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.
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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 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 by opening greenfield locations and returning to more normalized rental equipment capital expenditures by adding fleet in high growth markets. 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 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. 24
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
Three Months Ended September 30, Nine Months Ended September 30,
($ in millions) 2021 2020 $ Change % Change 2021 2020 $ Change % Change
Equipment rental $ 519.6 $ 402.3 $ 117.3 29.2 % $ 1,368.0 $ 1,116.4 $ 251.6 22.5 %
Sales of rental equipment 16.6 45.3 (28.7) (63.4) 91.1 116.7 (25.6) (21.9)
Sales of new equipment, parts and
supplies 8.6 6.2 2.4 38.7 22.5 20.2 2.3 11.4
Service and other revenue 5.6 2.9 2.7 93.1 13.5 7.6 5.9 77.6
Total revenues 550.4 456.7 93.7 20.5 1,495.1 1,260.9 234.2 18.6
Direct operating 225.9 169.4 56.5 33.4 611.9 503.3 108.6 21.6
Depreciation of rental equipment 105.4 101.9 3.5 3.4 306.9 303.7 3.2 1.1
Cost of sales of rental equipment 13.7 46.3 (32.6) (70.4) 76.8 118.3 (41.5) (35.1)
Cost of sales of new equipment,
parts and supplies 6.5 4.4 2.1 47.7 15.6 14.6 1.0 6.8
Selling, general and
administrative 81.5 61.0 20.5 33.6 221.0 187.6 33.4 17.8
Impairment - - - - 0.4 9.5 (9.1) (95.8)
Interest expense, net 21.4 22.4 (1.0) (4.5) 63.8 70.1 (6.3) (9.0)
Other expense (income), net (0.1) (0.3) 0.2 (66.7) (0.3) 4.7 (5.0) (106.4)
Income before income taxes 96.1 51.6 44.5 86.2 199.0 49.1 149.9 NM
Income tax provision (23.8) (11.7) (12.1) 103.4 (46.7) (10.9) (35.8) NM
Net income $ 72.3 $ 39.9 $ 32.4 81.2 % $ 152.3 $ 38.2 $ 114.1 NM
NM - not meaningful
Three Months Ended
Equipment rental revenue increased$117.3 million , or 29.2%, during the third quarter of 2021 when compared to the third quarter of 2020 primarily due to higher volume of equipment on rent of 16.0% and positive pricing of 2.8% during the third quarter of 2021 over the same period in the prior year. Sales of rental equipment decreased$28.7 million , or 63.4%, during the third quarter of 2021 when compared to the third quarter of 2020. During the third 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 82.5% in the third quarter of 2021 compared to 102.2% in the third quarter of 2020. The increase in margin on sale of rental equipment in the third quarter of 2021 was due to a larger proportion of overall volume of sales through higher margin sales channels. Direct operating expenses in the third quarter of 2021 increased$56.5 million , or 33.4%, when compared to the third quarter of 2020 primarily related to increases in (i) personnel-related expenses of$22.1 million resulting from merit increases and bonus incentives; additionally, there were limitations on overtime and furloughs in place during the third quarter of 2020, (ii) delivery and freight expenses of$8.8 million due to an increased volume of transactions in the third quarter of 2021, (iii) maintenance expense of$6.4 million related to initiatives to service more equipment with in-house resources and (iv) re-rent expense of$11.5 million due to the corresponding increase in re-rent revenue. Selling, general and administrative expenses increased$20.5 million , or 33.6%, in the third quarter of 2021 when compared to the third quarter of 2020. The increase was primarily due to selling expense, including commissions and bonus incentives, of$8.5 million , general payroll and benefits increases of$3.7 million and travel expense of$2.6 million as business travel resumes. Interest expense, net decreased$1.0 million , or 4.5%, during the third 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. 25
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Income tax provision was
Nine Months Ended
Equipment rental revenue increased$251.6 million , or 22.5%, during the nine months endedSeptember 30, 2021 when compared to the prior-year period primarily due to higher volume of equipment on rent of 11.3% and positive pricing of 1.6% over the same period in the prior year. Sales of rental equipment decreased$25.6 million , or 21.9%, during the nine months endedSeptember 30, 2021 when compared to the prior-year period. During the nine months endedSeptember 30, 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 84.3% in the nine months endedSeptember 30, 2021 compared to 101.4% in the prior-year period. The increase in margin on sale of rental equipment in the nine months endedSeptember 30, 2021 was due to a larger proportion of overall volume of sales through higher margin sales channels. Direct operating expenses in the nine months endedSeptember 30, 2021 increased$108.6 million , or 21.6%, when compared to the prior-year period primarily related to (i) personnel-related expenses of$36.9 million resulting from merit increases and bonus incentives; additionally, there were limitations on overtime and furloughs in place during the second and third quarters of 2020, (ii) delivery and freight expenses of$23.2 million due to an increased volume of transactions in the nine months endedSeptember 30, 2021 compared to the prior-year period, (iii) maintenance expense of$13.7 million related to initiatives to service more equipment with in-house resources and (iv) re-rent expense of$16.9 million due to the corresponding increase in re-rent revenue. Selling, general and administrative expenses increased$33.4 million , or 17.8%, in the nine months endedSeptember 30, 2021 when compared to the prior-year period. The increase was primarily due to selling expense, including commissions and bonus incentives, of$15.9 million , general payroll and benefits increases of$14.9 million , which includes an increase in stock compensation expense of$7.5 million , partially offset by a decrease in bad debt expense of$5.4 million due to the continued improvements in collections. Impairment expense during the nine months endedSeptember 30, 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 nine months endedSeptember 30, 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$6.3 million , or 9.0%, during the nine months endedSeptember 30, 2021 when compared to the prior-year period due to lower average outstanding balances and lower weighted average interest rates on the ABL Credit Facility. Income tax provision was$46.7 million during the nine months endedSeptember 30, 2021 compared to$10.9 million during the same period in 2020. The provision in the nine months ended 2021 was primarily driven by the level of pre-tax income, offset by non-deductible expenses and stock-based compensation.
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 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 ofSeptember 30, 2021 , we had approximately$1.8 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, capital expenditures, acquisitions and payment of dividends. 26
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Our liquidity as ofSeptember 30, 2021 consisted of cash and cash equivalents of$35.2 million and unused commitments of approximately$1.4 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,
2021 2020 $ Change
Cash provided by (used in):
Operating activities $ 503.2 $ 424.0 $ 79.2
Investing activities (613.8) (171.6) (442.2)
Financing activities 112.9 (232.1) 345.0
Effect of exchange rate changes (0.1) 0.5 (0.6)
Net change in cash and cash equivalents $ 2.2 $ 20.8 $ (18.6)
Operating Activities
During the nine months ended September 30, 2021 , we generated $79.2 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 nine months ended September
30, 2021 as compared to the same period in 2020.
Investing Activities
Cash used in investing activities increased$442.2 million during the nine months endedSeptember 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 four acquisitions during the nine months endedSeptember 30, 2021 and finalized the working capital adjustment for a prior acquisition for a net cash outflow of$225.2 million . Financing Activities Cash provided by financing activities was$112.9 million during the nine months endedSeptember 30, 2021 compared with cash used of$232.1 million in the prior-year period. Financing activities primarily represents our changes in debt, which included net borrowings of$127.9 million on our revolving lines of credit and securitization during the nine months ended of 2021, which were used primarily to fund acquisitions during the period. Net repayments in the prior year period were$221.7 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 27
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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).
Nine Months Ended September 30,
2021 2020
Rental equipment expenditures $ 447.0 $ 273.2
Disposals of rental equipment (86.1) (114.1)
Net rental equipment expenditures $
360.9
Net capital expenditures for rental equipment increased$201.8 million during the nine months endedSeptember 30, 2021 compared to the same period in 2020. During the nine months endedSeptember 30, 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. 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 9, "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 $ 1,367.3 $ 1,367.3
AR Facility - -
Total $ 1,367.3 $ 1,367.3
As of September 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.
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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 ofSeptember 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 OnSeptember 20, 2021 , the Company declared a quarterly dividend of$0.50 per share to record holders as ofOctober 20, 2021 , with payment date ofNovember 4, 2021 . 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.
CONTRACTUAL OBLIGATIONS
As ofSeptember 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 ofSeptember 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 13, "Commitments and Contingencies" in Part I, Item 1 "Financial Statements" of this Report.
For information concerning the securities litigation and other contingencies, see Note 13, "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.
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