We operate in mid-size and large urban markets serving a wide range of industries, which enables us to reduce exposure to any single customer or market, with no single customer making up more than 3% of our equipment rental revenue for the years ended December 31, 2019, 20182022, 2021 or 2017.2020. Our footprint and broad customer base also assist in reducing the seasonality of our revenues and the impact from any one market's cycle.
We market and sell our services through a variety of complementary programs. Through a dedicated sales team, we provide our customers with support services, market and application expertise, and sales offerings. For example, we have sales teams committed to servicing various categories of our customer base, including clients in the construction, industrial, government and entertainment industries. Our product experts oversee general rentals and specialty products, providing application support and program management services to our clients. Through our national accounts program, our dedicated sales team provides our large customers with support across a number of diverse geographic, functional and equipment sectors. We also provide client support via our sales coordinators, reservation centers and customer care centers to help customers with their comprehensive needs.
We advertise our broad range of offerings through industry catalogs, participation and sponsorship of industry events, trade shows, and via the Internet. Additionally, through our website and mobile apps, our customers can arrange for the rental of equipment, browse and purchase used equipment, review our service offerings and manage their fleet and overall account with us.
Competition in the equipment rental industry is intense, often taking the form of aggressive price competition. Other competitive factors include customer loyalty, changes in market penetration, the introduction of new equipment, services and technology by competitors, changes in marketing, product diversity and quality and the ability to supply equipment and services to customers in a timely, predictable manner.
Our competitors in the equipment rental industry range from other large national companies to regional and local businesses and include equipment vendors and dealers who both sell and rent equipment directly to customers. The equipment rental industry is highly fragmented, with many companies operating on a regional or local scale and offering a limited number of products. The
number of our competitors operating on a national scale is comparatively much smaller, although they often have significant breadth in their rental equipment categories. We believe, based on market and industry data, that we are one of the leading participants in the North American equipment rental industry, with the remainder comprised of a small number of multi-location regional operators and a large number of relatively small, independent businesses serving discrete local markets and specialty rental segments. In North America, the other leading national-scale industry participants are United Rentals, Inc., Ashtead Group plc’s Sunbelt Rentals brand and H&E Equipment Services, Inc. Aggreko is a global competitor in the power generation rental markets in which we also participate.
Our business is seasonal, with demand for our rental equipment tending to be lower in the winter months, particularly in the northern United States and Canada. 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 specialty products that serve different industries with less seasonality and different business cycles. See Item 1A "Risk Factors—Risks Related to Our Business."
We own intellectual property, including trademarks, copyrights and trade secrets, that plays an important role in maintaining our competitive position. While no single copyright or trade secret is, in our opinion, of such value to us that our business would be materially affected by the expiration or termination thereof, taken in the aggregate, these intellectual property rights provide meaningful protection for our business. However, we view the name and primary mark "Herc Rentals" and "Herc" as material to our business as a whole. We own a number of secondary trade names and trademarks applicable to certain aspects of our business that we also view as important.
materials to clean and maintain equipment, dispose of solid and hazardous waste and wastewater from equipment washing, and store and dispense petroleum products from storage tanks at certain of our locations.
We file annual, quarterly and current reports and other information with the Securities and Exchange Commission ("SEC"). You may also access, free of charge, our reports filed with the SEC (for example, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) through our Internet website (http://ir.hercrentals.com). Reports filed with or furnished to the SEC will be available through our Internet website as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. Our committee charters, Corporate Governance Guidelines and Code of Ethics are also available on our website. The information found on our website is not part of this or any other report filed with or furnished to the SEC. The SEC maintains an Internet website (http://www.sec.gov) that contains reports, proxy and information statements and other information about issuers that file electronically with the SEC, including Herc Holdings.
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ITEM 1A. RISK FACTORS
Investing in or maintaining your investment in Herc Holdings common stock involves a high degree of risk. You should carefully consider each of the risks and uncertainties set forth below as well as the other information contained in this Report before deciding to invest in our common stock.securities. We have grouped our Risk Factors under captions that we believe describe various categories of potential risk. For the reader’s convenience, we have not duplicated risk factors that could be considered to be included in more than one category. Any of the following risks and uncertainties could materially and adversely affect our business, financial condition, results of operations, liquidity and/or cash flows and the impact could be compounded if multiple risks were to occur. However, the following risks and uncertainties are not the only risks and uncertainties facing us. Additional risks and uncertainties not currently known to us or those we currently view to be immaterial also may materially and adversely affect our business, financial condition, results of operations, liquidity and/or cash flows. In the event that any of these risks have such a material adverse effect, the market pricevalue of our common stocksecurities could decline and you could lose all or part of your investment.
Risks Related to Our Business
Our business is cyclical and depends on the levels of capital investment and maintenance expenditures by our customers. A slowdown in economic conditions or adverse changes in the level of economic activity or other economic factors specific to our customers or their industries, in particular contractors and industrial customers, could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Our rental equipment is used by our customers in a wide variety of industries, including contractors in residential and commercial construction and restoration, remediation and environment; general industrial, including refineries and petrochemical operations, manufacturing, power, metals and mining and agriculture; infrastructure; and other customers, including commercial and retail services, facility maintenance, recreation and entertainment production. Many of these industries are cyclical in nature. The demand for our rental equipment is directly affected by the level of economic activity in these industries, which means that when these industries experience a decline in activity, there is likely a corresponding decline in the demand for our rental equipment. This could materially adversely affect our results of operations.
A substantial portion of our revenues are derived from the rental of equipment to various types of contractors, including in the non-residential construction market, and to industrial customers. A decline in construction or industrial activity could lead to a decrease in the demand for our rental equipment and intensified price competition from other equipment rental industry participants. Similarly, declines in oil or gas prices, or even the perception of longer-term lower oil and natural gas prices, could lead to a significant slowdown in business activity, capital investments and maintenance expenditures of industrial customers in the upstream oil and gas markets and related service providers, which could negatively affect our rentals to participants in this industry, and could extend to other markets that we serve. Worsening of economic conditions or not achieving anticipated levels of economic expansion, either generally or in our customers’ specific industries, could have an adverse effect on demand for our products and services within those industries and extend to other markets that we serve, and could therefore materially adversely affect our business, financial condition and results of operations.
The following factors, among others, may cause weakness in our markets, either temporarily or long-term:
•a decrease in the expected levels of rental versus ownership of equipment;
•government regulations and policies, including government initiatives for infrastructure improvements or expansions, or the policies of governments regarding exploration for, and production and development of, oil and natural gas reserves;
•a prolonged or recurring shutdown of the U.S. government;and Canadian federal, state, provincial and local governments;
•an increase in the cost of construction materials;
•the level of supply and demand and relative prices or anticipated prices for oil and natural gas;
•an overcapacity of fleet in the equipment rental industry;
•a lack of availability of credit;
•an increase in interest rates; and
•terrorism or hostilities involving the United States or Canada.
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ITEM lA. RISK FACTORS (continued)
Additionally, some of our customers may delay capital investment and maintenance even when favorable conditions exist in their industries or markets.
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ITEM lA. RISK FACTORS (continued)
If we were to experience a significant decrease in orders or an increase in order delays or cancellations that can result from the aforementioned economic conditions or other factors beyond our control, it could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Our industry is highly competitive, and competitive pressures or not timely identifying and responding to customer needs, expectations or trends could lead to a decrease in our market share or in the prices that we can charge.
The equipment rental industry is highly fragmented and competitive. Our competitors include small, independent businesses with one or two rental locations, regional competitors that operate in one or more states, public companies or divisions of public companies, and equipment vendors and dealers who both sell and rent equipment directly to customers. We may in the future encounter increased competition from our existing competitors or from new competitors. Competitive pressures could adversely affect our revenues and operating results by, among other things, decreasing our rental volumes, depressing the prices that we can charge or increasing our costs to retain employees. In addition, the success of our business depends, in part, on our ability to identify and respond promptly to evolving trends in consumer preferences, expectations and needs while also managing appropriate equipment in our branches and maintaining an excellent customer experience. It is difficult to successfully predict the equipment and services our customers will demand. We also need to offer more localized assortments of our equipment to address local requirements and needs. If we do not successfully identify and provide the appropriate equipment to meet our customers’ needs and expectations, we may lose market share.
We are dependent on our relationships with key suppliers to obtain equipment for our business.
We are dependent on suppliers for access to the equipment and other products we offer and use throughout our network of branches.If we fail to have or maintain adequate relationships with suppliers or if we fail to timely receive equipment and products from our suppliers, then our competitive position may be harmed and our results of operations and/or cash flows may be negatively impacted.In addition, the prices of equipment and products have significantly increased in the past twelve months and there continues to be inflationary pressures that could further increase such costs. We may not be able to pass on these costs to our customers, which could have a material adverse impact on our results of operations and/or cash flows.
We have experienced, and in the future are likely to experience, lack of access to and delays in receipt of equipment and products from suppliers.For example, the rapid increase in demand as the COVID-19 pandemic wanes has caused, and is expected to continue to cause, significant stress on global supply chains. Unavailability of, and delays in obtaining, equipment and products may result from a number of factors affecting our suppliers including capacity constraints, labor shortages or disputes, supplier product quality issues, suppliers’ impaired financial condition and suppliers’ allocations to other purchasers. These risks are increased in a weak economic environment or when demand increases coming out of an economic downturn. Such disruptions have resulted and could further result in our inability to effectively meet our customers’ needs, impair our ability to execute our growth plans and could result in a material adverse effect on our results of operations, financial condition, and/or cash flows.
A widespread outbreak of an illness or any other communicable disease, or any other public health crisis, could adversely affect our business, results of operations and financial condition.
A widespread outbreak of epidemic, pandemic, or contagious diseases in the human population, including the COVID-19 pandemic, could cause a widespread public health crisis that results in economic and trade disruptions that could negatively impact our business and the businesses of our customers.
While the pandemic's impact on social and economic conditions has begun to subside and potentially shifting toward becoming more endemic in the U.S. , the extent of the impact of COVID-19 on our operational and financial performance, including our ability to execute our business strategies and initiatives in the expected time frame, will depend on future developments, including the duration and spread of COVID-19 and related restrictions on economic activity, all of which are uncertain and cannot be predicted. An extended period of economic disruption could materially affect our business, results of operations, access to sources of liquidity, particularly our cash flow from operations, and financial condition.
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ITEM lA. RISK FACTORS (continued)
Our business is heavily reliant upon communicationscommunication networks, centralized information technology ("IT") systems, and centralized IT systemsthird-party technologies and services, and the concentration of our IT systems and sensitive information creates or increases risks for us, including the risk of the misuse or theft of information as a result of cybersecurity breaches or otherwise, which could harm our brand, reputation or competitive position and give rise to material liabilities.
We regularly possess, collect, receive, store, process, generate, use, disclose, transmit, protect, and handle non-public information about individuals and businesses, including both credit and debit card information and other proprietary, sensitive and confidential personal information (collectively, sensitive information). In addition, our customers regularly transmit sensitive information to us via the Internet and through other electronic means.
We rely heavily on communication networks, and IT systems, including the Internet and on IT systems, to process rental and sales transactions, manage our pricing, manage our equipment fleet, manage our financing arrangements, pay suppliers and other third parties, collect from our customers, account for our activities and otherwise conduct our business.business and report our financial results. Our major IT systems and accounting functions are centralized in a few locations. Any disruption, termination or substandard provision of these services, whether as the result of computer or telecommunications issues (including operational failures, ransomwareserver malfunctions, software bugs, software or hardware failures, loss of data or other IT assets, or similar), cyber attacks (such as computer malware)malware, ransomware, business e-mail compromise, malicious code like viruses or worms, denial of service attacks, credential stuffing, credential harvesting, supply-chain attacks or other social engineering attacks like phishing attacks), personnel misconduct or error, localized conditions (such as a power outage, fire or explosion) or events or circumstances of broader geographic impact (such as an earthquake, storm, flood, other natural disaster, epidemic, strike, act of war, civil unrest or terrorist act), could materially adversely affect our business by disrupting normal operations. Our systemsIn particular, severe ransomware attacks are also subjectbecoming increasingly prevalent and can lead to cyber attacks (such as business e-mail compromise or other social engineering attacks) which, if successful, could material adversely affectsignificant interruptions in our ability to operate our business and negatively impact our reputation.
We regularly possess, store and handle non-public information about individuals and businesses, including both credit and debit cardoperations, loss of sensitive information and other sensitiveincome, reputational harm, and confidential personal information. In addition, our customers regularly transmit confidential informationdiversion of funds. Extortion payments may alleviate the negative impact of a ransomware attack, but we may be unwilling or unable to us via the Internet and through other electronic means. make such payments due to, for example, applicable laws or regulations prohibiting such payments.
Our facilities and systems and those of our third-party service providers may contain defects in design or manufacture or other problems that could compromise information security, and are also subject to the risk of human error. Unauthorized parties also may attempt to gain access to our systems or facilities, or those of third parties with whom we do business, and these attacksbusiness. All of the aforementioned threats are prevalent, increasing in their frequency, sophistication and intensity. Manyintensity, and come from a variety of sources, including traditional computer “hackers,” threat actors, “hacktivists,” organized criminal threat actors, sophisticated nation states, and nation-state-supported actors (including nation-state actors for geopolitical reasons and in conjunction with military conflicts and defense activities). During times of war and other major conflicts, we, the third parties upon which we rely, and our customers may be vulnerable to a heightened risk of these attacks, including retaliatory cyber attacks, that could materially disrupt our systems and operations, supply chain, and ability to produce, sell and distribute our goods and provide services.
Any of the previously identified or similar threats could cause a security breach or other interruption that could result in unauthorized, unlawful, or accidental acquisition, modification, destruction, loss, alteration, encryption, disclosure of, or access to our sensitive information or our IT systems, or those of the third parties upon whom we rely. A security breach or other interruption could disrupt our ability (and that of third parties upon whom we rely) to provide our products and services.
We may expend significant resources or modify our business activities to try to protect against security breaches, and certain data privacy and security obligations may require us to implement and maintain specific security measures or industry-standard or reasonable security measures to protect our IT systems and sensitive information. While we have implemented security measures designed to protect against security breaches, there can be no assurance that these measures are effective. We may be unable in the future to detect vulnerabilities in our IT systems and networks because many of the techniques used to obtain unauthorized access, including viruses, worms and other malicious software programs,effectuate a security breach are difficult to detect or anticipate until launched against a target and we may be unable to (or delayed in adopting measures to) prevent, contain or detect security breaches or other compromises or implement adequate preventative measures.
Applicable data privacy and security obligations may require us to notify relevant stakeholders of security breaches. Such disclosures are costly, and the disclosure or the failure to comply with such requirements could lead to adverse consequences. A compromise of our security systems resulting in unauthorized access to certain personal information about our customers, distributors or employeesbreach could adversely affect our corporate reputation as well as our operations, and could result in government enforcement actions, litigation against us, additional reporting requirements and/or oversight, restrictions on processing sensitive information, indemnification obligations, monetary fund diversions, interruptions in our operations, financial loss, the
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ITEM lA. RISK FACTORS (continued)
imposition of penalties. Security breaches can create system disruptions, shutdowns or unauthorized disclosure of confidential information, which could result in financial damage or loss. Most states have enacted laws requiring companies to notify individualspenalties, and often state authorities of data security breaches involving their personal data. These mandatory disclosures regarding aother similar harms. A security breach often lead to widespread negative publicity, which would harm our reputation and brand, and may cause our customers and employees to lose confidence in the effectiveness of our data security measures. As a result, a security breachattendant consequences could cause the loss of customers, deter new customers from using our services, negatively impact our ability to grow and could alsooperate our business, and require that we invest significant additional resources related to our information security systems.
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ITEM lA. RISK FACTORS (continued)
In addition, we outsourcerely on third-party service providers and technologies to operate critical business systems to process sensitive information in a portionvariety of contexts, including, without limitation, cloud-based infrastructure, data center facilities, encryption and authentication technology, employee email, and other functions. We may also rely on third-party service providers to provide other products, services, parts, or otherwise to operate our IT services.business. Therefore, we are also susceptible to disruptions, failures and breaches of the systems maintained by our outsourced providers, which we do not control. Our ability to monitor these third parties’ information security practices is limited, and these third parties may not have adequate information security measures in place. Any disruption, failure, breach or poor performance of any of these systems could lead to lower revenues, increased costs or other material adverse effects on our business and results of operations. While we may be entitled to damages if our third-party service providers fail to satisfy their privacy or security-related obligations to us, any award may be insufficient to cover our damages, or we may be unable to recover such award. In addition, supply-chain attacks have increased in frequency and severity, and we cannot guarantee that third parties’ infrastructure in our supply chain or our third-party partners’ supply chains have not been compromised. Additionally, future or past business transactions (such as acquisitions or integrations) could expose us to additional cybersecurity risks and vulnerabilities, as our systems could be negatively affected by vulnerabilities present in acquired or integrated entities’ systems and technologies.
Our contracts may not contain limitations of liability, and even where they do, there can be no assurance that limitations of liability in our contracts are sufficient to protect us from liabilities, damages, or claims related to our data privacy and security obligations. We cannot be sure that our insurance coverage will be adequate or sufficient to protect us from or to mitigate liabilities arising out of our privacy and security practices, that such coverage will continue to be available on commercially reasonable terms or at all, or that such coverage will pay future claims. Additionally, we are incorporated into the supply chain of a large number of companies in North America and, as a result, if our products are compromised, a significant number or, in some instances, all of our customers and their data could be simultaneously affected. The potential liability and associated consequences we could suffer as a result of such a large-scale event could be catastrophic and result in irreparable harm.
Failure to maintain, and upgrade or replace our IT systems could materially adversely affect us.
Our business continues to demand the use of sophisticated systems and technologies, including digital tools, SaaS offerings and cloud computing. As a result, of our reliance on IT systems in the conduct of our business, we devote significant time and expenseresources in maintaining, upgrading or replacing our systems and upgrading our systems.technologies in order to meet customers' demands and expectations. These types of activities subject us to additional costs and inherent risks associated with maintaining, upgrading, replacing and changing these systems and technologies, including impairment of our ability to manage our business, loss of customer confidence and business, potential disruption of our internal control structure, substantial capital expenditures, additional administration and operating expenses, demands on management time, training our employees to operate the systems, and other risks and costs of delays or difficulties in transitioning to, new systems or of integrating, new systems and technologies into our current systems.business. We rely on certain third party software vendorsproviders to maintain and periodically upgrade many of these systems and technologies so that they can continue to support our business. Further, the software programs supporting many of our systems werebusiness are licensed to us by independent software developers. The inability of these developers or us to continue to maintain and upgrade these informationour systems and software programstechnologies would disrupt or reduce the efficiency of our operations if we were unable to convert to alternate systems in an efficient and timely manner.
In addition, costs and potential problems and interruptions associated with the implementation of new or upgraded systems and technology,technologies, maintenance or adequate support of outdated or other existing systems and technologies could disrupt or reduce the efficiency of our business operations and could have an adverse effect on our operations if not anticipated and appropriately mitigated. Our competitive position may be adversely affected if we are unable to maintain, upgrade or replace systems and technologies that allow us to manage our business in a competitive manner. We also may not achieve the benefits that we anticipate from an upgraded or replaced system and technology. Additionally, any systems failuresfailure of a system or technology could impede our ability to timely collect and report financial results in accordance with applicable laws and regulations.
We may fail to respond adequately to changes in technology and customer demands.
In recent years, our industry has been characterized by rapid changes in technology and customer demands. For example, industry participants have taken advantage of new technologies, including digital tools, SaaS offerings and cloud computing, to improve fleet efficiency, decrease customer wait times and improve customer satisfaction. Our ability to continually improve
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ITEM lA. RISK FACTORS (continued)
our current processes and customer-facing tools in response to changes in technology or in customer expectations is essential in maintaining our competitive position and maintaining current levels of customer satisfaction. We may experience technical or other difficulties that could delay or prevent the development or implementation of new technologies. We also may not achieve the benefits that we anticipate from new technologies we develop or implement. The effects of these risks may, individually or in the aggregate, materially adversely affect our results of operations, liquidity and cash flows.
We face intense competition, including from our own suppliers, that may lead to downward pricing or an inability to increase prices.
The markets in which we operate are highly competitive. Competitive factors in our industry include price competition, the importance of customer loyalty, changes in market penetration, the introduction of new equipment, services and technology by competitors, changes in marketing, product diversity and quality and the ability to supply equipment and services to customers in a timely, predictable manner. Because we do not have multi-year contractual arrangements with many of our customers, these competitive factors could cause our customers to cease renting our equipment and shift suppliers quickly.
The equipment rental market is highly fragmented, and we believe that price is one of the primary competitive factors. The Internet has enabled cost-conscious customers to more easily compare rates available from rental companies. If we try to increase our pricing, our competitors, some of whom may have greater resources and better access to capital or lower fixed operating costs, may seek to compete aggressively on the basis of pricing. In addition, our competitors may reduce prices in order to attempt to gain a competitive advantage, capture market share or compensate for declines in rental activity. To the extent we do not match or remain within a reasonable competitive margin of our competitors’ pricing, our revenues and results of operations could be materially adversely affected. If competitive pressures lead us to match any of our competitors’ downward pricing and we are not able to reduce our operating costs, then our margins, results of operations and cash flows could be materially adversely impacted.
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ITEM lA. RISK FACTORS (continued)
We face competition from traditional rental companies as well as our own suppliers. We purchase our rental equipment from leading, globally-known original equipment manufacturers. Under our supplier arrangements, the suppliers may appoint additional distributors, elect to sell or rent directly to our customers or unilaterally terminate their arrangements with us at any time without cause. Any such actions could have a material adverse effect on our business, financial condition, results of operations, liquidity and cash flows due to a reduction of, or an inability to increase, our revenues.
Our success depends on our ability to attract and retain key management, sales and trades talent, while supporting the onboarding and career development of our team members.
Our ability to successfully execute on our business plan depends upon the contributions of our senior management team as well as other key talent including our dedicated sales force and trades talent such as drivers and mechanics. In recent years, we have experienced increasing competition for available talent in the North American workforce as reflected by the low unemployment rate, and shortages of available industry trades talent.talent and increasing costs to retain employees. As a result, we could experience inefficiencies or a lack of business continuity due to employee turnover, new employees’ lack of historical knowledge and lack of familiarity with the business processes, operating requirements, purpose and culture, policies and procedures, and key information technologies and related infrastructure used in our day-to-day operations and financial reporting. Historically we have noted a ramp-up period before new members of our sales organization typically achieve a level of sales comparable to those we have employed for a longer period of time. We may also experience additional costs as new employees learn their roles and gain necessary experience, in addition to the cost of hiring new individuals. It is important to our success that newly hired team members quickly adapt to and excel in their new roles. If they are unable to do so, our business and financial results could be materially adversely affected. Further, if we cannot meet our needs for IT staff, we may not be able to fulfill our technology initiatives while continuing to provide maintenance on existing systems.
If we were to lose the services of members of our senior management team or other key talent, whether due to death, disability, resignation or termination of employment, our ability to successfully implement our business strategy, financial plans, marketing and other objectives could be significantly impaired. In addition, if we are unable to attract and retain qualified key talent, we may not be able to effectively and efficiently manage our business and execute our business plan.
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ITEM lA. RISK FACTORS (continued)
Due to seasonality, especially in the construction industry, any occurrence that disrupts rental activity during our peak periods could materially adversely affect our results of operations, liquidity and cash flows.
Significant components of our expenses are fixed in the short-term, including real estate taxes, rent, insurance, utilities, maintenance and other facility-related expenses, the costs of operating our IT systems and certain staffing costs. Seasonal changes in our revenues do not alter those fixed expenses, typically resulting in higher profitability in periods when our revenues are higher, and lower profitability in periods when our revenues are lower. Our business, especially in the construction industry, has historically experienced lower levels of business from December until late spring, particularly in the northern United States and Canada, and heightened activity during our third and fourth quarter until December. Any occurrence that disrupts rental activity during this period of heightened activity, including adverse weather conditions such as prolonged periods of cold, rain, blizzards, floods, fires, hurricanes or other severe weather patterns, could have a disproportionately adverse effect on our business, results of operations, liquidity and cash flows.
Some or all of our deferred tax assets could expire if we experience an “ownership change” as defined in Section 382 of the Internal Revenue Code (the "Code").
An "ownership change" could limit our ability to utilize tax attributes, including net operating losses, capital loss carryovers, excess foreign tax carryforwards, and credit carryforwards, to offset future taxable income. As of December 31, 2019,2022, we had unutilized U.S. federal net operating loss carryforwards of approximately $509.1 million (which begin to expire in 2031).$532.1 million. Our ability to use such tax attributes to offset future taxable income and tax liabilities may be significantly limited if we experience an "ownership change" as defined in Section 382(g) of the Code. In general, an ownership change will occur if and when the percentage of Herc Holdings’ ownership (by value) of one or more "5-percent shareholders" (as defined in the Code) has increased by more than 50 percentage points over the lowest percentage of stock owned by such shareholders at any time during the prior three years (calculated on a rolling basis). An entity that experiences an ownership change generally should be subject to an annual limitation on its pre-ownership change tax loss carryforward which accumulates each year to the extent that there is any unused limitation from a prior year. The limitation on our ability to utilize tax losses and credit carryforwards arising from an ownership change under Section 382 depends on the value of our equity at the time of any ownership change. If we were to experience an "ownership change,” it is possible that a significant portion of our tax loss carryforwards could expire before we would be able to use them to offset future
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ITEM lA. RISK FACTORS (continued)
taxable income. Many states have adopted the federal Section 382 rules and therefore have similar limitations with respect to state tax attributes.
Doing business in foreign countries exposes us to a number of additional risks, including complying with foreign and local laws and regulations that may conflict with U.S. laws and those under anticorruption, competition, economic sanctions and anti-boycott regulations, that may materially adversely affect our business, financial condition, results of operations, liquidity and cash flows.
We currently operate in several foreign countries, including Canada and China. Operating in different countries exposes us to varying risks, which include: (i) multiple, and sometimes conflicting, foreign regulatory requirements and laws that are subject to change, including laws relating to taxes, insurance rates, insurance products, consumer privacy, data security, employment matters, cost and fee recovery, and the protection of our trademarks and other intellectual property; (ii) the effect of foreign currency translation risk; (iii) varying tax regimes, including consequences from changes in applicable tax laws; (iv) local ownership or investment requirements, as well as difficulties in obtaining financing in foreign countries for local operations; and (v) political and economic instability, natural calamities, disease and epidemics, war and terrorism. The failure to comply with international laws could have an adverse effect on us that is disproportionate to the relative size of our foreign operations.
Our international operations are also subject to U.S. and foreign anti-corruption laws and regulations, such as the Foreign Corrupt Practices Act ("FCPA"), economic sanction programs administered by the U.S. Treasury Department’s Office of Foreign Assets Control ("OFAC") and the anti-boycott regulations administered by the U.S. Department of Commerce's Office of Antiboycott Compliance. As a result of doing business in foreign countries, we are exposed to a heightened risk of violating these and other laws. As part of our business, we regularly deal with foreign officials for regulatory purposes and may deal with state-owned business enterprises, the employees of which are considered foreign officials for purposes of the FCPA. In addition, the provisions of the U.K. Bribery Act of 2010 extend beyond bribery of foreign public officials and are more onerous than the FCPA in a number of other respects. Some of the international locations in which we operate lack a developed legal system and have relatively higher levels of corruption. Economic sanctions programs restrict our business dealings with certain sanctioned countries and other sanctioned individuals and entities. Violations of anti-corruption laws, competition laws and sanctions regulations are punishable by civil penalties, including fines, denial of export privileges, injunctions, asset seizures, debarment (or other loss of business) from government contracts and revocations or restrictions of licenses, as well as criminal fines and imprisonment. We have established policies and procedures designed to assist our compliance with applicable laws and regulations; however, there can be no assurance that they will effectively prevent us from violating these laws and regulations in every transaction in which we may engage. A violation of legal requirements could materially and adversely affect our reputation, business, financial condition, results of operations and cash flows.
In addition, we are subject to limitations on our ability to repatriate funds to the United States from our operations outside of the United States. These limitations arise from regulations in certain countries that limit our ability to remove funds from or transfer funds to foreign subsidiaries, as well as from tax liabilities that would be incurred in connection with such transfers.
The effects of the foregoing risks may, individually or in the aggregate, materially adversely affect our results of operations, liquidity and cash flows.
Changes in the legal and regulatory environment that affect our operations, including with respect to taxes, consumer rights, privacy, data security and employment matters, could disrupt our business, increase our expenses or otherwise have a material adverse effect on our results of operations.
We primarily conduct business in the United States and Canada. We also have other international operations. Our operations expose us to a number of national, state, local and foreign laws and regulations, in addition to legal, regulatory and contractual requirements we face as a government contractor. These laws and regulations address multiple aspects of our operations, including taxes, worker safety, transportation, consumer rights, privacy, data security and employment matters and also may impact other areas of our business. There are often different requirements in different jurisdictions. Changes in government regulation of our businesses have the potential to materially alter our business practices or our profitability. Depending on the jurisdiction, those changes may come about through the issuance of new laws and regulations or changes in the interpretation of existing laws and regulations by a court, regulatory body or governmental official. Sometimes those changes may have both a retroactive and prospective effect; this is particularly true when a change is made through reinterpretation of laws or regulations that have been in effect for some time. Moreover, changes in regulation that may seem neutral on their face may have either more or less impact
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on us than on our competitors, depending on the circumstances. Changes in any legal or regulatory requirements applicable to us, or any material failure by us to comply with them, could negatively impact our reputation, reduce our business, require significant management time and attention and generally otherwise adversely affect our financial position, results of operations or cash flows. Similarly, changes in laws and regulations applicable to our customers or impacting the economy generally may also impact our financial condition and results of operations.
An impairment of our goodwill or our indefinite-lived intangible assets could have a material adverse non-cash impact on our financial condition and results of operations.
We review our goodwill and indefinite-lived intangible assets for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Our goodwill and indefinite-lived intangible assets comprised approximately 9.5% of our total assets as of December 31, 2019. If economic deterioration occurs, we may be required to record charges for goodwill or indefinite-lived intangible asset impairments in the future, which could have a material adverse non-cash impact on our financial condition and results of operations.
Other Operational Risks
Any decline in our relationships with our key national account customers or the amount of equipment they rent from us could materially adversely affect our business, financial position, results of operations and cash flows.
Our business depends on our ability to maintain positive relations with our key national account customers, which collectively accounted for 42%43% of our rental revenue in 2019.2022. We cannot assure you that all of these relationships will continue at current levels or on current terms. Our contracts with our customers generally do not obligate them to rent equipment from us. Revenue from customers that have accounted for significant revenue in past periods, individually or as a group, may not continue in future periods or, if continued, may not reach or exceed historical levels in any period. Further, if our key customers fail to remain competitive in their respective markets or encounter financial or operational problems, our business, financial position, results of operations and cash flows may be materially adversely affected.
Our rental fleet is subject to residual value risk upon disposition and may not sell at the prices we expect.
The market value of our equipment at the time of its disposition could be less than its estimated residual value or its depreciated value at such time. A number of factors could affect the value received upon disposition of our equipment, including:
•the market price for similar new equipment;
•the age of the equipment, wear and tear on the equipment relative to its age and the performance of preventive maintenance;
•the time of year that it is sold;
•the supply of used equipment relative to the demand for used equipment, including as a result of changes in economic conditions or conditions in the markets that we serve;
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•inventory levels at original equipment manufacturers; and
•the existence and capacities of different sales outlets.
A sale of equipment below its net book value could adversely affect our results of operations, liquidity and cash flows. Accordingly, decisions to reduce the size of our rental fleet in the event of an economic downturn or to respond to changes in rental demand are subject to the risk of loss based on the residual value of rental equipment.
We incur maintenance and repair costs associated with our rental fleet that could have a material adverse effect on our financial condition, results of operations, liquidity and cash flows in the event these costs are greater than anticipated.
As our rental equipment ages, the cost of maintaining such equipment, if not replaced within a certain period of time, and the risk of fleet equipment being out of service, generally increase. As of December 31, 2019,2022, the average age of our rental equipment fleet was approximately 4548 months. Determining the optimal age at disposition for our rental equipment is subjective and requires considerable estimates by management. We have made estimates regarding the relationship between the age of our rental equipment, the maintenance and repair costs, the availability of our fleet and the market value of used equipment. It is possible that we may allow the average age of our rental equipment fleet to increase, which wouldcould increase our costs for maintenance and repair and
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likely would negatively impact the market value of such equipment at the time of its disposition. If maintenance and repair costs are higher than estimated or in-service times or market values of used equipment are lower than estimated, our financial condition, results of operations, liquidity and cash flows could be materially adversely affected.
We may be unable to protect our trade secrets and other intellectual property rights, and our business could be harmed as a result.
We rely on trade secrets to protect our know-how and other proprietary information, including pricing, purchasing, promotional strategies, customer lists and/or supplier lists. However, trade secrets are difficult to protect. Our employees, consultants, contractors or advisors may unintentionally or willfully disclose our information to competitors. In addition, any confidentiality agreements executed to protect these assets may not be enforceable or provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure. The effects of these risks may materially adversely affect our business, results of operations, liquidity and cash flows.
We are exposed to a variety of claims and losses arising from our operations, and our insurance may not cover all or any portion of such claims.
We are exposed to a variety of claims arising from our operations, including claims by third parties for injury or property damage arising from the operation of our equipment or acts or omissions of our personnel and workers’ compensation claims. We are currently a defendant in numerous actions and have received numerous claims on which actions have not yet been commenced for liability and property damage arising from the operation of equipment rented from us. We also are exposed to risk of loss from damage to our equipment and resulting business interruption. Our responsibility for such claims and losses is increased when we waive the provisions in certain of our rental contracts that hold a renter responsible for damage or loss under an optional loss or damage waiver that we offer. While we attempt to mitigate our exposure to large liability losses arising from such claims by maintaining general liability, workers' compensation and vehicle liability insurance coverage, our coverage may not be adequate to protect us against these exposures and we self-insure against losses associated with exposures not covered by these insurance policies.
Moreover, in the event that insurance coverage does apply, we will bear a portion of the associated losses through the application of deductibles and self-insured retention in the insurance policies. For a company our size, such deductibles or self-insured retention could be substantial. There is also no assurance that insurance policies of these types will be available for purchase or renewal on commercially reasonable terms, or at all, or that the premiums and deductibles under such policies will not substantially increase, including as a result of market conditions in the insurance industry.
If we were to incur one or more liabilities that are significant, individually or in the aggregate, where we are not fully insured, that we self-insure against or that our insurers dispute, it could have a material adverse effect on our financial condition. Even with adequate insurance coverage, we still may experience a significant interruption to our operations as a result of third-party claims or other losses arising from our operations.
Environmental, health, and safety laws and regulations and the costs of complying with them, or any change to them impacting our markets, could materially adversely affect our financial position, results of operations and cash flows.
Our operations are subject to numerous national, state, provincial and local laws and regulations governing environmental protection and occupational health and safety matters. These laws govern such issues as wastewater, storm water, solid and hazardous wastes and materials, air quality and matters of workplace safety. Under these laws and regulations, regardless of fault we may be liable for, among other things, the cost of investigating and remediating contamination at our sites as well as sites to which we have sent hazardous wastes for disposal or treatment, and also fines and penalties for non-compliance. We use hazardous materials to clean and maintain equipment, dispose of solid and hazardous waste and wastewater from equipment washing, and store and dispense petroleum products from storage tanks at certain of our locations. We also indemnify various parties for the costs associated with remediating numerous hazardous substance storage, recycling or disposal sites in many
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states and, in some instances, for natural resource damages. The amount of any such expense or related natural resource damages for which we may be held responsible could be substantial. We cannot predict the potential financial impact on our business if new adverse environmental, health, or safety conditions are discovered, or environmental, health, and safety requirements become more stringent. As of December 31, 2022 and December 31, 2021, the aggregate amounts accrued for environmental liabilities, including liability for environmental indemnities, reflected in the Company's consolidated balance sheets in "Accrued liabilities" were $0.4 million and $0.3 million, respectively. If we are required to incur environmental, health, or safety compliance or remediation costs that are not currently anticipated by us, our financial position, results of operations and cash flows could be materially adversely affected, depending on the magnitude of the cost.
Climate change and legal or regulatory responses thereto may have a long-term negative impact on our business and results of operations.
14
TableThere is increasing concern that a gradual increase in global average temperatures due to the concentration of Contentscarbon dioxide and other greenhouse gases in the atmosphere will cause significant change in weather patterns around the globe and increase the frequency and severity of natural disasters. Climate change may also exacerbate water scarcity, negatively impacting our capability to deliver equipment that meets the safety and functional expectations of our customers as well as the health and safety of our employees. Increased frequency or duration of extreme weather conditions could impact our business and the demand for our equipment and services. An increase in demand for rental equipment may require additional capital expenditures in order for us to compete for such demand and we may not be able to make similar levels of investment as our larger competitors. In addition, in an effort to combat climate change, our customers may require our rental equipment to meet certain standards. If we are unable to meet such standards and the expectations of our customers, our business and results of operations could be materially adversely affected.HERC HOLDINGS INC. AND SUBSIDIARIES
ITEM lA. RISK FACTORS (continued)
In addition, the U.S. Congress and other legislative and regulatory authorities in the United States and internationally have considered, and likely will continue to consider, numerous measures related to climate change, greenhouse gas emissions and other laws and regulations affecting our end markets, such as oil, gas and other natural resource extraction. Should such laws and regulations become effective, demand for our services could be affected, our fleet and/or other costs could increase and our business could be materially adversely affected.
Further, investors are placing a greater emphasis on non-financial factors, including ESG factors, when evaluating investment opportunities. If we are unable to provide sufficient disclosure about ESG practices or if we fail to achieve ESG goals, investors may not view us as an attractive investment, which could have a negative effect on our stock price and business.
Part of our strategy includes pursuing strategic transactions, which could be difficult to identify and implement, and could disrupt our business or change our business profile significantly.
We may opportunistically considerOur strategy includes growth through the acquisition of other companies or service lines of other businesses that either complement or expand our existing business, or webusiness. We also may consider the divestiture of some of our businesses. Any acquisitions or divestitures we may seek to consummate will be subject to the negotiation of definitive agreements, satisfactory financing arrangements and applicable governmental approvals and consents, including under applicable antitrust laws, such as the Hart-Scott-Rodino Act. We cannot assure you that we will be able to identify suitable transactions and, even if we are able to identify such transactions, that we will be able to consummate any such acquisitions or divestitures on acceptable terms. Any future acquisitions or divestitures we pursue may involve a number of risks, including some or all of the following:
•the diversion of management’s attention from our core business;
•the disruption of our ongoing business;
•inaccurate assessment of undisclosed liabilities;
•potential known and unknown liabilities of the acquired or divested businesses and lack of adequate protections or potential related indemnities;
•the inability to integrate our acquisitions without substantial costs, delays or other problems;
•the loss of key customers or employees of the acquired or divested business;
•increasing demands on our operational systems;
•the integration of information systems and internal control over financial reporting; and
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•possible adverse effects on our reported results of operations or financial position, particularly during the first several reporting periods after an acquisition or divestiture is completed.
Any acquired entities or assets may not enhance our results of operations. Even if we are able to integrate future acquired businesses with our operations successfully, we cannot assure you that we will realize the cost savings, synergies or revenue enhancements that we may anticipate from such integration or that we will realize such benefits within the expected time frame. Any acquisition also may cause us to assume liabilities, record goodwill and other intangible assets that will be subject to impairment testing and potential impairment charges, incur potential restructuring charges and increase working capital and capital expenditure requirements, which may reduce our return on invested capital.
If we were to undertake a substantial acquisition, the acquisition likely would need to be financed in part through additional financing from banks, through public offerings or private placements of debt or equity securities or with other arrangements. We cannot assure you that the necessary acquisition financing would be available to us on acceptable terms if and when required, given our substantial indebtedness and restrictions in the terms of our indebtedness that may limit the additional indebtedness that we may incur or the acquisitions that we may pursue, which may make it difficult or impossible for us to obtain financing for acquisitions. If we were to undertake an acquisition by issuing equity securities or equity-linked securities, the acquisition may have a dilutive effect on the interests of the holders of our common stock.
A significant divestiture would, in the short term, result in loss of revenues and possibly earnings, and could require the amendment or refinancing of our outstanding indebtedness or a portion thereof. Further, to the extent that we agree to accept payment of all or a portion of the sale price over time, we will bear the risk that the portion of the price that is not paid at closing may be uncollectible. In addition, in connection with any divestiture, we may agree to retain obligations related to the business or assets sold and we may agree to indemnify the purchaser for outstanding liabilities or with respect to the representations, warranties or covenants included in the definitive agreement between the parties. These retained obligations and indemnification obligations could result in significant costs and expenses.
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Any material weaknesses in our internal control over financial reporting may adversely affect our ability to report our financial condition and results of operations in a timely and accurate manner, which may adversely affect investor and lender confidence in us and, as a result, the value of our common stock and our ability to obtain future financing on acceptable terms.
In accordance with the Sarbanes-Oxley Act of 2002 and SEC rules, management is responsible for evaluating and reporting on the effectiveness of our internal control over financial reporting. We previously identified material weaknesses in our internal control over financial reporting, which were disclosed in our Annual Reports on Form 10-K for the years ended December 31, 2017 and 2016 and have since been remediated. We incurred significant time and expense, including consulting, audit, legal and other professional fees, to remediate those material weaknesses, and there can be no assurance that our efforts to design and implement an effective control environment will be sufficient to prevent future material weaknesses from occurring. The failure to maintain required controls could result in material misstatements in our consolidated financial statements. Any such material misstatement could result in a restatement of our consolidated financial statements, which could lead to, among other things, delays in filing required financial disclosures; loss of investor and lender confidence in the accuracy and completeness of our financial reports; events of default under the agreements governing our asset-based revolving credit facility or our accounts receivable securitization facility (collectively, the “credit facilities”) or the indenture governing our senior notes (or significant payments to amend such agreements); investigations or enforcement actions by the New York Stock Exchange, the SEC or other federal or state government agencies or regulatory authorities; sanctions, fines or penalties; legal, accounting and other expenses; a decline in the prices of our securities; and liabilities arising from stockholder litigation. Any of these potential issues, or resulting negative publicity, may have a material adverse effect on our ability to attract and retain customers, employees and vendors. We also may lose assets if we do not maintain adequate internal controls. The foregoing circumstances could have a material adverse effect on our reputation, business, financial condition, results of operations, liquidity or cash flows.
We may face issues with our union employees.
Labor contracts covering the terms of employment of approximately 420585 employees in the U.S. and 150105 employees in Canada were in effect as of December 31, 20192022 under approximately 2025 active contracts with local unions, affiliated primarily with the International Brotherhood of Teamsters and the International Union of Operating Engineers. These contracts are renegotiated periodically. Failure to negotiate a new labor agreement when required could result in a work stoppage. Although we believe that our labor relations have generally been good, it is possible that we could become subject to additional work rules imposed by agreements with labor unions, or that work stoppages or other labor disturbances could occur in the future. In addition, our non-union workforce has been subject to unionization efforts in the past, and we could be subject to future unionization, which could lead to increases in our operating costs and/or constraints on our operating flexibility.
Risks Related to the Spin-Off and Our Separation from New Hertz
We and New Hertz have assumed and will share responsibility for certain liabilities in connection with the Spin-Off, any of which could have a material adverse effect on our business, financial condition and results of operations.
Pursuant to the separation and distribution agreement entered into in connection with the Spin-Off, we assumed, among other things, liabilities associated with our equipment rental business and related assets, whether such liabilities arose prior to or subsequent to the Spin-Off, and have agreed to indemnify New Hertz for any losses arising from such liabilities, as well as any other liabilities we assumed pursuant to the separation and distribution agreement. We also will be responsible for a portion (typically 15%) of certain shared liabilities not otherwise specifically allocated to us or New Hertz under the separation and distribution agreement. Although we will be responsible for a portion of these shared liabilities, New Hertz has the authority to manage the defense and resolution of them. The amount of such liabilities could be greater than anticipated and have a material adverse effect on our business, financial condition, results of operations and cash flows.
In addition, New Hertz has assumed, among other things, liabilities associated with its vehicle rental business and related assets, whether such liabilities arose prior to or subsequent to the Spin-Off, and has agreed to indemnify us for any losses arising from such liabilities, as well as any other liabilities it assumed pursuant to the separation and distribution agreement. New Hertz also will be responsible for a portion (typically 85%) of certain shared liabilities not otherwise specifically allocated to New Hertz or us under the separation and distribution agreement. We rely on New Hertz to manage the defense and resolution of these shared
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liabilities. If New Hertz fails to satisfy its performance and payment obligations under the separation and distribution agreement, including its indemnification obligations, such failure could have a material adverse effect on our business, financial condition, results of operations and cash flows.
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If there is a determination that any portion of the Spin-Off transaction is taxable for U.S. federal income tax purposes, then we and our stockholders could incur significant U.S. federal income tax liabilities.
Hertz Holdings received a favorable private letter ruling from the Internal Revenue Service (the "IRS") to the effect that, subject to the accuracy of and compliance with certain representations, assumptions and covenants, (i) the Spin-Off qualified as a tax-free transaction under Sections 355 and 368(a)(1)(D) of the Code), and (ii) the internal spin-off transactions (collectively with the Spin-Off, the "Spin-Offs") qualified as tax free under Section 355 of the Code. A private letter ruling from the IRS generally is binding on the IRS. However, the IRS ruling does not rule that the Spin-Offs satisfied every requirement for a tax-free spin-off, and Hertz Holdings relied solely on opinions of its tax advisors to determine that such additional requirements were satisfied. The ruling and the opinions relied on certain facts, assumptions, representations and undertakings from Hertz Holdings and New Hertz regarding the past and future conduct of the companies’ respective businesses and other matters. If any of these facts, assumptions, representations or undertakings are incorrect or not otherwise satisfied, Herc Holdings, its affiliates and its stockholders may not be able to rely on the ruling or the opinions of tax advisors and could be subject to significant tax liabilities. Notwithstanding the private letter ruling and opinions of tax advisors, the IRS could determine on audit that the Spin-Offs and related transactions are taxable if it determines that any of these facts, assumptions, representations or undertakings are not correct or have been violated or if it disagrees with the conclusions in the opinions that are not covered by the private letter ruling, or for other reasons, including as a result of certain significant changes in the stock ownership of Herc Holdings or New Hertz after the Spin-Off. If the Spin-Offs or related transactions are determined to be taxable for U.S. federal income tax purposes, we and, in certain cases, our stockholders could incur significant U.S. federal income tax liabilities, including taxation on the value of the New Hertz common stock in the Spin-Off.
If we take or fail to take actions that cause the Spin-Offs to fail to qualify as tax-free transactions, we could be required to indemnify New Hertz for any resulting taxes and related losses.
Under the tax matters agreement with New Hertz, if either Herc Holdings or New Hertz takes or fails to take any action (or permits any of its affiliates to take or fail to take any action) that causes the Spin-Offs to be taxable, or if there is an acquisition of the equity securities or assets of either party (or equity securities or assets of any member of that party's group) that causes the Spin-Offs to be taxable, that party will be required to indemnify the other party for any resulting taxes and related losses.
If any of the Spin-Offs were taxable to any of the applicable companies, such companies would recognize gain equal to the excess, if any, of the fair market value of the stock distributed over the tax basis in that stock, and Herc Holdings and its affiliates would have to pay tax on that gain. The amount of tax would be substantial, and the party causing the Spin-Off to be taxable may not have sufficient financial resources to operate its business after paying any resulting taxes and related losses.
We could incur significant tax or other liability if New Hertz fails to pay the tax liabilities attributable to it under the tax matters agreement or to perform its obligations under the separation and distribution agreement.
Under U.S. federal income tax laws, Herc Holdings and New Hertz (or certain of its subsidiaries) are jointly and severally liable for Hertz Holdings’ federal income taxes attributable to certain periods prior to or including the 2016 taxable year of Hertz Holdings. Although the tax matters agreement allocates responsibility for tax liabilities between us and New Hertz, if New Hertz fails to pay the taxes for which it is responsible under the tax matters agreement, we may be liable for these unpaid liabilities. Certain other jurisdictions may have similar rules. Similarly, the separation and distribution agreement identifies obligations to be borne by New Hertz and liabilities that are shared between us and New Hertz. If New Hertz fails to perform its obligations or pay its share of the shared liabilities, we could incur significant liability which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
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Herc Holdings has limited operating history as a stand-alone public company, and our historical financial information for periods prior to July 1, 2016 is not necessarily representative of the results that we would have achieved as a separate, publicly traded company, and may not be a reliable indicator of our future results.
Due to the accounting treatment of the Spin-Off, which considers Herc Holdings to be the spinnee or divested entity, our historical financial information included in this Report for periods prior to July 1, 2016 is derived from the consolidated financial statements and accounting records of Hertz Holdings. Accordingly, the historical financial information included herein for such periods does not necessarily reflect the financial position, results of operations, and cash flows that we would have achieved as a separate, publicly traded company during those periods or those that we will achieve in the future, primarily as a result of the following factors:
Prior to the Spin-Off, our equipment rental business was operated by Hertz Holdings as part of its broader corporate organization, rather than as an independent company. Hertz Holdings or one of its affiliates performed various corporate functions for us, including accounting, corporate affairs, external reporting, human resources, IT, legal services, risk management, tax administration, treasury, and certain governance functions (including internal audit and compliance with the Sarbanes-Oxley Act of 2002). As a result, our historical financial results for periods prior to July 1, 2016 reflect allocations of corporate expenses for these and similar functions. These allocations may be less than the comparable expenses we would have incurred (or may incur in the future) had we operated as a separate public company during such periods.
Prior to the Spin-Off, our equipment rental business was integrated with the vehicle rental business of Hertz Holdings, which is now operated by New Hertz following the Spin-Off. As a result, our historical financial results for periods prior to July 1, 2016 reflect these shared economies of scale in costs, employees, systems, vendor relationships and customer relationships.
Prior to the Spin-Off, our working capital requirements and capital for our general corporate purposes, including capital expenditures and acquisitions, generally were historically satisfied as part of the enterprise-wide cash management policies of Hertz Holdings. The cost of capital for our business may be higher than Hertz Holdings’ cost of capital prior to the Spin-Off.
The adjustments and allocations we have made in preparing our historical combined financial statements may not fully reflect our operations during periods prior to the Spin-Off as if we had in fact operated as a stand-alone entity.
The Spin-Off may be challenged by creditors as a fraudulent transfer or conveyance.
If, under relevant federal and state fraudulent transfer and conveyance statutes, in a bankruptcy or reorganization case or a lawsuit by or on behalf of unpaid creditors of New Hertz, a court were to find that (i) the Spin-Off and related transactions were undertaken with the intent of hindering, delaying or defrauding current or future creditors of New Hertz, or (ii) at the time that Hertz Holdings undertook the Spin-Off and related transactions, New Hertz was insolvent, or was rendered insolvent, by reason of the completion of the Spin-Off and related transactions, then the court could rescind the Spin-Off or, under certain circumstances, require Herc Holdings to fund liabilities of New Hertz for the benefit of creditors.
The measure of insolvency for purposes of the foregoing considerations will vary depending upon the law of the jurisdiction that is being applied in the relevant legal proceeding. Generally, however, New Hertz would be considered insolvent if, at the time that Hertz Holdings undertook the Spin-Off and related transactions, either:
the sum of New Hertz’s debts, including contingent liabilities, was greater than its assets, at a fair valuation; or
the fair saleable value of New Hertz’s assets was less than the amount required to pay the probable liability on its total existing debts and liabilities, including contingent liabilities, as they become absolute and matured.
We cannot give you any assurance as to what standards a court would use to determine whether New Hertz was solvent at the relevant time, or whether, whatever standard is used, the Spin-Off would be rescinded or other liabilities would be imposed on us on another of the grounds described above. We believe that no basis exists to challenge the Spin-Off as a fraudulent transfer or conveyance under the foregoing standards. However, in reaching such conclusion we have relied upon the advice of Hertz Holdings’ management and its third-party advisors whose analysis was based on certain projections and other assumptions. We cannot assure you, however, that a court would reach the same conclusion.
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Risks Related to Our SubstantialSignificant Indebtedness
Our substantialsignificant level of indebtedness exposes or makes us more vulnerable to a number of risks that could materially adversely affect our financial condition, results of operations, cash flows, liquidity and ability to compete.
As of December 31, 2019,2022, we had total outstanding debt of approximately $2.1$2.9 billion, including our outstanding senior notes and the amounts drawn under our credit facilities. This substantialsignificant indebtedness requires us to dedicate a significant portion of our cash flows from operations and investing activities to make payments on our debt, which reduces the amount available for working capital, capital expenditures or other general corporate purposes and which decreases our profitability and cash flow. We cannot assure you that we will maintain financing activities and cash flows sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness. In addition, our indebtedness could materially adversely affect us. For example, it could: (i) make it more difficult for us to satisfy our obligations to the holders of our outstanding debt securities and to the lenders under our credit facilities, resulting in possible defaults on, and acceleration of, such indebtedness; (ii) be difficult to refinance or borrow additional funds in the future; (iii) increase our vulnerability to, and limit our flexibility to plan for, or react to, general adverse economic and industry conditions, (iv) place us at a competitive disadvantage to our competitors that have proportionately less debt or comparable debt at more favorable interest rates or on better terms; (v) limit our ability to declare and (v)pay dividends; and (vi) limit our ability to react to competitive pressures, or make it difficult for us to carry out capital spending that is necessary or important to our growth strategy and our efforts to improve operating margins. There is also a risk that one or more of the financial institutions providing commitments under our revolving credit facilities could fail to fund an extension of credit under any such facility, due to insolvency or otherwise, leaving us with less liquidity than expected. Our ability to manage these risks will depend, among other things, on financial market conditions as well as our financial and operating performance, which, in turn, is subject to a wide range of risks, including those described above under “—Risks Related to Our Business.”
If our capital resources (including borrowings under our financing arrangements and access to other refinancing indebtedness) and operating cash flows are not sufficient to pay our obligations as they mature or to fund our liquidity needs, we may be forced, among other things, to do one or more of the following: (i) sell certain of our assets; (ii) reduce the size of our rental fleet; (iii) reduce or delay capital expenditures; (iv) reduce or eliminate our dividend; (v) obtain additional equity capital; (v)(vi) forgo business opportunities, including acquisitions and joint ventures; or (vi)(vii) restructure or refinance all or a portion of our debt before maturity. We cannot assure you that we would be able to accomplish any of these alternatives on a timely basis or on satisfactory terms, if at all. If we cannot refinance or otherwise pay our obligations as they mature and fund our liquidity
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needs, our business, financial condition, results of operations, cash flows, liquidity, ability to obtain financing and ability to compete could be materially adversely affected.
Substantially all of our consolidated assets secure certain of our indebtedness, which could materially adversely affect our business and holders of our debt and equity.
Substantially all of our consolidated assets, including our rental fleet, are subject to security interests under our revolving credit facility. As a result, the lenders under those financing arrangements have a secured claim on such assets in the event of our bankruptcy, insolvency, liquidation or reorganization, and we may not have sufficient funds to pay in full, or at all, all of our creditors or make any amount available to holders of our equity. The same is true with respect to structurally senior obligations. In general, all liabilities and other obligations of a subsidiary must be satisfied before the assets of such subsidiary can be made available to the unsecured or junior creditors (or equity holders) of the parent entity.
Because substantially all of our assets are encumbered under our revolving credit facility, our ability to incur additional secured indebtedness or to sell or dispose of assets to raise capital may be impaired, which could have a material adverse effect on our financial flexibility and liquidity and force us to attempt to incur additional unsecured indebtedness, which may not be available to us.
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ITEM lA. RISK FACTORS (continued)
An increase in interest rates or in our borrowing margin would increase the cost of servicing our debt and could reduce our profitability.
A significant portion of our indebtedness bears interest at floating rates, which increases our vulnerability to general adverse economic and industry conditions (such as economic cycles and credit-related disruptions), including interest rate fluctuations. To the extent we have not hedged against rising interest rates, an increase in the applicable benchmark interest rates would increase our cost of servicing our debt and could reduce our profitability and materially adversely affect our results of operations.
In addition, we may in the future seek to refinance our indebtedness. If interest rates or our borrowing margins increase between the time an existing financing arrangement was consummated and the time such financing arrangement is refinanced, the cost of servicing our debt would increase and our results of operations and liquidity could be materially adversely affected.
Despite our current level of indebtedness, we may still be able to incur substantially more debt. This could further exacerbate the risks described above.
We and our subsidiaries may be able to incur significant additional indebtedness in the future. Although the agreements and instruments governing our financing arrangements contain restrictions on our ability to incur additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and the additional indebtedness that could be incurred in compliance with these restrictions could be substantial. Further, these restrictions also do not prevent us from incurring obligations that do not constitute indebtedness. If new debt or other obligations are added to our current debt and liability levels without a corresponding refinancing or redemption of our existing indebtedness and obligations, the risks related to our substantial indebtedness could increase.
Risks Related to the Securities Markets and Ownership of Our Common Stock
The market price of our common stock could decline as a result of the sale or distribution of a large number of shares of our common stock in the market or the perception that a sale or distribution could occur. These factors also could make it more difficult for us to raise funds through future offerings of our common stock.
We are unable to predict whether significant amounts of our common stock will be sold in the open market or the potential negative effects that these sales could have on the price of our common stock. Certain shareholders, most notably affiliates of Carl Icahn and Mario Gabelli, have accumulated significant amounts of our common stock. Sales or distributions of substantial amounts of our common stock in the public market, or the perception that such sales or distributions will occur, could adversely affect the market price of our common stock and make it difficult for us to raise funds through securities offerings in the future. As of December 31, 2019,2022, there were 28.828.9 million shares of our common stock outstanding, which are freely transferable without restriction or further registration under the Securities Act of 1933, as amended (the “Securities Act”), unless held or acquired by our “affiliates” as that term is defined in Rule 144 under the Securities Act. In addition, all shares of our common
HERC HOLDINGS INC. AND SUBSIDIARIES
ITEM lA. RISK FACTORS (continued)
stock acquired upon exercise of stock options and other equity-based awards granted under our stock incentive plan also will be freely tradable under the Securities Act unless acquired by our affiliates, as will shares acquired by our employees under our employee stock purchase plan. Approximately 2.6 million shares of common stock have been issued or are reserved for issuance under our stock incentive plan and our employee stock purchase plan.
We also may issue additional common stock for a number of reasons, including to finance our operations and business strategy (including acquisitions), to adjust our ratio of debt to equity, or to provide incentives pursuant to certain executive compensation arrangements. Such future issuances of equity securities, or the expectation that they will occur, could cause the market price for our common stock to decline.
HERC HOLDINGS INC. AND SUBSIDIARIES
ITEM lA. RISK FACTORS (continued)
Provisions of our Certificate of Incorporation and our By-Laws could discourage potential acquisition proposals and could deter or prevent a change in control.
Our Certificate of Incorporation and By-Laws contain provisions that are intended to deter coercive takeover practices and inadequate takeover bids and to encourage prospective acquirers to negotiate with our Board of Directors rather than to attempt a hostile takeover. These provisions include:
•granting to our Board of Directors sole power to set the number of directors and to fill any vacancy on the Board of Directors, whether such vacancy occurs as a result of an increase in the number of directors or otherwise;
•the ability of our Board of Directors to designate and issue one or more series of preferred stock without stockholder approval, the terms of which may be determined at the sole discretion of our Board of Directors;
•prohibiting our stockholders from acting by written consent;
•prohibiting our stockholders from calling special meetings of stockholders;
•the absence of cumulative voting; and
•advance notice requirements for stockholder proposals and nominations for election to the Board of Directors at stockholder meetings.
We believe that these provisions protect our stockholders from coercive or otherwise unfair takeover tactics by requiring potential acquirers to negotiate with our Board of Directors and by providing our Board of Directors with more time to assess any acquisition proposal. These provisions are not intended to make us immune from takeovers. However, these provisions apply even if the offer may be considered beneficial by some stockholders and could delay or prevent an acquisition that our Board of Directors determines is in our best interests and that of our stockholders. Any or all of the foregoing provisions could limit the price that some investors might be willing to pay for shares of our common stock.
The market price of our common stock may fluctuate significantly.
The market price of Herc Holdings common stock could fluctuate significantly due to a number of factors, including:
our quarterly or annual earnings, or those of other companies in our industry;
actual or anticipated fluctuations in our financial position, results of operations, liquidity or cash flows;
the effectiveness of our internal control over financial reporting;
the public reaction to our press releases, our other public announcements and our filings with the SEC;
announcements by us or our competitors of significant acquisitions, dispositions, innovations or new programs and services;
comments by institutional investors or media reports regarding our Company, business or industry;
changes in earnings or other financial estimates and recommendations by securities analysts following our stock, research and reports that industry or securities analysts may publish about us or the rental industry or the failure of securities analysts to cover our common stock;
changes in our ability to meet analyst estimates;
purchases or sales of large blocks of our stock by institutional investors;
the operating and stock price performance of other comparable companies;
general economic conditions and fluctuations in the overall market and the markets served by our customers, including construction and industrial markets;
anticipated spending by government entities or agencies on infrastructure improvement or expansion projections, or the lack of, delay in or reduction in spending on such projects; and
the trading volume of our common stock.
In addition, the realization of any of the risks described in these “Risk Factors” could have a material and adverse impact on the market price of our common stock in the future and cause the value of your investment to decline. The securities of many companies and the stock market in general have experienced extreme price and volume volatility that has often been unrelated to the operating performance of particular companies. These fluctuations may adversely affect the trading price of our common stock, regardless
HERC HOLDINGS INC. AND SUBSIDIARIES
ITEM lA. RISK FACTORS (continued)
of our actual performance. In the past, following periods of volatility in the market price of a company’s securities, stockholders have often instituted securities class action litigation against the company. If we were to be involved in a class action lawsuit, it could divert the attention of senior management, and, if adversely determined, have a material adverse effect on our business, results of operations and financial condition.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
As of February 21, 2020,10, 2023, we had approximately 275358 locations primarily in the United States and Canada, with locations also in China.Canada. We also operate regional headquarters, sales offices and service facilities in the foregoing countries in support of our equipment rental operations. Our principal executive offices are located in Bonita Springs, Florida.
As of December 31, 2019,2022, we owned approximately 8%7% of the locations from which we operate our equipment rental business, with the remainder leased. Those leases are typically triple net leases, where Herc is responsible for the ongoing expenses of the property, including real estate taxes, insurance, and maintenance, in addition to paying rent and utilities.
Our rental locations generally are located in industrial or commercial zones. A growing number of locations have highway or major thoroughfare visibility. The typical location includes a customer reception area, an equipment service area and storage facilities for equipment. Most branches have stand-alone maintenance and fueling facilities and showrooms.
ITEM 3. LEGAL PROCEEDINGS
In re Hertz Global Holdings, Inc. Securities LitigationThe information required with respect to this item can be found in - In November 2013, a putative shareholder class action, Pedro Ramirez, Jr. v. Hertz Global Holdings, Inc., et al., was commenced in the U.S. District Court for the District of New Jersey naming Hertz Holdings and certain of its officers as defendants and alleging violations of the federal securities laws. The complaint alleged that Hertz Holdings made material misrepresentations and/or omission of material fact in its public disclosures during the period from February 25, 2013 through November 4, 2013, in violation of Section 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Rule 10b-5 promulgated thereunder. The complaint sought unspecified monetary damages on behalf of the purported class and an award of costs and expenses, including counsel fees and expert fees. In June 2014, Hertz Holdings moved to dismiss the amended complaint. In October 2014, the court granted Hertz Holdings’ motion to dismiss without prejudice, allowing the plaintiff to amend the complaint a second time. In November 2014, plaintiff filed a second amended complaint, which shortened the putative class period and made allegations that were not substantively very different than the allegations in the prior complaint. In early 2015, Hertz Holdings moved to dismiss the second amended complaint. In July 2015, the court granted Hertz Holdings’ motion to dismiss without prejudice, allowing plaintiff to file a third amended complaint. In August 2015, plaintiff filed a third amended complaint, which included additional allegations, named additional then-current and former officers as defendants and expanded the putative class period to extend from February 14, 2013 to July 16, 2015. In November 2015, Hertz Holdings moved to dismiss the third amended complaint. The plaintiff then sought leave to add a new plaintiff because of challenges to the standing of the first plaintiff. The court granted plaintiff leave to file a fourth amended complaint to add the new plaintiff, and the new complaint was filed on March 1, 2016. Hertz Holdings and the individual defendants moved to dismiss the fourth amended complaint with prejudice on March 24, 2016. In April 2017, the court granted Hertz Holdings' and the individual defendants' motions to dismiss and dismissed the action with prejudice. In May 2017, plaintiff filed a notice of appeal in the U.S. Court of Appeals for the Third Circuit and, in September 2018, the court affirmed the dismissal of the action with prejudice. On February 5, 2019, plaintiff filed a motion to set aside the judgment against it, and for leave to file a fifth amended complaint. The proposed amended complaint would add allegations related to the settlement with the SEC that, among other things, ordered New Hertz to cease and desist from violating certain of the federal securities laws and imposed a civil penalty of
$16.0 million. On February 26, 2019, New Hertz filed an opposition to plaintiff’s motion for relief from judgment and leave to file a fifth amended complaint. On March 8, 2019, plaintiff filed a reply in support of that motion. On September 30, 2019, the court denied plaintiff’s motion for relief from judgment and leave to file a fifth amended complaint. On October 30, 2019, plaintiff filed a notice of appeal with the U.S. Court of Appeals for the Third Circuit.
In addition, we are subject to a number of claims and proceedings that generally arise in the ordinary conduct of our business. These matters include, but are not limited to, claims arising from the operation of rented equipment and workers' compensation
HERC HOLDINGS INC. AND SUBSIDIARIES
ITEM 3. LEGAL PROCEEDINGS (Continued)
claims. We do not believe that the liabilities arising from such ordinary course claims and proceedings will have a material adverse effect on our consolidated financial position, results of operations or cash flows.
For additional information regarding legal proceedings, see Note 16,17, "Commitments and Contingencies" of our consolidated financial statements included in Part II, Item 8 of this Report.
HERC HOLDINGS INC. AND SUBSIDIARIES
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
Executive Officers of the Registrant
The name, age, position and a description of the business experience of each of our executive officers is provided below. There is no family relationship among the executive officers or between any executive officer and a director.
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| | | | | | | |
Name | Age | Position |
Lawrence H. Silber | 6366 | President and Chief Executive Officer, Director |
Mark H. Irion | 5356 | Senior Vice President and Chief Financial Officer |
Christian J. Cunningham | 5861 | Senior Vice President and Chief Human Resources Officer |
Aaron D. Birnbaum | 5457 | Senior Vice President and Chief Operating Officer |
Tamir Peres | 5053 | Senior Vice President and Chief Information Officer |
S.WadeS. Wade Sheek | 4346 | Senior Vice President, Chief Legal Officer and Secretary |
Lawrence H. Silber. Mr. Silber joined the Company in May 2015. Prior to that, Mr. Silber most recently served as an executive advisor at Court Square Capital Partners, LLP, a private equity firm primarily investing in the business services, healthcare, general industrial and technology and telecommunications sectors, from April 2014 to May 2015. Mr. Silber led Hayward Industries, one of the world’s largest swimming pool equipment manufacturers, as chief operating officer from 2008 to 2012, overseeing a successful transition through the recession and returning the company to solid profitability. From 1978 to 2008, Mr. Silber worked for Ingersoll-Rand plc, a publicly traded manufacturer of industrial products and components, in a number of roles of increasing responsibility. He led major Ingersoll-Rand business groups, including Utility Equipment, Rental and Remarketing and the Equipment and Services businesses. Earlier in his career, he led sales, marketing and operations functions in Ingersoll-Rand’s Power Tool Division and Construction and Mining Group. Mr. Silber has also served as a director of Hayward Holdings, Inc., one of the world's largest swimming pool manufacturers, since November 2019. Mr. Silber previously served on the board of directors of SMTC Corporation, a mid-size provider of end-to-end electronics manufacturing services, from 2012 to 2015 (and from May 2013 through January 2014 served as its interim president and CEO).
Mark H. Irion. Mr. Irion joined the Company in June 2018. Prior to that, Mr. Irion most recently served as the chief financial officer of Neff Corporation, a publicly traded equipment rental company, for 19 years until its sale in October 2017. Prior to his role with Neff, he was chief financial officer for Markvision Holdings, Inc., a computer component distribution company, from 1994 to 1998 and, before that, he was an audit senior for Deloitte & Touche LLP in the U.S. and New Zealand.
Christian J. Cunningham. Mr. Cunningham joined the Company in September 2014 from DFC Global Corporation where he served as vice president, corporate HR and HR services since June 2013 with global responsibility for all human resource matters for corporate staff. Previously, Mr. Cunningham held the position of vice president, HR, compensation and benefits at Sunoco Inc. and Sunoco Logistics from 2010 to 2013. Prior to Sunoco, Mr. Cunningham served at ARAMARK as vice president, global compensation and strategy from 2008 to 2010; at Scholastic Inc. as vice president, compensation, benefits and HRIS from 2006 to 2007; and at Pep Boys as assistant vice president, human resources from 2005 to 2006. Previously, Mr. Cunningham held director and regional managerial positions in roles with increasing levels of responsibility at Pep Boys from 1995 to 2005 and Tire Service Corporation, Inc. from 1985 to 1995.
Aaron D. Birnbaum. Mr. Birnbaum served the Company and its predecessor business for more than 30 years. Prior to his current role, Mr. Birnbaum has served as the Company’s Senior Vice President from 2017 to 2019 and served as a Regional Vice President from 2012 to 2017. As Senior Vice President, Mr. Birnbaum oversaw the Company's Western, Northwest, North Central and Canada regions as well as its Herc Entertainment Services® and Cinelease® specialty equipment rental units. Mr. Birnbaum also has held leadership responsibilities related to the Company's strategic planning, operational execution and M&A activities.
HERC HOLDINGS INC. AND SUBSIDIARIES
Executive Officers of the Registrant (continued)
Tamir Peres. Mr. Peres joined the Company in September 2017 from Sunoco Logistics, a publicly-traded, midstream energy company, where he served as vice president and chief information officer since 2012, leading the Sunoco Logistics Information Technology group. From 2005 to 2012, Mr. Peres held the position of director of corporate information technology at Sunoco, Inc., where he was responsible for all strategic and tactical aspects of technology across the Refining and Supply, Retail Marketing, Chemicals, Logistics and Coke business units. He was previously director of Worldwide Financial Systems for Kulicke & Soffa Industries, Inc., a global manufacturer and supplier of semiconductor equipment, and before that he worked for Ernst & Young, including as a Senior Auditoran audit senior in its Assurance Services area.
S.WadeS. Wade Sheek. Mr. Sheek joined the Company in November 2019 from Republic Airways Holdings Inc., a regional airline, where he served as general counsel and secretary from 2018 to 2019 and oversaw the legal, contracting, communications and government relations functions. From 2013 to 2018, he served as deputy general counsel and corporate secretary at Allegion plc, a multi-national manufacturing company, and had responsibility for SEC matters, corporate governance, M&A and strategic initiatives. Prior to that, Mr. Sheek held roles with increasing responsibility with The Home Depot, Inc., UnitedHealth Group Incorporated and Ingersoll-Rand plc.
PART II
ITEM 5. MARKET FOR REGISTRANT'SREGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIESSECURITY
Common Stock and Registered Holders
Our common stock trades on the New York Stock Exchange ("NYSE") under the symbol "HRI". On February 21, 2020,10, 2023, there were 1,2661,527 registered holders of our common stock. The number of beneficial owners is substantially greater than the number of record holders because a large portion of our common stock is held of record in "street name."
Share Repurchase Program
In March 2014, Hertz Holdingswe announced a $1.0 billion share repurchase program (the "Share Repurchase Program"), which replaced an earlier program. The Share Repurchase Program permits us as the successor to Hertz Holdings, to purchase shares through a variety of methods, including in the open market or through privately negotiated transactions, in accordance with applicable securities laws. We are not obligated to make any repurchases at any specific time or in any specific amount.amount and our repurchases may be subject to certain predetermined price/volume guidelines, set from time-time, by our Board of Directors. The timing and extent to which we repurchase shares will depend upon, among other things, strategic priorities, market conditions, share price, liquidity targets, contractual restrictions, regulatory requirements and other factors. Share repurchases may be commenced or suspended at any time or from time to time, subject to legal and contractual requirements, without prior notice. There were no share
The following table provides information about our repurchases during the year ended December 31, 2019. As of December 31, 2019, the approximate dollar value that remains available for share purchases under the Share Repurchase Program is $395.9 million.
Dividends
We paid no cash dividends on our common stock in 2019, and we do not expectduring the fourth quarter of 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
Period | Total Number of Shares Purchased | | Average Price Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Dollar Amount of Shares That May Yet Be Purchased Under the Program |
October 1, 2022 to October 31, 2022 | 459,388 | | | $ | 109.46 | | | 459,388 | | | |
November 1, 2022 to November 30, 2022 | 48,774 | | | $ | 118.62 | | | 48,774 | | | |
December 1, 2022 to December 31, 2022 | — | | | $ | — | | | — | | | |
Total | 508,162 | | | $ | 110.34 | | | 508,162 | | | $ | 280,638,376 | |
Dividends
On February 8, 2023, the Company declared a quarterly dividend of $0.6325 per share to pay dividends on our common stock for the foreseeable future.record holders as of February 22, 2023, with payment date of March 9, 2023. The agreements governing our indebtedness restrict our ability to pay dividends. See Item 7, "Management Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Dividends," in this Report.
HERC HOLDINGS INC. AND SUBSIDIARIES
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES (Continued)
Recent Performance
The following graph compares the cumulative total stockholder return on Herc Holdings common stock from July 1, 2016, the first day of trading for our stock on the NYSE,December 31, 2017 through December 31, 2019,2022, with the cumulative total returns of the Standard & Poor's Small Cap 600 Index, the Standard & Poor's Mid Cap 400 Trading Companies & Distributors Industry Index and an industry peer group. The Standard & Poor's Mid Cap 400 Trading Companies & Distributors Industry Index was added in 2022 as the companies included more closely align to the Company's industry and business. The industry peer group is comprised of publicly traded companies participating in the equipment rental industry and other relevant companies of comparable size in the broader industry in which we compete. Our industry peer group is comprised of Aggreko plc, Applied Industrial Tech Inc., Ashstead Group plc, Beacon Roofing Supply, Inc., Fastenal Company, GATX Corp., H&E Equipment Services, KAR Auction Services Inc., McGrath RentCorp, Mobile Mini, Inc., NOW Inc., Pool Corp., Ritchie Bros. Auctioneers Incorporated, Triton International Ltd., Watsco Inc., WillScot Mobile Mini Holdings Corp. and United Rentals, Inc.
HERC HOLDINGS INC. AND SUBSIDIARIES
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES (Continued)
The graph assumes that $100 was invested on July 1, 2016December 31, 2017 over the indicated time periods and assumes reinvestment of all dividends, if any, paid on the securities. We have not paid any cash dividends and, therefore, theThe cumulative total return calculation for Herc Holdings is based solely uponon stock price appreciation.appreciation and payment of cash dividends. The stock price performance shown on the graph is not necessarily indicative of future price performance.
ITEM 6. RESERVED
HERC HOLDINGS INC. AND SUBSIDIARIES
ITEM 6. SELECTED FINANCIAL DATA
The following tables present selected consolidated financial information and are not necessarily indicative of results of future operations. Additionally, the historical financial information presented below for periods prior to the Spin-Off is not necessarily indicative of what our financial position or results of operations actually would have been had we operated as a separate, independent company for such periods. The information presented should be read in conjunction with Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related notes thereto included in this Report in Item 8, "Financial Statements and Supplementary Data," to fully understand factors that may affect the comparability of the information presented below. The selected consolidated financial data in this section is not intended to replace the consolidated financial statements.
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| | | | | | | | | | | | | | | | | | | | |
| Years ended December 31, |
(In millions, except per share data) | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
Statement of Operations Data | | | | | | | | | |
Total revenues | $ | 1,999.0 |
| | $ | 1,976.7 |
| | $ | 1,754.5 |
| | $ | 1,554.8 |
| | $ | 1,678.2 |
|
Total expenses(a) | 1,935.4 |
| | 1,907.9 |
| | 1,818.9 |
| | 1,559.7 |
| | 1,521.3 |
|
Income (loss) before income taxes | 63.6 |
| | 68.8 |
| | (64.4 | ) | | (4.9 | ) | | 156.9 |
|
Income tax benefit (provision)(b) | (16.1 | ) | | 0.3 |
| | 224.7 |
| | (14.8 | ) | | (45.6 | ) |
Net income (loss) | $ | 47.5 |
| | $ | 69.1 |
| | $ | 160.3 |
| | $ | (19.7 | ) | | $ | 111.3 |
|
Earnings (loss) per share: | | | | | | | | | |
Basic | $ | 1.66 |
| | $ | 2.43 |
| | $ | 5.66 |
| | $ | (0.70 | ) | | $ | 3.69 |
|
Diluted | $ | 1.63 |
| | $ | 2.39 |
| | $ | 5.60 |
| | $ | (0.70 | ) | | $ | 3.69 |
|
|
| | | | | | | | | | | | | | | | | | | |
| As of December 31, |
(In millions) | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
Balance Sheet Data | | | | | | | | | |
Cash and cash equivalents(c) | $ | 33.0 |
| | $ | 27.8 |
| | $ | 41.5 |
| | $ | 24.0 |
| | $ | 24.7 |
|
Total assets | 3,817.0 |
| | 3,610.2 |
| | 3,549.7 |
| | 3,466.0 |
| | 3,397.0 |
|
Total debt(d) | 2,078.5 |
| | 2,156.8 |
| | 2,159.8 |
| | 2,194.3 |
| | 136.7 |
|
Total equity(e) | 644.3 |
| | 572.7 |
| | 510.4 |
| | 317.7 |
| | 2,302.0 |
|
| |
(a) | Total expenses were impacted by long-lived asset impairments in 2019 and 2017 of $5.1 million and $29.7 million, respectively, losses on extinguishment of debt in 2019, 2018 and 2017 of $53.6 million, $5.4 million and $11.4 million, respectively, and the gain on the sale of our operations in France and Spain in 2015 of $50.9 million. |
| |
(b) | Income tax benefit in 2018 and 2017 includes $20.8 million and $207.1 million, respectively, net benefit resulting from the Tax Cuts and Jobs Act of 2017. |
| |
(c) | Includes the correction of an error which increased the amount by $12.4 million and $9.0 million as of December 31, 2016 and 2015, respectively. See Note 2, "Basis of Presentation and Recently Issued Accounting Pronouncements" to the notes to our consolidated financial statements included in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2017. |
| |
(d) | Includes net loans payable to affiliates as of December 31, 2015 of $73.2 million. |
| |
(e) | Total equity as of December 31, 2016 was impacted by $2.0 billion of distributions and transfers to THC related to the Spin-Off. |
HERC HOLDINGS INC. AND SUBSIDIARIES
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s discussion and analysis of financial condition and results of operations ("MD&A") should be read in conjunction with the consolidated financial statements and accompanying notes included in Item 8 of this Report, which include additional information about our accounting policies, practices and the transactions underlying our financial results. The preparation of our 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 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 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 are primarily 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)fuel);
•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.
HERC HOLDINGS INC. AND SUBSIDIARIES
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
20192022 Overview
In 2019,Our results for 2022 reflect the strong demand in the rental industry as demonstrated by our equipment rental revenues of $2.6 billion, an increase of 33.6% over 2021, reflecting positive pricing of 5.8% and increased volume of equipment on rent of 31.8%. Our local markets and industries have shown continued strength in economic activity and we believe the operating environment continues to be favorable for equipment rental companies of scale. We continued our focusto execute on quality of earnings through the execution of company-wide initiatives to increase our operating margins and profitability. Results of these initiatives include:
Equipment rental revenue grew 2.6% during 2019 as compared to 2018 onprofitability, resulting in an increase of rental fleet at original equipment cost of 1.2% reflecting management's disciplined approachin net income to adding fleet, while disposing of older equipment and focusing on improved utilization. Management also implemented strategic programs to reduce lower margin re-rent revenue by 18.5%.$329.9 million from $224.1 million in 2021.
Pricing increased by 4.0% during 2019 as compared to 2018 reflecting management's continued focus on the accounts and customer types that are best suited to our strategy for profitable growth.
Direct operating costs and selling, general and administrative costs declined by 1.8% and 5.3%, respectively, during 2019 as compared to 2018 as there were strategic reductions in re-rent expense, delivery and freight expenses as well as reductions in consulting and professional fees.
We invested significantly in our rental equipment as part of our long-term capital expenditure plans, adding rental equipment in high growth markets in response to customer demand and to position ourselves for growth into 2023. Additionally, during 2022, we completed 18 acquisitions, adding 29 branches, totaling a net cash outflow of $515.2 million, while also took a numberopening 21 new greenfield locations. The addition of actions relatednew locations supports our long-term strategy to achieve greater density and scale in select urban markets across North America to better serve both our capital structure that have improved ourlocal and national customers.
In order to provide financial flexibility and liquidity, including:
Issued $1.2 billion aggregate principal amount of 5.50%continue investment in our business, we amended our senior notes due 2027 (the "2027 Notes").
Redeemed $427.0 million of our 7.50% senior secured second priority notes due 2022 (the "2022 Notes").
Redeemed $437.5 million of our 7.75% senior secured second priority notes due 2024 (the "2024 Notes").
Entered into a new asset-based revolving credit facility (the "New ABL Credit Facility"), which replacedto increase the existing asset-basedaggregate amount of the revolving credit facility (the "Old ABL Credit Facility")commitments from $1.75 billion to $3.5 billion and extended the maturity to 2024.
RESULTS OF OPERATIONS
|
| | | | | | | | | | | | | | |
| Year Ended December 31, | 2019 vs. 2018 |
($ in millions) | 2019 | | 2018 | | $ Change | | % Change |
Equipment rental | $ | 1,701.8 |
| | $ | 1,658.3 |
| | $ | 43.5 |
| | 2.6 | % |
Sales of rental equipment | 242.8 |
| | 256.2 |
| | (13.4 | ) | | (5.2 | ) |
Sales of new equipment, parts and supplies | 44.0 |
| | 49.3 |
| | (5.3 | ) | | (10.8 | ) |
Service and other revenue | 10.4 |
| | 12.9 |
| | (2.5 | ) | | (19.4 | ) |
Total revenues | 1,999.0 |
| | 1,976.7 |
| | 22.3 |
| | 1.1 |
|
Direct operating | 771.1 |
| | 785.2 |
| | (14.1 | ) | | (1.8 | ) |
Depreciation of rental equipment | 409.1 |
| | 387.5 |
| | 21.6 |
| | 5.6 |
|
Cost of sales of rental equipment | 243.2 |
| | 244.3 |
| | (1.1 | ) | | (0.5 | ) |
Cost of sales of new equipment, parts and supplies | 33.3 |
| | 37.7 |
| | (4.4 | ) | | (11.7 | ) |
Selling, general and administrative | 294.8 |
| | 311.3 |
| | (16.5 | ) | | (5.3 | ) |
Restructuring | 7.7 |
| | 5.0 |
| | 2.7 |
| | 54.0 |
|
Impairment | 5.1 |
| | 0.1 |
| | 5.0 |
| | NM |
|
Interest expense, net | 173.5 |
| | 137.0 |
| | 36.5 |
| | 26.6 |
|
Other income, net | (2.4 | ) | | (0.2 | ) | | (2.2 | ) | | NM |
|
Income (loss) before income taxes | 63.6 |
| | 68.8 |
| | (5.2 | ) | | (7.6 | ) |
Income tax (provision) benefit | (16.1 | ) | | 0.3 |
| | (16.4 | ) | | NM |
|
Net income (loss) | $ | 47.5 |
| | $ | 69.1 |
| | $ | (21.6 | ) | | (31.3 | )% |
NM - Not Meaningful
2027. Additionally, we amended and extended our account receivable securitization facility, which now matures August 31, 2023 and increased the aggregate commitments from $250 million to $335 million.
Year Ended December 31, 2019 Compared with Year Ended December 31, 2018
As part of our capital allocation strategy, we have continued to pay quarterly dividends at $0.575 per share throughout 2022 and also repurchased approximately 1.1 million shares of our common stock for $115.2 million.
Equipment rental revenue increased $43.5 million, or 2.6%, during
COVID-19
We continue to monitor the year ended December 31, 2019 when compared with 2018.ongoing impact of the COVID-19 pandemic and the potential shift toward becoming more endemic in the U.S. The increase was attributablehealth and safety of our employees, customers, and the communities in which we operate remains our top priority. We remain focused on the safety and well-being of our employees, customers and communities as we maintain a high-level of service to pricing increasesour customers. As part of 4.0% during 2019 when comparedour overall safety culture, we communicate frequently throughout the organization to 2018reinforce our health and increases in deliverysafety guidelines, informed by the Center for Disease Control recommendations.
The impact of COVID-19 continues to evolve and freight revenue. The increase was partially offsetthe impact on the economy may be influenced by a strategic reductionnumber of factors, including a widespread resurgence in re-rent revenueCOVID-19 infections, whether due to the spread of variants of the virus or otherwise, the rate and lower volume.efficacy of vaccinations, labor constraints, the strength of the global supply chain, and government actions. We cannot predict the extent to which the ultimate impacts of the COVID-19 pandemic, or a shift from pandemic to endemic, will have on our financial condition, results of operations or cash flows, however, we believe we are well-positioned to operate effectively through the present environment.
HERC HOLDINGS INC. AND SUBSIDIARIES
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
($ in millions) | 2022 | | 2021 | | $ Change | | % Change |
Equipment rental | $ | 2,551.5 | | | $ | 1,910.4 | | | $ | 641.1 | | | 33.6 | % |
Sales of rental equipment | 125.7 | | | 113.1 | | | 12.6 | | | 11.1 | |
Sales of new equipment, parts and supplies | 35.8 | | | 30.1 | | | 5.7 | | | 18.9 | |
Service and other revenue | 25.8 | | | 19.5 | | | 6.3 | | | 32.3 | |
Total revenues | 2,738.8 | | | 2,073.1 | | | 665.7 | | | 32.1 | |
Direct operating | 1,027.7 | | | 782.3 | | | 245.4 | | | 31.4 | |
Depreciation of rental equipment | 535.9 | | | 420.7 | | | 115.2 | | | 27.4 | |
Cost of sales of rental equipment | 88.8 | | | 93.3 | | | (4.5) | | | (4.8) | |
Cost of sales of new equipment, parts and supplies | 22.3 | | | 20.3 | | | 2.0 | | | 9.9 | |
Selling, general and administrative | 410.1 | | | 310.8 | | | 99.3 | | | 31.9 | |
Non-rental depreciation and amortization | 94.9 | | | 68.0 | | | 26.9 | | | 39.6 | |
Impairment | 3.5 | | | 3.2 | | | 0.3 | | | 9.4 | |
Interest expense, net | 122.0 | | | 86.3 | | | 35.7 | | | 41.4 | |
Other expense (income), net | 0.2 | | | (2.2) | | | 2.4 | | | 109.1 | |
Income before income taxes | 433.4 | | | 290.4 | | | 143.0 | | | 49.2 | |
Income tax provision | (103.5) | | | (66.3) | | | (37.2) | | | 56.1 | |
Net income | $ | 329.9 | | | $ | 224.1 | | | $ | 105.8 | | | 47.2 | % |
Year Ended December 31, 2022 Compared with Year Ended December 31, 2021
Equipment rental revenue increased $641.1 million, or 33.6%. The increase was primarily due to higher volume of equipment on rent of 31.8% and positive pricing of 5.8% during 2022 over the prior year.
Sales of rental equipment decreased $13.4increased $12.6 million, or 5.2%11.1%, during the year ended December 31, 20192022 when compared with 2018. The volume of sales during the 2019 declined in response to improvements over the past year2021 as disposals in the mix and age of equipmentfourth quarter returned to a more seasonal pattern in line with rotating the fleet as part of our long-term capital expenditure plans.strategy. The corresponding cost ofmargin on sales of rental equipment as a percentage of the related revenue was 100.2% during the year ended December 31, 201929.4% in 2022 compared to 95.4%17.5% in 2018.2021. The reductionincrease in margin on sale of rental equipment in 20192022 was primarilydriven by improved pricing due to a higher proportion of sales through the lower-margin auction channel.overall strong market for used equipment.
Direct operating expenses decreased $14.1increased $245.4 million, or 1.8%31.4%, during the year ended December 31, 2019 when compared with 2018related to increases in (i) personnel-related expenses of $106.0 million primarily resulting from increased headcount and increased wages and benefits, (ii) fleet related expenses including fuel and maintenance expense of $86.0 million resulting from our increased fleet size and higher volume and higher average fuel prices in 2022, (iii) facilities expense of $25.6 million as we have added more locations through acquisitions and opening greenfield locations, (iv) delivery expense of $16.2 million due to increased volume of transactions, and (v) re-rent expense of $13.0 million due to the following:
Fleet and related expenses decreased $32.1 million primarily due to the declinecorresponding increase in re-rent expense of $11.8 million mainly due to the decrease in re-rent revenue. Maintenance expenses decreased $6.6 million due to a reduction in fleet age and increased maintenance efficiency and delivery and freight expense decreased $7.7 million due to an increase in internal delivery personnel and better management of transportation costs.
Personnel-related expenses increased $2.2 million primarily due to an increase in wages of $9.5 million related to personnel and related costs including overtime. The increase was partially offset by a decrease in benefits of $4.9 million due to improved claims experience.
Other direct operating costs increased $15.8 million primarily due to increased field facilities expenses of $10.3 million primarily related to new branches that were opened during 2018 and 2019 and increases due to recurring lease renewals on existing locations.
Depreciation of rental equipment increased $21.6$115.2 million, or 5.6%27.4%, during 2022 due to the year ended December 31, 2019 when compared with 2018.increase in average fleet size. Non-rental depreciation and amortization increased $26.9 million, or 39.6%, primarily due to amortization of intangible assets related to acquisitions.
Selling, general and administrative expenses increased $99.3 million, or 31.9%. The increase was primarily due to depreciation recognized on rental equipment with higher cost due to capital expendituresselling expense, including commissions and the saleother variable compensation increases, of older equipment with lower depreciation.
Selling, general and administrative expenses decreased $16.5 million, or 5.3%, during the year ended December 31, 2019 when compared with 2018. The decline was primarily due to a decrease in Spin-Off related costs of $13.9$44.9 million, and professional feesgeneral payroll and benefits increases of $13.2$14.4 million, partially offset by a $5.6 million increase for increased sales compensation and related commissions and incentives to drive revenue growth andwhich includes an increase in stock compensation expense of $4.2 million in advertising$3.8 million. Travel expense and travel expenses.
Restructuringcredit and collections expense was $7.7 million during the year ended December 31, 2019 as a result of our plan of restructuring in Canada which included right-of-use assets and related leasehold improvement impairment of $5.5also increased by $13.0 million and severance expense of $2.2 million. Restructuring expense during the year ended December 31, 2018 of $5.0$8.2 million, also related to a plan of restructuring in Canada which related to facility closing costs and severance expenses.
Impairment charges of $5.1 million were recorded during the year ended December 31, 2019 and primarily related to certain assets of our other international operations outside of North America that were deemed held for sale at December 31, 2019.
respectively.
Interest expense, net increased $36.5$35.7 million, or 26.6%41.4%, during 2022 due to higher average outstanding balances and weighted average interest rates on the year ended December 31, 2019ABL Credit Facility and AR Facility when compared to 2021.
HERC HOLDINGS INC. AND SUBSIDIARIES
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Income tax provision was $103.5 million during 2022 when compared with $66.3 million for the same period in 2018.2021. The increase was primarily due to a loss on extinguishment of debt of $53.6 million related to the extinguishment of theprovision during 2022 Notes, 2024 Notes and the refinancing of the ABL Credit Facility in July 2019 as compared to a loss on extinguishment of debt of $5.4 million in 2018 related to the partial redemption of the 2022 Notes and 2024 Notes. This increase was partially offset by a decrease in interest expense due to a reduction in interest rates related to the debt transactions described in Note 10, "Debt".
Income tax expense was $16.1 million during the year ended December 31, 2019 compared to a $0.3 million benefit in the prior-year period. The increase in income tax expense in 2019 was primarily driven by the eliminationincreased level of a benefit of $20.8 million in 2018 as a result of the Tax Cutspre-tax income, non-deductible expenses, stock-based compensation, state taxes and Jobs Act of 2017.tax credits.
LIQUIDITY AND CAPITAL RESOURCES
Our primary liquidity needs include the payment of operating expenses, purchases of rental equipment to be used in our operations, and servicing of debt.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
HERC HOLDINGS INC. AND SUBSIDIARIES
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
borrowings under our debt arrangements. As of December 31, 2019,2022, we had approximately $2.1$2.9 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 of December 31, 20192022 consisted of cash and cash equivalents of $53.5 million and unused commitments of approximately $1.6 billion under our New ABL Credit Facility. See "Borrowing Capacity and Availability" below.below for further discussion. Our practice is to maintain sufficient liquidity through cash from operations, our New 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 New ABL Credit Facility and the AR Facility or other financing arrangements will be adequate to permit ussufficient to meet our obligationsworking 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):
|
| | | | | | | | | | | |
| Years Ended December 31, | 2019 vs. 2018 |
| 2019 | | 2018 | | $ Change |
Cash provided by (used in): | | | | | |
Operating activities | $ | 635.6 |
| | $ | 559.1 |
| | $ | 76.5 |
|
Investing activities | (463.6 | ) | | (567.0 | ) | | 103.4 |
|
Financing activities | (167.1 | ) | | (4.2 | ) | | (162.9 | ) |
Effect of exchange rate changes | 0.3 |
| | (1.6 | ) | | 1.9 |
|
Net change in cash and cash equivalents | $ | 5.2 |
| | $ | (13.7 | ) | | $ | 18.9 |
|
| | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | |
| 2022 | | 2021 | | $ Change | |
Cash provided by (used in): | | | | | | |
Operating activities | $ | 916.7 | | | $ | 744.0 | | | $ | 172.7 | | |
Investing activities | (1,681.8) | | | (961.3) | | | (720.5) | | |
Financing activities | 784.1 | | | 219.6 | | | 564.5 | | |
Effect of exchange rate changes | (0.6) | | | (0.2) | | | (0.4) | | |
Net change in cash and cash equivalents | $ | 18.4 | | | $ | 2.1 | | | $ | 16.3 | | |
Year Ended December 31, 20192022 Compared with Year Ended December 31, 20182021
Operating Activities
During the year ended December 31, 2019,2022, we generated $76.5$172.7 million more cash from operating activities compared with 2018.the same period in 2021. The increase was related to improved operating results primarily resulting from higher revenues lower professional fees, lower maintenance and delivery costs andcoupled with improved collection of receivables and other working capital improvements during the year ended December 31, 2019 as compared to 2018.operating leverage on costs.
Investing Activities
Cash used in investing activities decreased $103.4increased $720.5 million forduring 2022 when compared with the year ended December 31, 2019 as compared to 2018.prior-year period. Our primary use of cash in investing activities is for the acquisition of rental equipment, and non-rental capital expenditures. Weexpenditures 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.
Financing Activities
Cash used in financing activities was $167.1 million for the year ended December 31, 2019 as compared to $4.2 million for 2018. Cash flows used in financing activities Additionally, we closed on 18 acquisitions during the year ended December 31, 2019 primarily represents our changes in debt, which included the proceeds2022 for a net cash outflow of $1.2 billion upon issuance of our 2027 Notes, offset by the redemption of $864.5 million of our 2022 Notes and 2024 Notes collectively. We also had net outflows of $434.8 million on our revolving lines of credit and securitization which included the refinancing of the Old ABL Credit Facility.$515.2 million.
HERC HOLDINGS INC. AND SUBSIDIARIES
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Financing Activities
Cash provided by financing activities increased $564.5 million during 2022 when compared with the prior-year period. Financing activities during 2022 primarily represent our changes in debt, which included net borrowings of $1.0 billion on our revolving lines of credit and securitization, which were used primarily to fund acquisitions and invest in rental equipment during the year. Net borrowings in the prior year period were $251.6 million.
In accordance with our Share Repurchase Program, we may from time to time repurchase shares in the open market or through privately negotiated transactions, in accordance with applicable securities laws. We repurchased approximately 1.1 million shares during 2022 in accordance with our overall capital allocation strategy and as of December 31, 2022, $280.6 million remains available for repurchases.
In order to reduce future cash interest payments, as well as future amounts due at maturity or upon redemption, we may from time to time repurchase our debt, including our notes, bonds, loans or other indebtedness, in privately negotiated, open market or other transactions and upon such terms and at such prices as we may determine. We will evaluate any such transactions in light of then-existing market conditions, taking into account our current liquidity and prospects for future access to capital. The repurchases may be material and could relate to a substantial proportion of a particular class or series, which could reduce the trading liquidity of such class or series.
Capital Expenditures
Our capital expenditures relate largely to purchases of rental equipment, with the remaining portion representing purchases of property, equipment and information technology. The table below sets forth the capital expenditures related to our rental equipment and related disposals for the periods noted (in millions).
|
| | | | | | | |
| Years Ended December 31, |
| 2019 | | 2018 |
Rental equipment expenditures | $ | 638.4 |
| | $ | 771.4 |
|
Disposals of rental equipment | (224.2 | ) | | (272.3 | ) |
Net rental equipment expenditures | $ | 414.2 |
| | $ | 499.1 |
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 |
Rental equipment expenditures | $ | 1,168.5 | | | $ | 593.8 | |
Disposals of rental equipment | (121.1) | | | (106.9) | |
Net rental equipment expenditures | $ | 1,047.4 | | | $ | 486.9 | |
Net capital expenditures for rental equipment decreased $84.9increased $560.5 million during the year ended December 31, 20192022 compared to 2018. During 2019,2021, as we reduced rentalmanage 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 tight equipment expenditures to improve utilization and also reduced the volume of rental equipment sales based on the improvements seen in the mix and age of equipment and timing related to the strength of the used equipment rental market.
In 2020,2023, we expect our net rental equipment capital expenditures to be in the range of $410.0 million$1.0 billion to $450.0 million.
$1.2 billion.
Borrowing Capacity and Availability
In July 2019, we issued $1.2 billion aggregate principal amount of 2027 Notes. The funds were used to redeem the remaining 2022 Notes and 2024 Notes and repay a portion of the indebtedness outstanding under the then existing Old ABL Credit Facility. Additionally, we entered into the New ABL Credit Facility, which refinances in full and replaces the Old ABL Credit Facility. See Note 10, "Debt" included in Part II, Item 8 "Financial Statements" of this Report for more information.
Our New ABL Credit Facility and accounts receivable securitization facility (the "AR Facility" and together,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."
In connection with the AR Facility, we sell accounts receivable on an ongoing basis to a wholly-owned special-purpose entity (the "SPE"). 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 our obligations.the obligations of the Company or any of its other subsidiaries. Substantially all of ourthe remaining assets of Herc and certain of its U.S. and Canadian subsidiaries are encumbered in favor of our lenders under our New ABL Credit Facility. None of such assets are available to satisfy the claims of our general creditors. See Note 10,11, "Debt" to the notes to our consolidated financial statements included in Part II, Item 8 "Financial Statements and Supplementary Data" 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 Facilities.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 FacilitiesFacility (i.e., the amount of debt we could borrow given the collateral we possess at such time).
HERC HOLDINGS INC. AND SUBSIDIARIES
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
As of December 31, 2019,2022, the following was available to us (in millions):
| | | | | | | | | | | |
| Remaining Capacity | | Availability Under Borrowing Base Limitation |
ABL Credit Facility | $ | 2,134.5 | | | $ | 1,575.3 | |
AR Facility | — | | | — | |
Total | $ | 2,134.5 | | | $ | 1,575.3 | |
|
| | | | | | | |
| Remaining Capacity | | Availability Under Borrowing Base Limitation |
New ABL Credit Facility | $ | 1,079.4 |
| | $ | 1,079.4 |
|
AR Facility | — |
| | — |
|
Total | $ | 1,079.4 |
| | $ | 1,079.4 |
|
At December 31, 2019,During the Company's borrowing basethird quarter of 2022, we entered into an amendment to the ABL Credit Facility that was capped at $175.0 million byexecuted primarily to increase the aggregate amount of the revolving credit commitments to $3.5 billion and to extend the maturity date to July 5, 2027. Additionally, we amended the AR Facility to increase the aggregate commitments underfrom $250 million to $335 million and extend the AR Facility. Subsequentmaturity to DecemberAugust 31, 2019, the borrowing base under the AR Facility declined to $169.4 million.2023. See Note 11, "Debt" included in Part II, Item 8 "Financial Statements and Supplementary Data" of this Report for more information.
In addition, as of December 31, 2019, our subsidiary in China had uncommitted credit facilities, of which $4.8 million was available for borrowing.
As of December 31, 2019, $20.62022, $25.8 million of standby letters of credit were issued and outstanding under the New ABL Credit Facility, none of which hadhave been drawn upon. The New ABL Credit Facility had $229.4$224.2 million available under the letter of credit facility sublimit, subject to borrowing base restrictions.
Covenants
Our New 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 New ABL Credit Facility, our AR Facility and our 2027 Notes, we are not subject to ongoing financial maintenance covenants; however, under the New 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 December 31, 2019,2022, the appropriate levels of liquidity have been maintained, therefore this financial maintenance covenant is not applicable.
For further information on the terms of our 2027 Notes, New ABL Credit Facility and AR Facility see Note 10,11, "Debt" included in Part II, Item 8 "Financial Statements and Supplementary Data" of this Report. For a discussion of the risks associated with our significant indebtedness, see Part I, Item 1A "Risk Factors" contained in this Report.
Dividends
OurOn February 8, 2023, the Company declared a quarterly dividend of $0.6325 per share to record holders as of February 22, 2023, with payment date of March 9, 2023. 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. As of the date of this Report, we have no plans to pay dividends on our common stock.
HERC HOLDINGS INC. AND SUBSIDIARIES
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
CONTRACTUAL OBLIGATIONS
The following table details the contractual cash obligations for debt and related interest payable, finance and operating leases, and other purchase obligations as of December 31, 2019 (in millions):
|
| | | | | | | | | | | | | | | | | | | |
| | | Payments Due by Period |
| Total | | 2020 | | 2021-2022 | | 2023-2024 | | After 2024 |
Debt principal, including current maturities | $ | 2,030.2 |
| | $ | 5.2 |
| | $ | — |
| | $ | 825.0 |
| | $ | 1,200.0 |
|
Interest on debt(a) | 613.5 |
| | 91.2 |
| | 182.4 |
| | 172.1 |
| | 167.8 |
|
Financing obligations(b) | 158.2 |
| | 9.4 |
| | 18.8 |
| | 18.8 |
| | 111.2 |
|
Finance lease obligations(c) | 60.7 |
| | 23.2 |
| | 14.0 |
| | 12.5 |
| | 11.0 |
|
Operating lease obligations(d) | 251.4 |
| | 37.3 |
| | 66.8 |
| | 51.1 |
| | 96.2 |
|
Purchase obligations(e) | 15.6 |
| | 7.5 |
| | 7.2 |
| | 0.9 |
| | — |
|
Total | $ | 3,129.6 |
| | $ | 173.8 |
| | $ | 289.2 |
| | $ | 1,080.4 |
| | $ | 1,586.2 |
|
| |
(a) | Estimated interest payments have been calculated based on the applicable interest rates as of December 31, 2019. |
| |
(b) | Includes obligations under financing agreements primarily for the lease of 44 properties. See Note 11, "Financing Obligations" to the notes to our consolidated financial statements included in Part II, Item 8 of this Report.
|
| |
(c) | Includes obligations under lease agreements primarily for service vehicles. See Note 8, "Leases " to the notes to our consolidated financial statements included in Part II, Item 8 of this Report.
|
| |
(d) | Includes obligations under lease agreements for real estate and computer equipment. Such obligations are reflected to the extent of their minimum non-cancelable terms. See Note 8, "Leases " to the notes to our consolidated financial statements included in Part II, Item 8 of this Report.
|
| |
(e) | Purchase obligations represent agreements to purchase goods or services that are legally binding on us and that specify all significant terms, including fixed or minimum quantities; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Only the minimum non-cancelable portion of purchase agreements and related cancellation penalties are included as obligations. In the case of contracts that state minimum quantities of goods or services, amounts reflect only the stipulated minimums; all other contracts reflect estimated amounts. |
The table excludes our pension and other postretirement benefit obligations. See Note 12, "Employee Retirement Benefits" to the notes to our consolidated financial statements included in Part II, Item 8 of this Report.
OFF-BALANCE SHEET COMMITMENTS AND ARRANGEMENTS
As of December 31, 2019 and 2018, the following guarantees (including indemnification commitments) were issued and outstanding.
Indemnification Obligations
In the ordinary course of business, we execute contracts involving indemnification obligations customary in the relevant industry and indemnifications related to a specific transaction such as the sale of a business. These indemnification obligations might include claims relating to the following: environmental matters; condition of property; intellectual property rights; governmental regulations and employment-related matters; customer, supplier and other commercial contractual relationships; and financial or other matters. Performance under these indemnification obligations would generally be triggered by a breach of terms of the contract or by a third-party claim. We regularly evaluate the probability of having to incur costs associated with these indemnification obligations and accrue for expected losses that are probable and estimable. Also see Note 20, "Arrangements with New Hertz" to the notes to our consolidated financial statements included in Part II, Item 8 of this Report. For discussion of the risks associated with indemnification obligations in the context of divestitures see "Other Operational Risks" in Part I, Item 1A "Risk Factors" contained in this Report.
HERC HOLDINGS INC. AND SUBSIDIARIES
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Contingencies, Environmental Matters and Guarantee
The information concerning the ongoing securities litigation and governmental investigation contained in Part I, Item 3 "Legal Proceedings" of this Report and the information concerning other contingencies, including environmental contingencies and the amount currently held in reserve for environmental matters and our guarantee is contained in Note 16, "Commitments and Contingencies" to the notes to our consolidated financial statements included in Part II, Item 8 of this Report is incorporated herein by reference. The additional information concerning environmental matters included in Part I, Item 1 "Business—Environmental, Health and Safety Matters and Governmental Regulation" of this Report is also incorporated herein by reference.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of the consolidated financial statements requires management to make estimates and judgments that affect the reported amounts in our consolidated financial statements and accompanying notes.
HERC HOLDINGS INC. AND SUBSIDIARIES
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Certain of our accounting policies, as discussed below, involve a higher degree of judgment and complexity in their application and, therefore, represent the critical accounting policies used in the preparation of our financial statements. If different assumptions or conditions were to prevail, the results could be materially different from our reported results. For additional discussion of our critical accounting policies and estimates, as well as our significant accounting policies, see Note 2, "Basis"Basis of Presentation and Recently IssuedSignificant Accounting Pronouncements"Policies" to the notes to our consolidated financial statements included in Part II, Item 8 of this Report.
Revenue Recognition
Equipment rental revenue includes revenue generated from renting equipment to customers and is recognized on a straight-line basis over the length of the rental contract. Also included in equipment rental revenue are fees for equipment delivery and pick-up and fees for our rental protection program, which allows customers to limit risk of financial loss in the event our equipment is damaged or lost. Delivery and pick-up fees are recognized as revenue when the services are performed and fees related to our rental protection program are recognized over the length of the contract term.
We recognize revenue from the sale of rental equipment, new equipment, parts and supplies when control of the asset transfers to the customer, which is typically when the asset is picked up by or delivered to the customer and when significant risks and rewards of ownership have passed to the customer. Sales and other tax amounts collected from customers and remitted to government authorities are accounted for on a net basis and, therefore, excluded from revenue.
Service and other revenue is recognized as the services are performed.
Rental Equipment
Our principal assets are rental equipment, which represented 65.2%58.5% and 69.4%59.4% of our total assets as of December 31, 20192022 and 2018,2021, respectively. Rental equipment consists of equipment utilized in our equipment rental operations. When rental equipment is acquired, we use historical experience, industry residual value guidebooks and the monitoring of market conditions to set depreciation rates. Generally, we estimate the period that we will hold the asset, primarily based on historical measures of the amount of equipment usage and the targeted age of equipment at the time of disposal. We also estimate the residual value of the applicable rental equipment at the expected time of disposal. The residual value for rental equipment is affected by factors which include equipment age and amount of usage. Depreciation is recorded over the estimated holding period. Depreciation rates are reviewed regularly based on management's ongoing assessment of present and estimated future market conditions, their effect on residual values at the time of disposal and the estimated holding periods. To the extent that the useful lives of all of our rental equipment were to increase or decrease by one year, we estimate that our annual depreciation expense would decrease or increase by approximately $50 million or $60 million, respectively. Market conditions for used equipment sales also can be affected by external factors such as the economy, natural disasters, fuel prices, supply of similar used equipment, the market price for similar new equipment and incentives offered by manufacturers. As a result of this ongoing assessment, we make periodic adjustments to depreciation rates of rental equipment in response to changing market conditions. During the years ended December 31, 2022 and 2021, there were no material adjustments to our depreciation rates.
HERC HOLDINGS INC. AND SUBSIDIARIES
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Defined Benefit Pension Obligations
The Herc Holdings Retirement Plan (the "Plan") participates in certainis a U.S. qualified defined benefit plans covering substantially all U.S.pension plan that has been frozen to new employees as well as certain non-U.S. defined benefit plans covering eligible non-U.S. employees. For each of these plans, we record our portion of the expense and the related obligations.since it was established in 2016. Additionally, pursuant to various collective bargaining agreements, certain union-represented employees participate in multiemployer pension plans.
Employee pension costs and obligations are dependent on assumptions used by actuaries in calculating such amounts. These assumptions include discount rates, salary growth, long-term return on plan assets, retirement rates, mortality rates and other factors. Actual results that differ from our assumptions are accumulated and amortized over future periods and, therefore, generally affect our recognized expense in such future periods. While we believe that the assumptions used are appropriate, significant differences in actual experience or significant changes in assumptions would affect our pension costs and obligations. The various employee-related actuarial assumptions (e.g., retirement rates, mortality rates and salary growth) used in determining pension costs and plan liabilities are reviewed periodically by management, assisted by the enrolled actuary, and updated as warranted. The discount rate used to value the pension liabilities and related expenses and the expected rate of return on plan assets are the two most significant assumptions impacting pension expense. The discount rate used is a market-based rate as of the valuation date. For the expected return on assets assumption, we use a forward-looking rate that is based on the expected return for each asset class (including the value added by active investment management), weighted by the target asset allocation. The past annualized long-term performance of the Plan's assets has generally been in line with the long-term rate of return assumption.
Business Combinations
See Note 12, "Employee Retirement Benefits" to the notes to our consolidated financial statements included in Part II, Item 8 of this Report.
The Company has made multiple acquisitions and may continue to make acquisitions in the future. The assets acquired and liabilities assumed are recorded based on their respective fair values at the date of acquisition. Determining the fair value of the assets and liabilities acquired is judgmental in nature and can involve the use of significant estimates and assumptions. Long-lived assets (principally rental equipment), goodwill and other intangible assets generally represent the largest components of the acquisitions. Rental equipment is valued utilizing either a cost or market approach, or a combination of these methods, depending on the asset being valued and the availability of market data. The intangible assets that the Company has acquired are non-compete agreements, customer relationships and trade names and associated trademarks. The estimated fair values of these intangible assets reflect various assumptions about discount rates, revenue growth rates, operating margins, terminal
HERC HOLDINGS INC. AND SUBSIDIARIES
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
values, useful lives and other prospective financial information. Goodwill is calculated as the excess of the cost of the acquired entity over the net of the fair value of the assets acquired and the liabilities assumed. Non-compete agreements, customer relationships and trade names and associated trademarks are valued based on an excess earnings or income approach based on projected cash flows and may be amortized over the useful life if they are determined to be finite-lived intangible assets.
As part of an acquisition, the Company will also acquire other assets and assume liabilities. These other assets and liabilities typically include, but are not limited to, parts inventory, accounts receivable, accounts payable and other working capital items. Because of their short-term nature, the fair values of these other assets and liabilities generally approximate the book values on the acquired entities' balance sheets.
Goodwill and Indefinite-Lived Intangible Assets
On an annual basis and at interim periods when circumstances require, we test the recoverability of our goodwill. Goodwill impairment is deemed to exist if the carrying value of goodwill of a reporting unit exceeds its fair value. A reporting unit is an operating segment or a business one level below that operating segment (the component level) if discrete financial information is prepared and regularly reviewed by segment management. However, components are aggregated as a single reporting unit if they have similar economic characteristics. We have assessed the guidance and performed our analysis using our one reporting unit, worldwideNorth American equipment rental.
Pursuant to Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 350, ("Topic 350"), Intangibles-Goodwill and Other, an entity may first assess qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the quantitative goodwill impairment test. Various factors are considered in performing the qualitative test, including macroeconomic conditions, industry and market considerations, the overall financial performance of our reporting unit, our stock price and the excess amount between our reporting unit’s fair value and carrying value as indicated on our most recent quantitative assessment.
When assessing the fair value of our reporting units using a quantitative approach, we estimate the fair value using a combination of an income approach on the present value of estimated future cash flows and a market approach based on published earnings multiples of comparable entities with similar operations and economic characteristics as well as acquisition multiples paid in recent transactions. The key assumptions used in the discounted cash flow valuation model for impairment testing include discount rates, growth rates, cash flow projections and terminal value rates. Discount rates are set by using the weighted average cost of capital, or "WACC," methodology. The WACC methodology considers market and industry data as well as company specific risk factors for each reporting unit in determining the appropriate discount rates to be used. The discount rate utilized for each reporting unit is indicative of the return an investor would expect to receive for investing in such a business. The cash flows represent management's most recent planning assumptions. These assumptions are based on a combination of industry outlooks, views on general economic conditions and our expected pricing plans. Terminal value rate determination follows common methodology of capturing the present value of perpetual cash flow estimates beyond the last projected period assuming a constant WACC and low long-term growth rates. If the carrying value of the reporting unit is greater than its fair value, we recognize an impairment charge for the amount equal to that excess. A significant decline in the projected cash flows or a change in the WACC used to determine fair value could result in a future goodwill impairment charge.
HERC HOLDINGS INC. AND SUBSIDIARIES
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Indefinite-lived intangible assets, primarily trademarks,trade names, are not amortized but are evaluated annually for impairment and whenever events or changes in circumstances indicate that the carrying amount of this asset may exceed its fair value. If the carrying value of an indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.
In connection with our impairment analysis for goodwill and indefinite-lived intangible assets conducted as of October 1, 2019,2022, we assessed qualitative factors as described above to determine if it is more likely than not that goodwill and indefinite-lived assets may be impaired and concluded that there was no impairment related to such assets.
See Note 6, "Goodwill and Intangible Assets" to the notes to our consolidated financial statements included in Part II, Item 8 of this Report.
Finite-Lived Intangible and Long-Lived Assets
IntangibleFinite-lived intangible assets include technology, customer relationships, trade names and other intangibles. Intangible assets with finite lives are amortized using the straight-line method over the estimated economic lives of the assets, which range from threefive to ten14 years. These assets are
HERC HOLDINGS INC. AND SUBSIDIARIES
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
primarily amortized using the straight-line method, however, certain assets may be amortized using an accelerated method that reflects the economic benefit to us. Long-lived assets, including intangible assets with finite lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss for long-lived assets that management expects to hold and use is based on the estimated fair value of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or estimated fair value less costs to sell. During the years ended December 31, 2022, 2021 and 2020, we recorded asset impairment charges of $3.5 million, $3.2 million and $15.4 million, respectively, see Note 8, "Impairment" to the notes to our consolidated financial statements included in Part II, Item 8 of this Report for further detail.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are determined based on differences between the financial statement carrying amounts and net bases of assets and liabilities and aremeasured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates is recognized in the statement of operations in the period that includes the enactment date. Valuation allowances are recorded to reduce deferred tax assets by the
amount that is more likely than not to be realized. Subsequent changes to enacted tax rates will result in changes to deferred taxes and any related valuation allowances. We have recorded a deferred tax asset for unutilized net operating loss carryforwards in various tax jurisdictions.
The Company has determined not to assert that earnings from foreign operations are permanently reinvested. Therefore, the Company recognizes deferred taxes on foreign earnings as appropriate. The Company has asserted that future earnings associated with the potential stock sale or liquidation of foreign subsidiaries is permanently reinvested. Accordingly, the Company has not recorded any deferred tax liabilities associated with these book-to-tax differences. We regularly review our cash positions and our determination of permanent reinvestment of foreign earnings. If we determine that all or a portion of such foreign earnings are repatriated, we may be subject to additional foreign withholding taxes and U.S. state income taxes. Many foreign jurisdictions impose taxes on distributions to other jurisdictions. Due to the variations and complexities of these laws, we believe it would be impractical to calculate and accrue these taxes beyond the normal earnings and profits standard for U.S. tax purposes.
In accordance with ASC Topic 740, Income Taxes ("Topic 740"), the Company recognizes, in its consolidated financial statements, the impact of the Company's tax positions that are more likely than not to be sustained upon examination. The Company will determine whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, the Company presumes that the position will be examined by the appropriate taxing authority with full knowledge of all relevant information. Upon determination that a tax position meets the more-likely-than-not recognition threshold, it is measured to determine the amount of benefit to recognize in the financial statements. The Company recognizes interest and penalties for uncertain tax positions in income tax expense.
We are subject to ongoing tax examinations and assessments in various jurisdictions. Accordingly, accruals for tax contingencies are established based on the probable outcomes of such matters. Our ongoing assessments of the probable outcomes of the
HERC HOLDINGS INC. AND SUBSIDIARIES
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
examinations and related tax accruals require judgment and could increase or decrease our effective tax rate as well as impact our operating results.
results..
See
RECENT ACCOUNTING PRONOUNCEMENTS
For a discussion of recent accounting pronouncements, see Note 14, "Income Taxes"2, "Basis of Presentation and Significant Accounting Policies" to the notes to our consolidated financial statements included in Part II, Item 8 "Financial Statements and Supplementary Data" of this Report.
Stock Based Compensation
All stock-based compensation award disclosures are measured in terms of common stock of Herc Holdings. The cost of employee services received in exchange for an award of equity instruments is based on the grant date fair value of the award. That cost is recognized over the period during which the employee is required to provide service in exchange for the award, referred to as the vesting period. In addition to the service vesting condition, the performance stock units had an additional vesting condition, which called for the number of units that will be awarded based on achievement of a certain level of adjusted EBITDA, return on invested capital, or other performance measures as defined in the applicable award agreements, over the applicable measurement period.
HERC HOLDINGS INC. AND SUBSIDIARIES
We estimated the fair value of options issued at the date of grant using a Black-Scholes option-pricing model, which includes assumptions related to volatility, expected term, dividend yield and risk-free interest rate. These factors combined with the stock price on the date of grant result in a fixed expense which is recorded on a straight-line basis over the vesting period. The assumed volatility was calculated based on a blend of peer group volatility and implied volatility as we do not have sufficient stock price data to calculate historical volatility. The assumed dividend yield is zero. The risk-free interest rate is the implied zero-coupon yield for U.S. Treasury securities having a maturity approximately equal to the expected term of the options, as of the grant dates.
See Note 13, "Stock-Based Compensation" to the notes to our consolidated financial statements included in Part II, Item 8 of this Report.
RECENT ACCOUNTING PRONOUNCEMENTS
For a discussion of recent accounting pronouncements, see Note 2, "Basis of Presentation and Recently Issued Accounting Pronouncements" to the notes to our consolidated financial statements included in Part II, Item 8 of this Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
RISK MANAGEMENT
For a discussion of additional risks arising from our operations, see Part I, Item 1A "Risk Factors" included in this Report.
Market Risk
We are exposed to a variety of market risks, including the effects of changes in interest rates (including credit spreads), foreign currency exchange rates and fluctuations in fuel prices. We manage our exposure to these market risks through our regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. Derivative financial instruments are viewed as risk management tools and have not been used for speculative or trading purposes. In addition, derivative financial instruments are entered into with a diversified group of major financial institutions in order to manage our exposure to counterparty nonperformance on such instruments.
Interest Rate Risk
We have assessed our exposure to changes in interest rates by analyzing the sensitivity to our earnings assuming various changes in market interest rates. Assuming a hypothetical increase of one percentage point in interest rates on our New ABL Credit Facility, AR Facility and cash and cash equivalents as of December 31, 2019,2022, our pre-tax earnings would decrease by an estimated $8.0$16.2 million over a 12-month period.
From time to time, we may enter into interest rate swap agreements to manage interest rate risk on our mix of fixed and floating rate debt. Consistent with the terms of certain agreements governing our debt obligations, we may decide to hedge a portion of the floating rate interest exposure under the New ABL Credit Facility to provide protection in respect of such exposure.
HERC HOLDINGS INC. AND SUBSIDIARIES
Foreign Currency Risk
We have foreign currency exposure to exchange rate fluctuations, primarily with respect to the Canadian dollar and Chinese yuan.
dollar. We manage our foreign currency risk primarily by incurring, to the extent practicable, operating and financing expenses in the local currency in the countries in which we operate, including making fleet and equipment purchases and borrowing locally.
We also manage exposure to fluctuations in currency risk on cross currency intercompany loans we make to certain of our subsidiaries by entering into foreign currency forward contracts, when appropriate, which are intended to offset the impact of foreign currency movements on the underlying intercompany loan obligations.
During the year ended December 31, 2022, our foreign subsidiaries accounted for less than 10% of our total revenue and total income before income taxes. Based on the size of our foreign operations relative to the Company as a whole, we do not believe that a 10% change in exchange rates would have a material impact on our earnings. We do not hedge our operating results against currency movement as they are primarily translationalengage in nature. Using foreign currencypurchasing forward rates as of December 31, 2019, each hypothetical one percentage point change in foreign currency movements would not have a significant impact on our revenue or earnings.
exchange contracts for speculative purposes.
HERC HOLDINGS INC. AND SUBSIDIARIES
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Herc Holdings Inc.:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Herc Holdings Inc. and its subsidiaries (the(the “Company”) as of December 31, 20192022 and 2018,2021, and the related consolidated statements of operations, of comprehensive income, (loss),of changes in equity and of cash flows for each of the three years in the period ended December 31, 2019,2022, including the related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 20192022 appearing under Item 8 (collectively referred to as the “consolidated financial statements”).We also have audited the Company's internal control over financial reporting as of December 31, 2019,2022, based on criteria established in Internal Control - Integrated Framework(2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20192022 and 2018, 2021, and the results of itsoperations and itscash flows for each of the three years in the period ended December 31, 2019,2022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019,2022, based on criteria established in Internal Control - Integrated Framework(2013)issued by the COSO.
Change in Accounting Principle
As discussed in Note
2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019 due to the adoption of Topic 842, using a modified retrospective transition method.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Overover Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidatedfinancial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidatedfinancial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
HERC HOLDINGS INC. AND SUBSIDIARIES
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
HERC HOLDINGS INC. AND SUBSIDIARIES
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidatedfinancial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Income Taxes
As describednoted in Notes 2 and 1415 to the consolidated financial statements, the Company recorded an income tax provision of $16.1$103.5 million for the year endedas of December 31, 2019.2022. Additionally, the Company reported a net deferred tax liability balance of $459.3 million as of December 31, 2019.$646.5 million. Deferred tax assets and liabilities are determined based on differences between the financial statement carrying amounts and tax bases of assets and liabilities and are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. As disclosed by management, theyManagement also recorded arecords deferred tax assetassets for unutilized net operating loss carryforwards in various tax jurisdictions. Management records valuation allowances to reduce its deferred tax assets by the amount that is more likely than not to be realized. Subsequent changes to enacted tax rates will result in changes to deferred taxes and any related valuation allowances.taxes. Management recognizes the impact of the Company's uncertain tax positions that are more likely than not to be sustained upon examination. Management will determine whether it is more likely than not that a tax position will be sustained upon examination. Upon determination that a tax position meets the more-likely-than-not recognition threshold, it is measured to determine the amount of benefit to recognize in the financial statements.
The principal considerations for our determination that performing procedures relating to income taxes is a critical audit matter are there wasthe significant judgment by management in determining the income tax provision and in evaluating the Company’s tax positions, including analyzing uncertain tax positions and assessing the realizability of deferred tax assets, which in turn led to significant auditor judgment, subjectivity, and effort in performing audit procedures and evaluating audit evidence relating to income taxes.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the income tax provision, the identification of uncertain tax positions and assessment of related liability changes, if material, and assessing the realizability of deferred tax assets, including assessing the related positive and negative evidence.material. These procedures also included, among others, (i) testing the completeness and accuracy of the income tax provision, including the rate reconciliation, return to provision adjustments, and permanent and temporary differences, and (ii) testing the completeness of management’s assessment of both the identification of uncertain tax positions and the possible outcomes of each uncertain tax position, and (iii) evaluating management’s assessment of the realizability of deferred tax assets on a jurisdictional basis, including an assessment of the positive and negative evidence regarding realization.positions.
/s/ PricewaterhouseCoopers LLP
Tampa, Florida
February 27, 202014, 2023
We have served as the Company’s auditor since 2013.
HERC HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except par value) | | | December 31, 2019 | | December 31, 2018 | | December 31, 2022 | | December 31, 2021 |
ASSETS | | | | ASSETS | | | |
Cash and cash equivalents | $ | 33.0 |
| | $ | 27.8 |
| Cash and cash equivalents | $ | 53.5 | | | $ | 35.1 | |
Receivables, net of allowances of $18.8 and $21.5, respectively | 306.7 |
| | 332.4 |
| |
Receivables, net of allowances of $17.6 and $13.6, respectively | | Receivables, net of allowances of $17.6 and $13.6, respectively | 522.5 | | | 388.1 | |
Other current assets | 28.9 |
| | 40.2 |
| Other current assets | 67.5 | | | 46.5 | |
Assets held for sale | 31.1 |
| | — |
| |
Total current assets | 399.7 |
| | 400.4 |
| Total current assets | 643.5 | | | 469.7 | |
Rental equipment, net | 2,490.0 |
| | 2,504.7 |
| Rental equipment, net | 3,485.2 | | | 2,665.3 | |
Property and equipment, net | 311.8 |
| | 282.5 |
| Property and equipment, net | 391.9 | | | 308.4 | |
Right-of-use lease assets | 207.3 |
| | — |
| Right-of-use lease assets | 552.0 | | | 413.7 | |
Intangible assets, net | 291.5 |
| | 293.5 |
| Intangible assets, net | 431.4 | | | 388.7 | |
Goodwill | 93.6 |
| | 91.0 |
| Goodwill | 418.7 | | | 231.5 | |
Other long-term assets | 23.1 |
| | 38.1 |
| Other long-term assets | 34.1 | | | 13.1 | |
Total assets | $ | 3,817.0 |
| | $ | 3,610.2 |
| Total assets | $ | 5,956.8 | | | $ | 4,490.4 | |
LIABILITIES AND EQUITY | | | | LIABILITIES AND EQUITY | | | |
Current maturities of long-term debt and financing obligations | $ | 30.4 |
| | $ | 29.9 |
| Current maturities of long-term debt and financing obligations | $ | 16.1 | | | $ | 15.2 | |
Current maturities of operating lease liabilities | 30.5 |
| | — |
| Current maturities of operating lease liabilities | 41.9 | | | 38.7 | |
Accounts payable | 126.5 |
| | 147.0 |
| Accounts payable | 318.3 | | | 280.6 | |
Accrued liabilities | 135.7 |
| | 122.3 |
| Accrued liabilities | 227.7 | | | 195.4 | |
Total current liabilities | 323.1 |
| | 299.2 |
| Total current liabilities | 604.0 | | | 529.9 | |
Long-term debt, net | 2,051.5 |
| | 2,129.9 |
| Long-term debt, net | 2,921.9 | | | 1,916.1 | |
Financing obligations, net | 117.6 |
| | 116.3 |
| Financing obligations, net | 107.8 | | | 111.2 | |
Operating lease liabilities | 182.2 |
| | — |
| Operating lease liabilities | 527.7 | | | 387.4 | |
Deferred tax liabilities | 459.3 |
| | 448.3 |
| Deferred tax liabilities | 646.5 | | | 536.8 | |
Other long-term liabilities | 39.0 |
| | 43.8 |
| Other long-term liabilities | 40.2 | | | 32.1 | |
Total liabilities | 3,172.7 |
| | 3,037.5 |
| Total liabilities | 4,848.1 | | | 3,513.5 | |
Commitments and contingencies (Note 16) | | | | |
Commitments and contingencies (Note 17) | | Commitments and contingencies (Note 17) | | | |
Equity: | | | | Equity: | | | |
Preferred stock, $0.01 par value, 13.3 shares authorized, no shares issued and outstanding | — |
| | — |
| Preferred stock, $0.01 par value, 13.3 shares authorized, no shares issued and outstanding | — | | | — | |
Common stock, $0.01 par value, 133.3 shares authorized, 31.5 and 31.2 shares issued and 28.8 and 28.5 shares outstanding | 0.3 |
| | 0.3 |
| |
Common stock, $0.01 par value, 133.3 shares authorized, 32.7 and 32.4 shares issued and 28.9 and 29.7 shares outstanding | | Common stock, $0.01 par value, 133.3 shares authorized, 32.7 and 32.4 shares issued and 28.9 and 29.7 shares outstanding | 0.3 | | | 0.3 | |
Additional paid-in capital | 1,796.9 |
| | 1,777.9 |
| Additional paid-in capital | 1,820.0 | | | 1,822.2 | |
Accumulated deficit | (351.2 | ) | | (391.1 | ) | |
Retained earnings (accumulated deficit) | | Retained earnings (accumulated deficit) | 224.1 | | | (53.4) | |
Accumulated other comprehensive loss | (109.7 | ) | | (122.4 | ) | Accumulated other comprehensive loss | (128.5) | | | (100.2) | |
Treasury stock, at cost, 2.7 shares and 2.7 shares | (692.0 | ) | | (692.0 | ) | |
Treasury stock, at cost, 3.8 shares and 2.7 shares | | Treasury stock, at cost, 3.8 shares and 2.7 shares | (807.2) | | | (692.0) | |
Total equity | 644.3 |
| | 572.7 |
| Total equity | 1,108.7 | | | 976.9 | |
Total liabilities and equity | $ | 3,817.0 |
| | $ | 3,610.2 |
| Total liabilities and equity | $ | 5,956.8 | | | $ | 4,490.4 | |
The accompanying notes are an integral part of these financial statements.
HERC HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
Revenues: | | | | | |
Equipment rental | $ | 2,551.5 | | | $ | 1,910.4 | | | $ | 1,543.7 | |
Sales of rental equipment | 125.7 | | | 113.1 | | | 198.5 | |
Sales of new equipment, parts and supplies | 35.8 | | | 30.1 | | | 28.2 | |
Service and other revenue | 25.8 | | | 19.5 | | | 10.9 | |
Total revenues | 2,738.8 | | | 2,073.1 | | | 1,781.3 | |
Expenses: | | | | | |
Direct operating | 1,027.7 | | | 782.3 | | | 626.7 | |
Depreciation of rental equipment | 535.9 | | | 420.7 | | | 403.9 | |
Cost of sales of rental equipment | 88.8 | | | 93.3 | | | 203.6 | |
Cost of sales of new equipment, parts and supplies | 22.3 | | | 20.3 | | | 20.5 | |
Selling, general and administrative | 410.1 | | | 310.8 | | | 257.4 | |
Non-rental depreciation and amortization | 94.9 | | | 68.0 | | | 62.5 | |
| | | | | |
Impairment | 3.5 | | | 3.2 | | | 15.4 | |
Interest expense, net | 122.0 | | | 86.3 | | | 92.6 | |
Other expense (income), net | 0.2 | | | (2.2) | | | 4.6 | |
Total expenses | 2,305.4 | | | 1,782.7 | | | 1,687.2 | |
Income before income taxes | 433.4 | | | 290.4 | | | 94.1 | |
Income tax provision | (103.5) | | | (66.3) | | | (20.4) | |
Net income | $ | 329.9 | | | $ | 224.1 | | | $ | 73.7 | |
Weighted average shares outstanding: | | | | | |
Basic | 29.6 | | | 29.6 | | | 29.1 | |
Diluted | 30.2 | | | 30.4 | | | 29.4 | |
Earnings per share: | | | | | |
Basic | $ | 11.15 | | | $ | 7.57 | | | $ | 2.53 | |
Diluted | $ | 10.92 | | | $ | 7.37 | | | $ | 2.51 | |
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2019 | | 2018 | | 2017 |
Revenues: | | | | | |
Equipment rental | $ | 1,701.8 |
| | $ | 1,658.3 |
| | $ | 1,499.0 |
|
Sales of rental equipment | 242.8 |
| | 256.2 |
| | 190.8 |
|
Sales of new equipment, parts and supplies | 44.0 |
| | 49.3 |
| | 52.3 |
|
Service and other revenue | 10.4 |
| | 12.9 |
| | 12.4 |
|
Total revenues | 1,999.0 |
| | 1,976.7 |
| | 1,754.5 |
|
Expenses: | | | | | |
Direct operating | 771.1 |
| | 785.2 |
| | 718.9 |
|
Depreciation of rental equipment | 409.1 |
| | 387.5 |
| | 378.9 |
|
Cost of sales of rental equipment | 243.2 |
| | 244.3 |
| | 192.0 |
|
Cost of sales of new equipment, parts and supplies | 33.3 |
| | 37.7 |
| | 39.5 |
|
Selling, general and administrative | 294.8 |
| | 311.3 |
| | 319.1 |
|
Restructuring | 7.7 |
| | 5.0 |
| | 2.0 |
|
Impairment | 5.1 |
| | 0.1 |
| | 29.7 |
|
Interest expense, net | 173.5 |
| | 137.0 |
| | 140.0 |
|
Other income, net | (2.4 | ) | | (0.2 | ) | | (1.2 | ) |
Total expenses | 1,935.4 |
| | 1,907.9 |
| | 1,818.9 |
|
Income (loss) before income taxes | 63.6 |
| | 68.8 |
| | (64.4 | ) |
Income tax (provision) benefit | (16.1 | ) | | 0.3 |
| | 224.7 |
|
Net income | $ | 47.5 |
| | $ | 69.1 |
| | $ | 160.3 |
|
Weighted average shares outstanding: | | | | | |
Basic | 28.7 |
| | 28.4 |
| | 28.3 |
|
Diluted | 29.1 |
| | 28.9 |
| | 28.6 |
|
Earnings per share: | | | | | |
Basic | $ | 1.66 |
| | $ | 2.43 |
| | $ | 5.66 |
|
Diluted | $ | 1.63 |
| | $ | 2.39 |
| | $ | 5.60 |
|
The accompanying notes are an integral part of these financial statements.
HERC HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions)
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
Net income | $ | 329.9 | | | $ | 224.1 | | | $ | 73.7 | |
Other comprehensive income (loss): | | | | | |
Foreign currency translation adjustments | (16.3) | | | 1.2 | | | 3.7 | |
Reclassification of foreign currency items to other expense (income), net | — | | | — | | | 2.1 | |
Unrealized gains and (losses) on hedging instruments: | | | | | |
| | | | | |
Reclassification into net income | — | | | — | | | (1.5) | |
Income tax provision related to hedging instruments | — | | | — | | | 0.3 | |
Pension and postretirement benefit liability adjustments: | | | | | |
Amortization of net losses and settlement losses included in net periodic pension cost | 1.9 | | | 1.1 | | | 1.7 | |
Pension and postretirement benefit liability adjustments arising during the period | (13.1) | | | 4.8 | | | (3.2) | |
Income tax provision related to pension and postretirement plans | (0.8) | | | (0.3) | | | (0.4) | |
Total other comprehensive income (loss) | (28.3) | | | 6.8 | | | 2.7 | |
Total comprehensive income | $ | 301.6 | | | $ | 230.9 | | | $ | 76.4 | |
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2019 | | 2018 | | 2017 |
Net income | $ | 47.5 |
| | $ | 69.1 |
| | $ | 160.3 |
|
Other comprehensive income (loss): | | | | | |
Foreign currency translation adjustments | 11.5 |
| | (20.0 | ) | | 17.7 |
|
Unrealized gains and (losses) on hedging instruments: | | | | | |
Unrealized gains (losses) on hedging instruments | (3.6 | ) | | 1.5 |
| | 2.1 |
|
Income tax benefit (provision) related to hedging instruments | 2.1 |
| | (0.4 | ) | | (0.8 | ) |
Pension and postretirement benefit liability adjustments: | | | | | |
Amortization of net losses and settlement losses included in net periodic pension cost | 1.9 |
| | 1.9 |
| | 2.3 |
|
Pension and postretirement benefit liability adjustments arising during the period | 3.3 |
| | (5.6 | ) | | — |
|
Income tax benefit (provision) related to pension and postretirement plans | (2.5 | ) | | 1.0 |
| | (1.2 | ) |
Total other comprehensive income (loss) | 12.7 |
| | (21.6 | ) | | 20.1 |
|
Total comprehensive income | $ | 60.2 |
| | $ | 47.5 |
| | $ | 180.4 |
|
The accompanying notes are an integral part of these financial statements.
HERC HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-In Capital | | Retained Earnings (Accumulated Deficit) | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | Total Equity |
Balance at: | Shares | | Amount | |
December 31, 2019 | 28.8 | | | $ | 0.3 | | | $ | 1,796.9 | | | $ | (351.2) | | | $ | (109.7) | | | $ | (692.0) | | | $ | 644.3 | |
Net income | — | | | — | | | — | | | 73.7 | | | — | | | — | | | 73.7 | |
Other comprehensive income | — | | | — | | | — | | | — | | | 2.7 | | | — | | | 2.7 | |
Stock-based compensation charges | — | | | — | | | 16.4 | | | — | | | — | | | — | | | 16.4 | |
Net settlement on vesting of equity awards | 0.3 | | | — | | | (3.0) | | | — | | | — | | | — | | | (3.0) | |
Employee stock purchase plan | — | | | — | | | 2.3 | | | — | | | — | | | — | | | 2.3 | |
Exercise of stock options | 0.3 | | | — | | | 5.6 | | | — | | | — | | | — | | | 5.6 | |
December 31, 2020 | 29.4 | | | 0.3 | | | 1,818.2 | | | (277.5) | | | (107.0) | | | (692.0) | | | 742.0 | |
Net income | — | | | — | | | — | | | 224.1 | | | — | | | — | | | 224.1 | |
Other comprehensive income | — | | | — | | | — | | | — | | | 6.8 | | | — | | | 6.8 | |
Stock-based compensation charges | — | | | — | | | 23.3 | | | — | | | — | | | — | | | 23.3 | |
Dividends declared, $0.50 per share | — | | | — | | | (15.1) | | | — | | | — | | | — | | | (15.1) | |
Net settlement on vesting of equity awards | 0.2 | | | — | | | (9.0) | | | — | | | — | | | — | | | (9.0) | |
Employee stock purchase plan | 0.1 | | | — | | | 2.6 | | | — | | | — | | | — | | | 2.6 | |
Exercise of stock options | — | | | — | | | 2.2 | | | — | | | — | | | — | | | 2.2 | |
December 31, 2021 | 29.7 | | | 0.3 | | | 1,822.2 | | | (53.4) | | | (100.2) | | | (692.0) | | | 976.9 | |
Net income | — | | | — | | | — | | | 329.9 | | | — | | | — | | | 329.9 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (28.3) | | | — | | | (28.3) | |
Stock-based compensation charges | — | | | — | | | 27.1 | | | — | | | — | | | — | | | 27.1 | |
Dividends declared, $2.30 per share | — | | | — | | | (17.6) | | | (52.4) | | | — | | | — | | | (70.0) | |
Net settlement on vesting of equity awards | 0.3 | | | — | | | (15.5) | | | — | | | — | | | — | | | (15.5) | |
Employee stock purchase plan | — | | | — | | | 3.6 | | | — | | | — | | | — | | | 3.6 | |
Exercise of stock options | — | | | — | | | 0.2 | | | — | | | — | | | — | | | 0.2 | |
Repurchase of common stock | (1.1) | | | — | | | — | | | — | | | — | | | (115.2) | | | (115.2) | |
December 31, 2022 | 28.9 | | | $ | 0.3 | | | $ | 1,820.0 | | | $ | 224.1 | | | $ | (128.5) | | | $ | (807.2) | | | $ | 1,108.7 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-In Capital | | Retained Earnings (Accumulated Deficit) | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | Total Equity |
Balance at: | Shares | | Amount | |
December 31, 2016 | 28.3 |
| | $ | 0.3 |
| | $ | 1,753.3 |
| | $ | (625.2 | ) | | $ | (118.7 | ) | | $ | (692.0 | ) | | $ | 317.7 |
|
Net income | — |
| | — |
| | — |
| | 160.3 |
| | — |
| | — |
| | 160.3 |
|
Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 20.1 |
| | — |
| | 20.1 |
|
Cumulative effect of a change in accounting for stock-based payments | — |
| | — |
| | — |
| | 2.5 |
| | — |
| | — |
| | 2.5 |
|
Net settlement on vesting of equity awards | — |
| | — |
| | (0.1 | ) | | — |
| | — |
| | — |
| | (0.1 | ) |
Stock-based compensation charges | — |
| | — |
| | 10.1 |
| | — |
| | — |
| | — |
| | 10.1 |
|
Employee stock purchase plan | — |
| | — |
| | 1.1 |
| | — |
| | — |
| | — |
| | 1.1 |
|
Exercise of stock options | — |
| | — |
| | 0.7 |
| | — |
| | — |
| | — |
| | 0.7 |
|
Net transfers with THC | — |
| | — |
| | (2.0 | ) | | — |
| | — |
| | — |
| | (2.0 | ) |
December 31, 2017 | 28.3 |
| | 0.3 |
| | 1,763.1 |
| | (462.4 | ) | | (98.6 | ) | | (692.0 | ) | | 510.4 |
|
Net income | — |
| | — |
| | — |
| | 69.1 |
| | — |
| | — |
| | 69.1 |
|
Cumulative effect of accounting change (Note 14) | — |
| | — |
| | — |
| | 2.2 |
| | (2.2 | ) | | — |
| | — |
|
Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (21.6 | ) | | — |
| | (21.6 | ) |
Net settlement on vesting of equity awards | 0.1 |
| | — |
| | (1.1 | ) | | — |
| | — |
| | — |
| | (1.1 | ) |
Stock-based compensation charges | — |
| | — |
| | 13.4 |
| | — |
| | — |
| | — |
| | 13.4 |
|
Employee stock purchase plan | — |
| | — |
| | 2.0 |
| | — |
| | — |
| | — |
| | 2.0 |
|
Exercise of stock options | 0.1 |
| | — |
| | 0.5 |
| | — |
| | — |
| | — |
| | 0.5 |
|
December 31, 2018 | 28.5 |
| | 0.3 |
| | 1,777.9 |
| | (391.1 | ) | | (122.4 | ) | | (692.0 | ) | | 572.7 |
|
Net income | — |
| | — |
| | — |
| | 47.5 |
| | — |
| | — |
| | 47.5 |
|
Adoption of new accounting pronouncement (Note 2) | — |
| | — |
| | — |
| | (7.6 | ) | | — |
| | — |
| | (7.6 | ) |
Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 12.7 |
| | — |
| | 12.7 |
|
Net settlement on vesting of restricted stock | 0.3 |
| | — |
| | (3.7 | ) | | — |
| | — |
| | — |
| | (3.7 | ) |
Stock-based compensation charges | — |
| | — |
| | 19.5 |
| | — |
| | — |
| | — |
| | 19.5 |
|
Employee stock purchase plan | — |
| | — |
| | 2.4 |
| | — |
| | — |
| | — |
| | 2.4 |
|
Exercise of stock options | — |
| | — |
| | 0.8 |
| | — |
| | — |
| | — |
| | 0.8 |
|
December 31, 2019 | 28.8 |
| | $ | 0.3 |
| | $ | 1,796.9 |
| | $ | (351.2 | ) | | $ | (109.7 | ) | | $ | (692.0 | ) | | $ | 644.3 |
|
The accompanying notes are an integral part of these financial statements.
HERC HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
Cash flows from operating activities: | | | | | |
Net income | $ | 329.9 | | | $ | 224.1 | | | $ | 73.7 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Depreciation of rental equipment | 535.9 | | | 420.7 | | | 403.9 | |
Depreciation of property and equipment | 63.5 | | | 55.6 | | | 54.5 | |
Amortization of intangible assets | 31.4 | | | 12.4 | | | 8.0 | |
Amortization of deferred debt and financing obligations costs | 3.3 | | | 3.2 | | | 3.4 | |
| | | | | |
Stock-based compensation charges | 27.1 | | | 23.3 | | | 16.4 | |
| | | | | |
Impairment | 3.5 | | | 3.2 | | | 15.4 | |
Provision for receivables allowance | 52.3 | | | 28.9 | | | 31.4 | |
Deferred taxes | 83.8 | | | 53.4 | | | 11.9 | |
Loss (gain) on sale of rental equipment | (36.9) | | | (19.8) | | | 5.1 | |
Other | 2.8 | | | 1.9 | | | 4.7 | |
Changes in assets and liabilities: | | | | | |
Receivables | (171.9) | | | (92.7) | | | (24.6) | |
Other assets | (15.7) | | | (9.4) | | | (7.9) | |
Accounts payable | (22.4) | | | 22.9 | | | (6.4) | |
Accrued liabilities and other long-term liabilities | 30.1 | | | 16.3 | | | 21.4 | |
Net cash provided by operating activities | 916.7 | | | 744.0 | | | 610.9 | |
Cash flows from investing activities: | | | | | |
Rental equipment expenditures | (1,168.5) | | | (593.8) | | | (344.1) | |
Proceeds from disposal of rental equipment | 121.1 | | | 106.9 | | | 192.5 | |
Non-rental capital expenditures | (103.7) | | | (48.0) | | | (41.4) | |
Proceeds from disposal of property and equipment | 7.5 | | | 4.6 | | | 6.6 | |
Acquisitions, net of cash acquired | (515.2) | | | (431.0) | | | (45.6) | |
Proceeds from disposal of business | — | | | — | | | 24.5 | |
Other investing activities | (23.0) | | | — | | | — | |
Net cash used in investing activities | (1,681.8) | | | (961.3) | | | (207.5) | |
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2019 | | 2018 | | 2017 |
Cash flows from operating activities: | | | | | |
Net income | $ | 47.5 |
| | $ | 69.1 |
| | $ | 160.3 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Depreciation of rental equipment | 409.1 |
| | 387.5 |
| | 378.9 |
|
Depreciation of property and equipment | 54.0 |
| | 51.9 |
| | 46.8 |
|
Amortization of intangible assets | 7.0 |
| | 5.4 |
| | 4.7 |
|
Amortization of deferred debt and financing obligations costs | 5.2 |
| | 6.3 |
| | 6.4 |
|
Loss on extinguishment of debt | 53.6 |
| | 5.4 |
| | 11.4 |
|
Stock-based compensation charges | 19.5 |
| | 13.4 |
| | 10.1 |
|
Restructuring | 5.5 |
| | — |
| | — |
|
Impairment | 5.1 |
| | 0.1 |
| | 29.7 |
|
Provision for receivables allowance | 48.2 |
| | 57.8 |
| | 52.4 |
|
Deferred taxes | 10.7 |
| | (10.5 | ) | | (228.4 | ) |
Loss (gain) on sale of rental equipment | 0.4 |
| | (11.9 | ) | | 1.2 |
|
Income from joint ventures | (0.3 | ) | | (1.6 | ) | | (1.9 | ) |
Other | (1.5 | ) | | 2.1 |
| | 1.8 |
|
Changes in assets and liabilities: | | | | | |
Receivables | (38.3 | ) | | (29.9 | ) | | (131.6 | ) |
Other assets | 4.1 |
| | 1.8 |
| | (2.1 | ) |
Accounts payable | (12.9 | ) | | (1.7 | ) | | (10.0 | ) |
Accrued liabilities and other long-term liabilities | 18.7 |
| | 13.9 |
| | 19.4 |
|
Net cash provided by operating activities | 635.6 |
| | 559.1 |
| | 349.1 |
|
Cash flows from investing activities: | | | | | |
Rental equipment expenditures | (638.4 | ) | | (771.4 | ) | | (501.4 | ) |
Proceeds from disposal of rental equipment | 224.2 |
| | 272.3 |
| | 160.1 |
|
Non-rental capital expenditures | (56.9 | ) | | (77.6 | ) | | (74.6 | ) |
Proceeds from disposal of property and equipment | 7.7 |
| | 9.7 |
| | 5.9 |
|
Other investing activities | (0.2 | ) | | — |
| | — |
|
Net cash used in investing activities | (463.6 | ) | | (567.0 | ) | | (410.0 | ) |
The accompanying notes are an integral part of these financial statements.
4540
HERC HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In millions)
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
Cash flows from financing activities: | | | | | |
| | | | | |
| | | | | |
Proceeds from revolving lines of credit and securitization | 2,617.8 | | | 1,131.6 | | | 528.0 | |
Repayments on revolving lines of credit and securitization | (1,616.2) | | | (880.0) | | | (924.7) | |
| | | | | |
Principal payments under finance lease and financing obligations | (14.9) | | | (12.9) | | | (13.9) | |
| | | | | |
Payment of debt financing costs | (7.6) | | | (0.1) | | | (0.3) | |
Dividends paid | (68.1) | | | (14.8) | | | — | |
Net settlement on vesting of equity awards | (15.5) | | | (9.0) | | | (3.0) | |
Proceeds from employee stock purchase plan | 3.6 | | | 2.6 | | | 2.3 | |
Proceeds from exercise of stock options | 0.2 | | | 2.2 | | | 5.6 | |
Repurchase of common stock | (115.2) | | | — | | | — | |
Net cash provided by (used in) financing activities | 784.1 | | | 219.6 | | | (406.0) | |
Effect of foreign exchange rate changes on cash and cash equivalents | (0.6) | | | (0.2) | | | 2.6 | |
Net change in cash and cash equivalents during the period | 18.4 | | | 2.1 | | | — | |
Cash and cash equivalents at beginning of period | 35.1 | | | 33.0 | | | 33.0 | |
Cash and cash equivalents at end of period | $ | 53.5 | | | $ | 35.1 | | | $ | 33.0 | |
| | | | | |
Supplemental disclosures of cash flow information: | | | | | |
Cash paid for interest | $ | 114.1 | | | $ | 82.7 | | | $ | 92.4 | |
Cash paid for income taxes, net | $ | 22.1 | | | $ | 22.8 | | | $ | 5.0 | |
Supplemental disclosures of non-cash investing activity: | | | | | |
Purchases of rental equipment in accounts payable | $ | 38.4 | | | $ | 129.1 | | | $ | 4.0 | |
Non-rental capital expenditures in accounts payable | $ | 16.6 | | | $ | — | | | $ | 1.3 | |
| | | | | |
| | | | | |
Supplemental disclosures of non-cash investing and financing activity: | | | | | |
Equipment acquired through finance lease | $ | 24.1 | | | $ | 22.5 | | | $ | 1.4 | |
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2019 | | 2018 | | 2017 |
Cash flows from financing activities: | | | | | |
Proceeds from issuance of long-term debt | 1,200.0 |
| | — |
| | — |
|
Repayments of long-term debt | (864.5 | ) | | (123.5 | ) | | (247.0 | ) |
Proceeds from revolving lines of credit and securitization | 1,230.0 |
| | 737.5 |
| | 561.9 |
|
Repayments on revolving lines of credit and securitization | (1,664.8 | ) | | (604.0 | ) | | (339.2 | ) |
Proceeds from financing obligations | 4.7 |
| | 6.4 |
| | 119.5 |
|
Principal payments under finance lease and financing obligations | (17.2 | ) | | (17.0 | ) | | (16.7 | ) |
Debt redemption premium payment | (41.5 | ) | | (3.7 | ) | | (7.4 | ) |
Payment of financing obligation and debt financing costs | (13.3 | ) | | (1.3 | ) | | (2.7 | ) |
Proceeds from exercise of stock options | 0.8 |
| | 0.5 |
| | 0.7 |
|
Proceeds from employee stock purchase plan | 2.4 |
| | 2.0 |
| | 1.1 |
|
Net settlement on vesting of equity awards | (3.7 | ) | | (1.1 | ) | | (0.1 | ) |
Net cash provided by (used in) financing activities | (167.1 | ) | | (4.2 | ) | | 70.1 |
|
Effect of foreign exchange rate changes on cash and cash equivalents | 0.3 |
| | (1.6 | ) | | 1.3 |
|
Net increase (decrease) in cash and cash equivalents during the period | 5.2 |
| | (13.7 | ) | | 10.5 |
|
Cash and cash equivalents at beginning of period | 27.8 |
| | 41.5 |
| | 31.0 |
|
| $ | 33.0 |
| | $ | 27.8 |
| | $ | 41.5 |
|
| | | | | |
Supplemental disclosures of cash flow information: | | | | | |
Cash paid for interest | $ | 130.6 |
| | $ | 129.3 |
| | $ | 131.7 |
|
Cash paid (refunded) for income taxes, net | $ | 7.9 |
| | $ | 13.4 |
| | $ | (5.5 | ) |
Supplemental disclosures of non-cash investing activity: | | | | | |
Purchases of rental equipment in accounts payable | $ | — |
| | $ | — |
| | $ | 22.8 |
|
Disposals of rental equipment in accounts receivable | $ | — |
| | $ | — |
| | $ | 12.6 |
|
Non-rental capital expenditures in accounts payable | $ | 2.8 |
| | $ | — |
| | $ | — |
|
Disposals of property and equipment in accounts receivable | $ | 2.4 |
| | $ | — |
| | $ | — |
|
Note receivable on disposal of joint venture | $ | 19.0 |
| | $ | — |
| | $ | — |
|
Supplemental disclosures of non-cash financing activity: | | | | | |
Non-cash settlement of transactions with THC through equity | $ | — |
| | $ | — |
| | $ | 2.0 |
|
Supplemental disclosures of non-cash investing and financing activity: | | | | | |
Equipment acquired through finance leases | $ | 39.1 |
| | $ | 2.6 |
| | $ | 0.4 |
|
The accompanying notes are an integral part of these financial statements.
4641
HERC HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1—Organization and Description of Business Note 1—Background
Herc Holdings Inc. ("Herc Holdings" or the "Company") is one of the leading equipment rental suppliers with approximately 275356 locations in North America as of December 31, 2019, principally in North America.2022. The Company conducts substantially all of its operations through subsidiaries, including Herc Rentals Inc. ("Herc"). Operations are conducted under the Herc Rentals brand in the United States and Canada and under the Hertz Equipment Rental brand in other international locations. With over 5057 years of experience, the Company is a full-line equipment rental supplier offering a broad portfolio of equipment for rent. In addition to its principal business of equipment rental, the Company sells used equipment and contractor supplies such as construction consumables, tools, small equipment and safety supplies; provides repair, maintenance, equipment management services and safety training to certain of its customers; offers equipment re-rental services and provides on-site support to its customers; and provides ancillary services such as equipment transport, rental protection, cleaning, refueling and labor.
The Company's classic fleet includes aerial, earthmoving, material handling, trucks and trailers, air compressors, compaction and lighting. The Company's equipment rental business is supported by ProSolutionsRProSolutions®, its industry-specific solutions-based services, which includes power generation, climate control, remediation and restoration, andpumps, trench shoring, studio and production equipment, and its ProContractor professional grade tools.
On June 30, 2016, the Company, in its previous form as the holding company of both the existing equipment rental operations as well as the former vehicle rental operations (in its form prior to the Spin-Off, "Hertz Holdings"), completed a spin-off (the "Spin-Off") of its global vehicle rental business through a dividend to stockholders of all of the issued and outstanding common stock of Hertz Rental Car Holding Company, Inc., which was re-named Hertz Global Holdings, Inc. ("New Hertz") in connection with the Spin-Off. New Hertz is an independent public company that trades on the New York Stock Exchange under the symbol "HTZ" and continues to operate its global vehicle rental business through its operating subsidiaries including The Hertz Corporation ("THC"). The Company changed its name to Herc Holdings Inc. on June 30, 2016, and trades on the New York Stock Exchange under the symbol “HRI.”
Note 2—Basis of Presentation and Recently IssuedSignificant Accounting PronouncementsPolicies
Basis of Presentation
The Company prepares its consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP"). The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and footnotes. Actual results could differ materially from those estimates.
Significant estimates inherent in the preparation of the consolidated financial statements include 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, valuation of acquired intangible assets, pension and postretirement benefits, valuation of stock-based compensation, reserves for litigation and other contingencies and accounting for income taxes.taxes, among others.
Principles of Consolidation
The consolidated financial statements include the accounts of Herc Holdings and its wholly owned subsidiaries. In the event that the Company is a primary beneficiary of a variable interest entity, the assets, liabilities and results of operations of the variable interest entity are included in the Company's consolidated financial statements. The Company accounts for investments in joint ventures using the equity method when it has significant influence but not control and is not the primary beneficiary. All significant intercompany transactions have been eliminated in consolidation.
Reclassifications
Certain amounts in prior years have been reclassified to conform with the presentation in the current year.
HERC HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and highly liquid investments with an original maturity of three months or less.
Concentration of Credit Risk
The Company's cash and cash equivalents are held in checking accounts, various investment grade institutional money market accounts or bank term deposits. Deposits held at banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with financial institutions with reputable credit and therefore bear minimal credit risk. The Company seeks to mitigate such risks by spreading the risk across multiple counterparties and monitoring the risk profiles of these counterparties. In addition, the Company has credit risk from financial
HERC HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
instruments used in hedging activities.activities, when appropriate. The Company limits its exposure relating to financial instruments by diversifying the financial instruments among various counterparties, which consist of major financial institutions.
No single customer accounted for more than 3% of the Company’s equipment rental revenue during the years ended December 31, 2019, 20182022, 2021 and 2017.2020. As of December 31, 20192022 and 2018,2021, no single customer accounted for more than 5% of accounts receivable.
Receivables
Receivables are stated net of allowances and represent credit extended to customers and manufacturers that satisfy defined credit criteria. The estimate of the allowance for doubtful accounts is based on the Company's historical experience and its judgment as to the likelihood of ultimate collection. Actual receivables are written-off against the allowance for doubtful accounts when the Company determines the balance will not be collected. Estimates for future credit memos are based on historical experience and are reflected as reductions to revenue, while the provision for bad debt for rental transactions is reflected as a component of "Selling, general and administrative expenses" in the Company's consolidated statements of operations.
Rental Equipment
Rental equipment is stated at cost, net of related discounts, with holding periods ranging from one year to 15 years. Generally, when rental equipment is acquired, the Company estimates the period that it will hold the asset, primarily based on historical measures of the amount of rental activity (e.g. equipment usage) and the targeted age of equipment at the time of disposal. The Company also estimates the residual value of the applicable rental equipment at the expected time of disposal. The residual value for rental equipment is affected by factors which include equipment age and amount of usage. Depreciation is recorded over the estimated holding period. Depreciation rates are reviewed on a quarterly basis based on management's ongoing assessment of present and estimated future market conditions, their effect on residual values at the time of disposal and the estimated holding periods. Market conditions for used equipment sales can also be affected by external factors such as the economy, natural disasters, fuel prices, supply of similar used equipment, the market price for similar new equipment and incentives offered by manufacturers of new equipment. These key factors are considered when estimating future residual values and assessing depreciation rates. As a result of this ongoing assessment, the Company makes periodic adjustments to depreciation rates of rental equipment in response to changed market conditions.
Property and Equipment
Property and equipment are stated at cost and are depreciated utilizing the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized over the estimated useful lives of the related assets or leases, whichever is shorter.
HERC HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Useful lives are as follows:
|
| | | | |
Buildings | 8 to 33 years |
Service vehicles | 3 to 1513 years |
Machinery and equipment | 1 to 15 years |
Computer equipment | 31 to 5 years |
Furniture and fixtures | 2 to 10 years |
Leasehold improvements | The lesser of the asset life or expected lease term including lease extension options. |
The Company follows the practice of charging routine maintenance and repairs, including the cost of minor replacements, to maintenance expense. Costs of major replacements are capitalized and depreciated.
HERC HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Leases
Leases are classified as either finance or operating at inception of the lease, with classification affecting the pattern of expense recognition in the income statement. Operating and finance leases result in the recognition of right-of-use ("ROU") assets and lease liabilities on the balance sheet. ROU assets represent the Company's right to use the leased asset for the lease term and lease liabilities represent the obligation to make lease payments. The liability is calculated as the present value of the remaining minimum lease payments for existing operating leases using either the rate implicit in the lease or, if none exists, the Company's incremental borrowing rate. The Company's capital leases are accounted for as finance leases; no significant changes have been made forOperating lease cost is recorded on a straight-line basis over the accountingremaining lease term. Finance lease cost includes amortization of such leases upon the adoption of ASC Topic 842, Leases, ("Topic 842")ROU assets on January 1, 2019.a straight-line basis and interest on the lease liabilities using the effective interest method.
In certain instances, the Company may sell property and enter into an arrangement to lease the property back from the landlord. In these instances, the Company performs a sale-leaseback analysis to determine if the assets can be removed from the balance sheet. If certain criteria are met, the Company recognizes the transaction as a sale, removes the assets from its balance sheet and reflects the future lease payments as rent expense. If the criteria for sale is not met, such as available repurchase options or continuing involvement with the property, the Company is considered the owner for accounting purposes. In these instances, the Company is precluded from derecognizing the assets from its balance sheet and will continue to depreciate the assets over the expected lease term. In conjunction with these arrangements, the Company records a financing obligation equal to the cash proceeds or fair market value of the assets received from the landlord. Lease payments for these properties are recognized as interest expense and a reduction of the financing obligation using the effective interest method. At the end of the lease term, including exercise of any renewal options, the net remaining financing obligation over the net carrying value of the fixed asset will be recognized as a non-cash gain on sale of the property.
Public Liability and Property DamageReserves for Self-Insured Claims
The obligation for public liability and property damage on self-insured U.S. and international equipment represents an estimate for both reported accident claims not yet paid, and claims incurred but not yet reported. The related liabilities are recorded on a non-discounted basis. Reserve requirements are based on actuarial evaluations of historical accident claim experience and trends, as well as future projections of ultimate losses, expenses, premiums and administrative costs. The adequacy of the liability is regularly monitored based on evolving accident claim history and insurance-related state legislation changes. If the Company's estimates change or if actual results differ from these assumptions, the amount of the recorded liability is adjusted to reflect these results.
Reserves for Claims
The Company is exposed to various claims relating to our business, including those for which we provide self-insurance. Claims for which we self-insure include: (i) workers compensation claims; (ii) general liability claims by third parties for injury or property damage caused by our equipment or personnel; (iii) automobile liability claims; and (iv) employee health insurance claims. These types of claims may take a substantial amount of time to resolve and, accordingly, the ultimate liability associated with a particular claim, including claims incurred but not reported as of a period-end reporting date, may not be known for an extended period of time. The Company's methodology for developing self-insurance reserves is based on management estimates and independent third party actuarial estimates. The estimation process considers, among other matters, the cost of known claims over time, cost inflation and incurred but not reported claims. These estimates may change based on, among other things, changes in the Company's claim history or receipt of additional information relevant to assessing the claims and the amount of the recorded liability is adjusted
HERC HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
to reflect these changes. The long-term portion of our self-insurance reserves is included in "Other long-term liabilities" in the consolidated balance sheet.
Defined Benefit Pension Plans and Other Employee Benefits
The Company's employee pension costs and obligations are developed from actuarial valuations. Inherent in these valuations are key assumptions, including discount rates, salary growth, long-term return on plan assets, retirement rates, mortality rates and other factors. The selection of assumptions is based on historical trends and known economic and market conditions at the time of valuation, as well as independent studies of trends performed by actuaries. However, actual results may differ substantially from the estimates that were based on the critical assumptions. The Company uses a December 31 measurement date for all of the plans.
Actual results that differ from the Company's assumptions are accumulated and amortized over future periods and, therefore, generally affect its recognized expense in such future periods. While management believes that the assumptions used are
HERC HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
appropriate, significant differences in actual experience or significant changes in assumptions would affect the Company's pension costs and obligations.
The Company maintains reserves for employee medical claims, up to its insurance stop-loss limit, and workers' compensation claims. These are regularly evaluated and revised, as needed, based on a variety of information, including historical experience, actuarial estimates and current employee statistics.
Foreign Currency Translation and Transactions
Assets and liabilities of international subsidiaries whose functional currency is the local currency are translated at the rate of exchange in effect on the balance sheet date; income and expenses are translated at the average exchange rates throughout the year. The related translation adjustments are reflected in “Accumulated other comprehensive income (loss)” in the equity section of the Company's consolidated balance sheets. Foreign currency gains and losses resulting from transactions are included in earnings.
Financial Instruments
The Company is exposed to a variety of market risks, including the effects of changes in interest rates and foreign currency exchange rates. The Company manages exposure to these market risks through ongoing processes to monitor the impact of market changes and, when deemed appropriate, through the use of financial instruments. Financial instruments are viewed as risk management tools and have not been used for speculative or trading purposes. The Company accounts for all derivatives in accordance with U.S. GAAP, which requires that they be recorded on the balance sheet as either assets or liabilities measured at their fair value. For financial instruments that are designated and qualify as hedging instruments, the Company designates the hedging instrument, based upon the exposure being hedged, as either a fair value hedge or a cash flow hedge. The effective portion of changes in fair value of financial instruments designated as cash flow hedging instruments is recorded as a component of other comprehensive income (loss). Amounts included in accumulated other comprehensive income (loss) for cash flow hedges are reclassified into earnings in the same period that the hedged item is recognized in earnings. The ineffective portion of changes in the fair value of financial instruments designated as cash flow hedges is recognized currently in earnings within the same line item as the hedged item, based upon the nature of the hedged item. For financial instruments that are not part of a qualified hedging relationship, the changes in their fair value are recognized currently in earnings.
Business Combinations
The Company has made multiple acquisitions and may continue to make acquisitions in the future. The assets acquired and liabilities assumed are recorded based on their respective fair values at the date of acquisition. Long-lived assets (principally rental equipment), goodwill and other intangible assets generally represent the largest components of the acquisitions. Rental equipment is valued utilizing either a cost or market approach, or a combination of these methods, depending on the asset being valued and the availability of market data. The intangible assets that the Company has acquired are non-compete agreements, customer relationships, and trade names and associated trademarks. The estimated fair values of these intangible assets reflect various assumptions about discount rates, revenue growth rates, operating margins, terminal values, useful lives and other prospective financial information. Goodwill is calculated as the excess of the cost of the acquired entity over the net of the fair value of the assets acquired and the liabilities assumed. Non-compete agreements, customer relationships, and trade names and associated trademarks are valued based on an excess earnings or income approach based on projected cash flows and may be amortized over the useful life if they are determined to be finite-lived intangible assets. Determining the fair value of the assets and liabilities acquired is judgmental in nature and can involve the use of significant estimates and assumptions.
As part of an acquisition, the Company will also acquire other assets and assume liabilities. These other assets and liabilities typically include, but are not limited to, parts inventory, accounts receivable, accounts payable and other working capital items. Because of their short-term nature, the fair values of these other assets and liabilities generally approximate the book values on the acquired entities' balance sheets.
Goodwill and Indefinite-Lived Intangible Assets
On an annual basis and at interim periods when circumstances require, the Company tests the recoverability of its goodwill. The analysis is conducted as of October 1 each year. The Company has 1one reporting unit and compares the carrying value of its reporting unit to its fair value. If the carrying value of the reporting unit is greater than its fair value, the Company recognizes an impairment charge for the amount equal to that excess.
The Company may first assess qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the quantitative
HERC HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
goodwill impairment test. If a quantitative impairment test is performed, the fair value of the reporting unit is estimated using a combination of an income approach on the present value of estimated future cash flows and a market approach based on published earnings multiples of
HERC HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
comparable entities with similar operations and economic characteristics as well as acquisition multiples paid in recent transactions. The Company’s discounted cash flows are based upon reasonable and appropriate assumptions, which are weighted for their likely probability of occurrence, about the underlying business activities of the Company.
Indefinite-lived intangible assets, primarily ourthe Company's trade name, are not amortized but are evaluated annually for impairment and whenever events or changes in circumstances indicate that the carrying amount of this asset may exceed its fair value. If the carrying value of an indefinite-lived intangible asset exceeds its fair value, an impairment charge is recognized in an amount equal to that excess.
Finite-Lived Intangible and Long-Lived Assets
Intangible assets include technology, customer relationships and technology.other intangibles. Intangible assets with finite lives are amortized using the straight-line method over the estimated economic lives of the assets, which range from three yearsfive to 1014 years. These assets are primarily amortized using the straight-line method, however, certain assets may be amortized using an accelerated method that reflects the economic benefit to the Company. Long-lived assets, including intangible assets with finite lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss for long-lived assets that management expects to hold and use is based on the estimated fair value of the asset.
Long-lived assets, or disposal groups comprising assets and liabilities, that are expected to be recovered primarily through sale rather than through continuing use are classified as assets held for sale. Upon designation as an asset held for sale, the carrying value of each long-lived asset or disposal group is recorded at the lower of its carrying value or its estimated fair value, less estimated costs to sell, and depreciation expense is no longer recorded.
Revenue Recognition
The Company is principally engaged in the business of renting equipment. Ancillary to the Company’s principal equipment rental business, the Company also sells used rental equipment, new equipment and parts and supplies and offers certain services to support its customers.
The Company’s rental transactions are principally accounted for under Topic 842. Prior to the adoption ofASC Topic 842, on January 1, 2019, the Company accounted for these transactions under ASC Topic 840, Leases,, ("("Topic 840"842"). Equipment rental revenue includes revenue generated from renting equipment to customers, including re-rent revenue, and is recognized on a straight-line basis over the length of the rental contract. Other equipment rental revenues include fees for the Company's rental protection program and environmental charges and are recognized on a straight-line basis over the length of the rental contractcontract.
The Company’s sale of rental and new equipment, parts and supplies along with certain services provided to customers are recognized under ASC Topic 606, Revenue from Contracts with Customers, ("Topic 606") which was adopted on January 1, 2018. Prior to adoption of Topic 606, the Company recognized these transactions under ASC Topic 605, Revenue Recognition, ("Topic 605"). The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. The amount of revenue recognized reflects the consideration the Company expects to be entitled to in exchange for such products or services.
See Note 3,, "Revenue Recognition" "Revenue Recognition" for further discussion of ourthe Company's revenue accounting.
Advertising
Advertising and sales promotion costs are expensed the first time the advertising or sales promotion takes place. Advertising costs are reflected as a component of "Selling, general and administrative" expense in the Company's consolidated statements of operations. For the years ended December 31, 2019, 2018 and 2017, advertising costs were $2.7 million, $1.0 million and $2.7 million, respectively.
Stock Based Compensation
Under the Company's stock based compensation plans, certain employees and members of the Company's board of directors have received grants of restricted stock units, performance stock units and stock options for Herc Holdings common stock.
HERC HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. That cost is recognized over the period during which the employee is required to provide service in exchange for the award. The Company estimates the fair value of stock options issued at the date of grant using a Black-Scholes option-pricing model, which includes assumptions related to volatility, expected term, dividend yield and risk-free interest rate.
HERC HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company accounts for restricted stock unit and performance stock unit awards as equity classified awards. For restricted stock units, the expense is based on the grant date fair value of the stock and the number of shares that vest, recognized over the service period. For performance stock units, the expense is based on the grant date fair value of the stock, recognized over a service period depending upon the applicable performance condition. For performance stock units, the Company re-assesses the probability of achieving the applicable performance condition each reporting period and adjusts the recognition of expense accordingly.
Income Taxes
The Company applies the provisions of ASC Topic 740, Income Taxes, ("Topic 740"), and computes the provision for income taxes on a Separate Return Basis. Under Topic 740, deferred tax assets and liabilities are determined based on differences between the financial statement carrying amounts and tax bases of assets and liabilities and are measured using the enacted tax rates that are expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates is recognized in the statement of operations in the period that includes the enactment date. The Company records valuation allowances to reduce its deferred tax assets by the amount that is more likely than not to be realized. Subsequent changes to enacted tax rates and changes in the interpretations thereof will result in deferred taxes and changes to any related valuation allowances. Provisions are not made for income taxes on undistributed earnings of international subsidiaries that are intended to be indefinitely reinvested outside of the United States or are expected to be remitted free of taxes. Future distributions, if any, from these international subsidiaries to the United States or changes in U.S. tax rules may require a charge to reflect tax on these amounts.
In accordance with Topic 740, the Company recognizes, in its consolidated financial statements, the impact of the Company's tax positions that are more likely than not to be sustained upon examination. The Company will determine whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, the Company presumes that the position will be examined by the appropriate taxing authority with full knowledge of all relevant information. Upon determination that a tax position meets the more-likely-than-not recognition threshold, it is measured to determine the amount of benefit to recognize in the financial statements. The Company recognizes interest and penalties for uncertain tax positions in income tax expense.
The Tax Cuts and Jobs Act of 2017 (the "2017 Tax Act"), had a substantial impact on the income tax benefit for the years ended December 31, 2018 and 2017. See Note 14, "Income Taxes" for further detail.
Recently Issued Accounting Pronouncements
Adopted
Leases
In February 2016,As of December 31, 2022, the Company has implemented all applicable new accounting standards and updates issued by the Financial Accounting Standards Board ("FASB") issuedthat were in effect. There were no new leasing guidance ("Topic 842")standards or updates during the year ended December 31, 2022 that replaced the existing lease guidance ("Topic 840"). Topic 842 established a right-of-use ("ROU") model that requires a lessee to record a ROU asset and lease liability on the balance sheet for all leases with terms longer than 12 months. Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. This guidance also expanded the requirements for lessees to record leases embedded in other arrangements and the required quantitative and qualitative disclosures surrounding leases. Accounting guidance for lessors is largely unchanged.
The Company adopted Topic 842 on its effective date of January 1, 2019 using a modified retrospective transition approach; as such, Topic 842 was not applied to periods prior and the adoption had no impact on the Company's previously reported results. The Company recognized operating lease liabilities of $165.3 million upon adoption, with corresponding ROU assets on its balance sheet. This guidance did not have a material impact on its results of operations and cash flows.
HERC HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company took advantage of the transition package of practical expedients permitted within Topic 842 which allowed the Company not to reassess (i) whether any expired or existing lease contracts are or contain leases, (ii) the historical lease classification for any expired or existing leases and (iii) initial direct costs for any existing leases. The Company has elected not to combine lease and non-lease components for its real estate leases and allocates the consideration in the contract based on relative stand-alone prices of each component.
Additionally, as discussed in Note 3, "Revenue Recognition," most of the Company's equipment rental revenues were accounted for under Topic 840 until the adoption of Topic 842. The Company recognized a cumulative-effect adjustment to the opening balance of retained earnings related to these items of $7.6 million. The adoption of Topic 842 does not have a significant impact on future revenues. The Company also elected the practical expedient that allows lessors to treat the lease and non-lease components as a single lease component where the non-lease component would otherwise be accounted for under Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers (“Topic 606”), astiming and pattern of transfer for the lease component and non-lease components associated with that lease component are the same.
Not Yet Adopted
Compensation - Retirement Benefits
In August 2018, the FASB issued guidance that adds, removes, and modifies disclosure requirements related to defined benefit pension and other postretirement plans in order to improve the disclosure effectiveness. The guidance is effective for fiscal years beginning after December 15, 2020 and should be applied on a retrospective basis to all periods presented, with early adoption permitted. The Company expects to adopt the new and modified disclosures requirements of this new guidance on its effective date.
Fair Value Measurement
In August 2018, the FASB issued new guidance that modifies disclosure requirements on fair value measurements, removing and modifying certain disclosures, while adding other disclosures. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Company expects to adopt the new guidance on its effective date and adoption is not expected to have a material impact on the Company'sconsolidated financial statement disclosures.statements.
Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued guidance that will require companies to present assets held at amortized cost and available for sale debt securities net of the amount expected to be collected. The guidance requires the measurement of expected credit losses to be based on relevant information from past events, including historical experiences, current conditions and reasonable and supportable forecasts that affect collectibility. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 with early adoption permitted. Different components of the guidance require modified retrospective or prospective adoption. This guidance does not apply to receivables arising from operating leases and, as discussed in Note 3, "Revenue Recognition," most of the Company's equipment rental revenue is accounted for as lease revenue under Topic 842. The Company expects to adopt this guidance when effective, and the impact on our financial statements is not expected to be material.
Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued guidance that will simplify the accounting for income taxes. The guidance removes the following exceptions: (i) exceptions to the approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items, (ii) exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment, (iii) exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary and (iv) exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. Additionally, the guidance simplifies the accounting for income taxes by: (i) requiring that an entity recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax, (ii) requiring that an entity evaluate when a step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction, (iii) specifying that an entity is not required to allocate the consolidated amount of current and deferred tax
HERC HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
expense to a legal entity that is not subject to tax in its separate financial statements (although the entity may elect to do so (on an entity-by-entity basis) for a legal entity that is both not subject to tax and disregarded by the taxing authority), (iv) requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date and (v) making minor improvements for income tax accounting related to employee stock ownership plans and investments in qualified affordable housing projects accounted for using the equity method. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company expects to early adopt this guidance on January 1, 2020 and does not expect a material impact on its financial position, results of operations or cash flows.
Note 3—Revenue Recognition Note 3
—Revenue Recognition
The Company is principally engaged in the business of renting equipment. Ancillary to the Company’s principal equipment rental business, the Company also sells used rental equipment, new equipment and parts and supplies and offers certain services to support its customers. The Company’s business is primarily focusedCompany operates in North America with revenue from the United States representing approximately 89.9%91.2%, 88.9%92.1% and 88.2%91.5% of total revenue for the years ended December 31, 2019, 20182022, 2021 and 2017,2020, respectively.
The Company’s rental transactions are principally accounted for under Topic 842. Prior to the adoption of Topic 842, the Company accounted for rental transactions under Topic 840. The Company’s sale of rental and new equipment, parts and supplies along with certain services provided to customers are accounted for under Topic 606. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. The amount of revenue recognized reflects the consideration the Company expects to be entitled to in exchange for such products or services.
HERC HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes the applicable accounting guidance for the Company’s revenues (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Topic 842 | | Topic 606 | | Total | | Topic 842 | | Topic 606 | | Total | | Topic 842 | | Topic 606 | | Total |
Revenues: | | | | | | | | | | | | | | | | | |
Equipment rental | $ | 2,284.1 | | | $ | — | | | $ | 2,284.1 | | | $ | 1,728.9 | | | $ | — | | | $ | 1,728.9 | | | $ | 1,401.1 | | | $ | — | | | $ | 1,401.1 | |
Other rental revenue: | | | | | | | | | | | | | | | | | |
Delivery and pick-up | — | | | 169.7 | | | 169.7 | | | — | | | 109.6 | | | 109.6 | | | — | | | 86.7 | | | 86.7 | |
Other | 97.7 | | | — | | | 97.7 | | | 71.9 | | | — | | | 71.9 | | | 55.9 | | | — | | | 55.9 | |
Total other rental revenues | 97.7 | | | 169.7 | | | 267.4 | | | 71.9 | | | 109.6 | | | 181.5 | | | 55.9 | | | 86.7 | | | 142.6 | |
Total equipment rentals | 2,381.8 | | | 169.7 | | | 2,551.5 | | | 1,800.8 | | | 109.6 | | | 1,910.4 | | | 1,457.0 | | | 86.7 | | | 1,543.7 | |
Sales of rental equipment | — | | | 125.7 | | | 125.7 | | | — | | | 113.1 | | | 113.1 | | | — | | | 198.5 | | | 198.5 | |
Sales of new equipment, parts and supplies | — | | | 35.8 | | | 35.8 | | | — | | | 30.1 | | | 30.1 | | | — | | | 28.2 | | | 28.2 | |
Service and other revenues | — | | | 25.8 | | | 25.8 | | | — | | | 19.5 | | | 19.5 | | | — | | | 10.9 | | | 10.9 | |
Total revenues | $ | 2,381.8 | | | $ | 357.0 | | | $ | 2,738.8 | | | $ | 1,800.8 | | | $ | 272.3 | | | $ | 2,073.1 | | | $ | 1,457.0 | | | $ | 324.3 | | | $ | 1,781.3 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
| Topic 842 | | Topic 606 | | Total | | Topic 840 | | Topic 606 | | Total | | Topic 840 | | Topic 605 | | Total |
Revenues: | | | | | | | | | | | | | | | | | |
Equipment rental | $ | 1,549.9 |
| | $ | — |
| | $ | 1,549.9 |
| | $ | 1,509.7 |
| | $ | — |
| | $ | 1,509.7 |
| | $ | 1,372.3 |
| | $ | — |
| | $ | 1,372.3 |
|
Other rental revenue: | | | | | | | | | | | | | | | | | |
Delivery and pick-up | — |
| | 98.0 |
| | 98.0 |
| | — |
| | 88.4 |
| | 88.4 |
| | — |
| | 75.2 |
| | 75.2 |
|
Other | 53.9 |
| | — |
| | 53.9 |
| | 60.2 |
| | — |
| | 60.2 |
| | 51.5 |
| | — |
| | 51.5 |
|
Total other rental revenues | 53.9 |
| | 98.0 |
| | 151.9 |
| | 60.2 |
| | 88.4 |
| | 148.6 |
| | 51.5 |
| | 75.2 |
| | 126.7 |
|
Total equipment rentals | 1,603.8 |
| | 98.0 |
| | 1,701.8 |
| | 1,569.9 |
| | 88.4 |
| | 1,658.3 |
| | 1,423.8 |
| | 75.2 |
| | 1,499.0 |
|
Sales of rental equipment | — |
| | 242.8 |
| | 242.8 |
| | — |
| | 256.2 |
| | 256.2 |
| | — |
| | 190.8 |
| | 190.8 |
|
Sales of new equipment, parts and supplies | — |
| | 44.0 |
| | 44.0 |
| | — |
| | 49.3 |
| | 49.3 |
| | — |
| | 52.3 |
| | 52.3 |
|
Service and other revenues | — |
| | 10.4 |
| | 10.4 |
| | — |
| | 12.9 |
| | 12.9 |
| | — |
| | 12.4 |
| | 12.4 |
|
Total revenues | $ | 1,603.8 |
| | $ | 395.2 |
| | $ | 1,999.0 |
| | $ | 1,569.9 |
| | $ | 406.8 |
| | $ | 1,976.7 |
| | $ | 1,423.8 |
| | $ | 330.7 |
| | $ | 1,754.5 |
|
Topic 842 revenues
Equipment Rental Revenue
The Company offers a broad portfolio of equipment for rent on a hourly, daily, weekly or monthly basis, with mostsubstantially all rental agreements cancelablecancellable upon the return of the equipment. Virtually all customer contracts can be canceled by the customer with no penalty by returning the equipment within one day; therefore, the Company does not allocate the transaction price between the different contract elements.
Equipment rental revenue includes revenue generated from renting equipment to customers and is recognized on a straight-line basis over the length of the rental contract. As part of this straight-line methodology, when the equipment is returned, the Company recognizes as incremental revenue the excess, if any, between the amount the customer is contractually required to pay, which is based on the rental contract period applicable to the actual number of days the equipment was out on rent, over the cumulative amount of revenue recognized to date. In any given accounting period, the Company will have customers return equipment and
HERC HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
be contractually required to pay more than the cumulative amount of revenue recognized to date under the straight-line methodology. Also included in equipment rental revenue is re-rent revenue in which the Company will rent specific pieces of equipment from vendors and then re-rent that equipment to its customers. Provisions for discounts, rebates to customers and other adjustments are provided for in the period the related revenue is recorded.
Other
Other equipment rental revenue is primarily comprised of fees for the Company’s rental protection program and environmental charges. Fees paid for the rental protection program allow customers to limit the risk of financial loss in the event the Company’s equipment is damaged or lost. Fees for the rental protection program and environmental recovery fees are recognized on a straight-line basis over the length of the rental contract.
Topic 606 revenues
Delivery and pick-up
Delivery and pick-up revenue associated with renting equipment is recognized when the services are performed.
HERC HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Sales of Rental Equipment, New Equipment, Parts and Supplies
The Company sells its used rental equipment, new equipment, parts and supplies. Revenues recorded for each category are as follows (in millions):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
Sales of rental equipment | $ | 242.8 |
| | $ | 256.2 |
| | $ | 190.8 |
|
Sales of new equipment | 21.0 |
| | 21.3 |
| | 26.9 |
|
Sales of parts and supplies | 23.0 |
| | 28.0 |
| | 25.4 |
|
Total | $ | 286.8 |
| | $ | 305.5 |
| | $ | 243.1 |
|
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
Sales of rental equipment | $ | 125.7 | | | $ | 113.1 | | | $ | 198.5 | |
Sales of new equipment | 8.6 | | | 7.9 | | | 11.5 | |
Sales of parts and supplies | 27.2 | | | 22.2 | | | 16.7 | |
Total | $ | 161.5 | | | $ | 143.2 | | | $ | 226.7 | |
The Company recognizes revenue from the sale of rental equipment, new equipment, parts and supplies when control of the asset transfers to the customer, which is typically when the asset is picked up by or delivered to the customer and when significant risks and rewards of ownership have passed to the customer. Sales and other tax amounts collected from customers and remitted to government authorities are accounted for on a net basis and, therefore, excluded from revenue.
The Company routinely sells its used rental equipment in order to manage repair and maintenance costs, as well as the composition, age and size of its fleet. The Company disposes of used equipment through a variety of channels including retail sales to customers and other third parties, sales to wholesalers, brokered sales and auctions.
The Company also sells new equipment, parts and supplies. The types of new equipment that the Company sells vary by location and include a variety of ProContractor tools and supplies, small equipment (such as work lighting, generators, pumps, compaction equipment and power trowels), safety supplies and expendables.
Under Topic 606, the accounts receivable balance, prior to allowances for doubtful accounts, for the sale of rental equipment, new equipment, parts and supplies, was approximately $15.6$8.6 million and $19.5$11.1 million as of December 31, 20192022 and 2018,2021, respectively.
Service and other revenues
Service and other revenues primarily include revenue earned from equipment management and similar services for rental customers which includes providing customer support functions such as dedicated in-plant operations, plant management services, equipment and safety training, and repair and maintenance services particularly to industrial customers who request such services.
The Company recognizes revenue for service and other revenues as the services are provided. Service and other revenues are typically invoiced together with a customer’s rental amounts and, therefore, it is not practical for the Company to separate the accounts receivable amount related to services and other revenues that are accounted for under Topic 606; however, such amount is not considered material.
HERC HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Receivables and contract assets and liabilities
Most of the Company's equipment rental revenue is accounted for under Topic 842. The customers that are responsible for the remaining equipment rental revenue that is accounted for under Topic 606 are generally the same customers that rent the Company's equipment. Concentration of credit risk with respect to the Company's accounts receivable is limited because a large number of geographically diverse customers makes up its customer base. No single customer makes up more than 3% of the Company's equipment rental revenue or more than 5% of its accounts receivable balance for the last three years. The Company manages credit risk associated with its accounts receivable at the customer level through credit approvals, credit limits and other monitoring procedures. The Company maintains allowances for doubtful accounts that reflect the Company's estimate of the amount of receivables that the Company will be unable to collect based on its historical write-off experience.
The Company does not have material contract assets or contract liabilities associated with customer contracts. The Company's contracts with customers do not generally result in material amounts billed to customers in excess of recognizable revenue. The Company did not recognize material revenue forduring the years ended December 31, 2019 and 20182022, 2021 or 2020 that was included in the contract liability balance as of the beginning of sucheach period.
HERC HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Performance obligations
Most of the Company's revenue recognized under Topic 606 is recognized at a point-in-time, rather than over time. Accordingly, in any particular period, the Company does not generally recognize a significant amount of revenue from performance obligations satisfied (or partially satisfied) in previous periods, and the amount of such revenue recognized during the years ended December 31, 20192022, 2021 and 2018 were2020 was not material. We also do not expect to recognize material revenue in the future related to performance obligations that were unsatisfied (or partially unsatisfied) as of December 31, 2019 and 2018.2022.
Contract estimates and judgments
The Company's revenues accounted for under Topic 606 generally do not require significant estimates or judgments, primarily for the following reasons:
•The transaction price is generally fixed and stated on the Company's contracts;
•As noted above, the Company's contracts generally do not include multiple performance obligations, and accordingly do not generally require estimates of the standalone selling price for each performance obligation;
•The Company's revenues do not include material amounts of variable consideration; and
•Most of the Company's revenue is recognized as of a point-in-time and the timing of the satisfaction of the applicable performance obligations is readily determinable. As noted above, the revenue recognized under Topic 606 is generally recognized at the time of delivery to, or pick-up by, the customer.
The Company monitors and reviews its estimated standalone selling prices on a regular basis.
Note 4—Rental Equipment
Note 4
—Rental Equipment
Rental equipment consists of the following (in millions):
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
Rental equipment | $ | 5,408.6 | | | $ | 4,254.8 | |
Less: Accumulated depreciation | (1,923.4) | | | (1,589.5) | |
Rental equipment, net | $ | 3,485.2 | | | $ | 2,665.3 | |
|
| | | | | | | |
| December 31, 2019 | | December 31, 2018 |
Rental equipment | $ | 3,821.6 |
| | $ | 3,840.7 |
|
Less: Accumulated depreciation | (1,331.6 | ) | | (1,336.0 | ) |
Rental equipment, net | $ | 2,490.0 |
| | $ | 2,504.7 |
|
Note 5—Property and Equipment
Property and equipment consists of the following (in millions):
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
Land and buildings | $ | 142.6 | | | $ | 123.7 | |
Service vehicles | 395.5 | | | 316.6 | |
Leasehold improvements | 111.5 | | | 105.6 | |
Machinery and equipment | 24.8 | | | 24.0 | |
Computer equipment and software | 79.3 | | | 76.9 | |
Furniture and fixtures | 17.1 | | | 16.0 | |
Construction in progress | 19.7 | | | 6.5 | |
Property and equipment, gross | 790.5 | | | 669.3 | |
Less: accumulated depreciation | (398.6) | | | (360.9) | |
Property and equipment, net | $ | 391.9 | | | $ | 308.4 | |
Depreciation expense for the years ended December 31, 2022, 2021 and 2020 was $63.5 million, $55.6 million and $54.5 million, respectively, and is included in "Non-rental depreciation and amortization" in the Company's consolidated statements of operations.
HERC HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 5—Property and Equipment
Property and equipment consists of the following (in millions):
|
| | | | | | | |
| December 31, 2019 | | December 31, 2018 |
Land and buildings | $ | 116.1 |
| | $ | 120.2 |
|
Service vehicles | 305.3 |
| | 258.6 |
|
Leasehold improvements | 94.3 |
| | 89.1 |
|
Machinery and equipment | 23.3 |
| | 27.3 |
|
Computer equipment and software | 64.9 |
| | 64.8 |
|
Furniture and fixtures | 15.1 |
| | 14.6 |
|
Construction in progress | 9.4 |
| | 6.2 |
|
Property and equipment, gross | 628.4 |
| | 580.8 |
|
Less: accumulated depreciation | (316.6 | ) | | (298.3 | ) |
Property and equipment, net | $ | 311.8 |
| | $ | 282.5 |
|
Depreciation expense for the years ended December 31, 2019, 2018 and 2017 was $54.0 million, $51.9 million and $46.8 million, respectively. Depreciation expense for property and equipment is included in "Direct operating" and "Selling, general and administrative" expenses in the Company's consolidated statements of operations.
The Company leases certain of its service vehicles and office equipment under finance leases. Depreciation of assets held under finance leases is included in depreciation expense. The gross amounts of property and equipment and related depreciation recorded under finance leases, included in the table above, were as follows (in millions):
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
Service vehicles | $ | 98.0 | | | $ | 81.5 | |
Furniture and fixtures | 1.5 | | | 1.3 | |
| 99.5 | | | 82.8 | |
Less: accumulated depreciation | (36.0) | | | (30.8) | |
| $ | 63.5 | | | $ | 52.0 | |
|
| | | | | | | |
| December 31, 2019 | | December 31, 2018 |
Service vehicles | $ | 101.8 |
| | $ | 87.7 |
|
Furniture and fixtures | 1.0 |
| | — |
|
| 102.8 |
| | 87.7 |
|
Less: accumulated depreciation | (46.2 | ) | | (50.3 | ) |
| $ | 56.6 |
| | $ | 37.4 |
|
The Company has entered into financing obligations to lease certain of its properties as discussed further in Note 11, "Financing Obligations.12, "Financing Obligations." Depreciation of assets held under financing obligations is included in depreciation expense. The gross amounts of land, building and leasehold improvements and related depreciation recorded under financing obligations, included in the table above, were as follows (in millions):
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
Land, building and leasehold improvements | $ | 72.4 | | | $ | 75.4 | |
Less: accumulated depreciation | (38.5) | | | (39.2) | |
| $ | 33.9 | | | $ | 36.2 | |
|
| | | | | | | |
| December 31, 2019 | | December 31, 2018 |
Land, building and leasehold improvements | $ | 77.4 |
| | $ | 76.6 |
|
Less: accumulated depreciation | (36.1 | ) | | (32.7 | ) |
| $ | 41.3 |
| | $ | 43.9 |
|
Note 6—Business Combinations
2022 Business Combinations
On April 19, 2022, the Company completed the acquisition of Cloverdale Equipment Company ("Cloverdale"). Cloverdale was a full-service general equipment rental company comprised of approximately 120 employees and four locations serving industrial and construction customers with core operations in the metropolitan areas of Detroit and Grand Rapids, Michigan; Cleveland, Ohio; and Pittsburgh, Pennsylvania. The aggregate consideration was approximately $178.3 million. The acquisition and related fees and expenses were funded through available cash and drawings on the senior secured asset-based revolving credit facility. The following table summarizes the purchase price allocation of the assets acquired and liabilities assumed (in millions):
| | | | | |
| Cloverdale |
Accounts receivable | $ | 7.6 | |
Other current assets | 1.7 |
Rental equipment | 125.2 |
Property and equipment | 4.2 |
Intangibles(a) | 10.9 |
Total identifiable assets acquired | 149.6 |
Current liabilities | 2.1 |
Long term liabilities | 19.5 |
Net identifiable assets acquired | 128.0 |
Goodwill(b) | 50.3 |
Net assets acquired | $ | 178.3 | |
(a) The following table reflects the fair values and useful lives of the acquired intangible assets identified (in millions):
| | | | | | | | | | | |
| Cloverdale | | Life (years) |
Customer relationships | $ | 10.2 | | | 10 |
Non-compete agreements | 0.7 | | | 5 |
| $ | 10.9 | | | |
HERC HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(b) The level of goodwill that resulted from the acquisitions is primarily reflective of operational synergies that the Company expects to achieve that are not associated with identifiable assets, the value of Cloverdale's assembled workforce and new customer relationships expected to arise from the acquisition. All of the goodwill is expected to be deductible for income tax purposes.
The assets and liabilities for Cloverdale were recorded as of April 19, 2022 and the results of operations have been included in the Company's consolidated results of operations since that date. Total revenue and income before taxes for Cloverdale included in the consolidated statement of operations since the acquisition date are $41.9 million and $8.2 million, respectively.
In addition to the acquisition of Cloverdale, the Company completed the acquisitions of 17 companies totaling 25 locations including Southern Equipment Rental, Harris Diversified, LLC, Kilowatt Boy, Inc., All Trade Rentals, Inc., Absolute Rental & Supply, Inc., Single Source Rentals Ltd., Kropp Equipment, Inc., Colvin's Inc., All Star Rents, High River Rentals, Inc., Longhorn Car-Truck Rental, Inc., Avalanche Equipment, LLC, Portable Air II, LLC, Golf Tournaments, Inc., Shore-Tek, Inc., Power Rents, LLC and Prime Construction Rentals.
2021 Business Combinations
On August 30, 2021, the Company completed the acquisition of substantially all of the assets of Contractors Building Supply Co. LLC ("CBS"). CBS was a full-service general equipment rental company comprising approximately 190 employees and twelve locations serving construction and industrial customers throughout Texas, as well as a location in New Mexico and Tennessee. The acquisition expanded the Company's presence in Texas to 38 physical locations, which collectively provide general and specialty equipment rental solutions and related services. The aggregate consideration was approximately $190.3 million. The acquisition and related fees and expenses were funded through available cash and drawings on the senior secured asset-based revolving credit facility.
On November 15, 2021, the Company completed the acquisition of substantially all of the assets of Rapid Equipment Rental Limited ("Rapid"). Rapid was a full-service general equipment rental company comprising approximately 110 employees and seven locations serving construction and industrial customers throughout the Greater Toronto Area. The aggregate consideration was approximately $73.7 million. The acquisition and related fees and expenses were funded through available cash and drawings on the senior secured asset-based revolving credit facility.
There have been no material adjustments to the purchase price allocations of CBS or Rapid during the year ended December 31, 2022.
Throughout 2021, the Company also completed the acquisitions of nine additional companies, totaling 14 locations, which included San Mateo Rentals and Jim N I Rentals, Inc., Dwight Crane Ltd. along with its U.S. based affiliate, LRX LLC, Reliable Equipment, LLC, SkyKing Lift, Inc. Atlantic Aerial Inc., Central Valley Shoring, Inc., Priority Rental LLC and Temp Power, Inc.
HERC HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Pro Forma Supplementary Data
The unaudited pro forma supplementary data presented in the table below (in millions) gives effect to the acquisitions of Cloverdale, CBS, and Rapid as if they had been included in the Company's consolidated results for the periods reflected below. The unaudited pro forma supplementary data is provided for informational purposes only and is not indicative of the Company's results of operations had the acquisitions been included for the periods presented, nor is it indicative of the Company's future results.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 | | Year Ended December 31, 2021 |
| Herc | Cloverdale | Total | | Herc | CBS | Rapid | Cloverdale | Total |
Historic/pro forma total revenues | $ | 2,738.8 | | $ | 24.6 | | $ | 2,763.4 | | | $ | 2,073.1 | | $ | 42.9 | | $ | 22.0 | | $ | 61.7 | | $ | 2,199.7 | |
Historic/combined pretax income (loss) | 433.4 | | 7.5 | | 440.9 | | | 290.4 | | 6.5 | | (1.9) | | 10.6 | | 305.6 | |
Pro forma adjustments to consolidated pretax income (loss): | | | | | | | | | |
Impact of fair value adjustments/useful life changes on depreciation(a) | | 2.2 | | 2.2 | | | | 2.8 | | (4.4) | | 7.4 | | 5.8 | |
Intangible asset amortization(b) | | (0.4) | | (0.4) | | | | (3.3) | | (1.6) | | (1.4) | | (6.3) | |
Interest expense(c) | | (1.0) | | (1.0) | | | | (1.7) | | (1.1) | | (2.4) | | (5.2) | |
Elimination of historic interest(d) | | 0.9 | | 0.9 | | | | 1.1 | | 1.3 | | 1.1 | | 3.5 | |
Elimination of merger related costs(e) | | 0.6 | | 0.6 | | | | 0.3 | | 0.3 | | — | | 0.6 | |
Pro forma pretax income | | | $ | 443.2 | | | | | | | $ | 304.0 | |
(a) Depreciation of rental equipment was adjusted for the fair value at acquisition and changes in useful lives of equipment acquired.
(b) Intangible asset amortization was adjusted to include amortization of the acquired intangible assets.
(c) As discussed above, the Company funded the Cloverdale, CBS, and Rapid acquisitions primarily using drawings on its senior secured asset-based revolving credit facility. Interest expense was adjusted to reflect interest on such borrowings.
(d) Historic interest on debt that is not part of the combined entity was eliminated.
(e) Merger related direct costs primarily comprised of financial and legal advisory fees associated with the Cloverdale, CBS, and Rapid acquisitions were eliminated as they were assumed to have been recognized prior to the pro forma acquisition date.
Note 6—7—Goodwill and Intangible Assets
Goodwill
The Company performed its annual goodwill impairment test as of October 1 and determined that 0no impairment existed for the years ended December 31, 20192022 and 2018.2021.
The following summarizes the Company's goodwill (in millions):
| | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 |
Balance at the beginning of the period: | | | |
Goodwill | $ | 906.5 | | | $ | 775.4 | |
Accumulated impairment losses | (675.0) | | | (674.9) | |
| 231.5 | | | 100.5 | |
| | | |
Additions | 189.5 | | | 131.1 | |
Currency translation | (2.3) | | | (0.1) | |
| | | |
Balance at the end of the period: | | | |
Goodwill | 1,087.6 | | | 906.5 | |
Accumulated impairment losses | (668.9) | | | (675.0) | |
| $ | 418.7 | | | $ | 231.5 | |
HERC HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following summarizes the Company's goodwill (in millions):
|
| | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 |
Balance at the beginning of the period: | | | |
Goodwill | $ | 765.9 |
| | $ | 765.9 |
|
Accumulated impairment losses | (674.9 | ) | | (674.9 | ) |
| 91.0 |
| | 91.0 |
|
| | | |
Additions | 2.6 |
| | — |
|
| | | |
Balance at the end of the period: | | | |
Goodwill | 768.5 |
| | 765.9 |
|
Accumulated impairment losses | (674.9 | ) | | (674.9 | ) |
| $ | 93.6 |
| | $ | 91.0 |
|
Intangible Assets
The Company performed its annual impairment test of indefinite-lived and finite-lived intangible assets as of October 1 and assessed finite-lived intangible assets for impairment triggers and determined that 0no impairment existed for the years ended December 31, 20192022 and 2018.
2021.
Intangible assets, net, consisted of the following major classes (in millions):
| | | December 31, 2019 | | December 31, 2022 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Value | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Value |
Finite-lived intangible assets: | | | | | | Finite-lived intangible assets: | | | | | |
Customer-related | $ | 11.4 |
| | $ | (8.9 | ) | | $ | 2.5 |
| |
Customer-related and non-compete agreements | | Customer-related and non-compete agreements | $ | 180.7 | | | $ | (38.3) | | | $ | 142.4 | |
Internally developed software(a) | 34.9 |
| | (16.4 | ) | | 18.5 |
| Internally developed software(a) | 57.3 | | | (38.6) | | | 18.7 | |
Total | 46.3 |
| | (25.3 | ) | | 21.0 |
| Total | 238.0 | | | (76.9) | | | 161.1 | |
Indefinite-lived intangible assets: | | | | | | Indefinite-lived intangible assets: | | | | | |
Trade name | 270.5 |
| | — |
| | 270.5 |
| Trade name | 270.3 | | | — | | | 270.3 | |
Total intangible assets, net | $ | 316.8 |
| | $ | (25.3 | ) | | $ | 291.5 |
| Total intangible assets, net | $ | 508.3 | | | $ | (76.9) | | | $ | 431.4 | |