HERC HOLDINGS INC MANAGEMENT REPORT ON FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-Q)
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 ACTIVITIES 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 income comes mainly from rents and related charges and consists of:
• Equipment rental (includes all revenue associated with equipment rental, including ancillary revenue from delivery, rental protection programs and refueling fees);
•Sales of rental equipment and sales of new equipment, parts and supplies; and
•Service and other revenue (primarily related to training and labor provided to customers).
Our expenses mainly 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 allowance relating to rental equipment;
•Selling, general and administrative expenses; and
•Interest charges.
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. 21
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HERC HOLDINGS INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT REPORT ON FINANCIAL POSITION 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, 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 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 March 31, ($ in millions) 2022 2021 $ Change % Change Equipment rental$ 526.8 $ 400.4 $ 126.4 31.6 % Sales of rental equipment 27.7 44.2 (16.5) (37.3) Sales of new equipment, parts and supplies 7.7 6.1 1.6 26.2 Service and other revenue 5.1 3.1 2.0 64.5 Total revenues 567.3 453.8 113.5 25.0 Direct operating 246.2 183.0 63.2 34.5 Depreciation of rental equipment 119.3 100.4 18.9 18.8 Cost of sales of rental equipment 18.5 38.4 (19.9) (51.8) Cost of sales of new equipment, parts and supplies 5.3 4.2 1.1 26.2 Selling, general and administrative 89.4 65.5 23.9 36.5 Interest expense, net 22.5 21.4 1.1 5.1 Other expense (income), net (1.0) (0.2) (0.8) NM Income before income taxes 67.1 41.1 26.0 63.3 Income tax provision (8.6) (8.2) (0.4) 4.9 Net income$ 58.5 $ 32.9 $ 25.6 77.8 % NM - Not Meaningful
Three months completed
Equipment rental revenue increased$126.4 million , or 31.6%, during the first quarter of 2022 when compared to the first quarter of 2021 primarily due to higher volume of equipment on rent of 29.0% and positive pricing of 4.3% during the first quarter of 2022 over the same period in the prior year. Sales of rental equipment decreased$16.5 million , or 37.3%, during the first quarter of 2022 when compared to the first quarter of 2021. During the first quarter of 2022, the decline in volume of sales was related to the increase in utilization and the 22
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HERC HOLDINGS INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT REPORT ON FINANCIAL POSITION AND RESULTS OF OPERATIONS (CONTINUED)
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 33.2% in 2022 compared to 13.1% 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 better pricing due to the overall strong market for used equipment. Direct operating expenses in the first quarter of 2022 increased$63.2 million , or 34.5%, when compared to the first quarter of 2021 primarily related to increases in (i) personnel-related expenses of$26.8 million primarily resulting from increased headcount and increased payroll and benefits, (ii) fleet related expenses including fuel and maintenance expense of$18.0 million related to our increased fleet size and higher average fuel prices in 2022, (iii) re-rent expense of$6.5 million due to the corresponding increase in re-rent revenue, (iv) facilities expense of$4.5 million as we have added more locations through acquisitions and opening greenfield locations.
Depreciation of rental equipment increased
Selling, general and administrative expenses increased$23.9 million , or 36.5%, in the first quarter of 2022 when compared to the first quarter of 2021. The increase was primarily due to selling expense, including commissions and other variable compensation increases, of$11.5 million and general payroll and benefits of$4.1 million . Travel expense also increased by$3.2 million . Interest expense, net increased$1.1 million , or 5.1%, during the first quarter of 2022 when compared with the same period in 2021 due to higher average outstanding balances and slightly higher weighted average interest rates on the ABL Credit Facility and AR Facility. Income tax provision was$8.6 million during the first quarter of 2022 compared to$8.2 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$8.1 million and$2.5 million for three months endedMarch 31, 2022 and 2021, respectively, and non-deductible expenses.
CASH 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 ofMarch 31, 2022 , we had approximately$2.2 billion of total nominal indebtedness outstanding. Our liquidity as ofMarch 31, 2022 consisted of cash and cash equivalents of$22.8 million and unused commitments of approximately$1.1 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 flow
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.
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HERC HOLDINGS INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT REPORT ON FINANCIAL POSITION AND RESULTS OF OPERATIONS (CONTINUED)
The following table summarizes the change in cash and cash equivalents for the
periods shown (in millions):
Three Months Ended March 31,
2022 2021 $ Change
Cash provided by (used in):
Operating activities $ 143.0 $ 134.7 $ 8.3
Investing activities (346.7) (62.2) (284.5)
Financing activities 191.4 (72.8) 264.2
Effect of exchange rate changes - 0.2
(0.2)
Net change in cash and cash equivalents$ (12.3) $ (0.1) $ (12.2) Operating Activities During the three months endedMarch 31, 2022 , we generated$8.3 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 continued cost control measures, partially offset by the timing of payments on accounts payable as compared to the same period in 2021. Investing Activities Cash used in investing activities increased$284.5 million during the three months endedMarch 31, 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 three acquisitions during the three months endedMarch 31, 2022 for a net cash outflow of$73.0 million .
Fundraising activities
Cash provided by financing activities increased$264.2 million during the three months endedMarch 31, 2022 when compared with the prior-year period. Financing activities primarily represents our changes in debt, which included net borrowings of$226.6 million on our revolving lines of credit and securitization, which were used primarily to fund acquisitions during the period. Net repayments in the prior year period were$65.0 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). Three Months Ended March 31, 2022 2021 Rental equipment expenditures $ 286.8$ 90.9 Disposals of rental equipment (28.8) (40.3) Net rental equipment expenditures $ 258.0$ 50.6 24
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HERC HOLDINGS INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT REPORT ON FINANCIAL POSITION AND RESULTS OF OPERATIONS (CONTINUED)
Net capital expenditures for rental equipment increased$207.4 million during the three months endedMarch 31, 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 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).
From
Availability Under
Remaining Borrowing Base
Capacity Limitation
ABL Credit Facility $ 1,066.8 $ 1,066.8
AR Facility - -
Total $ 1,066.8 $ 1,066.8
As of March 31, 2022 , $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.
pacts
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 ofMarch 31, 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 25
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HERC HOLDINGS INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT REPORT ON FINANCIAL POSITION AND RESULTS OF OPERATIONS (CONTINUED)
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 .
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.
OFF-BALANCE SHEET COMMITMENTS AND ARRANGEMENTS
As ofMarch 31, 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 regarding 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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