Hertz Global Holdings, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; includes fourth-quarter results. The filing combines Hertz Global Holdings, Inc. and The Hertz Corporation, which are managed as one enterprise. Unless stated otherwise, figures below are consolidated and in U.S. dollars.
Business context
Hertz operates vehicle rental businesses under the Hertz, Dollar and Thrifty brands, alongside Donlen’s fleet leasing and management business. On June 30, 2016, the company completed the spin-off of its equipment rental business; continuing-operations comparisons are affected by that separation and related discontinued-operations presentation.
Financial performance and liquidity
| Metric | 2016 | 2015 |
|---|---|---|
| Total revenue | $8.803 billion | $9.017 billion |
| Continuing-operations pretax income (loss) | ($470 million) | $132 million |
| Continuing-operations net income (loss) | ($474 million) | $115 million |
| Net income (loss), including discontinued operations | ($491 million) | $273 million |
| Operating cash flow | $2.529 billion | $2.776 billion |
| Cash and cash equivalents at year-end | $816 million | $474 million |
| Total debt at year-end | $13.541 billion | $15.770 billion |
| Total equity at year-end | $1.075 billion | $2.019 billion |
Revenue fell 2%; the company recorded $292 million of goodwill and intangible impairment expense, while total impairment charges and asset write-downs were $340 million. Interest expense was $623 million at Hertz ($624 million at Hertz Global, including the holding-company difference). The filing does not present a single consolidated operating-margin figure in the supplied text.
Net vehicle capital expenditures were $2.193 billion, down from $2.590 billion. Operating cash flow declined $246 million, primarily reflecting lower earnings excluding noncash items and a $125 million working-capital impact, including higher non-vehicle receivables.
Year-end debt comprised $9.646 billion of vehicle debt and $3.895 billion of non-vehicle debt. Cash plus availability under the primary non-vehicle revolving facility totaled approximately $1.946 billion ($816 million cash and $1.130 billion facility availability); total availability across facilities was reported as $2.541 billion before borrowing-base limitations. Corporate liquidity was lower than the prior year’s $2.1 billion, at $1.9 billion. Restricted cash was $278 million.
Material changes versus 2015
- U.S. Rental Car revenue declined 3% to $6.114 billion. Transaction days rose 3%, but total revenue per transaction day fell 6%; adjusted pretax income decreased to $298 million from $551 million.
- International Rental Car revenue declined 2% to $2.097 billion; excluding currency effects it was virtually flat. Adjusted pretax income was $194 million versus $215 million. The segment recorded a $172 million European goodwill impairment.
- All Other Operations revenue increased 2% to $592 million; adjusted pretax income rose to $72 million from $68 million.
- U.S. net depreciation per vehicle per month increased 13% to $301, reflecting lower residual values on non-program vehicles and higher vehicle acquisition costs. U.S. program vehicles declined to 6% of average fleet vehicles from 17%.
- Adjusted pretax income, a non-GAAP measure, declined to $66 million from $325 million. GAAP results also included $55 million of debt-extinguishment losses, $53 million of finance and IT transformation costs, and an $84 million gain on CAR Inc. share sales.
- The June spin-off generated approximately $2.0 billion in transfers to Hertz and its subsidiaries, used to repay debt. Non-vehicle debt decreased from $5.9 billion to $3.9 billion, and reported weighted-average maturity of term non-vehicle debt increased from 3.4 to 5.0 years.
Outlook, risks and unusual items
- Management said cash from operations, vehicle disposals, liquidity facilities and refinancing options should be adequate for operating needs and debt maturities over the next 12 months. No specific earnings or revenue guidance is provided in the supplied filing text.
- The company expects increased SG&A from IT investments in 2017 and 2018. It reported approximately $350 million in cost savings in 2016; consolidated direct vehicle and operating plus SG&A costs per transaction day declined 4%.
- In February 2017, amendments extended maturities on certain vehicle debt and changed the Senior RCF financial covenant. After amendments, approximately $809 million of vehicle debt was scheduled to mature in 2017; management stated it expected to refinance those maturities and could repay them from available liquidity if refinancing were unavailable.
- Substantial leverage, asset-backed vehicle financing dependence, collateral and covenant requirements, floating-rate exposure, residual-value declines, intense price competition, seasonal demand and reliance on airline travel are material risks. A one-percentage-point increase in interest rates was estimated to reduce pretax results by $49 million over 12 months.
- Management and the auditor concluded internal control over financial reporting was ineffective at December 31, 2016 because of material weaknesses involving risk assessment, IT controls, vehicle-related system reports and estimates, income taxes, non-fleet procurement, and certain accounting estimates. Remediation remained ongoing.
- The company disclosed SEC and other governmental inquiries and securities litigation associated with the prior financial-statement restatement, as well as a self-reported Brazil matter raising potential Foreign Corrupt Practices Act issues. Potential losses could be material, and ranges could not be estimated. In the fourth quarter, it corrected prior-period misstatements, assessing their effects as not material; the adjustments increased quarterly pretax loss by about $11 million and net loss by about $7 million.
- The Brazil operations sale to Localiza was expected to close in the first half of 2017, subject to approvals and closing conditions, for estimated proceeds of approximately $105 million; $18 million of impairment was recorded on assets held for sale. The filing also describes uncertainty around the tax-free status of the spin-off and possible tax, litigation, insurance and pension exposures.
Important facts for investors to verify
- Whether rental pricing and corporate-account performance stabilize, particularly in U.S. RAC, and whether utilization improvements offset fleet depreciation and residual-value pressure.
- Progress in remediating the disclosed material weaknesses and whether future filings report effective controls without further corrections or restatements.
- Refinancing, borrowing-base capacity, covenant compliance and the effects of February 2017 debt amendments, including restrictions on dividends and share repurchases.
- Resolution and potential financial exposure from the restatement-related investigations, securities litigation and Brazil compliance matter.
- Completion and proceeds of the Localiza transaction, and any resulting changes to segment results and liquidity.
- Whether continued impairment testing supports carrying values for the Dollar Thrifty tradename and remaining European goodwill; the filing notes significant sensitivity to valuation assumptions.