HERC HOLDINGS INC

Previous wording

Despite continued economic uncertainty, elevated interest rates, potential labor disruptions, and inflation, the equipment rental industry remains resilient, as demonstrated by the increase in volume in the current quarter. We actively monitor the impact of the dynamic macroeconomic environment and manage our business to adjust to such conditions. Interest rates on our debt instruments remain elevated; most notably, the weighted average interest rate on our floating rate debt has increased from 6.24% in the first quarter of 2023 to 6.82% in the current quarter. We monitor our exposure to floating rate debt and reevaluate our capital allocation strategy, as necessary. In response to supply chain disruptions easing in certain categories of equipment, we continue to increase the volume of sales of rental equipment, remaining mindful to the possibility we may experience more severe supply chain disruptions in the future. Although inflation appears to have stabilized, we have experienced and expect to continue to experience inflationary pressures, a portion of which, such as for fuel and delivery, is passed on to customers. There are other costs for which the pass through to customers is less direct, such as repairs and maintenance, and labor. We cannot predict the extent to which our financial condition, results of operations or cash flows will ultimately be impacted by these ongoing economic conditions, however, we believe we are well-positioned to operate effectively through the present environment.

Current wording

Despite continued economic uncertainty, elevated interest rates, potential labor disruptions, and inflation, the equipment rental industry remains resilient, as demonstrated by the increase in volume on rent in the current quarter. We actively monitor the impact of the dynamic macroeconomic environment and manage our business to adjust to such conditions. Interest rates on our debt instruments remain elevated; most notably, the weighted average interest rate on our floating rate debt has increased from 6.61% in the second quarter of 2023 to 6.69% in the current quarter. We monitor our exposure to floating rate debt and reevaluate our capital allocation strategy, as necessary. In response to supply chain disruptions easing in certain categories of equipment, we have returned to a more normalized cadence of rental equipment expenditures and disposals, remaining mindful of the possibility we may experience more severe supply chain disruptions in the future. Although inflation appears to have stabilized, we have experienced and expect to continue to experience inflationary pressures, a portion of which, such as for fuel and delivery, is passed on to customers. There are other costs for which the pass through to customers is less direct, such as repairs and maintenance, and labor. We cannot predict the extent to which our financial condition, results of operations or cash flows will ultimately be impacted by these ongoing economic conditions, however, we believe we are well-positioned to operate effectively through the present environment.

Previous wording

Equipment rental revenue increased $65 million, or 10%, during the first quarter of 2024 due to higher volume of equipment on rent of 8.0% and pricing growth of 5.1% over the same period in the prior year.

Current wording

Equipment rental revenue increased $63 million, or 9%, during the second quarter of 2024 due to higher volume of equipment on rent of 6.4% and pricing growth of 3.5% over the same period of the prior year.

Previous wording

Sales of rental equipment decreased $2 million, or 3%, during the first quarter of 2024 when compared to the first quarter of 2023. We continue to sell equipment in line with our fleet rotation planning to improve the equipment mix and manage fleet age. The margin on sales of rental equipment was 33% in 2024 compared to 35% in 2023. The slight decrease in margin on sale of rental equipment in 2024 was primarily due to mix of equipment sold.

Current wording

Sales of rental equipment decreased $18 million, or 22%, during the second quarter of 2024 when compared to the second quarter of 2023. We continue to sell equipment in line with our fleet rotation planning to improve the equipment mix and manage fleet age. The margin on sales of rental equipment was 31% in 2024 compared to 33% in 2023. The slight decrease in margin on sale of rental equipment in 2024 resulted from continued normalization of used equipment pricing in the market off peak pricing in prior years, partially offset by improvement in the mix of equipment sold in the higher margin retail and wholesale channels.

Previous wording

Depreciation of rental equipment increased $8 million, or 5%, during the first quarter of 2024 when compared to the first quarter of 2023 due to an increase in average fleet size. Non-rental depreciation and amortization increased $3 million, or 12%, primarily due to amortization of intangible assets related to acquisitions.

Current wording

Depreciation of rental equipment increased $4 million, or 2%, during the second quarter of 2024 when compared to the second quarter of 2023 due to an increase in average fleet size. Non-rental depreciation and amortization increased $2 million, or 7%, primarily due to amortization of intangible assets related to acquisitions.

Previous wording

Selling, general and administrative expenses increased $9 million, or 8%, in the first quarter of 2024 when compared to the first quarter of 2023. The increase was primarily due to increases in selling expenses, including commissions and other variable compensation, of $4 million, advertising and travel expense of $3 million, and general payroll and benefits of $2 million. Selling, general and administrative expenses were 16.0% of equipment rental revenue in 2024 compared to 16.2% in the prior-year period due to continued focus on improving operating leverage while expanding revenues.

Current wording

Selling, general and administrative expenses increased $9 million, or 8%, in the second quarter of 2024 when compared to the second quarter of 2023. The increase was primarily due to increases in selling expenses, including commissions and other variable compensation, of $4 million, advertising and travel expense of $2 million, and general payroll and benefits of $2 million. Selling, general and administrative expenses were 15.7% of equipment rental revenue in 2024 compared to 15.8% in the prior-year period due to continued focus on improving operating leverage while expanding revenues.

Previous wording

Interest expense, net increased $13 million, or 27%, during the first quarter of 2024 when compared with the first quarter of 2023 due to increased borrowings on the ABL Credit Facility primarily to fund acquisition growth and invest in rental equipment and higher interest rates on floating rate debt.

Current wording

Interest expense, net increased $9 million, or 17%, during the second quarter of 2024 when compared with the second quarter of 2023 due to increased borrowings on the ABL Credit Facility primarily to fund acquisition growth and invest in rental equipment and higher interest rates on floating rate debt.

Previous wording

Direct operating expenses in the first quarter of 2024 increased $26 million, or 9%, when compared to the first quarter of 2023. Direct operating expenses were 42.7% of equipment rental revenue in 2024, compared to 43.0% in the prior-year period, reflecting better cost performance and fixed cost absorption on higher revenue despite increases in (i) personnel-related expenses of $17 million resulting from increased headcount in support of growth initiatives, (ii) facilities expense of $5 million as we have added more locations through acquisitions and opening greenfield locations and (iii) maintenance expense of $5 million related to our increased fleet size in 2024. These increases were partially offset by a decrease in fuel expense of $4 million due to lower average fuel prices in the first quarter of 2024.

Current wording

Direct operating expenses in the first half of 2024 increased $70 million, or 12%, when compared to the first half of 2023. Direct operating expenses were 42.7% of equipment rental revenue in 2024, compared to 41.5% in the prior-year period, reflecting increases in (i) personnel-related expenses of $34 million resulting from increased headcount in support of growth initiatives, including greenfields and acquisitions, (ii) delivery expense of $7 million due to increased volume of transactions and transfers of equipment between branches to drive higher fleet efficiency, (iii) self insurance reserve increase of $7 million due to claims development attributable to unsettled cases, (iv) facilities expense of $9 million as we have added more locations through acquisitions and opening greenfield locations and (v) maintenance expense of $6 million related to our increased fleet size in 2024.

Previous wording

Income tax provision was $16 million, with an effective tax rate of 20%, during the first quarter of 2024 compared to $8 million and 11% in the same period of 2023. The rate increase was driven by a reduction in the benefit related to stock-based compensation and certain non-deductible expenses.

Current wording

Income tax provision was $39 million, with an effective tax rate of 22%, during the first half of 2024 compared to $35 million and 20% in the same period of 2023. The rate increase was driven by a reduction in the benefit related to stock-based compensation and certain non-deductible expenses.

Previous wording

Our primary uses of liquidity 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 of March 31, 2024, we had approximately $3.8 billion of total nominal indebtedness outstanding.

Current wording

Our primary uses of liquidity 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 of June 30, 2024, we had approximately $3.9 billion of total nominal indebtedness outstanding.

Previous wording

Our liquidity as of March 31, 2024 consisted of cash and cash equivalents of $63 million and unused commitments of approximately $1.3 billion under our ABL Credit Facility and AR 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.

Current wording

Our liquidity as of June 30, 2024 consisted of cash and cash equivalents of $70 million and unused commitments of approximately $2.0 billion under our ABL Credit Facility and AR 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.

Previous wording

During the three months ended March 31, 2024, we generated $5 million more cash from operating activities compared with the same period in 2023. The increase was related to the timing of payments on accounts payable and accrued liabilities.

Current wording

During the six months ended June 30, 2024, we generated $42 million more cash from operating activities compared with the same period in 2023. The increase was primarily related to the timing of payments on accounts payable and accrued liabilities.

Previous wording

Cash used in investing activities decreased $155 million during the three months ended March 31, 2024 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 three months ended March 31, 2024 for a net cash outflow of $148 million.

Current wording

Cash used in investing activities decreased $230 million during the six months ended June 30, 2024 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 six acquisitions during the six months ended June 30, 2024 for a net cash outflow of $290 million.

Previous wording

Cash provided by financing activities decreased $154 million during the three months ended March 31, 2024 when compared with the prior-year period. Financing activities primarily represents our changes in debt, which included net borrowings of $83 million on our revolving lines of credit and securitization, which were used primarily to fund acquisitions and invest in rental equipment during the period. Net borrowings in the prior year period were $293 million.

Current wording

Cash provided by financing activities decreased $256 million during the six months ended June 30, 2024 when compared with the prior-year period. Financing activities primarily represents our changes in debt, which included borrowings of $840 million on our revolving lines of credit and securitization which were used primarily to fund acquisitions and invest in rental equipment during the period. This was offset by repayments of $1.4 billion through operations and the proceeds from the issuance of our 2029 Notes. Net borrowings in the prior year period were $571 million.

Previous wording

Net capital expenditures for rental equipment decreased $163 million during the three months ended March 31, 2024 compared to the same period in 2023. As the supply chain constraints in several categories of equipment have eased, our rental equipment expenditures have returned to taking deliveries in line with our normal seasonal cadence, while we continue to optimize our fleet by investing in high growth markets as part of our long-term capital expenditure plans. Disposals have also slightly increased in the current year to maintain an appropriate mix of fleet and manage fleet age, while ensuring we have sufficient capacity of equipment to meet customer demand in light of some continuing supply chain constraints in certain equipment categories.

Current wording

Net capital expenditures for rental equipment decreased $229 million during the six months ended June 30, 2024 compared to the same period in 2023. As the supply chain constraints have eased, our rental equipment expenditures have returned to taking deliveries and disposing of equipment in line with our normal seasonal cadence, while we continue to optimize our fleet by investing in high growth markets as part of our long-term capital expenditure plans.

Previous wording

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.

Current wording

Our ABL Credit Facility, our AR Facility and our 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.

Previous wording

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 of March 31, 2024, the appropriate levels of liquidity have been maintained, therefore this financial maintenance covenant is not applicable.

Current wording

Under the terms of our ABL Credit Facility, our AR Facility and our 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 of June 30, 2024, the appropriate levels of liquidity have been maintained, therefore this financial maintenance covenant is not applicable.

Previous wording

At March 31, 2024, Herc Holdings' balance sheet was substantially identical to that of Herc, with the exception of the debt held by Herc Holdings (2027 Notes and ABL Credit Facility) and certain components of shareholders equity. For the three months ended March 31, 2024 and 2023, the statements of operations of Herc Holdings and Herc were identical with the exception of interest expense on the debt held at Herc Holdings that is not reflected in the statement of operations of Herc.

Current wording

At June 30, 2024, Herc Holdings' balance sheet was substantially identical to that of Herc, with the exception of the debt held by Herc Holdings (Notes and ABL Credit Facility) and certain components of shareholders equity. For the three and six months ended June 30, 2024 and 2023, the statements of operations of Herc Holdings and Herc were identical with the exception of interest expense on the debt held at Herc Holdings that is not reflected in the statement of operations of Herc.

Previous wording

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 ended December 31, 2023. 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 ended December 31, 2023.

Current wording

Additional information on the terms of our 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 ended December 31, 2023. 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 ended December 31, 2023.