Hertz Global Holdings, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Figures are in millions of dollars unless noted. Hertz Global is the parent of The Hertz Corporation; the two companies report substantially the same operating business.
Business context and financial performance
Hertz operates the Hertz, Dollar and Thrifty vehicle-rental brands globally and provides fleet leasing and management through Donlen. Its business is seasonal and capital intensive, with substantial vehicle-fleet financing needs.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $2,572 | $2,542 | $6,713 | $6,794 |
| Income (loss) before tax | $143 | $108 | $(397) | $(3) |
| Net income (loss) | $93 | $42 | $(289) | $(51) |
| Adjusted pre-tax income (loss), non-GAAP | $188 | $212 | $(107) | $159 |
| Operating cash flow | Not separately provided | Not separately provided | $1,977 | $2,051 |
Q3 basic and diluted earnings per share were $1.12, versus $0.50 basic and $0.49 diluted in the prior-year quarter. Nine-month loss per share was $3.48, versus $0.60. The filing does not provide a clear consolidated operating-margin figure.
Material changes versus the prior period
- Q3 revenue rose 1%; nine-month revenue declined 1%. U.S. Rental Car revenue fell 1% in Q3 and 3% year to date, while International Rental Car revenue increased 7% and 2%, respectively. All Other Operations revenue increased 5% and 7%.
- U.S. Rental Car adjusted pre-tax income was $158 in Q3 versus $173; year-to-date it fell to $5 from $312. Management cited lower U.S. transaction days and materially higher vehicle depreciation.
- International Rental Car adjusted pre-tax income increased to $147 from $142 in Q3 and $200 from $179 year to date. Donlen-led All Other Operations adjusted pre-tax income was $20 in Q3 and $59 year to date, up from $19 and $53.
- Vehicle depreciation and lease charges rose 11% year to date, to $2,144, mainly reflecting higher U.S. depreciation rates, vehicle mix and lower residual values. U.S. net depreciation per unit per month rose 14% to $336.
- Interest expense was $175 in Q3, up from $156; year-to-date interest expense declined to $461 from $480, with vehicle interest higher and non-vehicle interest lower.
Cash, debt and liquidity
- At September 30, cash and cash equivalents were $748, restricted cash was $1,029, and total debt was $15,919, compared with $13,541 at December 31, 2016. Vehicle debt was $10,916 and non-vehicle debt $5,003.
- For the first nine months, operating cash flow was $1,977; investing cash outflow was $3,316 and financing cash inflow was $1,252. Vehicle purchases were $8,683 and vehicle-disposal proceeds were $5,285.
- Reported corporate liquidity was $1,392, comprising $748 cash and $644 availability under the Senior RCF. Restricted cash includes proceeds subject to debt-use restrictions at quarter-end.
- The company described itself as highly leveraged. It was in compliance with the Senior RCF leverage covenant at September 30, at 2.58x versus a 3.25x maximum for that quarter. Substantially all revenue-earning vehicles and certain related assets are pledged or held by special-purpose entities and are not available to general creditors.
- After quarter-end, Hertz repaid $120 of Senior RCF borrowings, reduced RCF commitments, established a $400 letter-of-credit facility, and arranged extensions for several vehicle-debt facilities. It also initiated redemption of $450 of 6.75% notes due 2019. Management said approximately $1.8 billion of vehicle debt and $23 of non-vehicle debt would mature during the following twelve months and stated it expected to repay or refinance them.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance is provided. Management believes cash generation, vehicle-sale proceeds, liquidity facilities and refinancing access will be adequate for operations and debt maturities over the next twelve months, and expects covenant compliance for at least that period.
- Hurricanes in Q3 caused an estimated $15 revenue loss from business interruption and approximately $13 of expenses, primarily transportation and damage costs, net of expected insurance recoveries.
- The company recorded an $86 impairment of the Dollar Thrifty tradename in Q2 and a $30 impairment of an equity-method investment in Q1. It completed the Brazil operations sale in August for $115 proceeds, including $13 held in escrow, and recognized a $6 gain.
- Management said higher IT-transformation spending was expected to continue through the remainder of 2017 and into 2018. Topic 606 adoption in 2018 is expected to affect loyalty-point revenue timing; the impact was still being quantified. Lease-standard adoption in 2019 is expected to materially increase lease-related balance-sheet assets and liabilities, but not materially affect results of operations.
- Disclosure controls were deemed ineffective because material weaknesses in internal control over financial reporting remained. Remediation work was underway but not yet considered complete.
- Risks include ongoing SEC and U.S. Attorney investigations concerning prior accounting matters, and a company investigation and self-reporting of possible Brazil-related Foreign Corrupt Practices Act issues. The company said losses could be material but could not estimate a reasonably possible range. Public-liability and property-damage reserves were $448 at quarter-end.
Key facts for investors to verify
- Whether U.S. rental demand, pricing, utilization and vehicle depreciation improve, particularly given the year-to-date deterioration in U.S. Rental Car results.
- Cash availability and refinancing progress for near-term maturities, including the effect of post-quarter-end debt transactions and restrictions on cash and collateral.
- Progress in remediating the disclosed material weaknesses and any subsequent assessment of control effectiveness.
- Developments and potential financial exposure from the SEC, U.S. Attorney and Brazil-related investigations, as well as public-liability claims.
- The quantified financial and disclosure effects of loyalty-program accounting changes under Topic 606.