Herc Holdings reports 2019 Fourth Quarter and Full Year 2019 results

Posted on Feb 27, 2020 in Nuts & Bolts

• Equipment rental revenue increased 2.1% to $457.0 million in the fourth quarter and rose 2.6% to $1,701.8 million for the full year
• Total revenues were $540.1 million in the fourth quarter and $1,999.0 million for the full year
• Pricing improved by 3.3% in the fourth quarter and 4.0% for the full year
• Net income increased to $35.1 million, or $1.20 per diluted share, in the fourth quarter and $47.5 million, or $1.63 per diluted share, for the full year
• Adjusted EBITDA increased 8.1% to $214.4 million in the fourth quarter, and 8.2% to $741.0 million for the full year
• Net cash provided by operating activities increased by 13.7% to $635.6 million in 2019
• Free cash flow improved nearly $180 million to $172.0 million in 2019
• Initiated 2020 adjusted EBITDA guidance range of $760 million to $790 million

Herc Holdings Inc. (“Herc Holdings” or the “Company”) has reported financial results for the quarter ended December 31, 2019. Equipment rental revenue was $457.0 million and total revenues were $540.1 million in the fourth quarter of 2019, compared to $447.7 million and $543.7 million, respectively, for the same period last year. The Company reported net income of $35.1 million, or $1.20 per diluted share, in the fourth quarter of 2019, compared to $33.3 million, or $1.16 per diluted share, in the same 2018 period. Fourth-quarter 2019 adjusted net income was $38.9 million, or $1.33 per diluted share, compared to $33.4 million, or $1.16 per diluted share, in 2018. See page A-5 for a description of the items excluded in calculating adjusted net income and adjusted earnings per share.

“We generated $172.0 million in free cash flow in 2019, a positive swing of nearly $180 million from last year,” said Larry Silber, president, and chief executive officer. “Our strategic initiatives continue to deliver strong year-over-year pricing and we achieved major improvements in operating efficiency and dollar utilization in the fourth quarter and a full year. We focused on the quality of earnings throughout the year, and the fourth-quarter adjusted EBITDA margin rose 320 basis points to 39.7%, the highest fourth-quarter margin we have achieved since the spin-off in 2016. ”

“Our disciplined capital management initiatives reduced our net leverage ratio significantly in three-and-half years, to just 2.8x as of December 31, 2019. Targeted branch openings, controlled fleet additions, and self-help initiatives are expected to drive future profitability. Leading economic indicators continue to suggest positive momentum in our end markets and support our favorable outlook.”

Equipment rental revenue increased 2.1%, the average fleet at original equipment cost (OEC) was up 0.7% and overall pricing improved 3.3% in the fourth quarter of 2019, over the prior-year period. Adjusted EBITDA increased by 8.1% to $214.4 million in the fourth quarter compared to $198.4 million in the comparable 2018 period. See page A-4 for a description of the items excluded in calculating adjusted EBITDA.

Net cash provided by operating activities increased 13.7% to $635.6 million in 2019 compared to $559.1 million in the prior year. Free cash flow rose to $172 million in 2019 compared to a negative cash flow of $7.9 million in 2018. See page A-6 for a reconciliation from net cash provided by operating activities and free cash flow.

Fourth Quarter Highlights

• Equipment rental revenue in the fourth quarter of 2019 increased by 2.1% to $457.0 million compared to $447.7 million in the prior-year quarter. Strong year-over-year improvements in pricing were partially offset by lower volume.

• Total revenues decreased by 0.7% to $540.1 million in the fourth quarter compared to $543.7 million in 2018. The $3.6 million declines was related to a planned reduction of $9.6 million in sales of rental equipment, and a $3.0 million reductions in sales of new equipment, parts, and supplies compared to the prior year. Those reductions were partially offset by an increase in equipment rental revenue of $9.3 million.

• Pricing increased 3.3% in the fourth quarter of 2019 compared to the same period in 2018, the 15th consecutive quarter of year-over-year improvement.

• Dollar utilization increased 80 basis points to 40.5% in the fourth quarter of 2019 compared to the prior-year period, reflecting improved pricing and customer and fleet mix diversification.

• Direct operating expenses (DOE) decreased by 2.2% to $195.8 million in the fourth quarter of 2019 compared to $200.3 million in the prior-year period. The $4.5 million decreases was primarily related to lower transportation, insurance, and personnel-related expenses, offset by an increase in facilities and maintenance costs.

• Selling, general and administrative expenses (SG&A) decreased 10.1% to $73.6 million in the fourth quarter of 2019 compared to $81.9 million in the prior-year period. The $8.3 million declines were primarily attributed to the reduction in spin-off costs, bad debt, and professional fees, partially offsetting an increase in personnel and personnel-related expenses.

• Interest expense in the fourth quarter of 2019 decreased to $27.1 million compared to $34.0 million in the prior-year period. The decrease was primarily related to lower interest expense related to the refinancing of the Company’s Notes and ABL Credit Facility during the third quarter of 2019.

• The provision for income taxes in the fourth quarter was $18.1 million compared to $5.0 million in the previous year, which included a $6.0 million tax benefit related to the enactment of the Tax Cuts and Jobs Act of 2017 (“2017 Tax Act”).

• Net income increased 5.4% to $35.1 million in the fourth quarter of 2019 compared to $33.3 million in the prior-year period. Adjusted net income was $38.9 million compared to $33.4 million in the prior-year quarter.

• Adjusted EBITDA in the fourth quarter of 2019 increased by 8.1% to $214.4 million compared to $198.4 million in the prior-year period. The increase was primarily due to strong equipment rental revenue pricing and lower DOE and SG&A, partially offset by losses on the sale of rental equipment. The adjusted EBITDA margin increased to 39.7% in the fourth quarter of 2019, compared with 36.5% in the prior-year quarter.

Full Year 2019 Highlights:

• Equipment rental revenue in the year increased 2.6% to $1,701.8 million compared to $1,658.3 million in 2018. The $43.5 million increase was primarily related to improvement in pricing and increases in transportation revenue, partially offset by strategic reductions in re-rent revenue and lower volume.

• Total revenues increased 1.1% to $1,999.0 million in 2019 compared to $1,976.7 million in 2018. The $22.3 million year-over-year increase was related to the increase in equipment rental revenue, partially offset by lower planned sales of rental equipment of $13.4 million, and lower sales of new equipment, parts and supplies, and service and other revenue.

• Pricing increased by 4.0% in the year compared to the same period last year.

• Direct operating expenses decreased $14.1 million to $771.1 million compared to $785.2 million in the prior-year period. The 1.8% decline was primarily due to initiatives to reduce expenses, particularly in re-rent, maintenance, and transportation. The savings were partially offset by increases in new facilities costs, personnel, and personnel-related expenses.

• SG&A decreased $16.5 million to $294.8 million in the year compared to $311.3 million in the prior-year period. The 5.3% year-over-year decline resulted primarily from the reduction in spin-off related expenses and lower professional fees, partially offset by higher personnel-related expenses.

• 2019 results included restructuring expense of $7.7 million associated with the closures of underperforming branches.

• Interest expense increased to $173.5 million in the year compared to the prior year’s $137.0 million, primarily due to $53.6 million of debt extinguishment costs related to the refinancing of the Notes and ABL Credit Facility in 2019. Last year’s results also included a $5.4 million expense related to the partial redemption of the Company’s Notes. The increase was partially offset by a decrease in interest expense due to lower interest rates related to the Notes and ABL Credit Facility.

• The provision for income taxes increased to $16.1 million for the year, compared with the previous year’s $0.3 million tax benefit, which included a $20.8 million tax benefit related to the 2017 Tax Act.

• Net income was $47.5 million in the year ended December 31, 2019, compared to $69.1 million in the comparable prior-year period. Adjusted net income for the year was $91.6 million in 2019, compared to $67.8 million in 2018.

• Adjusted EBITDA in the year increased 8.2% to $741.0 million compared to $684.8 million in the prior year. The increase was primarily due to strong equipment rental revenue pricing and lower SG&A and DOE. The adjusted EBITDA margin increased to 37.1% compared with 34.6% in 2018.

Capital Expenditures – Fleet

• The Company reported net fleet capital expenditures of $414.2 million in the year 2019. Gross fleet capital expenditures were $638.4 million, and proceeds from disposals were $224.2 million. See page A-5 for the calculation of net fleet capital expenditures.

• As of December 31, 2019, the Company’s total fleet was approximately $3.82 billion at OEC.

• The average fleet at OEC increased by 0.7% in the fourth quarter of 2019 and 0.4% in the year compared to the prior-year periods.

• The average fleet age improved to approximately 45 months as of December 31, 2019, compared to approximately 46 months as of December 31, 2018.

Improved Free Cash Flow and Net Leverage

• The Company generated $172.0 million in free cash flow for the full year 2019, compared with a negative free cash flow of $7.9 million in 2018.
• Net leverage was reduced to 2.8x in 2019 – a decline from the 3.1x at the end of 2018.

2020 Guidance

“We expect adjusted EBITDA in 2020 to grow between approximately 3% to 7% over 2019, ” said Mr. Silber. “We plan a moderate increase in net fleet capital expenditures in 2020 over last year to improve our mix with modest fleet growth. We also expect to continue to generate substantial positive free cash flow this year, which will be primarily used to reduce net leverage,” he added.

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.