Business Context and Reporting Period
This Form 8-K, filed on June 6, 2014, by Hertz Global Holdings, Inc. and The Hertz Corporation (collectively "Hertz"), addresses a significant accounting review and preliminary operational highlights for the first quarter ended March 31, 2014. The filing discloses that the company delayed its Q1 2014 Form 10-Q due to the identification of errors in financial reporting.
Key Financial Metrics and Operational Highlights
The filing does not provide finalized revenue, profit, cash flow, or margin figures for the first quarter of 2014, stating that results are preliminary and subject to revision. However, it provides the following preliminary operational metrics:
- U.S. Car Rental: Revenue increased approximately 4.5% year-over-year. Total revenue per day (RPD) was down 1.6% due to supply/demand imbalances and mix changes, though adjusted RPD was flat. Retail sales mix improved to 23% of total cars sold (up from 10% in the prior year).
- International Car Rental: Revenue increased approximately 1.7% year-over-year. Fleet efficiency and employee productivity improved, partially offset by an unusually high insurance claim in Europe.
- Worldwide Equipment Rental: Revenue increased approximately 2.4% year-over-year. North America volume was up 7.4%, driven by construction activity. Pricing increased 1.5% year-over-year.
- All Other Operations: Revenue increased approximately 7.3% year-over-year, driven by strong performance in the Donlen leasing operation.
Specific figures for debt, liquidity, and net income are not provided in this filing.
Material Changes and Accounting Restatements
The most significant material change is the determination that financial statements for fiscal year 2011 must be restated and can no longer be relied upon. The Audit Committee identified errors regarding:
- Capitalization and timing of depreciation for non-fleet assets.
- Allowances for doubtful accounts in Brazil.
- Allowances for uncollectible amounts related to damaged vehicles.
- Restoration obligations at the end of facility leases.
Financial statements for 2012 and 2013 require correction, and a thorough review is underway to determine if these years also require restatement. Consequently, the company has declared a material weakness in internal controls over financial reporting and expects an adverse opinion from its auditor, PricewaterhouseCoopers LLP, for the period ended December 31, 2013.
Guidance, Outlook, and Management Commentary
Management expects first-quarter 2014 results to be below consensus due to accounting review costs and unusual items. The company will not hold its scheduled earnings conference call until the 10-K amendment and Q1 10-Q are filed.
- Outlook: Sequential improvement in fleet costs is expected in the first half of 2014 due to fleet right-sizing and new lower-cost vehicle deliveries. International volumes are expected to be positive as new locations ramp up.
- Business Separation: The separation of the equipment rental business (HERC) remains on track despite the accounting issues. Brian P. MacDonald has been appointed CEO of HERC.
- Remediation: The company is implementing new procedures and has hired new senior finance personnel, including a Chief Accounting Officer and Vice President of SOX/Compliance, to strengthen controls.
Investor Verification Checklist
- Verify the magnitude of the restatement adjustments for fiscal years 2011, 2012, and 2013 once the 10-K amendment is filed.
- Confirm the final impact of the accounting errors on Q1 2014 earnings and whether the "below consensus" expectation materializes.
- Monitor the timeline for the separation of the HERC equipment rental business to ensure it is not delayed by the accounting review.
- Review the upcoming adverse audit opinion on internal controls and the specific remediation plan details.
- Assess the impact of the unusually high insurance claim in Europe on future reserve levels and profitability.