.5
Investing activities (204.7) (101.6) (103.1)
Financing activities (122.0) (128.7) 6.7
Effect of exchange rate changes 0.4 0.1 0.3
Net change in cash and cash equivalents
Operating Activities During the six months endedJune 30, 2021 , we generated$47.5 million more cash from operating activities compared with the same period in 2020. The increase was 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 during the six months endedJune 30, 2021 as compared to the same period in 2020.
Investing Activities
Cash used in investing activities increased$103.1 million during the six months endedJune 30, 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 two acquisitions inApril 2021 and finalized the working capital adjustment for a prior acquisition for a net cash outflow of$17.9 million .
Financing Activities
Cash used in financing activities decreased$6.7 million during the six months endedJune 30, 2021 when compared with the prior-year period. Cash used in financing activities primarily represents our changes in debt, which included net repayments of$110.0 million on our revolving lines of credit and securitization during the first half of 2021. Net repayments in the prior year period were$119.7 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 24
--------------------------------------------------------------------------------
Table of Contents
HERC HOLDINGS INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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).
Six Months Ended June 30,
2021 2020
Rental equipment expenditures $ 239.3 $ 161.5
Disposals of rental equipment (71.0) (67.9)
Net rental equipment expenditures $ 168.3 Net capital expenditures for rental equipment increased$74.7 million during the six months endedJune 30, 2021 compared to the same period in 2020. During the six months endedJune 30, 2021 , we increased rental equipment expenditures back to pre-pandemic levels to add select fleet in high growth regions as part of our long-term capital expenditure plans and managed disposals to respond to a tightening market to effectively manage our fleet. 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 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, 2020 , and Note 7, "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 $ 1,580.2 $ 1,480.8
AR Facility - -
Total $ 1,580.2 $ 1,480.8
As of June 30, 2021 , $24.8 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 $225.2 million available under the letter of credit
facility sublimit, subject to borrowing base restrictions.
25--------------------------------------------------------------------------------
Table of Contents
HERC HOLDINGS INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 ofJune 30, 2021 , 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, 2020 . 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, 2020 . Dividends Our payment of dividends on our common stock 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.
CONTRACTUAL OBLIGATIONS
As ofJune 30, 2021 , there have been no material changes outside the ordinary course of business to our known contractual obligations as set forth in the Contractual Obligations table included in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year endedDecember 31, 2020 .
OFF-BALANCE SHEET COMMITMENTS AND ARRANGEMENTS
As ofJune 30, 2021 , 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, 2020 . For further information, see the discussion on indemnification obligations included in Note 11, "Commitments and Contingencies" in Part I, Item 1 "Financial Statements" of this Report.
For information concerning the securities litigation and other contingencies, see Note 11, "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 Recently Issued Accounting Pronouncements" in Part I, Item 1 "Financial Statements" of this Report.
26--------------------------------------------------------------------------------
Table of Contents
HERC HOLDINGS INC. AND SUBSIDIARIES
© Edgar Online, source
