Herc Holdings(HRI) - 2021 Q4 - Annual Report

Part I Business Herc Holdings Inc. is a leading North American equipment rental supplier operating 312 locations, offering a wide range of equipment and related services Company and Industry Overview Herc Holdings is a premier, full-line equipment rental supplier with over 56 years of experience, operating 312 locations across North America - The company operates 312 locations in North America and has over 56 years of experience in the equipment rental industry[17] - The equipment rental industry is highly fragmented, with growth driven by factors like non-residential construction, industrial capital investment, and a general trend of companies preferring to rent rather than own equipment[19][20] Competitive Strengths The company's competitive advantages include its significant scale, broad North American footprint, and diverse customer base - Herc is one of the largest equipment rental companies in North America, with an estimated 3% market share by revenue and 312 locations[23] - The company serves diverse markets including commercial and residential construction, industrial sectors (energy, manufacturing), and infrastructure, which mitigates risk from any single market's downturn[25] - The national accounts program is a significant contributor to revenue, representing 44% of equipment rental revenue for the year ended December 31, 2021[28] Our Strategy The company's long-term strategy focuses on growing core and specialty offerings, elevating technology, integrating ESG principles, and disciplined capital allocation - Strategic priorities include: Grow the Core and Expand Specialty, Elevate Technology, Integrate ESG, and Allocate Capital[33] - The company is expanding its North American footprint, focusing on urban markets through both new 'greenfield' locations and strategic acquisitions[34] - By 2030, the company aims to reduce greenhouse gas emission intensity by 25% and non-toxic waste intensity by 25%, using 2019 as a baseline[37] - A quarterly dividend was introduced in the fourth quarter of 2021 as part of the capital allocation strategy[38] Products and Services Herc's primary service is equipment rental, supplemented by sales of used equipment and contractor supplies Equipment Rental Fleet Composition by Original Cost | Equipment Type | 2021 | 2020 | |:---------------|:-----|:-----| | Aerial | 23.5% | 23.6% | | Material Handling | 17.7% | 17.3% | | Earthmoving | 13.9% | 13.5% | | Specialty | 23.5% | 23.2% | | Other | 21.4% | 22.4% | - As of December 31, 2021, the total original equipment cost of the rental fleet was $4.38 billion, with an average fleet age of 49 months[39][40] Our Customers Herc serves a broad customer base across diverse markets, with no single customer accounting for more than 3% of equipment rental revenue 2021 Equipment Rental Revenue by Customer Market | Customer Market | % of Rental Revenue | |:----------------|:--------------------| | Contractors | 32% | | Industrial | 29% | | Infrastructure and Government | 17% | | Other Customers | 22% | - No single customer accounted for more than 3% of equipment rental revenue in 2021, 2020, or 2019, highlighting customer diversification[43] Human Capital Management As of December 31, 2021, Herc employed approximately 5,600 people, focusing on talent, safety, and diversity - The company employed approximately 5,600 people as of December 31, 2021, with about 560 employees in the U.S. and Canada covered by collective bargaining agreements[50] 2021 Safety Performance Metrics | Metric | Rate | |:-------|:-----| | OSHA Total Recordable Incident Rate (TRIR) | 0.98 | | Days Away/Restricted Transfer Rate (DART) | 0.70 | | Lost Time Case Rate (LTC) | 0.24 | - As of December 31, 2021, women comprised 12% of the workforce and 15% of managerial roles, while people of color represented 30% of the workforce and 14% of managerial roles[62] Risk Factors The company faces various risks including cyclical industry dependence, intense competition, supply chain disruptions, cybersecurity threats, and significant indebtedness - The business is cyclical and highly dependent on capital investment and maintenance spending by customers in industries like construction and industrial manufacturing; a slowdown in these sectors could materially harm results[71][72] - The equipment rental industry is highly competitive, with pressure on pricing, and the company also faces risks from supply chain disruptions and increased equipment costs from its key suppliers[77][78] - The company relies heavily on centralized IT systems, making it vulnerable to cybersecurity breaches, which could harm its brand and result in material liabilities[86][87] - A significant level of indebtedness (approximately $1.9 billion as of Dec 31, 2021) exposes the company to risks such as reduced cash flow for operations, vulnerability to interest rate increases, and potential difficulties in refinancing[128] - The company shares responsibility for certain liabilities with New Hertz following the 2016 spin-off; failure by New Hertz to satisfy its obligations could materially harm Herc's financial condition[121][122] Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - None[140] Properties As of February 4, 2022, the company operated from 312 locations in the United States and Canada, with its principal executive offices in Bonita Springs, Florida - As of February 4, 2022, the company had 312 locations in the U.S. and Canada[141] - Approximately 7% of the operating locations are owned by the company, while the remainder are leased[142] Legal Proceedings The company is subject to various claims and proceedings in the ordinary course of business, with a significant past matter dismissed in April 2021 - The 'In re Hertz Global Holdings, Inc. Securities Litigation' case, initiated in 2013, was dismissed with prejudice on April 1, 2021[464][466] - The company is subject to ordinary course claims but does not expect them to have a material adverse effect on its financial condition[467] Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable[147] Part II Market for Common Equity, Stockholder Matters, and Issuer Purchases Herc Holdings' common stock trades on the NYSE under 'HRI', with a $1.0 billion share repurchase program and a recently declared quarterly dividend - The company's common stock trades on the New York Stock Exchange under the symbol 'HRI'[157] - As of December 31, 2021, $395.9 million remained available for share repurchases under the company's $1.0 billion program, with no repurchases made in 2021[158] - On February 8, 2022, the company declared a quarterly dividend of $0.575 per share[159] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management's discussion highlights strong 2021 performance driven by robust demand, significant revenue and net income growth, and strategic investments in fleet and acquisitions 2021 Overview The company's 2021 results reflect strong demand in the rental industry, with significant increases in equipment rental revenues and net income, supported by strategic acquisitions - Equipment rental revenues for 2021 were $1.9 billion, an increase of 23.8% over 2020, with pricing up 2.1%[169] - Net income increased to $224.1 million in 2021, compared to $73.7 million in 2020[170] - During 2021, the company completed eleven acquisitions with a net cash outflow of $431.0 million[171] Results of Operations For the year ended December 31, 2021, total revenues increased by 16.4% to $2.07 billion, driven by higher equipment rental volume and pricing, leading to a significant rise in net income Results of Operations (2021 vs. 2020) | ($ in millions) | 2021 | 2020 | $ Change | % Change | |:----------------|:-----|:-----|:---------|:---------| | Total revenues | $2,073.1 | $1,781.3 | $291.8 | 16.4% | | Equipment rental | $1,910.4 | $1,543.7 | $366.7 | 23.8% | | Income before income taxes | $290.4 | $94.1 | $196.3 | NM | | Net income | $224.1 | $73.7 | $150.4 | NM | - The increase in equipment rental revenue was driven by a 13.7% increase in the volume of equipment on rent and a 2.1% improvement in pricing[178] - Direct operating expenses increased by $161.1 million, primarily due to higher personnel-related costs ($62.8 million), delivery/freight expenses ($29.4 million), and re-rent expenses ($25.3 million) associated with higher business volume[180] Liquidity and Capital Resources As of December 31, 2021, the company maintained strong liquidity of approximately $1.33 billion, supported by increased operating cash flow and substantial investments in its rental fleet Cash Flow Summary (2021 vs. 2020) | ($ in millions) | 2021 | 2020 | $ Change | |:----------------|:-----|:-----|:---------| | Operating activities | $744.0 | $610.9 | $133.1 | | Investing activities | $(961.3) | $(207.5) | $(753.8) | | Financing activities | $219.6 | $(406.0) | $625.6 | Net Rental Equipment Capital Expenditures | ($ in millions) | 2021 | 2020 | |:----------------|:-----|:-----| | Rental equipment expenditures | $593.8 | $344.1 | | Disposals of rental equipment | $(106.9) | $(192.5) | | Net rental equipment expenditures | $486.9 | $151.6 | - As of December 31, 2021, the company had approximately $1.3 billion of unused borrowing capacity under its ABL Credit Facility[187][201] - The company projects net rental equipment capital expenditures to be in the range of $820 million to $1,120 million for 2022[197] Critical Accounting Policies and Estimates The company's financial statements rely on significant management estimates, particularly for revenue recognition, rental equipment depreciation, and goodwill impairment testing - Rental equipment depreciation is a critical estimate, based on historical experience, industry guidebooks, and market conditions to determine holding periods and residual values[212] - Goodwill and indefinite-lived intangible assets are tested for impairment annually (as of October 1) or when circumstances require, using the single reporting unit of North American equipment rental for the goodwill test[218] - For business combinations, the company allocates the purchase price to acquired assets and liabilities based on their fair values, which involves significant estimates for rental equipment, intangible assets, and goodwill[216] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks primarily from changes in interest rates, foreign currency exchange rates, and fuel prices, which are actively managed - The company's primary market risks are changes in interest rates, foreign currency exchange rates, and fuel prices[235] - A hypothetical 1% increase in interest rates on floating-rate debt and cash would decrease pre-tax earnings by an estimated $6.5 million over a 12-month period[237] - Foreign currency exposure is primarily related to the Canadian dollar and is managed by incurring expenses and borrowing in the local currency[239] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2021, along with an unqualified opinion from PricewaterhouseCoopers LLP - The independent auditor, PricewaterhouseCoopers LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting as of December 31, 2021[246] Consolidated Balance Sheet Highlights (as of Dec 31) | ($ in millions) | 2021 | 2020 | |:----------------|:-----|:-----| | Total current assets | $469.7 | $367.1 | | Rental equipment, net | $2,665.3 | $2,260.4 | | Total assets | $4,490.4 | $3,588.4 | | Long-term debt, net | $1,916.1 | $1,651.5 | | Total liabilities | $3,513.5 | $2,846.4 | | Total equity | $976.9 | $742.0 | Consolidated Statement of Operations Highlights (Year Ended Dec 31) | ($ in millions) | 2021 | 2020 | 2019 | |:----------------|:-----|:-----|:-----| | Total revenues | $2,073.1 | $1,781.3 | $1,999.0 | | Income before taxes | $290.4 | $94.1 | $63.6 | | Net income | $224.1 | $73.7 | $47.5 | | Diluted EPS | $7.37 | $2.51 | $1.63 | Changes in and Disagreements with Accountants The company reports no changes in or disagreements with its accountants on any accounting or financial disclosure matters - None[504] Controls and Procedures Management concluded that the company's disclosure controls and procedures and internal control over financial reporting were effective as of December 31, 2021 - The CEO and CFO concluded that disclosure controls and procedures were effective as of December 31, 2021[505] - Management concluded that internal control over financial reporting was effective as of December 31, 2021[506] Other Information This section notes the retirement of a director and an amendment to the company's By-Laws regarding the Finance Committee - Director Jacob M. Katz retired from the Board on February 9, 2022[509] - The Board of Directors amended the By-Laws on February 8, 2022, to eliminate the requirement for a Finance Committee[510] Part III Directors, Executive Officers and Corporate Governance Information regarding executive officers is provided in Part I, with other required details incorporated by reference from the 2022 Proxy Statement - Information required by this item is incorporated by reference from the company's Proxy Statement[514] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's Proxy Statement for its 2022 annual meeting of stockholders - Information required by this item is incorporated by reference from the company's Proxy Statement[515] Security Ownership and Equity Compensation Plans This section provides details on the company's equity compensation plans as of December 31, 2021, with other security ownership information incorporated by reference Equity Compensation Plan Information (as of Dec 31, 2021) | Plan category | Number of securities to be issued upon exercise (a) | Weighted average exercise price of outstanding options (b) | Number of securities remaining available for future issuance (c) | |:--------------|:----------------------------------------------------|:-----------------------------------------------------------|:-----------------------------------------------------------------| | Equity compensation plans approved by security holders | 850,856 | $43.48 | 1,441,012 | Certain Relationships, Related Transactions, and Director Independence Information regarding certain relationships, related party transactions, and director independence is incorporated by reference from the company's 2022 Proxy Statement - Information required by this item is incorporated by reference from the company's Proxy Statement[519] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the company's Proxy Statement for its 2022 annual meeting of stockholders - Information required by this item is incorporated by reference from the company's Proxy Statement[520] Part IV Exhibits and Financial Statement Schedule This section lists all documents filed as part of the Form 10-K report, including financial statements, schedules, and various exhibits - This item includes the consolidated financial statements, financial statement schedule (Schedule II), and a list of all exhibits filed with the report[522] Form 10-K Summary This item is not applicable to the company's filing - Not applicable[527]