10-Q 1 hri-20220331.htm 10-Q hri-20220331
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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 March 31, 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)
Delaware20-3530539
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
27500 Riverview Center Blvd.
Bonita Springs, Florida 34134
(239301-1000
(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 classTrading 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 filerSmaller 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 April 15, 2022, there were 29,889,593 shares of the registrant's common stock, $0.01 par value, outstanding.


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HERC HOLDINGS INC. AND SUBSIDIARIES
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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 March 31, 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.

1

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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)
March 31,
2022
December 31,
2021
ASSETS(Unaudited) 
Cash and cash equivalents$22.8 $35.1 
Receivables, net of allowances of $11.7 and $13.6, respectively
399.1 388.1 
Other current assets53.3 46.5 
Total current assets475.2 469.7 
Rental equipment, net2,792.2 2,665.3 
Property and equipment, net308.3 308.4 
Right-of-use lease assets443.2 413.7 
Intangible assets, net398.6 388.7 
Goodwill272.5 231.5 
Other long-term assets27.6 13.1 
Total assets$4,717.6 $4,490.4 
LIABILITIES AND EQUITY  
Current maturities of long-term debt and financing obligations$14.6 $15.2 
Current maturities of operating lease liabilities40.1 38.7 
Accounts payable239.4 280.6 
Accrued liabilities169.2 195.4 
Total current liabilities463.3 529.9 
Long-term debt, net2,142.1 1,916.1 
Financing obligations, net110.2 111.2 
Operating lease liabilities415.9 387.4 
Deferred tax liabilities543.2 536.8 
Other long term liabilities31.2 32.1 
Total liabilities3,705.9 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 capital1,796.6 1,822.2 
Retained earnings (accumulated deficit)5.1 (53.4)
Accumulated other comprehensive loss(98.3)(100.2)
Treasury stock, at cost, 2.7 shares and 2.7 shares
(692.0)(692.0)
Total equity1,011.7 976.9 
Total liabilities and equity$4,717.6 $4,490.4 

The accompanying notes are an integral part of these financial statements.
2

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HERC HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
(In millions, except per share data)
Three Months Ended March 31,
 20222021
Revenues:
Equipment rental$526.8 $400.4 
Sales of rental equipment27.7 44.2 
Sales of new equipment, parts and supplies7.7 6.1 
Service and other revenue5.1 3.1 
Total revenues567.3 453.8 
Expenses:
Direct operating246.2 183.0 
Depreciation of rental equipment119.3 100.4 
Cost of sales of rental equipment18.5 38.4 
Cost of sales of new equipment, parts and supplies5.3 4.2 
Selling, general and administrative89.4 65.5 
Interest expense, net22.5 21.4 
Other (income) expense, net(1.0)(0.2)
Total expenses500.2 412.7 
Income before income taxes67.1 41.1 
Income tax provision(8.6)(8.2)
Net income$58.5 $32.9 
Weighted average shares outstanding:
Basic 29.8 29.5 
Diluted30.4 30.2 
Earnings per share:
Basic$1.96 $1.12 
Diluted$1.92 $1.09 

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

3

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HERC HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Unaudited
(In millions)
 Three Months Ended March 31,
20222021
Net income$58.5 $32.9 
Other comprehensive income:
Foreign currency translation adjustments2.4 2.4 
Pension and postretirement benefit liability adjustments:
Amortization of net losses included in net periodic pension cost0.3 0.5 
Income tax provision related to defined benefit pension plans(0.8)(0.1)
Total other comprehensive income1.9 2.8 
Total comprehensive income$60.4 $35.7 


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

4

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HERC HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Unaudited
(In millions)
Common StockAdditional
Paid-In Capital
Retained Earnings (Accumulated Deficit)Accumulated
Other
Comprehensive
Income (Loss)
Treasury StockTotal
Equity
SharesAmount
Balance at December 31, 202129.7 $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 awards0.2 — (15.0)— — — (15.0)
Dividends on common stock— — (17.6)— — — (17.6)
Stock-based compensation charges— — 6.2 — — — 6.2 
Employee stock purchase plan— — 0.8 — — — 0.8 
Exercise of stock options— — — — — —  
Balance at March 31, 202229.9 $0.3 $1,796.6 $5.1 $(98.3)$(692.0)$1,011.7 


Common StockAdditional
Paid-In Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income (Loss)
Treasury StockTotal
Equity
SharesAmount
Balance at December 31, 202029.4 $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 awards0.2 — (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, 202129.6 $0.3 $1,818.5 $(244.6)$(104.2)$(692.0)$778.0 













The accompanying notes are an integral part of these financial statements.
5

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HERC HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In millions)
 Three Months Ended March 31,
 20222021
Cash flows from operating activities:
Net income$58.5 $32.9 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of rental equipment119.3 100.4 
Depreciation of property and equipment14.8 13.4 
Amortization of intangible assets5.9 2.4 
Amortization of deferred debt and financing obligations costs0.8 0.8 
Stock-based compensation charges6.2 5.3 
Provision for receivables allowances9.3 7.9 
Deferred taxes5.2 6.2 
Gain on sale of rental equipment(9.2)(5.8)
Other1.0  
Changes in assets and liabilities:
Receivables(23.5)(6.5)
Other assets(8.5)(0.6)
Accounts payable(8.8)3.1 
Accrued liabilities and other long-term liabilities(28.0)(24.8)
Net cash provided by operating activities143.0 134.7 
Cash flows from investing activities:
Rental equipment expenditures(286.8)(90.9)
Proceeds from disposal of rental equipment28.8 40.3 
Non-rental capital expenditures(12.9)(13.4)
Proceeds from disposal of property and equipment2.2 1.8 
Acquisitions, net of cash acquired(73.0) 
Other investing activities(5.0) 
Net cash used in investing activities(346.7)(62.2)

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


6


HERC HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Unaudited
(In millions)
 Three Months Ended March 31,
 20222021
Cash flows from financing activities:
Proceeds from revolving lines of credit and securitization345.0 70.0 
Repayments on revolving lines of credit and securitization(118.4)(135.0)
Principal payments under finance lease and financing obligations(3.9)(2.8)
Dividends paid(17.1) 
Proceeds from exercise of stock options 1.5 
Proceeds from employee stock purchase plan0.8 0.6 
Net settlement on vesting of equity awards(15.0)(7.1)
Net cash provided by (used in) financing activities191.4 (72.8)
Effect of foreign exchange rate changes on cash and cash equivalents 0.2 
Net change in cash and cash equivalents during the period(12.3)(0.1)
Cash and cash equivalents at beginning of period35.1 33.0 
Cash and cash equivalents at end of period$22.8 $32.9 
Supplemental disclosure of cash flow information:
Cash paid for interest$37.9 $36.9 
Cash paid for income taxes, net$4.9 $7.6 
Supplemental disclosure of non-cash investing activity:
Purchases of rental equipment in accounts payable$ $24.5 
Disposal of rental equipment in accounts receivable$ $0.4 
Equipment acquired through finance lease$0.8 $ 

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


7



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 320 locations in North America as of March 31, 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 April 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 months ended March 31, 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 91.1% of total revenue for the three months ended March 31, 2022 compared to 92.2% for the same period 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 table summarizes the applicable accounting guidance for the Company’s revenues for the three months ended March 31, 2022 and 2021 (in millions):
Three Months Ended March 31,
20222021
Topic 842Topic 606TotalTopic 842Topic 606Total
Revenues:
Equipment rental$476.5 $ $476.5 $364.8 $ $364.8 
Other rental revenue:
Delivery and pick-up 30.5 30.5  20.9 20.9 
Other19.8  19.8 14.7  14.7 
Total other rental revenues19.8 30.5 50.3 14.7 20.9 35.6 
Total equipment rental496.3 30.5 526.8 379.5 20.9 400.4 
Sales of rental equipment 27.7 27.7  44.2 44.2 
Sales of new equipment, parts and supplies 7.7 7.7  6.1 6.1 
Service and other revenues 5.1 5.1  3.1 3.1 
Total revenues$496.3 $71.0 $567.3 $379.5 $74.3 $453.8 

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
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited



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.
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 March 31,
20222021
Sales of rental equipment$27.7 $44.2 
Sales of new equipment1.8 1.9 
Sales of parts and supplies5.9 4.2 
Total$35.4 $50.3 

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 $7.2 million and $11.1 million as of March 31, 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
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HERC HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited



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 months ended March 31, 2022 and 2021 that was included in the contract liability balance as of the beginning of each such period.

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 months ended March 31, 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 March 31, 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):
March 31, 2022December 31, 2021
Rental equipment$4,462.9 $4,254.8 
Less: Accumulated depreciation(1,670.7)(1,589.5)
Rental equipment, net$2,792.2 $2,665.3 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited



Note 5—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 $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.

Pro Forma Supplementary Data

The unaudited pro forma supplementary data presented in the table below (in millions) gives effect to the 2021 acquisitions, CBS and Rapid, as if they had been completed on January 1, 2020. 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 completed on the above date, nor is it indicative of the Company's future results.

Three Months Ended March 31, 2021
HercCBSRapidTotal
Historic/pro forma total revenues$453.8 $16.1 $5.7 $475.6 
Historic/combined pretax income41.1 2.4 1.9 45.4 
Pro forma adjustments to consolidated pretax income:
Impact of fair value adjustments/useful life changes on depreciation(a)
0.9 (1.0)(0.1)
Intangible asset amortization(b)
(1.3)(0.5)(1.8)
Interest expense(c)
(0.6)(0.3)(0.9)
Elimination of historic interest(d)
0.4 0.3 0.7 
Elimination of merger related costs(e)
0.1 0.1 0.2 
Pro forma pretax income$43.5 
(a) Depreciation of rental equipment were 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 CBS and Rapid acquisitions primarily using drawings on its ABL facility. Interest expense was adjusted to reflect interest on the ABL facility 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 CBS and Rapid acquisitions were eliminated as they were assumed to have been recognized prior to the pro forma acquisition date.

In addition to the acquisitions of CBS and Rapid, the Company completed the acquisitions of nine additional companies, totaling 14 locations, throughout 2021. During the second quarter, the Company acquired San Mateo Rentals and Jim-N-I Rentals, Inc. In the third quarter, the Company completed the acquisition of Dwight Crane Ltd. along with its U.S. based affiliate, LRX LLC. In the fourth quarter, the Company completed the acquisition of Reliable Equipment, LLC, SkyKing Lift, Inc., Atlantic Aerial Inc., Central Valley Shoring, Inc., Priority Rental LLC and Temp-Power, Inc.

During the first quarter of 2022, the Company completed the acquisitions of three companies, totaling 3 locations including Southern Equipment Rental, Harris Diversified, LLC, and Kilowatt Boy, Inc.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited



Note 6—Goodwill and Intangible Assets

Goodwill

The following summarizes the Company's goodwill (in millions):
March 31, 2022December 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 
Additions40.7 131.1 
Currency translation0.3 (0.1)
Balance at the end of the period:
Goodwill947.2 906.5 
Accumulated impairment losses(674.7)(675.0)
$272.5 $231.5 

Intangible Assets

Intangible assets, net, consisted of the following major classes (in millions):
 March 31, 2022
 Gross Carrying AmountAccumulated AmortizationNet Carrying Value
Finite-lived intangible assets:  
Customer-related and non-compete agreements$125.9 $(19.2)$106.7 
Internally developed software(a)
52.9 (32.2)20.7 
Total178.8 (51.4)127.4 
Indefinite-lived intangible assets: 
Trade name271.2 — 271.2 
Total intangible assets, net$450.0 $(51.4)$398.6 
(a) Includes capitalized costs of $9.9 million yet to be placed into service.
 December 31, 2021
 Gross Carrying
Amount
Accumulated
Amortization
Net Carrying Value
Finite-lived intangible assets:  
Customer-related and non-compete agreements$113.7 $(15.0)$98.7 
Internally developed software(a)
49.6 (30.5)19.1 
Total163.3 (45.5)117.8 
Indefinite-lived intangible assets: 
Trade name270.9 — 270.9 
Total intangible assets, net$434.2 $(45.5)$388.7 
(a) Includes capitalized costs of $7.4 million yet to be placed into service.

Amortization of intangible assets was $5.9 million and $2.4 million for the three months ended March 31, 2022 and 2021, respectively.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited



Note 7—Leases

The Company leases real estate, office equipment and service vehicles. The Company's leases have remaining lease terms of up to 17 years, some of which include options to extend the leases for up to 20 years. The Company determines the lease term used to record each lease by including the initial lease term and, in the case where there are options to extend, will include the option to extend if it has determined that it is reasonably certain that the Company would exercise those options.

The Company also leases certain equipment that it rents to its customers where the payments vary based upon the amount of time the equipment is on rent. There are no fixed payments on these leases and, therefore, no lease liability or ROU assets have been recorded. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Lease expense for these leases is recognized on a straight-line basis over the lease term.

The components of lease expense consist of the following (in millions):
Three Months Ended March 31,
Classification20222021
Operating lease cost(a)
Direct operating$31.4 $23.8 
Finance lease cost:
Amortization of ROU assets
Depreciation and amortization(b)
4.8 2.3 
Interest on lease liabilitiesInterest expense, net0.4 0.3 
Sublease incomeEquipment rental revenue(18.2)(13.4)
Net lease cost$18.4 $13.0 

(a) Includes short-term leases of $15.3 million and $8.8 millions for the three months ended March 31, 2022 and 2021, respectively, and variable lease costs of $0.7 million and $1.7 million for the three months ended March 31, 2022 and 2021, respectively.
(b) Depreciation and amortization are included with selling, general and administrative expense.


Note 8—Debt

The Company's debt consists of the following (in millions):
Weighted Average Effective Interest Rate at March 31, 2022
Weighted Average Stated Interest Rate at March 31, 2022
Fixed or Floating Interest RateMaturityMarch 31,
2022
December 31,
2021
Senior Notes
2027 Notes5.61%5.50%Fixed2027$1,200.0 $1,200.0 
Other Debt
ABL Credit FacilityN/A1.67%Floating2024658.4 456.0 
AR FacilityN/A1.31%Floating2022250.0 225.0 
Finance lease liabilities2.77%N/AFixed2022-202950.4 52.6 
Unamortized Debt Issuance Costs(a)
(5.9)(6.1)
Total debt2,152.9 1,927.5 
Less: Current maturities of long-term debt(10.8)(11.4)
Long-term debt, net$2,142.1 $1,916.1 
(a)    Unamortized debt issuance costs totaling $4.6 million and $5.0 million related to the ABL Credit Facility and AR Facility (as each is defined below) as of March 31, 2022 and December 31, 2021, respectively, and are included in "Other long-term assets" in the condensed consolidated balance sheets.

The effective interest rate for the fixed rate 2027 Notes (as defined below) includes the stated interest on the notes and the amortization of any debt issuance costs.

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Unaudited



Senior Notes

On July 9, 2019, the Company issued $1.2 billion aggregate principal amount of its 5.50% Senior Notes due 2027 (the "2027 Notes"). Interest on the 2027 Notes accrues at the rate of 5.50% per annum and is payable semi-annually in arrears on January 15 and July 15. The 2027 Notes will mature on July 15, 2027. Additional information about the 2027 Notes is included in Note 11, "Debt" to the Company's financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2021.

ABL Credit Facility

On July 31, 2019, Herc Holdings, Herc and certain other subsidiaries of Herc Holdings entered into a credit agreement with respect to a senior secured asset-based revolving credit facility (the "ABL Credit Facility"). The ABL Credit Facility provides (subject to availability under a borrowing base) for aggregate maximum borrowings of up to $1,750 million under a revolving loan facility. Up to $250 million of the revolving loan facility is available for the issuance of letters of credit, subject to certain conditions including issuing lender participation. Subject to the satisfaction of certain conditions and limitations, the ABL Credit Facility allows for the addition of incremental revolving commitments and/or incremental term loans. The ABL Credit Facility matures on July 31, 2024. Additional information about the ABL Credit Facility is included in Note 11, "Debt" to the Company's financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2021.

Accounts Receivable Securitization Facility

In September 2018, the Company entered into an accounts receivable securitization facility (the "AR Facility"). The AR Facility was amended in August 2021 to extend the maturity date to August 31, 2022 and increase the aggregate commitments from $175 million to $200 million. In October 2021, the Company increased the aggregate commitments to $225 million and, in January 2022, further increased the aggregate commitments to $250 million. In connection with the AR Facility, Herc and one of its wholly-owned subsidiaries sell their accounts receivables on an ongoing basis to Herc Receivables U.S. LLC, a wholly-owned special-purpose entity (the "SPE"). The SPE's sole business consists of the purchase by the SPE of accounts receivable from Herc and the Herc subsidiary seller and borrowing by the SPE against the eligible accounts receivable from the lenders under the facility. The borrowings are secured by liens on the accounts receivable and other assets of the SPE. Collections on the accounts receivable are used to service the borrowings. The SPE is a separate legal entity that is consolidated in the Company's financial statements. The SPE assets are owned by the SPE and are not available to settle the obligations of the Company or any of its other subsidiaries. Herc is the servicer of the accounts receivable under the AR Facility. All of the obligations of the Herc subsidiary seller and the servicer and certain indemnification obligations of the SPE under the agreements governing the AR Facility are guaranteed by Herc pursuant to a performance guarantee. The AR Facility is excluded from current maturities of long-term debt as the Company has the intent and ability to consummate refinancing and extend the term of the agreement.
Borrowing Capacity and Availability

After outstanding borrowings, the following was available to the Company under the ABL Credit Facility and AR Facility as of March 31, 2022 (in millions):
Remaining
Capacity
Availability Under
Borrowing Base
Limitation
ABL Credit Facility$1,066.8 $1,066.8 
AR Facility  
Total $1,066.8 $1,066.8 

Letters of Credit

As of March 31, 2022, $24.8 million of standby letters of credit were issued and outstanding, none of which have been drawn upon. The ABL Credit Facility had $225.2 million available under the letter of credit facility sublimit, subject to borrowing base restrictions.

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HERC HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited



Note 9—Financing Obligations

In October 2017, Herc consummated a sale-leaseback transaction pursuant to which it sold 42 of its properties located in the U.S. for gross proceeds of approximately $119.5 million, and during the fourth quarter of 2018, entered into sale-leaseback transactions with respect to two additional properties for gross proceeds of $6.4 million. The sale of the properties did not qualify for sale-leaseback accounting due to continuing involvement with the properties. Therefore, the book value of the buildings and land remains on the Company's consolidated balance sheet.

During March 2019, Herc entered into a sale-leaseback transaction for certain service vehicles that did not qualify for sale-leaseback accounting, therefore the book value of the vehicles remains on the Company's consolidated balance sheet. Gross proceeds from the sale-leaseback transaction were $4.7 million.

The Company's financing obligations consist of the following (in millions):
Weighted Average Effective Interest Rate at March 31, 2022MaturitiesMarch 31, 2022December 31, 2021
Financing obligations5.21%2026-2038$116.2 $117.2 
Unamortized financing issuance costs
(2.2)(2.2)
Total financing obligations114.0 115.0 
Less: Current maturities of financing obligations(3.8)(3.8)
Financing obligations, net$110.2 $111.2 

Note 10—Income Taxes

Income tax provision was $8.6 million and $8.2 million for the three months ended March 31, 2022 and 2021, respectively. The provision in each period was driven by the level of pre-tax income, offset primarily by a benefit related to stock-based compensation of $8.1 million and $2.5 million for three months ended March 31, 2022 and 2021, respectively, and non-deductible expenses.

Note 11—Accumulated Other Comprehensive Income (Loss)

The changes in the accumulated other comprehensive income (loss) balance by component (net of tax) for the three months ended March 31, 2022 are presented in the table below (in millions).
Pension and Other Post-Employment BenefitsForeign Currency ItemsAccumulated Other Comprehensive Income (Loss)
Balance at December 31, 2021$(12.3)$(87.9)$(100.2)
Other comprehensive income before reclassification(0.7)2.4 1.7 
Amounts reclassified from accumulated other comprehensive income0.2  0.2 
Net current period other comprehensive income(0.5)2.4 1.9 
Balance at March 31, 2022 $(12.8)$(85.5)$(98.3)

Note 12—Commitments and Contingencies

Legal Proceedings

The Company is subject to a number of claims and proceedings that generally arise in the ordinary conduct of its business. These matters include, but are not limited to, claims arising from the operation of rented equipment and workers' compensation claims. The Company does not believe that the liabilities arising from such ordinary course claims and proceedings will have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited



The Company has established reserves for matters where the Company believes the losses are probable and can be reasonably estimated. For matters where a reserve has not been established, the ultimate outcome or resolution cannot be predicted at this time, or the amount of ultimate loss, if any, cannot be reasonably estimated. Litigation is subject to many uncertainties and there can be no assurance as to the outcome of the individual litigated matters. It is possible that certain of the actions, claims, inquiries or proceedings could be decided unfavorably to the Company or any of its subsidiaries involved. Accordingly, it is possible that an adverse outcome from such a proceeding could exceed the amount accrued in an amount that could be material to the Company's consolidated financial condition, results of operations or cash flows in any particular reporting period.

Off-Balance Sheet Commitments

Indemnification Obligations

In the ordinary course of business, the Company executes contracts involving indemnification obligations customary in the relevant industry and indemnifications specific to a transaction such as the sale of a business or assets or a financial transaction. These indemnification obligations might include claims relating to the following: accuracy of representations; compliance with covenants and agreements by the Company or third parties; environmental matters; intellectual property rights; governmental regulations; employment-related matters; customer, supplier and other commercial contractual relationships; condition of assets; 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. The Company regularly evaluates the probability of having to incur costs associated with these indemnification obligations and has accrued for expected losses that are probable and estimable. The types of indemnification obligations and has accrued for expected losses that are probably and estimable. The types of indemnification obligations for which payments are possible include the following:

    The Spin-Off

In connection with the Spin-Off, pursuant to the separation and distribution agreement (agreements and defined terms are discussed in Note 21, "Arrangements with New Hertz"), the Company has assumed the liability for, and control of, all pending and threatened legal matters related to its equipment rental business and related assets, as well as assumed or retained liabilities, and will indemnify New Hertz for any liability arising out of or resulting from such assumed legal matters. The separation and distribution agreement also provides for certain liabilities to be shared by the parties. The Company is responsible for a portion of these shared liabilities (typically 15%), as set forth in that agreement. New Hertz is responsible for managing the settlement or other disposition of such shared liabilities. Pursuant to the tax matters agreement, the Company has agreed to indemnify New Hertz for any resulting taxes and related losses if the Company 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-Off and related transactions to be taxable, or if there is an acquisition of the equity securities or assets of the Company or of any member of the Company’s group that causes the Spin-Off and related transactions to be taxable.

Guarantee

The Company has guaranteed an outstanding bank loan in connection with a previous joint venture. The Company has determined the maximum potential payment amount under the guarantee is approximately $2.3 million; however, the probability of any payment is remote and therefore the Company has not recorded a liability on its balance sheet as of March 31, 2022. The bank loan is collateralized by the rental equipment and other assets of the former joint venture entity and has maturities through 2024.

Note 13—Fair Value Measurements

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The fair value of accounts receivable, accounts payable and accrued liabilities, to the extent the underlying liability will be settled in cash, approximates the carrying values because of the short-term nature of these instruments.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited



Cash Equivalents

Cash equivalents, when held, primarily consist of money market accounts which are classified as Level 1 assets which the Company measures at fair value on a recurring basis. The Company determines the fair value of cash equivalents using a market approach based on quoted prices in active markets. The Company had no cash equivalents at March 31, 2022 or December 31, 2021.

Debt Obligations

The fair values of the Company's ABL Credit Facility, AR Facility and finance lease liabilities approximated their book values as of March 31, 2022 and December 31, 2021. The fair value of the Company's 2027 Notes are estimated based on quoted market rates as well as borrowing rates currently available to the Company for loans with similar terms and average maturities (Level 2 inputs) (in millions).
March 31, 2022December 31, 2021
Nominal Unpaid Principal BalanceAggregate Fair ValueNominal Unpaid Principal BalanceAggregate Fair Value
2027 Notes$1,200.0 $1,216.8 $1,200.0 $1,248.0 

Note 14—Earnings Per Share

Basic earnings per share has been computed based upon the weighted average number of common shares outstanding. Diluted earnings per share has been computed based upon the weighted average number of common shares outstanding plus the effect of all potentially dilutive common stock equivalents, except when the effect would be anti-dilutive.

The following table sets forth the computation of basic and diluted earnings per share (in millions, except per share data).

Three Months Ended March 31,
20222021
Basic and diluted earnings per share:
Numerator:
Net income, basic and diluted$58.5 $32.9 
Denominator: 
Basic weighted average common shares29.8 29.5 
Stock options, RSUs and PSUs0.6 0.7 
Weighted average shares used to calculate diluted earnings per share30.4 30.2 
Earnings per share:
Basic$1.96 $1.12 
Diluted$1.92 $1.09 
Antidilutive stock options, RSUs and PSUs0.1  

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HERC HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited




Note 15—Related Party Transactions

Agreements with Carl C. Icahn

The Company is subject to the Nomination and Standstill Agreement, dated September 15, 2014 (the "Nomination and Standstill Agreement"), with Carl C. Icahn and certain related entities and individuals. In connection with their appointments or nomination, as applicable, to the Company’s board of directors (the "Board"), each of Jonathan Frates, Hunter C. Gary, Andrew Langham, Steven D. Miller and Andrew Teno (collectively, the "Icahn Designees," and, together with Carl C. Icahn and the other parties to the Nomination and Standstill Agreements, the "Icahn Group") executed a Joinder Agreement agreeing to become bound as a party to the terms and conditions of the Nomination and Standstill Agreement (such Joinder Agreements, together with the Nomination and Standstill Agreement, are collectively referred to herein as the "Icahn Agreements").

Pursuant to the Icahn Agreements, the Icahn Designees were appointed to the Company’s Board. So long as an Icahn Designee is a member of the Board, the Board will not be expanded beyond its current size without approval from the Icahn Designees then on the Board. In addition, pursuant to the Icahn Agreements, subject to certain restrictions and requirements, the Icahn Group will have certain replacement rights in the event an Icahn Designee resigns or is otherwise unable to serve as a director (other than as a result of not being nominated by the Company for an annual meeting).

In addition, until the date that no Icahn Designee is a member of the Board (or otherwise deemed to be on the Board pursuant to the terms of the Icahn Agreements), the Icahn Group agrees to vote all of its shares of the Company’s common stock in favor of the election of all of the Company’s director nominees at each annual or special meeting of the Company’s stockholders, and, subject to limited exceptions, the Icahn Group further agrees to (i) adhere to certain standstill obligations, including the obligation to not solicit proxies or consents or influence others with respect to the same, and (ii) not acquire or otherwise beneficially own more than 20% of the Company’s outstanding voting securities.

Pursuant to the Icahn Agreements, the Company will not create a separate executive committee of the Board so as long as an Icahn Designee is a member of the Board. Under the Icahn Agreements, if the Icahn Group ceases to hold a “net long position,” as defined in the Nomination and Standstill Agreement, in at least 1,900,000 shares of the Company’s common stock, the Icahn Group will cause one Icahn Designee to resign from the Board; if the Icahn Group’s holdings are further reduced to specified levels, additional Icahn Designees are required to resign.

In addition, pursuant to the Icahn Agreements, the Company entered into a registration rights agreement, effective June 30, 2016 (the "Registration Rights Agreement"), with certain entities related to Carl C. Icahn on behalf of any person who is a member of the "Icahn group" (as such term is defined therein) who owns applicable securities at the relevant time and is or has become a party to the Registration Rights Agreement. The Registration Rights Agreement provides for customary demand and piggyback registration rights and obligations.

Note 16—Arrangements with New Hertz

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 and continues to operate its global vehicle rental business through its operating subsidiaries including The Hertz Corporation ("THC").

In connection with the Spin-Off, the Company entered into a separation and distribution agreement (the "Separation Agreement") with New Hertz. In connection therewith, the Company also entered into various other ancillary agreements with New Hertz to effect the Spin-Off and provide a framework for its relationship with New Hertz. The following summarizes some of the most significant agreements and relationships that Herc Holdings continues to have with New Hertz.

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HERC HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited



Separation and Distribution Agreement

The Separation Agreement sets forth the Company's agreements with New Hertz regarding the principal actions taken in connection with the Spin-Off. It also sets forth other agreements that govern aspects of the Company's relationship with New Hertz following the Spin-Off including (i) the manner in which legal matters and claims are allocated and certain liabilities are shared between the Company and New Hertz; (ii) other matters including transfers of assets and liabilities, treatment or termination of intercompany arrangements and releases of certain claims between the parties and their affiliates; (iii) mutual indemnification clauses; and (iv) allocation of Spin-Off expenses between the parties.

Tax Matters Agreement

The Company entered into a tax matters agreement with New Hertz that governs the parties' rights, responsibilities and obligations after the Spin-Off with respect to tax liabilities and benefits, tax attributes, tax contests and other tax matters regarding income taxes, other taxes and related tax returns.

Note 17—Subsequent Event

In April 2022, the Company acquired Michigan-based Cloverdale Equipment Company ("Cloverdale") for approximately $175 million. Cloverdale was a full-service general equipment rental company comprising approximately 120 employees and four locations serving construction and industrial customers throughout the metropolitan areas of Detroit and Grand Rapids, Michigan; Cleveland, Ohio; and Pittsburgh, Pennsylvania.
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Table of Contents        

HERC HOLDINGS INC. AND SUBSIDIARIES

ITEM 2.    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 unaudited condensed consolidated financial statements and accompanying notes included in Part I, Item 1 of this Report, which include additional information about our accounting policies, practices and the transactions underlying our financial results. The preparation of our unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") requires us to make estimates and assumptions that affect the reported amounts in our unaudited condensed consolidated financial statements and the accompanying notes including receivables allowances, depreciation of rental equipment, the recoverability of long-lived assets, useful lives and impairment of long-lived tangible and intangible assets including goodwill and trade name, pension and postretirement benefits, valuation of stock-based compensation, reserves for litigation and other contingencies, accounting for income taxes and other matters arising during the normal course of business. We apply our best judgment, our knowledge of existing facts and circumstances and our knowledge of actions that we may undertake in the future in determining the estimates that will affect our condensed consolidated financial statements. We evaluate our estimates on an ongoing basis using our historical experience, as well as other factors we believe appropriate under the circumstances, such as current economic conditions, and adjust or revise our estimates as circumstances change. As future events and their effects cannot be determined with precision, actual results may differ from these estimates.

OVERVIEW OF OUR BUSINESS AND OPERATING ENVIRONMENT

We are engaged principally in the business of renting equipment. Ancillary to our principal business of equipment rental, we also sell used rental equipment, sell new equipment and consumables and offer certain services and support to our customers. Our profitability is dependent upon a number of factors including the volume, mix and pricing of rental transactions and the utilization of equipment. Significant changes in the purchase price or residual values of equipment or interest rates can have a significant effect on our profitability depending on our ability to adjust pricing for these changes. Our business requires significant expenditures for equipment, and consequently we require substantial liquidity to finance such expenditures. See "Liquidity and Capital Resources" below.

Our revenues primarily are derived from rental and related charges and consist of:

Equipment rental (includes all revenue associated with the rental of equipment including ancillary revenue from delivery, rental protection programs and fueling charges);
Sales of rental equipment and sales of new equipment, parts and supplies; and
Service and other revenue (primarily relating to training and labor provided to customers).

Our expenses primarily consist of:

Direct operating expenses (primarily wages and related benefits, facility costs and other costs relating to the operation and rental of rental equipment, such as delivery, maintenance and fuel costs);
Cost of sales of rental equipment, new equipment, parts and supplies;
Depreciation expense relating to rental equipment;
Selling, general and administrative expenses; and
Interest expense.

COVID-19 Update

We continue to monitor the ongoing impact of the COVID-19 pandemic, including the effects of recent notable variants of the virus. The health and safety of our employees, customers, and the communities in which we operate remains our top priority. We remain focused on the safety and well-being of our employees, customers and communities as we maintain a high-level of service to our customers. We continue to communicate frequently throughout the organization to reinforce our health and safety guidelines, informed by the Center for Disease Control recommendations.


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HERC HOLDINGS INC. AND SUBSIDIARIES

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

During 2021, customer demand improved as the government rolled out the distribution of vaccines and lifted COVID-19 related restrictions, which opened up local economic activity. Demand in 2022 remains strong, however, despite the recovery we are seeing, the impact of the COVID-19 pandemic continues to evolve and the economic recovery could be slowed or reversed by a number of factors, including a widespread resurgence in COVID-19 infections, whether due to the spread of variants of the virus or otherwise, the rate and efficacy of vaccinations, labor constraints, the strength of the global supply chain, and government actions. We cannot predict the extent to which our financial condition, results of operations or cash flows will ultimately be impacted, however, we believe we are well-positioned to operate effectively through the present environment.

Seasonality

Our business is usually seasonal, with demand for our rental equipment tending to be lower in the winter months, particularly in the 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 products that serve different industries with less seasonality and different business cycles.

RESULTS OF OPERATIONS
Three Months Ended March 31,
($ in millions)20222021$ Change% Change
Equipment rental$526.8 $400.4 $126.4 31.6 %
Sales of rental equipment27.7 44.2 (16.5)(37.3)
Sales of new equipment, parts and supplies7.7 6.1 1.6 26.2 
Service and other revenue5.1 3.1 2.0 64.5 
Total revenues567.3 453.8 113.5 25.0 
Direct operating246.2 183.0 63.2 34.5 
Depreciation of rental equipment119.3 100.4 18.9 18.8 
Cost of sales of rental equipment18.5 38.4 (19.9)(51.8)
Cost of sales of new equipment, parts and supplies5.3 4.2 1.1 26.2 
Selling, general and administrative89.4 65.5 23.9 36.5 
Interest expense, net22.5 21.4 1.1 5.1 
Other expense (income), net(1.0)(0.2)(0.8)NM
Income before income taxes67.1 41.1 26.0 63.3 
Income tax provision(8.6)(8.2)(0.4)4.9 
Net income$58.5 $32.9 $25.6 77.8 %
NM - Not Meaningful

Three Months Ended March 31, 2022 Compared with Three Months Ended March 31, 2021

Equipment rental revenue increased $126.4 million, or 31.6%, during the first quarter of 2022 when compared to the first quarter of 2021 primarily due to higher volume of equipment on rent of 29.0% and positive pricing of 4.3% during the first quarter of 2022 over the same period in the prior year.

Sales of rental equipment decreased $16.5 million, or 37.3%, during the first quarter of 2022 when compared to the first quarter of 2021. During the first quarter of 2022, the decline in volume of sales was related to the increase in utilization and the
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HERC HOLDINGS INC. AND SUBSIDIARIES

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

strategic management of our rental equipment to maximize fleet size as part of our long-term strategy. The margin on sales of rental equipment was 33.2% in 2022 compared to 13.1% in 2021. The increase in margin on sale of rental equipment in 2022 was due to a larger proportion of overall volume of sales through higher margin sales channels and better pricing due to the overall strong market for used equipment.

Direct operating expenses in the first quarter of 2022 increased $63.2 million, or 34.5%, when compared to the first quarter of 2021 primarily related to increases in (i) personnel-related expenses of $26.8 million primarily resulting from increased headcount and increased payroll and benefits, (ii) fleet related expenses including fuel and maintenance expense of $18.0 million related to our increased fleet size and higher average fuel prices in 2022, (iii) re-rent expense of $6.5 million due to the corresponding increase in re-rent revenue, (iv) facilities expense of $4.5 million as we have added more locations through acquisitions and opening greenfield locations.

Depreciation of rental equipment increased $18.9 million, or 18.8%, during the first quarter of 2022 when compared to the first quarter of 2021 due to the increase in average fleet size.

Selling, general and administrative expenses increased $23.9 million, or 36.5%, in the first quarter of 2022 when compared to the first quarter of 2021. The increase was primarily due to selling expense, including commissions and other variable compensation increases, of $11.5 million and general payroll and benefits of $4.1 million. Travel expense also increased by $3.2 million.

Interest expense, net increased $1.1 million, or 5.1%, during the first quarter of 2022 when compared with the same period in 2021 due to higher average outstanding balances and slightly higher weighted average interest rates on the ABL Credit Facility and AR Facility.

Income tax provision was $8.6 million during the first quarter of 2022 compared to $8.2 million in 2021. The provision in each period was driven by the level of pre-tax income, offset primarily by a benefit related to stock-based compensation of $8.1 million and $2.5 million for three months ended March 31, 2022 and 2021, respectively, and non-deductible expenses.

LIQUIDITY AND CAPITAL RESOURCES

Our primary liquidity needs include the payment of operating expenses, purchases of rental equipment to be used in our operations, servicing of debt, funding acquisitions and payment of dividends. Our primary sources of funding are operating cash flows, cash received from the disposal of equipment and borrowings under our debt arrangements. As of March 31, 2022, we had approximately $2.2 billion of total nominal indebtedness outstanding.

Our liquidity as of March 31, 2022 consisted of cash and cash equivalents of $22.8 million and unused commitments of approximately $1.1 billion under our ABL Credit Facility. See "Borrowing Capacity and Availability" below for further discussion. Our practice is to maintain sufficient liquidity through cash from operations, our ABL Credit Facility and our AR Facility to mitigate the impacts of any adverse financial market conditions on our operations. We believe that cash generated from operations and cash received from the disposal of equipment, together with amounts available under the ABL Credit Facility and the AR Facility or other financing arrangements will be sufficient to meet working capital requirements and anticipated capital expenditures, and other strategic uses of cash, if any, and debt payments, if any, over the next twelve months.

Cash 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.
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HERC HOLDINGS INC. AND SUBSIDIARIES

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)


The following table summarizes the change in cash and cash equivalents for the periods shown (in millions):
 Three Months Ended March 31,
20222021$ Change
Cash provided by (used in):
Operating activities$143.0 $134.7 $8.3 
Investing activities(346.7)(62.2)(284.5)
Financing activities191.4 (72.8)264.2 
Effect of exchange rate changes— 0.2 (0.2)
Net change in cash and cash equivalents$(12.3)$(0.1)$(12.2)

Operating Activities

During the three months ended March 31, 2022, we generated $8.3 million more cash from operating activities compared with the same period in 2021. The increase was related to improved operating results primarily resulting from higher revenues coupled with continued cost control measures, partially offset by the timing of payments on accounts payable as compared to the same period in 2021.

Investing Activities

Cash used in investing activities increased $284.5 million during the three months ended March 31, 2022 when compared with the prior-year period. Our primary use of cash in investing activities is for the acquisition of rental equipment, non-rental capital expenditures and acquisitions. Generally, we rotate our equipment and manage our fleet of rental equipment in line with customer demand and continue to invest in our information technology, service vehicles and facilities. Changes in our net capital expenditures are described in more detail in the "Capital Expenditures" section below. Additionally, we closed on three acquisitions during the three months ended March 31, 2022 for a net cash outflow of $73.0 million.

Financing Activities

Cash provided by financing activities increased $264.2 million during the three months ended March 31, 2022 when compared with the prior-year period. Financing activities primarily represents our changes in debt, which included net borrowings of $226.6 million on our revolving lines of credit and securitization, which were used primarily to fund acquisitions during the period. Net repayments in the prior year period were $65.0 million.

In order to reduce future cash interest payments, as well as future amounts due at maturity or upon redemption, we may from time to time repurchase our debt, including our notes, bonds, loans or other indebtedness, in privately negotiated, open market or other transactions and upon such terms and at such prices as we may determine. We will evaluate any such transactions in light of then-existing market conditions, taking into account our current liquidity and prospects for future access to capital. The repurchases may be material and could relate to a substantial proportion of a particular class or series, which could reduce the trading liquidity of such class or series.
Capital Expenditures

Our capital expenditures relate largely to purchases of rental equipment, with the remaining portion representing purchases of property, equipment and information technology. The table below sets forth the capital expenditures related to our rental equipment and related disposals for the periods noted (in millions).
Three Months Ended March 31,
20222021
Rental equipment expenditures$286.8