Executive Summary / Key Takeaways

• Strategic Transformation through Acquisition: Herc Holdings has fundamentally reshaped its market position with the $4.8 billion acquisition of H&E Equipment Services (HEES), significantly expanding its scale and geographic density, particularly in high-growth U.S. regions. This move is central to unlocking substantial revenue and cost synergies over the next three years.
• Bifurcated Market Dynamics: The company is adeptly navigating a dual-speed market, capitalizing on robust demand from large-scale national "mega projects" (e.g., data centers, manufacturing reshoring, infrastructure) while managing persistent softness in interest rate-sensitive local commercial construction markets.
• Differentiated Technology and Specialty Focus: Herc's proprietary technology platforms for fleet management, pricing, and customer engagement, coupled with its expanding high-margin ProSolutions specialty fleet, provide a competitive edge and are crucial for capturing share of wallet and enhancing profitability.
• Financial Resilience Amidst Integration: Despite a Q2 2025 net loss driven by acquisition-related transaction costs and an impairment, core equipment rental revenue and Adjusted EBITDA show growth. Management's 2025 guidance reflects confidence in synergy realization and disciplined capital management, targeting deleveraging by 2027.
• Competitive Moat and Outlook: Herc's customer-centric service model, broad product offering, and strategic M&A position it as a formidable player. While facing integration risks and market headwinds, its focus on specialized solutions and large projects offers a compelling path for sustained long-term growth and improved returns.

The Evolution of a Rental Powerhouse: Scale, Specialization, and Technological Edge

Herc Holdings Inc., established in 1965, has evolved from a full-line equipment rental supplier into a diversified industry leader. A pivotal moment arrived in 2016 with its spin-off from Hertz (HTZ), which, despite initially burdening the company with significant leverage, forged a path toward independence and strategic agility. Over the subsequent eight years, Herc embarked on a deliberate journey of diversification, expanding into new end markets, geographies, and product offerings to build a more resilient business model less reliant on any single sector.

This strategic evolution accelerated in late 2020 with an aggressive market consolidation drive. Herc invested over $2 billion, adding 51 businesses (115 locations) and opening approximately 80 greenfield branches. This expansion targeted key metropolitan areas and high-growth regions like Texas, Southern California, Arizona, and the Eastern Seaboard. The core rationale was to capture market share, enhance national account capabilities, and improve revenue mix by cross-selling high-margin specialty solutions to newly acquired general rental customers.

Herc's competitive positioning is significantly bolstered by its technological differentiation. The company continuously advances proprietary internal applications for pricing, fleet management, logistics, and transportation. These systems enable more efficient allocation of its vast fleet, dynamic pricing adjustments to optimize revenue, and streamlined delivery and maintenance operations. For customers, Herc delivers value through its industry-leading ProControl account platform, which provides utilization insights and simplifies equipment management. This technological backbone contributes to Herc's competitive moat by enhancing operational efficiency, improving customer satisfaction, and supporting its ability to manage a complex, diversified fleet across a broad geographic footprint. While precise quantifiable metrics on the direct impact of these technologies are not publicly detailed, their strategic intent is to drive better asset utilization, optimize pricing, and reduce operational friction, ultimately contributing to stronger financial performance and market leadership.

The industry landscape in which Herc operates is characterized by a secular shift from equipment ownership to rental, particularly in the specialized equipment market. This trend is amplified by robust underlying demand drivers. Industrial Info Resources projects 2025 to be another strong year for capital and maintenance spending, with forecasts ranging from $446 billion to $527 billion. Dodge's forecast for non-residential construction starts in 2025 anticipates an increase of 7-8% to approximately $478-482 billion. Additionally, infrastructure projects are slated for significant growth, with an estimated $360 billion in 2025, representing a 10% increase over 2024. These figures underscore a multi-year opportunity, with a staggering $2 trillion in the mega project pipeline yet to be fully realized.

Strategic Expansion and Integration: The H&E Catalyst

The culmination of Herc's strategic expansion is the $4.80 billion acquisition of H&E Equipment Services, completed on June 2, 2025. This landmark transaction, the largest in the industry, was funded by a mix of $2.90 billion in cash and the issuance of approximately 4.70 million common shares valued at $584 million, alongside the extinguishment of $1.40 billion of H&E's outstanding debt. H&E, with its approximately 160 branches across over 30 U.S. states, significantly boosts Herc's scale and density in key rental regions. The strategic rationale is clear: to create substantial cross-sell opportunities for Herc's high-margin specialty equipment to H&E's expanded customer base and increase the overall availability of aerial, earthmoving, and material handling equipment.

Integration efforts are now Herc's primary focus, leading to a temporary pause in other M&A initiatives and a concentration on completing existing greenfield projects. An integration management office has been established, and Herc's regional and district managers have actively engaged with acquired branches. Operational regions have been remapped, sales force territories optimized, and key management positions filled by former H&E leaders. Fleet assessment is complete, with plans for incremental dispositions and strategic additions of specialty fleet to align with synergy targets. Early successes include immediate fleet sharing and sales referrals, demonstrating the "whole being greater than the sum of its parts." The technology integration, a critical component, is planned in geographic phases through Q3 2025, with initial cutovers proceeding smoothly.

Financial Performance and Operational Discipline

Herc's financial performance in the second quarter of 2025 reflects the initial impacts of the H&E acquisition and ongoing market dynamics. On a GAAP basis, total revenues reached $1.002 billion, up from $848 million in Q2 2024. Equipment rental revenue increased 13.7% year-over-year, and Adjusted EBITDA grew 12.8% to $406 million. However, the company reported a net loss of $35 million, primarily due to $73 million in transaction costs related to the H&E acquisition and a $49 million impairment loss on assets held for sale (Cinelease). On an adjusted basis, net income was $56 million.

When excluding the Cinelease business (which is classified as assets held for sale due to its departure from Herc's core strategy and suffered a nearly 40% revenue decline in Q2 2025 due to industry labor strikes), Herc's core equipment rental revenue increased 15.6% year-over-year. Adjusted EBITDA for the core business rose 15.1%, with REBITDA (excluding used equipment sales) up 14.5%. The REBITDA margin, however, dipped 30 basis points year-over-year, reflecting the initial one-month impact of the lower-margin acquired H&E business.
The H&E legacy branches experienced a roughly 15% decline in rental revenue exiting Q2 2025, attributed to workforce disruption during the acquisition process and volume/pricing pressure from a narrower product offering in a moderating local market. Conversely, Herc's legacy branches (excluding Cinelease) demonstrated resilience, with rental revenue increasing 4% year-over-year, driven by strong mega project activity and moderated growth in local markets.

Sales of rental equipment surged 63% to $106 million in Q2 2025, aligning with fleet rotation plans. However, the margin on these sales normalized to 19% from 31% in Q2 2024, reflecting broader market trends for used equipment. Operating expenses saw increases, with direct operating expenses up 16% (43.6% of rental revenue) due to lower fixed cost absorption from local market moderation and H&E integration. Depreciation and amortization also rose 18% and 50% respectively, driven by increased fleet size and acquisition-related intangibles. Notably, Selling, General & Administrative (SG&A) expenses, while up 9% in absolute terms, improved as a percentage of equipment rental revenue to 14.6% (from 15.3%), indicating initial cost synergies from H&E corporate overhead reduction and overall cost control.

Liquidity, Capital Allocation, and Deleveraging Path

Herc maintains a strong liquidity position, with $53 million in cash and cash equivalents and approximately $1.6 billion in unused commitments under its New ABL Credit Facility and AR Facility as of June 30, 2025. The H&E acquisition was financed through a combination of new debt instruments, including $2.8 billion in senior unsecured notes, a $750 million term loan, and $2.5 billion from a new asset-based revolving credit facility. The weighted average effective interest rate on this new debt is 6.80%.

The company's leverage ratio currently stands at 3.8x. Management is committed to bringing this back into its target range of 2x to 3x within calendar year 2027. This deleveraging path is expected to be driven by the realization of revenue and cost synergies from the H&E acquisition, leading to higher EBITDA flow-through and a more capital-efficient growth model. Herc's history of successfully reducing leverage from higher levels post-spin-off provides a precedent for this confidence.

In the first half of 2025, Herc generated $270 million in free cash flow (net of transaction costs), supported by higher operating cash flow and disciplined net capital expenditures. Net rental equipment expenditures decreased by $105 million compared to the prior year period. For the second half of 2025, Herc targets equipment disposals of $700 million to $800 million (at OEC) as part of the H&E fleet integration to align fleet levels with the new revenue base. The company's 2025 Adjusted Free Cash Flow guidance is $400 million to $500 million, which includes an approximate $130 million cash tax benefit from the recently enacted One Big Beautiful Bill Act (OBBBA), partially offset by higher interest expense.

Competitive Landscape and Strategic Outlook

Herc Holdings operates in a competitive equipment rental market, where its primary publicly traded rivals include United Rentals (URI), Ashtead Group (AHT), and MYR Group (MYRG). Herc holds an estimated 5-7% aggregate market share, with a growth trajectory of 6-8% annually. While Herc lags larger players like URI (13% revenue growth in 2024) and AHT (12% revenue growth in 2024) in overall scale and market presence, its strategy emphasizes differentiated service and specialized solutions.

Herc's customer-centric service ecosystem, including its ProSolutions offerings and on-site support, allows for higher pricing power and stronger customer loyalty, leading to higher recurring revenue rates compared to some competitors. This focus on integrated service bundles, rather than a purely transactional model, provides a competitive advantage, particularly in niche segments like remediation services where Herc's integrated approach can lead to 10-15% faster project completion times. Its regulatory licenses also provide access to government contracts, further solidifying its market position.

However, Herc faces competitive disadvantages, including higher operational costs (e.g., 15% higher energy consumption per unit than AHT) and potential technological lags compared to rivals like URI, which invests more in R&D and offers advanced telematics for predictive maintenance. MYR Group, with its specialization in electrical construction and clean energy projects, demonstrates faster processing speeds in areas like EV charging infrastructure, potentially capturing emerging high-growth segments. Herc's strategic response to these challenges involves leveraging its expanded scale from the H&E acquisition to drive capital efficiencies and economies of scale, while continuing to prioritize investments in high-margin specialty fleet and its proprietary technology platforms.

For 2025, Herc Holdings has provided a clear outlook (excluding Cinelease). Equipment Rental Revenue is projected to be between $3.7 billion and $3.9 billion, including six months of H&E results. Adjusted EBITDA is estimated to be between $1.8 billion and $1.9 billion, implying an Adjusted EBITDA margin of 42% to 43%. Net CapEx is guided to $400 million to $600 million. The company anticipates realizing approximately 50% of its $125 million EBITDA run rate cost synergy target by year-end 2025, and its gross revenue synergy target of $350 million over three years remains firm. This outlook is predicated on continued strength in national accounts and mega projects, offsetting a relatively flat local market environment. Pricing is expected to remain positive year-over-year, reflecting ongoing industry discipline.

Key risks to this outlook include the complex integration of H&E, which may take longer or be more costly than anticipated, potentially delaying synergy realization. Workforce disruptions and customer churn, while largely accounted for pre-close, remain factors to monitor. The prolonged elevated interest rate environment continues to pressure local commercial construction, and while Herc's diversification mitigates this, a significant macro downturn could impact overall demand. Inflationary pressures on costs like repairs, maintenance, and labor also pose a challenge, though Herc aims to pass a portion of these on to customers.

Conclusion

Herc Holdings is at a pivotal juncture, transforming its market footprint and operational capabilities through the strategic acquisition of H&E Equipment Services. This bold move, coupled with Herc's long-standing commitment to specialized solutions, technological advancement, and disciplined capital management, positions the company for a new phase of growth. While the integration of H&E presents near-term complexities and financial adjustments, management's clear synergy targets and deleveraging plan underscore a confident outlook.

The company's ability to capitalize on the robust mega project pipeline and its diversified customer base provides a resilient foundation against local market headwinds. As Herc continues to integrate its expanded network and leverage its differentiated service offerings and technology, it aims to enhance profitability and deliver superior returns. For investors, Herc Holdings represents a compelling opportunity in the equipment rental sector, driven by strategic scale, specialized solutions, and a clear path to long-term value creation.