Herc Holdings reports Fourth Quarter and full year 2018 results

Posted on Feb 28, 2019 in Nuts & Bolts

Achieves 8.0% growth in equipment rental revenue to $447.7 million for the fourth quarter and an increase of 10.6% to $1,658.3 million for the full year

Herc Holdings Inc. (“Herc Holdings” or the “Company”) has reported financial results for the quarter and year ended December 31, 2018. Equipment rental revenue was $447.7 million and total revenues were $543.7 million in the fourth quarter of 2018, up from $414.5 million and $491.7 million, respectively, for the same periods last year. The Company reported net income of $33.3 million or $1.16 per diluted share in the fourth quarter of 2018 compared to $214.3 million or $7.44 per diluted share in the same period in 2017. The results include net tax benefits of $6.0 million or $0.21 per diluted share in 2018, and $207.1 million or $7.19 per diluted share in 2017, related to the enactment of the Tax Cuts and Jobs Act of 2017 (“2017 Tax Act”).

Equipment rental revenue increased 8.0%, average fleet at original equipment cost (OEC) increased 4.4% and overall pricing improved 2.9% in the fourth quarter of 2018 over the prior-year period. Adjusted EBITDA increased 11.6% to $198.4 million in the fourth quarter compared to $177.8 million in the comparable period in 2017. See page A-4 for a description of the items excluded in calculating adjusted EBITDA.

“We are pleased with the double-digit year-over-year growth in equipment rental revenue and adjusted EBITDA we achieved in 2018,” said Larry Silber, president and chief executive officer. “During the year, we raised our adjusted EBITDA guidance twice, and our 2018 results came in at the high end of the updated range we provided in November. Dollar utilization of 39.7% for the fourth quarter was the highest recorded since we became a stand-alone public company. Solid market demand supported the uplift in pricing of 2.9% in the quarter, our 11th consecutive quarter of year-over-year pricing improvement.

“We intend to continue to drive rental revenue growth through our urban market strategy, fleet and customer diversification initiatives, and the strong market environment. We expect to enhance adjusted EBITDA margin with a steady focus on flow-through in 2019, which in turn should strengthen our free cash flow and continue to improve our balance sheet,” he added.

Fourth Quarter highlights

• Equipment rental revenue in the fourth quarter of 2018 increased 8.0% or $33.2 million to $447.7 million compared to $414.5 million in the prior-year quarter. The gain reflected strong growth in rental revenue from local accounts and ProSolutions^TM and ProContractor categories over the prior year.
• Total revenues increased 10.6% to $543.7 million in the fourth quarter compared to $491.7 million in 2017. The $52.0 million year-over-year improvement included an increase in equipment rental revenue of $33.2 million and in sales of rental equipment of $18.3 million. The Company benefited from a strong used equipment market as it continued to focus on improving equipment mix and reducing fleet age.
• Pricing increased 2.9% in the fourth quarter of 2018 compared to the same period in 2017.
• Dollar utilization of 39.7% in the fourth quarter of 2018 increased 100 basis points compared to the prior-year period, reflecting improved pricing and customer and fleet diversification.
• Direct operating expenses were $204.0 million in the fourth quarter of 2018 compared to $194.2 million in the prior-year period. The 5.0% increase was driven primarily by increased personnel costs related to higher rental activity, partially offset by improved operating efficiencies.
• Selling, general and administrative expenses (SG&A) increased $6.6 million to $82.4 million in the fourth quarter of 2018 compared to $75.8 million in the prior-year period. The increase was primarily related to higher variable compensation incentives supporting revenue growth.
• Interest expense in the fourth quarter of 2018 decreased to $34.0 million compared to $38.2 million in the prior-year period. The decrease was primarily due to lower average senior secured second priority notes (“Notes”) outstanding from the partial redemptions made in October 2017 and July 2018, which was partially offset by higher average interest rates on the revolving credit facility during the quarter compared with the same period last year.
• Net income was $33.3 million in the fourth quarter of 2018 compared to $214.3 million in the fourth quarter of 2017. The results for the fourth quarter include tax benefits of $6.0 million in 2018, and $207.1 million in 2017, related to the enactment of the 2017 Tax Act.

• Adjusted EBITDA in the fourth quarter of 2018 increased 11.6% to $198.4 million compared to $177.8 million in the fourth quarter of 2017. The increase was primarily due to strong equipment rental revenue growth.

Full Year 2018 highlights

• Equipment rental revenue for 2018 increased 10.6% or $159.3 million to $1,658.3 million compared to $1,499.0 million in 2017. The double-digit growth reflected strong growth in rental revenue from local accounts and ProSolutions^TM and ProContractor categories.
• Total revenues increased 12.7% to $1,976.7 million for 2018 compared to $1,754.5 million in 2017. The $222.2 million year-over-year increase included an increase in equipment rental revenue of $159.3 million and in sales of rental equipment of $65.4 million. The Company benefited from a strong used equipment market as it continues to focus on improving equipment mix and reducing fleet age.
• Pricing increased 2.9% for the full year 2018 compared to 2017.
• Dollar utilization grew to 37.4% for the full year 2018, an increase of 150 basis points over the prior year, reflecting improved pricing and customer and fleet mix diversification.
• Direct operating expenses were $788.9 million compared to $719.8 million in the prior-year period. The 9.6% increase was related primarily to strong rental revenue activity for 2018, which resulted in higher personnel costs and transportation expenses.
• SG&A decreased $7.6 million to $312.6 million for 2018 compared to $320.2 million in the prior-year period. The 2.4% year-over-year decline resulted primarily from the reduction of costs related to spin-off expenses and professional fees, which were partially offset by higher variable compensation incentives supporting revenue growth.
• Interest expense for 2018 decreased $3.0 million to $137.0 million from $140.0 million in the prior-year period. The decrease was primarily due to lower average Notes outstanding from the partial redemptions made in March and October 2017 and July 2018, which was partially offset by higher average outstanding balances and interest rates on the revolving credit facility compared with last year.
• Net income was $69.1 million for 2018 compared to $160.3 million in the comparable prior-year period. The results included net tax benefits of $20.8 million in 2018, and $207.1 million in 2017, related to the previously mentioned 2017 Tax Act.
• Adjusted EBITDA for 2018 increased 17.0% to $684.8 million compared to $585.4 million in the prior year. The increase was primarily due to strong equipment rental revenue growth and improved results from a higher volume of sales of rental equipment.

Capital Expenditures – Fleet

• The Company reported net fleet capital expenditures of $499.1 million for 2018. Gross fleet capital expenditures were $771.4 million, and disposals were $272.3 million. See page A-5 for the calculation of net fleet capital expenditures.
• As of December 31, 2018, the Company’s total fleet was approximately $3.78 billion at OEC.
• Average fleet at OEC increased 4.4% in the fourth quarter and 4.8% for the full year 2018 compared to the prior-year periods.
• Average fleet age declined to approximately 46 months as of December 31, 2018, compared with approximately 49 months as of December 31, 2017.

2019 Guidance

“The continued robust market demand along with our improved operating efficiencies support our expectation for year-over-year growth in adjusted EBITDA of approximately 7% to 11% in fiscal 2019,” said Mr. Silber. “Our 2019 net capital spending is expected to be lower than 2018 as we continue to improve the quality and age of the fleet by disposing of non-preferred brands and older equipment. By staying focused on disciplined capital management, we intend to continue to lower our net leverage by the end of the year.”

The Company does not provide forward-looking guidance for certain financial measures on a GAAP basis because certain items contained in the GAAP measures, which may be significant, cannot be reasonably estimated, such as restructuring and restructuring related charges, and gains and losses from asset sales.