Herc Holdings reports Second Quarter and First Half 2019 results

Posted on Aug 7, 2019 in Nuts & Bolts

Second Quarter 2019 Highlights

• Equipment rental revenue rose to $407.6 million and total revenues were $475.1 million
• Pricing improved by 4.6%, the 13th consecutive quarter of year-over-year improvement
• Net income increased $10.0 million to $9.7 million
• Adjusted EBITDA grew 14.9% to $174.9 million; adjusted EBITDA margin increased 550 basis points
• 2019 guidance range for adjusted EBITDA is raised to $735 million to $760 million

Herc Holdings Inc., (“Herc Holdings” or the “Company”) has reported financial results for the quarter ended June 30, 2019. Equipment rental revenue was $407.6 million and total revenues were $475.1 million in the second quarter of 2019, compared with $392.5 million and $485.5 million, respectively, for the same period last year. The Company reported net income of $9.7 million, or $0.33 per diluted share, in the second quarter of 2019 compared to a net loss of $0.3 million, or $0.01 per diluted share, in the same 2018 period.

Equipment rental revenue increased 3.8%, average fleet at original equipment cost (OEC) decreased 1.3% and overall pricing improved 4.6% in the second quarter of 2019 over the prior-year period. Adjusted EBITDA increased 14.9% to $174.9 million in the second quarter compared to $152.2 million in the comparable 2018 period. See page A-4 for a description of the items excluded in calculating adjusted EBITDA.

“Our strong second quarter results reflect the company-wide focus on quality of earnings,” said Larry Silber, president and chief executive officer. “We improved pricing 4.6% over last year and increased dollar utilization by 260 basis points to 38.0% in the quarter. Our margin improvement initiatives reduced expenses and contributed to the year-over-year increase in adjusted EBITDA margin of 550 basis points to 36.8%. Lower net fleet capital expenditures and increased pricing improved dollar utilization. These initiatives drove equipment revenue growth and strong profitability improvements despite record levels of rain in certain regions of the U.S.

“Customer feedback and project backlogs support our expectation for solid equipment rental demand for the rest of the year. As we continue to successfully implement our revenue and cost initiatives, we expect to continue generating strong growth in profitability for the full-year 2019,” he added.

Second Quarter Highlights

• Equipment rental revenue in the second quarter of 2019 increased 3.8% or $15.1 million to $407.6 million compared to $392.5 million in the prior-year quarter. Strong year-over-year improvements in pricing and mix were offset primarily by strategic reductions in re-rent revenue to drive margin improvement.

• Total revenues decreased 2.1% to $475.1 million in the second quarter compared to $485.5 million in 2018. The $10.4 million year-over-year decline was primarily related to the $26.9 million reduction in sales of rental equipment compared to 2018. The impact of the difference in sales of rental equipment was partially offset by an increase in equipment rental revenue of $15.1 million.

• Pricing increased 4.6% in the second quarter of 2019 compared to the same period in 2018, the 13th consecutive quarter of year-over-year improvement.

• Dollar utilization increased 260 basis points to 38.0% in the second quarter of 2019 compared to the prior-year period, reflecting improved pricing and customer and fleet mix diversification.

• Direct operating expenses (DOE) declined to $188.5 million in the second quarter of 2019 compared to $194.5 million in the prior-year period. The 3.1%, or $6.0 million, year-over-year decrease was driven primarily by initiatives to reduce maintenance and transportation expenses and strategic reductions in re-rent expense. Those savings were offset by investments in new facilities.

• Selling, general and administrative expenses (SG&A) decreased to $73.5 million in the second quarter of 2019 compared to $77.3 million in the prior-year period. The 4.9%, or $3.8 million, year-over-over decline was primarily attributed to the reduction in spin-off costs and professional fees, offset by an increase in salaries and benefits.

• The Company also recorded restructuring expense of $7.8 million in the second quarter associated with closures of under-performing branches.

• Interest expense in the second quarter of 2019 decreased to $31.6 million compared to $32.4 million in the prior-year period. The decrease was primarily due to lower average outstanding borrowings on our senior secured second priority notes (“Notes”) from the partial redemptions made in July 2018, which was partially offset by the higher average interest rates on the revolving credit facility compared with last year.

• Net income was $9.7 million in the second quarter of 2019 compared to a net loss of $0.3 million in the second quarter of 2018.

• Adjusted EBITDA in the second quarter of 2019 increased 14.9% to $174.9 million compared to $152.2 million in the second quarter of 2018. The increase was primarily due to strong equipment rental pricing, improved dollar utilization and reduced SG&A and DOE.

First Half Highlights

• Equipment rental revenue in the first half of 2019 increased 3.1% or $23.6 million to $785.2 million compared to $761.6 million in the first half of 2018. Strong improvement in pricing and mix were primarily offset by strategic reductions in re-rent revenue.

• Total revenues increased 3.7% to $950.8 million for the first half of 2019 compared to $916.8 million in the first half of 2018. The $34.0 million year-over-year increase included an increase in equipment rental revenue of $23.6 million and an increase in sales of rental equipment of $10.9 million.

• Pricing increased 4.2% for the first half of 2019 compared to the same period last year.

• Direct operating expenses decreased $12.9 million to $377.6 million compared to $390.5 million in the prior-year period. The 3.3% decline was primarily due to initiatives to reduce expenses, particularly in maintenance and re-rent expense. The savings were partially offset by investments in new facilities.

• SG&A decreased $5.8 million to $145.0 million for the first half of 2019 compared to $150.8 million in the prior-year period. The 3.8% year-over-year decline resulted primarily from the reduction in spin-off costs and professional fees, offset by an increase in salaries and benefits.

• First half results included restructuring expense of $7.8 million associated with closures of under-performing branches.

• Interest expense of $64.5 million for the first half of 2019 was flat compared to the prior year’s $64.4 million, primarily due to lower average outstanding borrowings on the Notes offset by higher average interest rates on the revolving credit facility.

• Net income was $3.0 million for the first half of 2019 compared to a loss of $10.4 million in the comparable prior-year period.

• Adjusted EBITDA for the first half of 2019 increased 11.3% to $317.2 million compared to $284.9 million in the prior year. The increase was primarily due to strong equipment rental revenue pricing, improved dollar utilization and lower SG&A and DOE.

Capital Expenditures – Fleet

• The Company reported net fleet capital expenditures of $133.4 million for the first half of 2019. Gross fleet capital expenditures were $257.1 million, and disposals were $123.7 million. See page A-5 for the calculation of net fleet capital expenditures.

• As of June 30, 2019, the Company’s total fleet was approximately $3.86 billion at OEC.

• Average fleet at OEC decreased 1.3% in the second quarter of 2019 and 0.3% for the first half compared to the prior-year periods.

• Average fleet age improved to approximately 44 months as of June 30, 2019, compared with approximately 46 months as of June 30, 2018.

2019 Guidance

“We raised the lower end of our adjusted EBITDA guidance to reflect the strong pricing environment and our outlook for continued equipment rental demand for the full year, ” said Mr. Silber. “We expect year-over-year growth in adjusted EBITDA of approximately 7% to 11% in 2019. We are also affirming our net fleet capital expenditure guidance. Our expectation for improved operating results and lower net fleet capital expenditures in 2019 are expected to generate strong positive free cash flow and improve our net leverage for the full 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.

Recent Developments

On July 9, 2019, Herc Holdings Inc. issued $1.2 billion aggregate principal amount of its 5.50% Senior Notes due 2027 (“2027 Notes”). Interest on the 2027 Notes will accrue at the rate of 5.50% per annum and will be payable semi-annually in arrears on January 15 and July 15, commencing on January 15, 2020. The 2027 Notes will mature on July 15, 2027.

The net proceeds from the sale of the 2027 Notes were used to redeem all $427.0 million outstanding principal amount of Herc Rentals Inc.’s 7.50% Senior Secured Second Priority Notes due 2022 (“2022 Notes”) and all $437.5 million outstanding principal amount of the 7.75% Senior Secured Second Priority Notes due 2024 (“2024 Notes”) and to partially repay indebtedness outstanding under the Company’s asset-backed revolving credit agreement and to pay related fees and expenses.

The 2022 Notes and 2024 Notes were redeemed on July 9, 2019, at a redemption price of 103.750% in the case of the 2022 Notes and 105.813% in the case of the 2024 Notes, plus $7.0 million interest accrued to, but excluding, July 9, 2019. The Company expects to record a loss of approximately $51 million on the early extinguishment of debt, comprised of the premiums paid and unamortized debt issuance costs.

Yesterday, it was announced that the Company completed the refinancing of the $1.75 billion Herc Rentals Inc. ABL Credit Facility in order to, among other things, add the Company as a borrower, extend the maturity date from 2021 to 2024 and reduce the cost by 25 bps to LIBOR +1.50 bps.