Herc Holdings Inc. reported financial results for the quarter ended September 30, 2019.
Equipment rental revenue was $459.6 million and total revenues were $508.1 million in the third quarter of 2019, compared to $449.0 million and $516.2 million, respectively, for the same period last year. The Company reported net income of $9.4 million, or $0.32 per diluted share, in the third quarter of 2019, compared to $46.2 million, or $1.60 per diluted share, in the same 2018 period. Third quarter 2019 adjusted net income was $43.2 million, or $1.48 per diluted share, compared to $36.7 million, or $1.27 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.
Equipment rental revenue increased 2.4%, average fleet at original equipment cost (OEC) was up 0.4% and overall pricing improved 4.5% in the third quarter of 2019, over the prior-year period. Adjusted EBITDA increased 3.9% to $209.4 million in the third quarter compared to $201.5 million in the comparable 2018 period. See page A-4 for a description of the items excluded in calculating adjusted EBITDA.
“The year-over-year improvement in our third quarter results reflect our continued focus on pricing and quality of earnings," said Larry Silber, president and chief executive officer. "We improved pricing 4.5% and improved adjusted EBITDA margin by 220 basis points compared to the prior year's third quarter.
"We have been taking a cautious approach regarding rental equipment expenditures and our balance sheet this year. Our ongoing focus on dollar utilization, along with strong end markets and positive expectations from national and local customers, support our 8% to 10% adjusted EBITDA growth assumptions for 2019, and form a solid base for improvement in 2020."
Third Quarter Highlights
- Equipment rental revenue in the third quarter of 2019 increased 2.4% to $459.6 million compared to $449.0 million in the prior-year quarter. Strong year-over-year improvements in pricing and mix were partially offset by strategic reductions in re-rent revenue.
- Total revenues decreased 1.6% to $508.1 million in the third quarter compared to $516.2 million in 2018. The $8.1 million decline was related to a reduction of $14.7 million in sales of rental equipment and $4.2 million reduction 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 $10.6 million.
- Pricing increased 4.5% in the third quarter of 2019 compared to the same period in 2018, the 14th consecutive quarter of year-over-year improvement.
- Dollar utilization increased 160 basis points to 40.8% in the third quarter of 2019 compared to the prior-year period, reflecting improved pricing and customer and fleet mix diversification.
- Direct operating expenses (DOE) increased 1.7% to $197.7 million in the third quarter of 2019 compared to $194.4 million in the prior-year period. The $3.3 million increase was primarily related to higher new facilities costs, personnel and personnel related-expenses, which were partially offset by strategic reductions in re-rent expense and lower transportation costs.
- Selling, general and administrative expenses (SG&A) decreased 2.8% to $76.2 million in the third quarter of 2019 compared to $78.4 million in the prior-year period. The $2.2 million decline was primarily attributed to the reduction in professional fees and spin-off costs. The savings were partially offset by an increase in selling expense.
- Interest expense in the third quarter of 2019 increased to $81.9 million compared to $38.6 million in the prior-year period. The increase was primarily related to $53.6 million of debt extinguishment costs related to the refinancing of the Company's Notes and ABL Credit Facility during the quarter.
- Net income was $9.4 million in the third quarter of 2019 compared to $46.2 million in the third quarter of 2018. Adjusted net income, excluding the loss on the extinguishment of debt, restructuring, certain other costs, and special tax adjustments was $43.2 million compared to $36.7 million in the prior year.
- Adjusted EBITDA in the third quarter of 2019 increased 3.9% to $209.4 million compared to $201.5 million in the third quarter of 2018. The increase was primarily due to strong equipment rental pricing, improved dollar utilization and reduced SG&A.
Nine Months Highlights
- Equipment rental revenue in the nine months increased 2.8% to $1,244.8 million compared to $1,210.6 million in 2018. The $34.2 million improvement was primarily related to better pricing and mix and partially offset by strategic reductions in re-rent revenue.
- Total revenues increased 1.8% to $1,458.9 million in the nine months compared to $1,433.0 million in 2018. The $25.9 million year-over-year increase was related to the increase in equipment rental revenue, partially offset by a decline in sales of rental equipment of $3.8 million, and lower sales of new equipment, parts and supplies and service and other revenue.
- Pricing increased 4.3% in the nine months compared to the same period last year.
- Direct operating expenses decreased $9.6 million to $575.3 million compared to $584.9 million in the prior-year period. The 1.6% 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 $8.0 million to $221.2 million in the nine months compared to $229.2 million in the prior-year period. The 3.5% year-over-year decline resulted primarily from the reduction in spin-off costs and professional fees, offset by an increase in salaries and benefits.
- Nine months results included restructuring expense of $7.8 million associated with closures of underperforming branches.
- Interest expense increased to $146.4 million in the nine months compared to the prior year's $103.0 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.
- Net income was $12.4 million in the nine months ended September 30, 2019, compared to $35.8 million in the comparable prior-year period. Adjusted net income for the nine months, which excludes the loss on the extinguishment of debt, restructuring, spin-off, certain other costs, and special tax adjustments, was $52.8 million in 2019, compared to $34.4 million in 2018.
- Adjusted EBITDA in the nine months increased 8.3% to $526.6 million compared to $486.4 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 $349.8 million in the nine months of 2019. Gross fleet capital expenditures were $506.7 million, and disposals were $156.9 million. See page A-5 for the calculation of net fleet capital expenditures.
- As of September 30, 2019, the Company's total fleet was approximately $3.94 billion at OEC.
- Average fleet at OEC increased 0.4% in the third quarter of 2019 and 0.3% in the nine months compared to the prior-year periods.
- Average fleet age improved to approximately 44 months as of September 30, 2019, compared to approximately 46 months as of September 30, 2018.
Balance Sheet - Refinancing Debt
- In July 2019, the Company issued $1.2 billion aggregate principal amount of 2027 Notes. The funds were used to redeem the remaining 2022 Notes and 2024 Notes and repay a portion of the indebtedness outstanding under the then existing ABL Credit Facility. Additionally, Herc Holdings, Herc and certain other subsidiaries of Herc Holdings entered into the New ABL Credit Facility, which refinances in full and replaces the ABL Credit Facility.
2019 Guidance
"We updated our adjusted EBITDA guidance to reflect the strong pricing environment and our outlook for equipment rental demand in the fourth quarter, " said Mr. Silber. "Our net fleet capital expenditure guidance is at the top of the range we provided earlier this year. Our expectation for improved operating results and lower year-over-year net fleet capital expenditures in 2019 are expected to generate strong positive free cash flow and improve our net leverage for the full year," he added.
