Hertz Global Holdings, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter ended September 30, 2019; comparisons are with the same 2018 periods. Unless stated otherwise, amounts are in millions of dollars. Hertz Global is the parent of The Hertz Corporation; their operating results are substantially the same.
Financial performance and position
- Q3 revenue: $2,836, up 3% year over year. Net income attributable to Hertz Global was $169, versus $141; diluted EPS was $1.26 versus $1.47, reflecting the increase in shares after the rights offering.
- Nine-month revenue and earnings: Revenue was $7,454, up 3%. Net income attributable to Hertz Global was $61, compared with a $124 loss in 2018; diluted EPS was $0.56 versus a $1.30 loss.
- Adjusted Corporate EBITDA: $392 in Q3, up 12%; $595 for the nine months, up 55%. This is a non-GAAP measure. Q3 U.S. Rental Car Adjusted EBITDA rose to $269 from $208, while International Rental Car fell to $115 from $140.
- Costs and operating trends: Q3 direct vehicle and operating expense rose 2% to $1,492, while SG&A fell 12% to $232 and vehicle depreciation and lease charges declined 1% to $667. Q3 U.S. Rental Car transaction days increased 5%, but utilization fell to 79% from 81%; International transaction days fell 2% and utilization was 80%. International segment revenue declined 4%, though it was flat excluding foreign exchange effects.
- Cash flow, nine months: Operating cash flow was $2,233, compared with $2,017. Investing cash outflow was $5,492, including $11,536 of vehicle purchases and $6,193 of vehicle disposal proceeds. Financing cash inflow was $2,551. Cash, cash equivalents and restricted cash declined $715 to $695.
- Debt and liquidity: Total debt was $18,041 at September 30, up from $16,324 at year-end 2018; this comprised $14,314 of vehicle debt and $3,727 of non-vehicle debt. Cash and cash equivalents were $465, and restricted cash was $230. Corporate liquidity, defined as cash plus Senior RCF availability and excluding unused vehicle-facility commitments, was $860, down from $1,623. The company reported $419 of total availability under borrowing-base limits across facilities, including $400 of non-vehicle availability.
- Balance sheet: Total assets were $25,541 and total equity $1,989. Adoption of the lease standard added $1,679 of operating lease right-of-use assets and $1,664 of lease liabilities by September 30.
Material changes and notable items
- The July rights offering was fully subscribed: 57.9 million shares were issued for $750 million gross proceeds. Hertz used the proceeds, along with proceeds from new debt, to redeem $700 million of 2020 Notes and $500 million of 2021 Notes. Shares outstanding increased materially.
- In August, Hertz issued $500 million of 7.125% Senior Notes due 2026. Total debt increased as vehicle debt rose with a larger average fleet; vehicle interest expense increased 16% in Q3 and 11% for the nine months.
- U.S. Rental Car revenue grew on higher volume and pricing. U.S. transaction days rose 5% in Q3, while average vehicles rose 7%; utilization consequently declined. Management attributed lower U.S. depreciation per unit to its vehicle acquisition strategy and stronger residual values.
- International Rental Car results were pressured by foreign exchange and higher vehicle-related costs. Excluding foreign exchange, revenue was flat, but management reported increased depreciation per unit amid richer European fleet mix and declining residual values.
- Topic 842 lease accounting was adopted January 1, 2019; management said adoption did not materially affect results or cash flows. The company also changed its segment profitability measure to Adjusted EBITDA and recast 2018 segment comparisons.
Outlook, risks and contingencies
- Management said operating cash generation, vehicle disposal proceeds, liquidity facilities and refinancing options should be sufficient to fund operating requirements for the next 12 months. It stated that refinancing or repayment of upcoming maturities was probable and intended, and expected covenant compliance for at least the next 12 months. These are forward-looking statements, not guarantees.
- Hertz was in compliance with its 3.00-to-1.00 first-lien net leverage covenant at September 30. The filing cites approximately $2.1 billion of vehicle debt and $20 million of non-vehicle debt maturing October 2019–September 2020; the MD&A separately says approximately $3.6 billion of vehicle debt and $20 million of non-vehicle debt will mature in the 12 months following the report. Investors should reconcile the different measurement windows.
- The company describes itself as highly leveraged. Vehicle financing depends on collateral and borrowing-base availability; substantially all revenue-earning vehicles and certain related assets are pledged or held in special-purpose entities and are not generally available to satisfy general creditors. Foreign cash repatriation could also create additional taxes.
- Key stated risks include travel demand, rental pricing and competition, vehicle purchase costs and residual values, financing and refinancing access, interest rates, manufacturer recalls, foreign exchange, technology and cybersecurity disruptions, and litigation or regulatory matters.
- Public liability and property-damage reserves were $418 million, subject to significant estimation uncertainty. The company disclosed ongoing Brazil-related local-law matters with a non-material accrual, an appeal motion in securities litigation, and lawsuits against former executives seeking recovery of compensation and investigation-related costs. An October 2019 confidential settlement with one former executive was disclosed; its terms were not provided.
- Management reported effective disclosure controls as of September 30 and noted a global ERP consolidation and technology upgrade in August. No formal revenue, earnings or EBITDA guidance is provided in the filing.
Important facts for investors to verify
- Refinancing plans and actual availability of vehicle and non-vehicle facilities, including how to interpret the different disclosed maturity windows.
- Cash generation relative to fleet investment, debt service and the decline in reported cash and corporate liquidity.
- Whether U.S. rental growth can be sustained while utilization is lower, and whether International margins and residual-value trends improve.
- The effects of the rights offering on per-share results and the company’s ability to generate returns on the added equity.
- Vehicle residual-value assumptions, public-liability reserves, and potential outcomes of disclosed litigation and investigations.