Herc Holdings Inc.,  (“Herc Holdings” or the “Company”) just reported financial results for the quarter and nine months ended September 30, 2018. Equipment rental revenue was $449.0 million and total revenues were $516.2 million in the third quarter of 2018, up from $413.1 millionand $457.6 million, respectively, for the same period last year. The Company’s net income improved by $33.4 million to $46.2 million or $1.60 per diluted share in the third quarter of 2018, compared to net income of $12.8 million or $0.45 per diluted share in the same period in 2017.

Equipment rental revenue increased 8.7%, average fleet at original equipment cost (OEC) increased 5.5% and overall pricing improved 3.2% in the third quarter of 2018 over the prior-year period. Adjusted EBITDA increased 14.0% to $201.5 million in the third quarter compared to $176.7 million in the comparable period in 2017. See page A-4 for a description of the items excluded in calculating adjusted EBITDA.

“We achieved strong rental revenue and adjusted EBITDA growth in the third quarter with adjusted EBITDA margin of 39.0% marking the highest quarterly level we have recorded since becoming a stand-alone public company,” said Larry Silber, president and chief executive officer. “Strong market demand facilitated an acceleration in pricing of 3.2% in the quarter, our 10th consecutive quarter of year-over-year pricing improvement. Our initiatives to better manage costs also began to gain traction as indicated by the stabilization of direct operating expenses and reduction in sales, general and administrative expenses. Our strategic plan continues to drive growth through fleet and customer diversification and we expect to steadily improve adjusted EBITDA margin with strong flow-through.”

Third Quarter Highlights

• Equipment rental revenue in the third quarter of 2018 increased 8.7% or $35.9 million to $449.0 million compared to $413.1 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 12.8% to $516.2 million in the third quarter compared to $457.6 million in 2017. The $58.6 million year-over-year improvement included an increase in sales of rental equipment of $22.4 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 3.2% in the third quarter of 2018 compared to the same period in 2017.
• Dollar utilization of 39.2% in the third quarter of 2018 increased 50 basis points compared to the prior-year period, reflecting improved pricing as well as and customer and fleet mix diversification.
• Direct operating expenses were $194.4 million in the third quarter of 2018 compared to $188.1 million in the prior-year period. The 3.3% increase was driven by increased rental activity, offset by improved operating efficiencies.
• Selling, general and administrative expenses (SG&A) decreased $6.1 million to $78.4 million in the third quarter of 2018 compared to $84.5 million in the prior-year period. The 7.2% year-over-year decline resulted primarily from the reduction of costs related to the spin-off.
• Interest expense in the third quarter of 2018 increased to $38.6 million compared to $32.4 million in the prior-year period. The increase was primarily due to expenses related to the partial redemption of the Company’s senior secured second priority notes (“Notes”) and higher average outstanding borrowings and average interest rate on the revolving credit facility during the quarter compared with the same period last year.
• Net income increased $33.4 million to $46.2 million in the third quarter of 2018 compared to $12.8 million in the third quarter of 2017, primarily due to improved operating results and a tax benefit related to a revision in the one-time transition tax estimate under the Tax Cuts and Jobs Act of 2017 (“2017 Tax Act”).
• Adjusted EBITDA in the third quarter of 2018 increased 14.0% to $201.5 million compared to $176.7 million in the third quarter of 2017. The increase was primarily due to strong rental revenue growth.

Nine Months Highlights

• Equipment rental revenue in the nine months of 2018 increased 11.6% or $126.1 million to $1,210.6 million compared to $1,084.5 million in the prior-year quarter. The double-digit growth reflected strong growth in rental revenue from local accounts and ProSolutions^TM and ProContractor categories.
• Total revenues increased 13.5% to $1,433.0 million in the nine months compared to $1,262.8 million in 2017. The $170.2 million year-over-year increase was aided by an increase in sales of rental equipment of $47.1 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 3.0% in the nine months of 2018 compared to the same period in 2017.
• Direct operating expenses were $584.9 million compared to $525.6 million in the prior-year period. The 11.3% increase was related to strong rental revenue activity for the nine-month period.
• SG&A decreased $14.2 million to $230.2 million in the nine months of 2018 compared to $244.4 million in the prior-year period. The 5.8% year-over-year decline resulted primarily from the reduction of costs related to the spin-off and professional fees.
• Interest expense in the nine months of 2018 increased $1.2 million to $103.0 million from $101.8 million in the prior-year period primarily due to higher average borrowings and a higher interest rate on the revolving credit facility compared with the same period last year, offset by a decrease in interest on the Notes due to lower average outstanding borrowings due to the partial redemptions made in July 2018 and October 2017.
• Net income rose $89.8 million to $35.8 million for the nine months of 2018 compared to a net loss of $54.0 million in the comparable prior-year period due to improved operating results and a tax benefit related to a revision in the one-time transition tax estimate under the 2017 Tax Act.
• Adjusted EBITDA in the nine months of 2018 increased 19.3% to $486.4 million compared to $407.6 million in the prior year. The increase was primarily due to strong 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 $428.4 million for the nine months of 2018. Gross fleet capital expenditures were $617.5 million, and disposals were $189.1 million. See page A-5 for the calculation of net fleet capital expenditures.
• As of September 30, 2018, the Company’s total fleet was approximately $3.92 billion at OEC, based on the American Rental Association guidelines.
• Average fleet at OEC increased 5.5% in the third quarter and 4.9% in the nine months compared to the prior-year periods.
• Average fleet age declined to approximately 46 months as of September 30, 2018, compared with approximately 49 months as of September 30, 2017.

2018 Guidance

“The continued robust market demand along with our improved operating efficiencies support the increase in our fiscal year 2018 adjusted EBITDA guidance range well above our previous guidance,” said Mr. Silber. “We also narrowed the guidance range of our net fleet capital expenditures for the full year and remain focused on a program of disciplined capital management.”