HERC HOLDINGS INC [HRI] Filings

10-Q 1 hri-20230930.htm 10-Q hri-20230930

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 September 30, 2023


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 October 20, 2023, there were 28,267,711 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 Statements		1
PART I. FINANCIAL INFORMATION
ITEM 1.	Financial Statements	2
	Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022	2
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2023 and 2022	3
	Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2023 and 2022	4
	Condensed Consolidated Statements of Changes in Equity for the Three and Nine Months Ended September 30, 2023 and 2022	5
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2023 and 2022	7
	Notes to Condensed Consolidated Financial Statements	9
ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	21
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	28
ITEM 4.	Controls and Procedures	28
PART II. OTHER INFORMATION
ITEM 1.	Legal Proceedings	29
ITEM 1A.	Risk Factors	29
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
ITEM 5.	Other Information	29
ITEM 6.	Exhibits	30
SIGNATURE		31

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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 September 30, 2023 (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, 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, 2022 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)


	September 30, 2023		December 31, 2022
ASSETS	(Unaudited)
Cash and cash equivalents	$	71	$	54
Receivables, net of allowances of $21 and $18, respectively	595		523
Other current assets	63		67
Total current assets	729		644
Rental equipment, net	3,990		3,485
Property and equipment, net	473		392
Right-of-use lease assets	670		552
Intangible assets, net	468		431
Goodwill	508		419
Other long-term assets	55		34
Total assets	$	6,893	$	5,957
LIABILITIES AND EQUITY
Current maturities of long-term debt and financing obligations	$	18	$	16
Current maturities of operating lease liabilities	43		42
Accounts payable	247		318
Accrued liabilities	230		228
Total current liabilities	538		604
Long-term debt, net	3,665		2,922
Financing obligations, net	105		108
Operating lease liabilities	648		528
Deferred tax liabilities	693		647
Other long term liabilities	45		40
Total liabilities	5,694		4,849
Commitments and contingencies (Note 11)
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, 33.1 and 32.7 shares issued and 28.3 and 28.9 shares outstanding	—		—
Additional paid-in capital	1,816		1,820
Retained earnings	425		224
Accumulated other comprehensive loss	(128)		(129)
Treasury stock, at cost, 4.8 shares and 3.8 shares	(914)		(807)
Total equity	1,199		1,108
Total liabilities and equity	$	6,893	$	5,957

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 September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Revenues:
Equipment rental	$	765	$	706	$	2,121	$	1,838
Sales of rental equipment	124		21		278		68
Sales of new equipment, parts and supplies	11		10		29		27
Service and other revenue	8		8		22		20
Total revenues	908		745		2,450		1,953
Expenses:
Direct operating	288		278		851		752
Depreciation of rental equipment	167		140		480		389
Cost of sales of rental equipment	99		16		201		49
Cost of sales of new equipment, parts and supplies	7		6		19		16
Selling, general and administrative	115		112		332		298
Non-rental depreciation and amortization	29		25		83		69

Interest expense, net	60		33		162		81
Other expense (income), net	(3)		—		(2)		(1)
Total expenses	762		610		2,126		1,653
Income before income taxes	146		135		324		300
Income tax provision	(33)		(34)		(68)		(68)
Net income	$	113	$	101	$	256	$	232
Weighted average shares outstanding:
Basic	28.3		29.7		28.5		29.8
Diluted	28.5		30.2		28.8		30.3
Earnings per share:
Basic	$	3.99	$	3.41	$	8.98	$	7.79
Diluted	$	3.96	$	3.36	$	8.89	$	7.66

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 September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Net income	$	113	$	101	$	256	$	232
Other comprehensive income (loss):
Foreign currency translation adjustments	(6)		(16)		—		(21)
Pension and postretirement benefit liability adjustments:
Amortization of net losses included in net periodic pension cost	—		—		1		1
Income tax provision related to defined benefit pension plans	—		—		—		(1)
Total other comprehensive income (loss)	(6)		(16)		1		(21)
Total comprehensive income	$	107	$	85	$	257	$	211

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 Other Comprehensive Income (Loss)		Treasury Stock		Total Equity
	Shares	Amount
Balance at December 31, 2022	28.9	$	—	$	1,820	$	224	$	(129)	$	(807)	$	1,108
Net income	—	—		—		67		—		—		67
Other comprehensive income	—	—		—		—		2		—		2
Stock-based compensation charges	—	—		4		—		—		—		4
Dividends declared, $0.6325 per share	—	—		—		(19)		—		—		(19)
Net settlement on vesting of equity awards	0.3	—		(25)		—		—		—		(25)
Employee stock purchase plan	—	—		1		—		—		—		1
Exercise of stock options	—	—		1		—		—		—		1
Repurchase of common stock	(0.4)	—		—		—		—		(52)		(52)
Balance at March 31, 2023	28.8	—		1,801		272		(127)		(859)		1,087
Net income	—	—		—		76		—		—		76
Other comprehensive income	—	—		—		—		5		—		5
Stock-based compensation charges	—	—		5		—		—		—		5
Dividends declared, $0.6325 per share	—	—		—		(18)		—		—		(18)

Employee stock purchase plan	—	—		1		—		—		—		1
Exercise of stock options	—	—		1		—		—		—		1
Repurchase of common stock	(0.5)	—		—		—		—		(55)		(55)
Balance at June 30, 2023	28.3	—		1,808		330		(122)		(914)		1,102
Net income	—	—		—		113		—		—		113
Other comprehensive loss	—	—		—		—		(6)		—		(6)
Stock-based compensation charges	—	—		6		—		—		—		6
Dividends declared, $0.6325 per share	—	—		—		(18)		—		—		(18)

Employee stock purchase plan	—	—		1		—		—		—		1
Exercise of stock options	—	—		1		—		—		—		1

Balance at September 30, 2023	28.3	$	—	$	1,816	$	425	$	(128)	$	(914)	$	1,199

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 (Continued)

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	$	—	$	1,822	$	(53)	$	(100)	$	(692)	$	977
Net income	—	—		—		58		—		—		58
Other comprehensive income	—	—		—		—		2		—		2
Stock-based compensation charges	—	—		6		—		—		—		6
Dividends declared, $0.575 per share	—	—		(18)		—		—		—		(18)
Net settlement on vesting of equity awards	0.2	—		(15)		—		—		—		(15)
Employee stock purchase plan	—	—		1		—		—		—		1


Balance at March 31, 2022	29.9	—		1,796		5		(98)		(692)		1,011
Net income	—	—		—		73		—		—		73
Other comprehensive loss	—	—		—		—		(7)		—		(7)
Stock-based compensation charges	—	—		5		—		—		—		5
Dividends declared, $0.575 per share	—	—		—		(18)		—		—		(18)

Employee stock purchase plan	—	—		1		—		—		—		1


Balance at June 30, 2022	29.9	—		1,802		60		(105)		(692)		1,065
Net income	—	—		—		101		—		—		101
Other comprehensive loss	—	—		—		—		(16)		—		(16)
Stock-based compensation charges	—	—		9		—		—		—		9
Dividends declared, $0.575 per share	—	—		—		(18)		—		—		(18)

Employee stock purchase plan	—	—		1		—		—		—		1

Repurchase of common stock	(0.5)	—		—		—		—		(59)		(59)
Balance at September 30, 2022	29.4	$	—	$	1,812	$	143	$	(121)	$	(751)	$	1,083

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)


	Nine Months Ended September 30,
	2023		2022
Cash flows from operating activities:
Net income	$	256	$	232
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of rental equipment	480		389
Depreciation of property and equipment	53		47
Amortization of intangible assets	30		22
Amortization of deferred debt and financing obligations costs	3		3
Stock-based compensation charges	15		20

Provision for receivables allowances	49		34
Deferred taxes	41		78
Gain on sale of rental equipment	(77)		(19)
Other	1		2
Changes in assets and liabilities:
Receivables	(79)		(156)
Other assets	(3)		(10)
Accounts payable	10		(2)
Accrued liabilities and other long-term liabilities	17		(17)
Net cash provided by operating activities	796		623
Cash flows from investing activities:
Rental equipment expenditures	(1,100)		(841)
Proceeds from disposal of rental equipment	231		67
Non-rental capital expenditures	(119)		(82)
Proceeds from disposal of property and equipment	11		4
Acquisitions, net of cash acquired	(332)		(441)

Other investing activities	(15)		(23)
Net cash used in investing activities	(1,324)		(1,316)

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)


	Nine Months Ended September 30,
	2023		2022
Cash flows from financing activities:
Proceeds from revolving lines of credit and securitization	1,755		2,080
Repayments on revolving lines of credit and securitization	(1,016)		(1,228)
Principal payments under finance lease and financing obligations	(12)		(12)
Payment of debt financing costs	—		(8)
Dividends paid	(56)		(51)
Net settlement on vesting of equity awards	(25)		(15)
Proceeds from employee stock purchase plan	3		3
Proceeds from exercise of stock options	3		—
Repurchase of common stock	(107)		(53)
Net cash provided by financing activities	545		716
Effect of foreign exchange rate changes on cash and cash equivalents	—		(1)
Net change in cash and cash equivalents during the period	17		22
Cash and cash equivalents at beginning of period	54		35
Cash and cash equivalents at end of period	$	71	$	57

Supplemental disclosure of cash flow information:
Cash paid for interest	$	175	$	92
Cash paid for income taxes, net	$	21	$	16
Supplemental disclosure of non-cash investing activity:
Purchases of rental equipment in accounts payable	$	—	$	39
Non-rental capital expenditures in accounts payable	$	—	$	6
Supplemental disclosure of non-cash investing and financing activity:
Equipment acquired through finance lease	$	15	$	13

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 379 locations in North America as of September 30, 2023. The Company conducts substantially all of its operations through subsidiaries, including Herc Rentals Inc. ("Herc"). With over 58 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 fleet includes aerial, earthmoving, material handling, trucks and trailers, air compressors, compaction, lighting, trench shoring, and studio and production equipment. 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, and pumps, 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, 2022, filed with the SEC on February 14, 2023.

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 September 30, 2023, 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 and nine months ended September 30, 2023 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 92.2% and 91.9% of total revenue for the three and nine months ended September 30, 2023, respectively, compared to 92.5% and 91.8% for the same periods in 2022.

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 summarizes the applicable accounting guidance for the Company’s revenues for the three and nine months ended September 30, 2023 and 2022 (in millions):


	Three Months Ended September 30,
	2023						2022
	Topic 842		Topic 606		Total		Topic 842		Topic 606		Total
Revenues:
Equipment rental	$	684	$	—	$	684	$	628	$	—	$	628
Other rental revenue:
Delivery and pick-up	—		52		52		—		50		50
Other	29		—		29		28		—		28
Total other rental revenues	29		52		81		28		50		78
Total equipment rental	713		52		765		656		50		706
Sales of rental equipment	—		124		124		—		21		21
Sales of new equipment, parts and supplies	—		11		11		—		10		10
Service and other revenues	—		8		8		—		8		8
Total revenues	$	713	$	195	$	908	$	656	$	89	$	745

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HERC HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Unaudited


	Nine Months Ended September 30,
	2023						2022
	Topic 842		Topic 606		Total		Topic 842		Topic 606		Total
Revenues:
Equipment rental	$	1,905	$	—	$	1,905	$	1,646	$	—	$	1,646
Other rental revenue:
Delivery and pick-up	—		139		139		—		121		121
Other	77		—		77		71		—		71
Total other rental revenues	77		139		216		71		121		192
Total equipment rental	1,982		139		2,121		1,717		121		1,838
Sales of rental equipment	—		278		278		—		68		68
Sales of new equipment, parts and supplies	—		29		29		—		27		27
Service and other revenues	—		22		22		—		20		20
Total revenues	$	1,982	$	468	$	2,450	$	1,717	$	236	$	1,953

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 September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Sales of rental equipment	$	124	$	21	$	278	$	68
Sales of new equipment	5		2		10		6
Sales of parts and supplies	6		8		19		21
Total	$	135	$	31	$	307	$	95

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 $43 million and $9 million as of September 30, 2023 and December 31, 2022, 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 nine months ended September 30, 2023 and 2022 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 nine months ended September 30, 2023 and 2022 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 September 30, 2023.

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):


	September 30, 2023		December 31, 2022
Rental equipment	$	5,996	$	5,408
Less: Accumulated depreciation	(2,006)		(1,923)
Rental equipment, net	$	3,990	$	3,485

Note 5—Goodwill and Intangible Assets

Goodwill

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


	September 30, 2023		December 31, 2022
Balance at the beginning of the period:
Goodwill	$	1,088	$	907
Accumulated impairment losses	(669)		(675)
	419		232

Additions	89		190
Currency translation	—		(3)

Balance at the end of the period:
Goodwill	1,177		1,088
Accumulated impairment losses	(669)		(669)
	$	508	$	419

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Intangible Assets

Intangible assets, net, consisted of the following major classes (in millions):


	September 30, 2023
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Value
Finite-lived intangible assets:
Customer-related and non-compete agreements	$	242	$	(62)	$	180
Internally developed software(a)	63		(45)		18
Total	305		(107)		198
Indefinite-lived intangible assets:
Trade name	270		—		270
Total intangible assets, net	$	575	$	(107)	$	468

(a) Includes capitalized costs of $4 million yet to be placed into service.


	December 31, 2022
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Value
Finite-lived intangible assets:
Customer-related and non-compete agreements	$	181	$	(38)	$	143
Internally developed software(a)	57		(39)		18
Total	238		(77)		161
Indefinite-lived intangible assets:
Trade name	270		—		270
Total intangible assets, net	$	508	$	(77)	$	431

(a) Includes capitalized costs of $3 million yet to be placed into service.

Amortization of intangible assets was $10 million and $30 million for the three and nine months ended September 30, 2023, respectively, and $9 million and $22 million for the three and nine months ended September 30, 2022, respectively.

Note 6—Leases

The Company leases real estate, office equipment and service vehicles. The Company's leases have remaining lease terms of up to 20 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.

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The components of lease expense consist of the following (in millions):


		Three Months Ended September 30,				Nine Months Ended September 30,
	Classification	2023		2022		2023		2022
Operating lease cost(a)	Direct operating	$	32	$	37	$	99	$	103
Finance lease cost:
Amortization of ROU assets	Depreciation and amortization	6		6		17		16
Interest on lease liabilities	Interest expense, net	—		—		1		1
Sublease income	Equipment rental revenue	(13)		(23)		(45)		(62)
Net lease cost		$	25	$	20	$	72	$	58

(a) Includes short-term leases of $11 million and $39 million for the three and nine months ended September 30, 2023, respectively, and $18 million and $51 million for the three and nine months ended September 30, 2022, respectively, and variable lease costs of $1 million and $3 million for the three and nine months ended September 30, 2023, respectively, and $1 million and $2 million for the three and nine months ended September 30, 2022, respectively.

Note 7—Debt

The Company's debt consists of the following (in millions):


	Weighted Average Effective Interest Rate at September 30, 2023	Weighted Average Stated Interest Rate at September 30, 2023	Fixed or Floating Interest Rate	Maturity	September 30, 2023		December 31, 2022
Senior Notes
2027 Notes	5.61%	5.50%	Fixed	2027	$	1,200	$	1,200
Other Debt
ABL Credit Facility	N/A	6.92%	Floating	2027	2,069		1,340
AR Facility	N/A	6.15%	Floating	2024	345		335
Finance lease liabilities	3.77%	N/A	Fixed	2023-2030	70		64
Unamortized Debt Issuance Costs(a)					(5)		(5)
Total debt					3,679		2,934
Less: Current maturities of long-term debt					(14)		(12)
Long-term debt, net					$	3,665	$	2,922

(a) Unamortized debt issuance costs totaling $9 million and $10 million related to the ABL Credit Facility and AR Facility (as each is defined below) as of September 30, 2023 and December 31, 2022, respectively, 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.

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, 2022.

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"), which was amended and extended on July 5, 2022. The ABL Credit Facility provides for aggregate maximum borrowings of up to $3.5 billion (subject to availability under a borrowing base). Up to $250 million of the revolving loan facility is available for the issuance of letters of

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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 5, 2027. 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, 2022.

Accounts Receivable Securitization Facility

The accounts receivable securitization facility (the "AR Facility") was amended in August 2023 to extend the maturity date to August 31, 2024 and increase the aggregate commitments from $335 million to $370 million. In connection with the AR Facility, Herc sells its 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 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 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 fund the AR Facility's borrowings on a long-term basis either by further extending the maturity date of the AR Facility or by utilizing the capacity available at the balance sheet date under the ABL Credit Facility.

Borrowing Capacity and Availability

After outstanding borrowings, the following was available to the Company under the ABL Credit Facility and AR Facility as of September 30, 2023 (in millions):


	Remaining Capacity		Availability Under Borrowing Base Limitation
ABL Credit Facility	$	1,404	$	1,404
AR Facility	25		25
Total	$	1,429	$	1,429

Letters of Credit

As of September 30, 2023, $27 million of standby letters of credit were issued and outstanding, none of which have been drawn upon. The ABL Credit Facility had $223 million available under the letter of credit facility sublimit, subject to borrowing base restrictions.

Note 8—Financing Obligations

In prior years, Herc entered into sale-leaseback transactions pursuant to which it sold 44 properties located in the U.S. and certain service vehicles. The sale of the properties and service vehicles did not qualify for sale-leaseback accounting; therefore, the book value of the assets remain on the Company's consolidated balance sheet.

The Company's financing obligations consist of the following (in millions):


	Weighted Average Effective Interest Rate at September 30, 2023	Maturities	September 30, 2023		December 31, 2022
Financing obligations	5.30%	2026-2038	$	111	$	114
Unamortized financing issuance costs			(2)		(2)
Total financing obligations			109		112
Less: Current maturities of financing obligations			(4)		(4)
Financing obligations, net			$	105	$	108

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Note 9—Income Taxes

Income tax provision was $33 million, with an effective tax rate of 23%, for the three months ended September 30, 2023 compared to $34 million and 25% in 2022. The rate decrease was driven by certain non-deductible expenses and return to provision adjustments during 2023.

Income tax provision for the nine months ended September 30, 2023 and 2022 was $68 million. The effective tax rate during 2023 was 21% compared to 23% in 2022. The rate decrease was driven by a benefit related to stock-based compensation of $12 million for the nine months ended September 30, 2023, compared to $8 million for the nine months ended September 30, 2022, certain non-deductible expenses and return to provision adjustments.

Note 10—Accumulated Other Comprehensive Income (Loss)

The changes in the accumulated other comprehensive income (loss) balance by component (net of tax) for the nine months ended September 30, 2023 are presented in the table below (in millions).


	Pension and Other Post-Employment Benefits		Foreign Currency Items		Accumulated Other Comprehensive Income (Loss)
Balance at December 31, 2022	$	(25)	$	(104)	$	(129)

Amounts reclassified from accumulated other comprehensive loss	1		—		1
Net current period other comprehensive income	1		—		1
Balance at September 30, 2023	$	(24)	$	(104)	$	(128)

Note 11—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.

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 for which payments are possible include the following:

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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The Spin-Off

In connection with the Spin-Off, pursuant to the separation and distribution agreement (agreements and defined terms are discussed in Note 15, "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.

Note 12—Fair Value Measurements

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The fair value of cash, 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.

Cash Equivalents

Cash equivalents 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 measures the fair value of cash equivalents using a market approach based on quoted prices in active markets. The Company had $31 million in cash equivalents at September 30, 2023 and $6 million at December 31, 2022.

Debt Obligations

The fair values of the Company's ABL Credit Facility, AR Facility and finance lease liabilities approximated their book values as of September 30, 2023 and December 31, 2022. The fair value of the Company's 2027 Notes is 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).


	September 30, 2023				December 31, 2022
	Nominal Unpaid Principal Balance		Aggregate Fair Value		Nominal Unpaid Principal Balance		Aggregate Fair Value
2027 Notes	$	1,200	$	1,131	$	1,200	$	1,119

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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Note 13—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 September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Basic and diluted earnings per share:
Numerator:
Net income, basic and diluted	$	113	$	101	$	256	$	232
Denominator:
Basic weighted average common shares	28.3		29.7		28.5		29.8
Stock options, RSUs and PSUs	0.2		0.5		0.3		0.5
Weighted average shares used to calculate diluted earnings per share	28.5		30.2		28.8		30.3
Earnings per share:
Basic	$	3.99	$	3.41	$	8.98	$	7.79
Diluted	$	3.96	$	3.36	$	8.89	$	7.66
Antidilutive stock options, RSUs and PSUs	—		0.1		0.1		0.1

Note 14—Related Party Transactions

Agreements with Carl C. Icahn

The Company was party to the Nomination and Standstill Agreement, dated September 15, 2014 (the "Nomination Agreement"), with Carl C. Icahn and certain related entities and individuals.

Pursuant to the Nomination Agreement, Hunter C. Gary, Steven D. Miller and Andrew J. Teno were Icahn Group designees and elected to the Company’s board of directors (the “Board”) at the 2022 annual meeting of stockholders. In March 2023, Messrs. Gary, Miller and Teno resigned from the Board as a result of the Icahn Group ceasing to hold a “net long position” above certain levels. As a result of their resignations, neither the Icahn Group nor the Company have any further duties or obligations under the Nomination Agreement, which is described below.

While an Icahn Group designee was a member of the Board, the Board could not be expanded without approval from the Icahn designees then on the Board. In addition, pursuant to the Nomination Agreement, subject to certain restrictions and requirements, the Icahn Group had certain replacement rights in the event an Icahn designee resigned or was otherwise unable to serve as a director (other than as a result of not being nominated by the Board to stand for election at an annual meeting).

In addition, until the date that no Icahn Group designee was a member of the Board (or otherwise deemed to be on the Board pursuant to the terms of the Nomination Agreement), the Icahn Group agreed to vote all of its shares of Company common stock in favor of the election of all of the Company’s director nominees at each annual or special meeting of stockholders and, subject to limited exceptions, the Icahn Group further agreed 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 Nomination Agreement, 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 provided for customary demand and piggyback registration rights and obligations.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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Note 15—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.

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 16—Subsequent Event

On October 13, 2023, management committed to a plan to explore strategic alternatives, including, but not limited to, the sale of its Cinelease studio entertainment and lighting and grip equipment rental business (“Cinelease”). The Company will reclassify the related assets and liabilities of Cinelease as held-for-sale during the fourth quarter of 2023 as the criteria for such presentation included in ASC Topic 360, “Property, Plant and Equipment” have been met. The potential disposition of Cinelease is not considered a strategic shift that will have a major effect on the Company’s consolidated results of operations, and therefore is not considered to be discontinued operations.

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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;

•Non-rental depreciation and amortization; and

•Interest expense.

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HERC HOLDINGS INC. AND SUBSIDIARIES

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

Economic Conditions

Despite continued economic uncertainty, rising interest rates, supply chain constraints, labor disruptions, and inflation, the equipment rental industry remains resilient, as demonstrated by the increase in volume in the current quarter. We actively monitor the impact of the dynamic macroeconomic environment and manage our business to adjust to such conditions. Interest rates on our debt instruments remain elevated; most notably, the weighted average interest rate on our floating rate debt has increased from 4.14% in the third quarter of 2022 to 6.81% in the current quarter. We monitor our exposure to floating rate debt and reevaluate our capital allocation strategy, as necessary. In response to supply chain disruptions easing in certain categories of equipment, we continue to increase the volume of sales of rental equipment, remaining mindful to the possibility we may experience more severe supply chain disruptions in the future. There have been labor disruptions in the film and television industry as a result of contract disputes and while some have been resolved, others remain outstanding. Our studio entertainment business will continue to be negatively impacted until the remaining contracts can be successfully negotiated, the timing of which is uncertain. Although inflation appears to have stabilized, we have experienced and expect to continue to experience inflationary pressures, a portion of which, such as for fuel and delivery, is passed on to customers. There are other costs for which the pass through to customers is less direct, such as repairs and maintenance, and labor. We cannot predict the extent to which our financial condition, results of operations or cash flows will ultimately be impacted by these ongoing economic conditions, however, we believe we are well-positioned to operate effectively through the present environment.

Seasonality

Our business is seasonal, with demand for our rental equipment tending to be lower in the winter months, particularly in the northern United States and Canada. Our equipment rental business, especially in the construction industry, has historically experienced decreased levels of business from December until late spring and heightened activity during our third and fourth quarters until December. We have the ability to manage certain costs to meet market demand, such as fleet capacity, the most significant portion of our cost structure. For instance, to accommodate increased demand, we increase our available fleet and staff during the second and third quarters of the year. A number of our other major operating costs vary directly with revenues or transaction volumes; however, certain operating expenses, including rent, insurance and administrative overhead, remain fixed and cannot be adjusted for seasonal demand, typically resulting in higher profitability in periods when our revenues are higher, and lower profitability in periods when our revenues are lower. To reduce the impact of seasonality, we are focused on expanding our customer base through products that serve different industries with less seasonality and different business cycles.

RESULTS OF OPERATIONS


	Three Months Ended September 30,								Nine Months Ended September 30,
($ in millions)	2023		2022		Change		Change		2023		2022		Change		Change
Equipment rental	$	765	$	706	$	59	8	%	$	2,121	$	1,838	$	283	15	%
Sales of rental equipment	124		21		103		490		278		68		210		309
Sales of new equipment, parts and supplies	11		10		1		10		29		27		2		7
Service and other revenue	8		8		—		—		22		20		2		10
Total revenues	908		745		163		22		2,450		1,953		497		25
Direct operating	288		278		10		4		851		752		99		13
Depreciation of rental equipment	167		140		27		19		480		389		91		23
Cost of sales of rental equipment	99		16		83		519		201		49		152		310
Cost of sales of new equipment, parts and supplies	7		6		1		17		19		16		3		19
Selling, general and administrative	115		112		3		3		332		298		34		11
Non-rental depreciation and amortization	29		25		4		16		83		69		14		20

Interest expense, net	60		33		27		82		162		81		81		100
Other expense (income), net	(3)		—		(3)		100		(2)		(1)		(1)		100
Income before income taxes	146		135		11		8		324		300		24		8
Income tax provision	(33)		(34)		1		(3)		(68)		(68)		—		—
Net income	$	113	$	101	$	12	12	%	$	256	$	232	$	24	10	%

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HERC HOLDINGS INC. AND SUBSIDIARIES

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

Three Months Ended September 30, 2023 Compared with Three Months Ended September 30, 2022

Equipment rental revenue increased $59 million, or 8%, during the third quarter of 2023 due to higher volume of equipment on rent of 11.5% and pricing growth of 6.9% over the same period in the prior year, partially offset by a decline in re-rent revenue and a reduction year-over-year in the studio entertainment business as a result of labor disruption in the film and television industry.

Sales of rental equipment increased $103 million, or 490%, during the third quarter of 2023 when compared to the third quarter of 2022. As supply chain disruptions have begun to ease in certain categories of equipment, we have increased the volume of sales in line with our fleet rotation planning to improve the equipment mix and manage fleet age. The margin on sales of rental equipment was 20% in 2023 compared to 24% in 2022. The decrease in margin on sale of rental equipment in 2023 was primarily due to a higher proportion of sales through the lower margin auction channel.

Direct operating expenses in the third quarter of 2023 increased $10 million, or 4%, when compared to the third quarter of 2022. Direct operating expenses were 37.6% of equipment rental revenue in 2023, compared to 39.4% in the prior-year period, reflecting better cost performance and fixed cost absorption on higher revenue despite increases in (i) personnel-related expenses of $10 million resulting from increased headcount in support of growth initiatives, (ii) facilities expense of $5 million as we have added more locations through acquisitions and opening greenfield locations and (iii) maintenance expense of $2 million related to our increased fleet size in 2023. These increases were partially offset by a decrease in re-rent expense of $8 million due to the corresponding decrease in re-rent revenue and fuel expense of $6 million due to lower average fuel prices in the third quarter of 2023.

Depreciation of rental equipment increased $27 million, or 19%, during the third quarter of 2023 when compared to the third quarter of 2022 due to an increase in average fleet size. Non-rental depreciation and amortization increased $4 million, or 16%, primarily due to amortization of intangible assets related to acquisitions.

Selling, general and administrative expenses increased $3 million, or 3%, in the third quarter of 2023 when compared to the third quarter of 2022. The increase was primarily due to increases in credit and collections expense of $5 million and selling expenses, including commissions and other variable compensation, of $3 million, partially offset by a $3 million reduction in stock based compensation expense. Selling, general and administrative expenses were 15.0% of equipment rental revenue in 2023 compared to 15.9% in the prior-year period due to continued focus on improving operating leverage while expanding revenues.

Interest expense, net increased $27 million, or 82%, during the third quarter of 2023 when compared with the third quarter of 2022 due to higher interest rates on floating rate debt and increased borrowings on the ABL Credit Facility primarily to fund acquisition growth and invest in rental equipment.

Income tax provision was $33 million, with an effective tax rate of 23%, during the third quarter of 2023 compared to $34 million and 25% in 2022. The rate decrease was driven by certain non-deductible expenses and return to provision adjustments during 2023.

Nine Months Ended September 30, 2023 Compared with Nine Months Ended September 30, 2022

Equipment rental revenue increased $283 million, or 15%, during the nine months ended of 2023 primarily due to higher volume of equipment on rent of 16.8% and pricing growth of 7.2% over the same period in the prior year, partially offset by a decline in re-rent revenue and a reduction year-over-year in the studio entertainment business as a result of labor disruption in the film and television industry.

Sales of rental equipment increased $210 million, or 309%, during the nine months ended of 2023 when compared to the nine months ended of 2022. As supply chain disruptions have begun to ease in certain categories of equipment, we have increased the volume of sales in line with our fleet rotation planning to improve the equipment mix and manage fleet age. The margin on sales of rental equipment was 28% in both periods.

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HERC HOLDINGS INC. AND SUBSIDIARIES

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

Direct operating expenses in the nine months ended of 2023 increased $99 million, or 13%, when compared to the nine months ended of 2022. Direct operating expenses were 40.1% of equipment rental revenue in 2023, compared to 40.9% in the prior-year period, reflecting better cost performance and fixed cost absorption on higher revenue despite increases in (i) personnel-related expenses of $58 million primarily resulting from increased headcount in support of growth initiatives, (ii) maintenance expense of $22 million related to our increased fleet size in 2023, and (iii) facilities expense of $16 million as we have added more locations through acquisitions and opening greenfield locations.

Depreciation of rental equipment increased $91 million, or 23%, during the nine months ended of 2023 when compared to the nine months ended of 2022 due to an increase in average fleet size. Non-rental depreciation and amortization increased $14 million, or 20%, primarily due to amortization of intangible assets related to acquisitions.

Selling, general and administrative expenses increased $34 million, or 11%, in the nine months ended of 2023 when compared to the nine months ended of 2022. The increase was primarily due to credit and collections expense of $16 million and selling expense, including commission and other variable compensation, of $12 million. Selling, general and administrative expenses were 15.7% of equipment rental revenue compared to 16.2% in the prior-year period due to continued focus on improving operating leverage while expanding revenues.

Interest expense, net increased $81 million, or 100%, during the nine months ended of 2023 when compared with the nine months ended of 2022 due to higher interest rates on floating rate debt and increased borrowings on the ABL Credit Facility primarily to fund acquisition growth and invest in rental equipment.

Income tax provision was $68 million during the nine months ended of 2023 and 2022. The effective tax rate during 2023 was 21% compared to 23% in 2022. The rate decrease was driven by a benefit related to stock-based compensation of $12 million and $8 million, respectively, certain non-deductible expenses, and return to provision adjustments.

LIQUIDITY AND CAPITAL RESOURCES

Our primary uses of liquidity include the payment of operating expenses, purchases of rental equipment to be used in our operations, servicing of debt, funding acquisitions, payment of dividends, and share repurchases. Our primary sources of funding are operating cash flows, cash received from the disposal of equipment and borrowings under our debt arrangements. As of September 30, 2023, we had approximately $3.7 billion of total nominal indebtedness outstanding.

Our liquidity as of September 30, 2023 consisted of cash and cash equivalents of $71 million and unused commitments of approximately $1.4 billion under our ABL Credit Facility and AR Facility. See "Borrowing Capacity and Availability" below for further discussion. Our practice is to maintain sufficient liquidity through cash from operations, our ABL Credit Facility and our AR Facility to mitigate the impacts of any adverse financial market conditions on our operations. We believe that cash generated from operations and cash received from the disposal of equipment, together with amounts available under the ABL Credit Facility and the AR Facility or other financing arrangements will be sufficient to meet working capital requirements and anticipated capital expenditures, and other strategic uses of cash, if any, and debt payments, if any, over the next twelve months.

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):