HERC HOLDINGS INC [HRI] Filings

10-Q 1 hri-20220630.htm 10-Q hri-20220630

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_______________________________________________________________________________

FORM 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2022


OR
☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-33139

HERC HOLDINGS INC.

(Exact name of registrant as specified in its charter)


Delaware						20-3530539
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification Number)

27500 Riverview Center Blvd.

Bonita Springs, Florida 34134

(239) 301-1000

(Address, including Zip Code, and telephone number,

including area code, of registrant's principal executive offices)

Not Applicable

(Former name, former address and former fiscal year,

if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of exchange on which registered

Common Stock, par value $0.01 per share

HRI

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

Smaller reporting company

☐

Accelerated filer

☐

Emerging growth company

☐

Non-accelerated filer

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of July 15, 2022, there were 29,916,562 shares of the registrant's common stock, $0.01 par value, outstanding.

Table of Contents

HERC HOLDINGS INC. AND SUBSIDIARIES

TABLE OF CONTENTS



		Page
Cautionary Note Regarding Forward-Looking Information		1
PART I. FINANCIAL INFORMATION
ITEM 1.	Financial Statements	2
	Condensed Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021	2
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2022 and 2021	3
	Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2022 and 2021	4
	Condensed Consolidated Statements of Changes in Equity for the Three and Six Months Ended June 30, 2022 and 2021	5
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2022 and 2021	6
	Notes to Condensed Consolidated Financial Statements	8
ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	24
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	30
ITEM 4.	Controls and Procedures	30
PART II. OTHER INFORMATION
ITEM 1.	Legal Proceedings	31
ITEM 1A.	Risk Factors	31
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31
ITEM 5.	Other Information	31
ITEM 6.	Exhibits	32
SIGNATURE		33

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HERC HOLDINGS INC. AND SUBSIDIARIES

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q for the period ended June 30, 2022 (this "Report") includes "forward-looking statements," as that term is defined by the federal securities laws. Forward-looking statements include statements concerning our business plans and strategy, projected profitability, performance or cash flows, future capital expenditures, our growth strategy, including our ability to grow organically and through M&A, anticipated financing needs, business trends, the impact of and our response to COVID-19, our capital allocation strategy, liquidity and capital management and other information that is not historical information. Forward looking statements are generally identified by the words "estimates," "expects," "anticipates," "projects," "plans," "intends," "believes," "forecasts," "looks," and future or conditional verbs, such as "will," "should," "could" or "may," as well as variations of such words or similar expressions. All forward-looking statements are based upon our current expectations and various assumptions and apply only as of the date of this Report. Our expectations, beliefs and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that our expectations, beliefs and projections will be achieved.

There are a number of risks, uncertainties and other important factors that could cause our actual results to differ materially from those suggested by our forward-looking statements, including those set forth in our Annual Report on Form 10-K for the year ended December 31, 2021 under Item 1A "Risk Factors," in Part II, Item 1A of this Report, and in our other filings with the Securities and Exchange Commission. All forward-looking statements are expressly qualified in their entirety by such cautionary statements. We undertake no obligation to update or revise forward-looking statements that have been made to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events.

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PART I—FINANCIAL INFORMATION

ITEM l. FINANCIAL STATEMENTS

HERC HOLDINGS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except par value)


	June 30, 2022		December 31, 2021
ASSETS	(Unaudited)
Cash and cash equivalents	$	52.1	$	35.1
Receivables, net of allowances of $13.5 and $13.6, respectively	457.8		388.1
Other current assets	56.9		46.5
Total current assets	566.8		469.7
Rental equipment, net	3,115.9		2,665.3
Property and equipment, net	336.3		308.4
Right-of-use lease assets	517.1		413.7
Intangible assets, net	415.9		388.7
Goodwill	325.5		231.5
Other long-term assets	32.5		13.1
Total assets	$	5,310.0	$	4,490.4
LIABILITIES AND EQUITY
Current maturities of long-term debt and financing obligations	$	14.9	$	15.2
Current maturities of operating lease liabilities	41.4		38.7
Accounts payable	286.9		280.6
Accrued liabilities	185.1		195.4
Total current liabilities	528.3		529.9
Long-term debt, net	2,503.3		1,916.1
Financing obligations, net	109.2		111.2
Operating lease liabilities	491.4		387.4
Deferred tax liabilities	580.1		536.8
Other long term liabilities	32.4		32.1
Total liabilities	4,244.7		3,513.5
Commitments and contingencies (Note 12)
Equity:
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, 32.6 and 32.4 shares issued and 29.9 and 29.7 shares outstanding	0.3		0.3
Additional paid-in capital	1,802.3		1,822.2
Retained earnings (accumulated deficit)	59.6		(53.4)
Accumulated other comprehensive loss	(104.9)		(100.2)
Treasury stock, at cost, 2.7 shares and 2.7 shares	(692.0)		(692.0)
Total equity	1,065.3		976.9
Total liabilities and equity	$	5,310.0	$	4,490.4

The accompanying notes are an integral part of these financial statements.

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HERC HOLDINGS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Unaudited

(In millions, except per share data)


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Revenues:
Equipment rental	$	605.4	$	448.0	$	1,132.2	$	848.4
Sales of rental equipment	19.3		30.3		47.0		74.5
Sales of new equipment, parts and supplies	9.4		7.8		17.1		13.9
Service and other revenue	6.3		4.8		11.4		7.9
Total revenues	640.4		490.9		1,207.7		944.7
Expenses:
Direct operating	270.7		203.0		516.9		386.0
Depreciation of rental equipment	130.2		101.1		249.5		201.5
Cost of sales of rental equipment	14.1		24.7		32.6		63.1
Cost of sales of new equipment, parts and supplies	5.4		4.9		10.7		9.1
Selling, general and administrative	97.0		74.0		186.4		139.5

Interest expense, net	25.2		21.0		47.7		42.4
Other (income) expense, net	0.3		0.4		(0.7)		0.2
Total expenses	542.9		429.1		1,043.1		841.8
Income before income taxes	97.5		61.8		164.6		102.9
Income tax provision	(25.3)		(14.7)		(33.9)		(22.9)
Net income	$	72.2	$	47.1	$	130.7	$	80.0
Weighted average shares outstanding:
Basic	29.8		29.6		29.8		29.5
Diluted	30.3		30.4		30.4		30.3
Earnings per share:
Basic	$	2.42	$	1.59	$	4.39	$	2.71
Diluted	$	2.38	$	1.55	$	4.30	$	2.64

The accompanying notes are an integral part of these financial statements.

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HERC HOLDINGS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Unaudited

(In millions)


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Net income	$	72.2	$	47.1	$	130.7	$	80.0
Other comprehensive income:
Foreign currency translation adjustments	(6.7)		3.1		(4.3)		5.5
Pension and postretirement benefit liability adjustments:
Amortization of net losses included in net periodic pension cost	0.1		0.5		0.4		1.0
Income tax provision related to defined benefit pension plans	—		(0.1)		(0.8)		(0.2)
Total other comprehensive income	(6.6)		3.5		(4.7)		6.3
Total comprehensive income	$	65.6	$	50.6	$	126.0	$	86.3

The accompanying notes are an integral part of these financial statements.

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HERC HOLDINGS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

Unaudited

(In millions)


	Common Stock			Additional Paid-In Capital		Retained Earnings (Accumulated Deficit)		Accumulated Other Comprehensive Income (Loss)		Treasury Stock		Total Equity
	Shares	Amount
Balance at December 31, 2021	29.7	$	0.3	$	1,822.2	$	(53.4)	$	(100.2)	$	(692.0)	$	976.9
Net income	—	—		—		58.5		—		—		58.5
Other comprehensive income	—	—		—		—		1.9		—		1.9
Net settlement on vesting of equity awards	0.2	—		(15.0)		—		—		—		(15.0)
Dividends declared, $0.575 per share	—	—		(17.6)		—		—		—		(17.6)
Stock-based compensation charges	—	—		6.2		—		—		—		6.2
Employee stock purchase plan	—	—		0.8		—		—		—		0.8

Balance at March 31, 2022	29.9	0.3		1,796.6		5.1		(98.3)		(692.0)		1,011.7
Net income	—	—		—		72.2		—		—		72.2
Other comprehensive income	—	—		—		—		(6.6)		—		(6.6)
Net settlement on vesting of equity awards	—	—		(0.2)		—		—		—		(0.2)
Dividends declared, $0.575 per share	—	—		—		(17.7)		—		—		(17.7)
Stock-based compensation charges	—	—		5.1		—		—		—		5.1
Employee stock purchase plan	—	—		0.8		—		—		—		0.8

Balance at June 30, 2022	29.9	$	0.3	$	1,802.3	$	59.6	$	(104.9)	$	(692.0)	$	1,065.3


	Common Stock			Additional Paid-In Capital		Accumulated Deficit		Accumulated Other Comprehensive Income (Loss)		Treasury Stock		Total Equity
	Shares	Amount
Balance at December 31, 2020	29.4	$	0.3	$	1,818.2	$	(277.5)	$	(107.0)	$	(692.0)	$	742.0
Net income	—	—		—		32.9		—		—		32.9
Other comprehensive income	—	—		—		—		2.8		—		2.8
Net settlement on vesting of equity awards	0.2	—		(7.1)		—		—		—		(7.1)
Stock-based compensation charges	—	—		5.3		—		—		—		5.3
Employee stock purchase plan	—	—		0.6		—		—		—		0.6
Exercise of stock options	—	—		1.5		—		—		—		1.5
Balance at March 31, 2021	29.6	0.3		1,818.5		(244.6)		(104.2)		(692.0)		778.0
Net income	—	—		—		47.1		—		—		47.1
Other comprehensive income	—	—		—		—		3.5		—		3.5
Net settlement on vesting of equity awards	—	—		(1.1)		—		—		—		(1.1)
Stock-based compensation charges	—	—		7.1		—		—		—		7.1
Employee stock purchase plan	—	—		0.6		—		—		—		0.6
Exercise of stock options	—	—		0.2		—		—		—		0.2
Balance at June 30, 2021	29.6	$	0.3	$	1,825.3	$	(197.5)	$	(100.7)	$	(692.0)	$	835.4

The accompanying notes are an integral part of these financial statements.

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HERC HOLDINGS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited

(In millions)


	Six Months Ended June 30,
	2022		2021
Cash flows from operating activities:
Net income	$	130.7	$	80.0
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of rental equipment	249.5		201.5
Depreciation of property and equipment	30.4		26.9
Amortization of intangible assets	13.0		4.9
Amortization of deferred debt and financing obligations costs	1.6		1.6
Stock-based compensation charges	11.3		12.4

Provision for receivables allowances	20.5		14.3
Deferred taxes	43.1		16.3
Gain on sale of rental equipment	(14.4)		(11.4)
Other	1.4		2.3
Changes in assets and liabilities:
Receivables	(83.0)		(27.8)
Other assets	(7.4)		0.2
Accounts payable	(22.8)		6.2
Accrued liabilities and other long-term liabilities	(15.0)		0.5
Net cash provided by operating activities	358.9		327.9
Cash flows from investing activities:
Rental equipment expenditures	(555.3)		(239.3)
Proceeds from disposal of rental equipment	46.8		71.0
Non-rental capital expenditures	(27.5)		(20.9)
Proceeds from disposal of property and equipment	3.3		2.4
Acquisitions, net of cash acquired	(317.1)		(17.9)

Other investing activities	(23.0)		—
Net cash used in investing activities	(872.8)		(204.7)

The accompanying notes are an integral part of these financial statements.

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HERC HOLDINGS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

Unaudited

(In millions)


	Six Months Ended June 30,
	2022		2021
Cash flows from financing activities:
Proceeds from revolving lines of credit and securitization	872.8		165.0
Repayments on revolving lines of credit and securitization	(286.2)		(275.0)
Principal payments under finance lease and financing obligations	(7.6)		(6.7)

Dividends paid	(34.3)		—
Proceeds from exercise of stock options	—		1.7
Proceeds from employee stock purchase plan	1.6		1.2
Net settlement on vesting of equity awards	(15.2)		(8.2)
Net cash provided by (used in) financing activities	531.1		(122.0)
Effect of foreign exchange rate changes on cash and cash equivalents	(0.2)		0.4
Net change in cash and cash equivalents during the period	17.0		1.6
Cash and cash equivalents at beginning of period	35.1		33.0
Cash and cash equivalents at end of period	$	52.1	$	34.6

Supplemental disclosure of cash flow information:
Cash paid for interest	$	45.6	$	40.8
Cash paid for income taxes, net	$	10.1	$	10.8
Supplemental disclosure of non-cash investing activity:
Purchases of rental equipment in accounts payable	$	7.2	$	63.9
Non-rental capital expenditures in accounts payable	$	18.4	$	—

Supplemental disclosure of non-cash investing and financing activity:
Equipment acquired through finance lease	$	7.1	$	0.3

The accompanying notes are an integral part of these financial statements.

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HERC HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

Note 1—Organization and Description of Business

Herc Holdings Inc. ("we," "us," "our," "Herc Holdings," or "the Company") is one of the leading equipment rental suppliers with 333 locations in North America as of June 30, 2022. The Company conducts substantially all of its operations through subsidiaries, including Herc Rentals Inc. ("Herc"). With over 56 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 ProSolutions®, its industry-specific solutions-based services, which includes power generation, climate control, remediation and restoration, pumps, trench shoring, studio and production equipment, and its ProContractor professional grade tools.

Note 2—Basis of Presentation and Significant Accounting Policies

Basis of Presentation

The Company prepares its condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP"). In the opinion of management, the condensed consolidated financial statements reflect all adjustments of a normal recurring nature that are necessary for a fair statement of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year. The year-end condensed consolidated balance sheet data was derived from audited financial statements, however, these condensed consolidated financial statements do not include all of the disclosures required for complete annual financial statements and, accordingly, certain information, footnotes and disclosures normally included in annual financial statements, prepared in accordance with U.S. GAAP, have been condensed or omitted in accordance with Securities and Exchange Commission ("SEC") rules and regulations. The Company believes that the disclosures made are adequate to make the information not misleading. Accordingly, the condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 10, 2022.

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 condensed 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, among others.

Principles of Consolidation

The condensed 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 condensed 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.

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HERC HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Unaudited

Recently Issued Accounting Pronouncements

As of July 21, 2022, the Company has implemented all applicable new accounting standards and updates issued by the Financial Accounting Standards Board ("FASB") that were in effect. There were no new standards or updates during the three or six months ended June 30, 2022 that had a material impact on the condensed consolidated financial statements.

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 operates in North America with revenue from the United States representing approximately 91.2% and 91.3% of total revenue for the three and six months ended June 30, 2022, respectively, compared to 91.6% and 91.9% for the same periods in 2021.

The Company’s rental transactions are accounted for under Accounting Standards Codification ("ASC") Topic 842, Leases ("Topic 842"). The Company’s sale of rental and new equipment, parts and supplies along with certain services provided to customers are accounted for under ASC Topic 606, Revenue from Contracts with Customers ("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.

The following tables summarize the applicable accounting guidance for the Company’s revenues for the three and six months ended June 30, 2022 and 2021 (in millions):


	Three Months Ended June 30,
	2022						2021
	Topic 842		Topic 606		Total		Topic 842		Topic 606		Total
Revenues:
Equipment rental	$	541.3	$	—	$	541.3	$	405.4	$	—	$	405.4
Other rental revenue:
Delivery and pick-up	—		40.8		40.8		—		25.6		25.6
Other	23.3		—		23.3		17.0		—		17.0
Total other rental revenues	23.3		40.8		64.1		17.0		25.6		42.6
Total equipment rental	564.6		40.8		605.4		422.4		25.6		448.0
Sales of rental equipment	—		19.3		19.3		—		30.3		30.3
Sales of new equipment, parts and supplies	—		9.4		9.4		—		7.8		7.8
Service and other revenues	—		6.3		6.3		—		4.8		4.8
Total revenues	$	564.6	$	75.8	$	640.4	$	422.4	$	68.5	$	490.9

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HERC HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Unaudited


	Six Months Ended June 30,
	2022						2021
	Topic 842		Topic 606		Total		Topic 842		Topic 606		Total
Revenues:
Equipment rental	$	1,017.8	$	—	$	1,017.8	$	770.2	$	—	$	770.2
Other rental revenue:
Delivery and pick-up	—		71.3		71.3		—		46.5		46.5
Other	43.1		—		43.1		31.7		—		31.7
Total other rental revenues	43.1		71.3		114.4		31.7		46.5		78.2
Total equipment rental	1,060.9		71.3		1,132.2		801.9		46.5		848.4
Sales of rental equipment	—		47.0		47.0		—		74.5		74.5
Sales of new equipment, parts and supplies	—		17.1		17.1		—		13.9		13.9
Service and other revenues	—		11.4		11.4		—		7.9		7.9
Total revenues	$	1,060.9	$	146.8	$	1,207.7	$	801.9	$	142.8	$	944.7

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 substantially all rental agreements cancellable 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 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.

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HERC HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Unaudited

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):


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Sales of rental equipment	$	19.3	$	30.3	$	47.0	$	74.5
Sales of new equipment	2.5		1.8		4.3		3.7
Sales of parts and supplies	6.9		6.0		12.8		10.2
Total	$	28.7	$	38.1	$	64.1	$	88.4

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 $6.5 million and $11.1 million as of June 30, 2022 and December 31, 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.

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. 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 during the three and six months ended June 30, 2022 and 2021 that was included in the contract liability balance as of the beginning of each such period.

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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 three and six months ended June 30, 2022 and 2021 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 June 30, 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

Rental equipment consists of the following (in millions):


	June 30, 2022		December 31, 2021
Rental equipment	$	4,879.4	$	4,254.8
Less: Accumulated depreciation	(1,763.5)		(1,589.5)
Rental equipment, net	$	3,115.9	$	2,665.3

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Note 5—Business Combinations

2022 Business Combinations

On April 19, 2022, the Company completed the acquisition of substantially all of the assets of Cloverdale Equipment Company ("Cloverdale"). Cloverdale was a full-service general equipment rental company comprising 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 $178.2 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	2.0
Net identifiable assets acquired	147.6
Goodwill(b)	30.6
Net assets acquired	$	178.2

(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

(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 $11.9 million and $1.8 million, respectively.

In addition to the acquisition of Cloverdale, the Company completed the acquisitions of three companies, totaling 3 locations including Southern Equipment Rental, Harris Diversified, LLC, and Kilowatt Boy, Inc. during the first quarter of 2022 and five companies totaling 5 locations including All Trade Rentals, Inc., Absolute Rental & Supply, Inc., Single Source Rentals Ltd., Kropp Equipment, Inc., and Colvin's Inc. during the second quarter of 2022.

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.

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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 $75.4 million and is subject to a potential working capital adjustment. 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 six months ended June 30, 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.

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 condensed consolidated results for the entire period reflected. 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 present, nor is it indicative of the Company's future results.


	Three Months Ended June 30, 2022
	Herc		Cloverdale		Total
Historic/pro forma total revenues	$	640.4	$	2.6	643.0
Historic/combined pretax income	$	97.5	1.6		99.1
Pro forma adjustments to consolidated pretax income:
Impact of fair value adjustments/useful life changes on depreciation(a)			0.4		0.4
Intangible asset amortization(b)			(0.4)		(0.4)
Interest expense(c)			(0.2)		(0.2)
Elimination of historic interest(d)			0.1		0.1
Elimination of merger related costs(e)			0.1		0.1
Pro forma pretax income					$	99.1


	Six Months Ended June 30, 2022
	Herc		Cloverdale		Total
Historic/pro forma total revenues	$	1,207.7	$	18.4	1,226.1
Historic/combined pretax income	$	164.6	11.4		176.0
Pro forma adjustments to consolidated pretax income:
Impact of fair value adjustments/useful life changes on depreciation(a)			2.2		2.2
Intangible asset amortization(b)			(0.4)		(0.4)
Interest expense(c)			(1.0)		(1.0)
Elimination of historic interest(d)			0.9		0.9
Elimination of merger related costs(e)			0.6		0.6
Pro forma pretax income					$	178.3

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	Three Months Ended June 30, 2021
	Herc		CBS		Rapid		Cloverdale		Total
Historic/pro forma total revenues	$	490.9	$	16.1	$	6.3	$	14.7	$	528.0
Historic/combined pretax income	$	61.8	2.4		(3.1)		3.9		65.0
Pro forma adjustments to consolidated pretax income:
Impact of fair value adjustments/useful life changes on depreciation(a)			1.1		(1.0)		2.1		2.2
Intangible asset amortization(b)			(1.2)		(0.4)		(0.3)		(1.9)
Interest expense(c)			(0.6)		(0.3)		(0.6)		(1.5)
Elimination of historic interest(d)			0.4		0.3		0.2		0.9
Elimination of merger related costs(e)			0.1		0.1		—		0.2
Pro forma pretax income									$	64.9


	Six Months Ended June 30, 2021
	Herc		CBS		Rapid		Cloverdale		Total
Historic/pro forma total revenues	$	944.7	$	32.2	$	12.0	$	28.4	$	1,017.3
Historic/combined pretax income	$	102.9	4.8		(1.2)		5.1		111.6
Pro forma adjustments to consolidated pretax income:
Impact of fair value adjustments/useful life changes on depreciation(a)			2.0		(2.0)		2.9		2.9
Intangible asset amortization(b)			(2.5)		(0.9)		(0.7)		(4.1)
Interest expense(c)			(1.2)		(0.6)		(1.2)		(3.0)
Elimination of historic interest(d)			0.8		0.6		0.5		1.9
Elimination of merger related costs(e)			0.2		0.2		—		0.4
Pro forma pretax income									$	109.7

(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.

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Note 6—Goodwill and Intangible Assets

Goodwill

The following summarizes the Company's goodwill (in millions):


	June 30, 2022		December 31, 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	94.6		131.1
Currency translation	(0.6)		(0.1)

Balance at the end of the period:
Goodwill	998.9