Executive Summary / Key Takeaways

• Strategic Transformation Through Acquisition: Herc Holdings has significantly expanded its scale and market density with the successful $4.80 billion acquisition of H&E Equipment Services (HEES), integrating operations and technology platforms rapidly to unlock substantial cost and revenue synergies over the next three years.
• Bifurcated Market Dynamics: The company is strategically positioned to capitalize on robust demand from mega projects and specialty solutions, which are offsetting persistent softness in local commercial construction markets driven by elevated interest rates.
• Technological Edge and Operational Efficiency: Herc's proprietary technology, including ProControl by Herc Rentals, a centralized pricing engine, and an optimized logistics system, provides a competitive advantage by enhancing customer experience, operational efficiency, and real-time performance visibility across its expanded network.
• Deleveraging and Capital Discipline: Despite an increased leverage ratio of 3.8x post-acquisition, management is committed to returning to its target range of 2x to 3x by year-end 2027, driven by strong free cash flow generation, synergy realization, and disciplined capital allocation focused on high-margin specialty fleet.
• Outlook and Risks: Herc reaffirmed its 2025 guidance, anticipating continued growth from national accounts and specialty offerings. Key risks include the successful integration of H&E, ongoing local market sensitivity to interest rates, and managing inflationary pressures.

A New Era of Scale and Specialization

Herc Holdings Inc. ($HRI), a leading equipment rental supplier with 612 locations across North America as of September 30, 2025, is undergoing a profound transformation. Founded in 1965, the company embarked on a strategic journey following its spin-off from Hertz Holdings (HTZ) in 2016, a period when it faced significant leverage. Since then, Herc has meticulously built a resilient business model through aggressive diversification across end markets, geographies, and product offerings. This foundational strategy has culminated in the recent $4.80 billion acquisition of H&E Equipment Services, Inc., a move designed to dramatically enhance Herc's scale, market density, and cross-selling capabilities.

The equipment rental industry currently presents a "disproportionate demand environment." While local commercial construction markets remain constrained by elevated interest rates, large-scale national projects—often termed "mega projects"—are booming. These include initiatives in manufacturing, LNG export capacity, artificial intelligence data centers, and infrastructure. Herc's strategic positioning, leveraging its expanded footprint and diversified fleet, allows it to thrive in this bifurcated landscape. The company aims for a long-term revenue split of 60% local and 40% national, a diversification strategy that management believes provides both growth and resiliency.

Technological Prowess: The Digital Backbone of Herc's Advantage

Herc's competitive edge is significantly bolstered by its advanced technology platform, which is central to its operational efficiency and customer value proposition. The company's core differentiated technology includes:

• ProControl by Herc Rentals: This industry-leading customer-facing technology provides a comprehensive platform for equipment renting, tracking, and asset management from any device, anywhere. It offers new efficiency features, seamless navigation, and tailored experiences, directly addressing customers' complex and expanding needs. For investors, ProControl enhances customer stickiness and operational transparency, contributing to recurring revenue and a stronger competitive moat.
• Proprietary Pricing Engine: Fully integrated with centralized controls, this system ensures consistency, protects margins, and aligns pricing decisions with broader business goals. This technological capability is crucial for optimizing revenue in a dynamic market and for aligning the pricing strategies of acquired businesses like H&E, which initially had lower pricing than Herc.
• Optimized Logistics System (Opti-Fleet): Now operational across the expanded network, this system improves delivery accuracy and optimizes route planning at the lowest possible cost. The tangible benefit is reduced operational expenses and enhanced service delivery, directly impacting profitability.
• Oracle ERP Framework: The successful transition of H&E's branch operations from SAP (SAP) to Herc's customized rental and front-end system and Oracle (ORCL) ERP framework in just 90 days underscores Herc's internal capabilities and disciplined planning. This integration provides real-time visibility into combined performance metrics, customer behavior, and operational KPIs, enabling granular analysis of productivity, expense management, and fleet management.

These technological differentiators contribute directly to Herc's competitive moat by enabling superior service, efficient operations, and data-driven decision-making. They enhance financial performance through better margin protection, reduced costs, and optimized asset utilization, positioning Herc for long-term growth and market leadership.

Competitive Landscape and Strategic Positioning

Herc Holdings operates in a highly competitive environment, primarily contending with industry giants like United Rentals (URI) and Ashtead Group (AHT), which operates Sunbelt Rentals, as well as equipment manufacturers with rental divisions such as Caterpillar (CAT).

United Rentals, a market leader, boasts an extensive national network and consistent revenue growth, often leading in overall market share and cash flow generation. Herc's strategy, particularly with its ProSolutions and ProContractor tools, focuses on providing specialized, solution-based services and on-site support, differentiating it in niche segments where customized solutions are valued. While URI's scale offers broader geographic reach, Herc's hands-on support and tailored offerings aim to foster stronger customer loyalty in its targeted markets.

Ashtead Group, through Sunbelt Rentals, has a significant international presence and a flexible rental model. Herc's more U.S.-centric approach, coupled with its comprehensive ancillary services like repair and maintenance, positions it as a one-stop provider, potentially offering greater efficiency in service delivery for domestic projects. Herc's unique value proposition in specific industries like remediation and entertainment allows it to carve out specialized niches.

Caterpillar, primarily a manufacturer, offers robust equipment through its rental division. Herc's pure rental model provides greater flexibility and lower upfront costs for customers, contrasting with CAT's longer-term leasing approach. Herc's market positioning as a rental specialist allows it to differentiate through comprehensive support services, while CAT leverages its brand for premium pricing and proprietary technology.

Herc's competitive advantages lie in its strong brand in specialized rental services, extensive distribution channels, and cost leadership in certain operational areas, particularly enhanced by its technology. Its ability to offer faster local delivery in the U.S. can counter the broader international reach of some competitors. However, Herc faces vulnerabilities from its dependence on cyclical industries and potential technological gaps compared to rivals with larger R&D budgets. The company's strategic response involves leveraging its acquired scale and technology to drive operational efficiencies and cross-selling, particularly in the high-growth specialty segments and mega projects.

Financial Performance and Operational Discipline

Herc Holdings' financial performance in the nine months ended September 30, 2025, reflects the impact of its strategic initiatives and the dynamic market. Equipment rental revenue increased by a robust 16% to $2.731 billion compared to the same period in 2024, driven by an increase in average Original Equipment Cost (OEC) on rent, including the H&E acquisition. Total revenues for the nine months reached $3.167 billion, a 21% increase year-over-year.

However, the integration of H&E brought some near-term pressures. On a pro forma basis, including the standalone pre-acquisition results of Otay and H&E, equipment rental revenue decreased 4.10% year-over-year for the nine months, primarily due to ongoing moderation in local markets where H&E's customer base was heavily concentrated. Adjusted EBITDA for the third quarter of 2025 increased 24% year-over-year, reaching $406 million, benefiting from higher equipment rental revenue and used equipment sales. Yet, the Adjusted EBITDA margin was impacted by a higher proportion of used equipment sold through the lower-margin auction channel as Herc worked to align the acquired fleet, as well as lower fixed cost absorption due to local market moderation and acquisition-related redundant costs. REBITDA, excluding used equipment sales, was up 22% in Q3, with a margin of 46%.

Operational details highlight the company's focus on fleet optimization. Sales of rental equipment surged 68% for the nine months ended September 30, 2025, to $362 million, as Herc increased volume to improve equipment mix and utilization, particularly focusing on the acquired fleet. The margin on these sales, however, decreased from 27% in 2024 to 18% in 2025, attributed to the fair value markup of acquired fleet sold and a larger volume through the auction channel. Direct operating expenses as a percentage of equipment rental revenue increased to 43% for the nine months, up from 41.10% in the prior-year period, due to lower fixed cost absorption and the impact of the H&E acquisition on facilities, maintenance, and fuel. Non-rental depreciation and amortization also increased significantly, by 61%, primarily due to intangible assets from the H&E and Otay acquisitions.

Interest expense, net, increased 46% for the nine months to $282 million, reflecting the new debt facilities issued to fund the H&E acquisition at a weighted average effective interest rate of 6.80%. Net income for the nine months was $23 million, compared to $257 million in the prior year, primarily impacted by $185 million in transaction expenses related to the H&E acquisition. The company also recognized a pre-tax gain of $1 million on the divestiture of Cinelease in Q3 2025, which generated $97 million in net cash proceeds.

Liquidity and Capital Allocation

As of September 30, 2025, Herc Holdings reported approximately $8.20 billion in total nominal indebtedness. Liquidity stood at $61 million in cash and cash equivalents, complemented by approximately $1.70 billion in unused commitments under its New ABL Credit Facility and AR Facility. The H&E acquisition was financed through a combination of new debt, including $2.80 billion in senior unsecured notes, a $750 million term loan facility, and $2.50 billion from a new asset-based revolving credit facility. The weighted average effective interest rate on this new debt was 6.80%.

The company's current leverage ratio is 3.8x. Management has a clear goal to return to its target range of 2x to 3x by year-end 2027, driven by higher EBITDA flow-through from revenue and cost synergies, and reduced capital requirements due to better utilization of existing fleet. Herc generated $342 million of free cash flow, net of transaction costs, in the nine months ended September 30, 2025. The company has paused other M&A activities to focus on the H&E integration and deleveraging.

Outlook and Strategic Initiatives

Herc Holdings reaffirmed its 2025 full-year guidance, expressing confidence that despite integration complexities, the outlook "still feels about right based on current visibility." The company expects gross fleet CapEx to be between $900 million and $1.1 billion for 2025, with disposals at OEC projected to be $1.1 billion to $1.2 billion. For 2026, Herc anticipates continued growth in national accounts and specialty solutions, with fleet planning focused on supporting this momentum and returning the "especially young fleet" acquired from H&E to Herc's historical average age.

The integration of H&E is a primary focus, with the full systems integration completed in just 90 days. This rapid integration, encompassing Herc's proprietary pricing engine and logistics system, provides real-time visibility into combined performance metrics. Management is now drilling down into productivity, expense management, and fleet management to identify efficiencies. The company plans to optimize its network footprint by consolidating some general rental branches and repurposing others into approximately 50 additional specialty locations in 2026, increasing its specialty network by 25%. This initiative supports accelerated growth in high-margin product categories. The attrition within H&E's sales organization has stabilized, and Herc is actively training new Professional Sales Associates to fill roles and align H&E's pricing with Herc's historical performance over time.

Risks and Challenges

Herc Holdings faces several pertinent risks. The cyclical nature of the equipment rental industry and its dependence on customer capital investment remain significant. Elevated interest rates continue to suppress growth in local commercial markets, and a pickup in demand typically lags interest rate reductions, requiring developers to secure financing and permits. While inflation appears to have stabilized, the company still anticipates inflationary pressures, particularly in less direct pass-through costs like repairs, maintenance, and labor.

The successful integration of the H&E acquisition is paramount. There is a risk that anticipated benefits and synergies may take longer to realize or may not be fully achieved, potentially impacting results and causing dilution. The integration process itself is complex, costly, and time-consuming, with challenges including retaining key talent, preserving customer relationships, and managing expanded operations. Seasonality also impacts the business, with lower demand in winter months and fixed operating expenses leading to lower profitability during these periods.

Conclusion

Herc Holdings Inc. stands at a pivotal juncture, having strategically expanded its operational footprint and technological capabilities through the transformative H&E acquisition. The company's core investment thesis is rooted in its ability to leverage this enhanced scale and its specialized ProSolutions offerings to capture significant opportunities in the booming mega project and infrastructure sectors, effectively counterbalancing the ongoing softness in local markets. Herc's disciplined approach to capital allocation, focused on high-margin specialty fleet, combined with its advanced technology platform, provides a robust framework for operational efficiency and superior customer service, reinforcing its competitive standing against larger rivals.

While the integration of H&E presents near-term financial and operational complexities, including elevated debt and initial margin pressures, management's clear roadmap for synergy realization and deleveraging by 2027 underpins a compelling long-term outlook. The company's commitment to stabilizing the acquired workforce, optimizing fleet, and expanding its specialty network through strategic repurposing of branches demonstrates a proactive response to market dynamics. Investors should monitor the pace of H&E integration, the trajectory of local market recovery, and the continued execution of Herc's technology-driven operational efficiencies as key indicators of its sustained growth and profitability in a dynamic and competitive industry.