Business context and reporting period
Hertz Global Holdings, Inc. (HTZ) filed this combined 10-K with its wholly owned operating company, The Hertz Corporation, for the fiscal year ended December 31, 2019. Hertz operates the Hertz, Dollar and Thrifty rental brands worldwide; Donlen provides fleet leasing and management services. Unless noted, financial amounts below are in U.S. dollars and millions. The filing also reports fourth-quarter results.
Financial results and key metrics
| Metric | 2019 | 2018 |
|---|---|---|
| Total revenue | $9,779 | $9,504 |
| Net loss attributable to Hertz Global | $(58) | $(225) |
| Diluted loss per share | $(0.49) | $(2.35) |
| Adjusted Corporate EBITDA | $649 | $433 |
| Operating cash flow | $2,900 | $2,556 |
| Cash and cash equivalents at year-end | $865 | $1,127 |
| Total debt at year-end | $17,089 | $16,324 |
Revenue rose 3%. Adjusted Corporate EBITDA, a non-GAAP measure, increased 50%; it equaled approximately 6.6% of revenue in 2019. The GAAP loss attributable to Hertz Global was approximately 0.6% of revenue. Interest expense, net, increased to $805 from $739, while depreciation of rental vehicles and lease charges declined to $2,565 from $2,690.
Fourth-quarter 2019 revenue was $2,326, compared with $2,294 in fourth-quarter 2018. Hertz Global reported a fourth-quarter pretax loss of $130 and net loss attributable to Hertz Global of $118, versus $120 and $101, respectively, in the prior-year quarter.
By segment, U.S. RAC revenue increased 7% to $6,938 and Adjusted EBITDA rose to $480 from $226. U.S. transaction days grew 4%, pricing (Total RPD) rose 2%, and vehicle utilization decreased to 80% from 81%. International RAC revenue decreased 5% to $2,169, primarily reflecting a $108 foreign-exchange impact; excluding that impact, revenue was flat. International Adjusted EBITDA fell to $147 from $231. Donlen and other operations revenue was $672, down from $748, while Adjusted EBITDA rose to $100 from $82; revenue comparability was affected by a change in presentation for certain leased vehicles.
Cash, debt and liquidity
Operating cash flow was $2,900. Investing activities used $4,425, including $13,714 of fleet purchases and $9,486 of vehicle disposal proceeds; net fleet investment was $4,228. Non-vehicle capital expenditures, net of disposals, were $197. Financing activities provided $1,474, and total cash, cash equivalents and restricted cash declined by $50 to $1,360. Of that ending total, $495 was restricted.
Year-end corporate liquidity, defined by the company as cash plus availability under the Senior Revolving Credit Facility, was $1,391, including $526 of Senior RCF availability. Total debt comprised $13,368 of vehicle debt and $3,721 of non-vehicle debt. Substantially all consolidated assets, including fleet vehicles, are pledged or otherwise encumbered under financing arrangements. Approximately $2.4 billion of vehicle debt and $20 million of non-vehicle debt came due in 2020; management said it expected and intended to refinance or repay maturities as appropriate. Hertz was in compliance with its 3.00-to-1.00 first-lien net leverage covenant at year-end and expected to remain compliant for at least 12 months.
Changes, outlook, risks and unusual items
- Capital and refinancing: A July 2019 rights offering issued 57.9 million shares for $750 million gross proceeds; the proceeds, together with debt issuance proceeds, funded redemptions of near-term senior notes. Hertz issued $500 million of 2026 notes and $900 million of 2028 notes, and redeemed $700 million of 2020 notes, $500 million of 2021 notes and $900 million of second-priority secured notes. The equity raise increased shares outstanding.
- Profitability and tax: The 2019 net loss narrowed substantially, but the company still recorded a loss despite positive Adjusted Corporate EBITDA. A $65 million income tax provision followed a $28 million tax benefit in 2018; the 2019 provision reflected, among other factors, increased valuation allowances. In the fourth quarter, the company corrected a prior-period tax apportionment error, increasing cumulative net loss by approximately $27 million; management concluded it was not material to prior periods or 2019.
- Management outlook: No specific earnings or revenue guidance is provided. Management stated that operating cash, vehicle disposal proceeds, liquidity facilities and capital-market refinancing options should be sufficient to fund operating requirements for the next 12 months. The company adopted lease accounting Topic 842 in 2019, recording operating lease right-of-use assets and liabilities; it reported no significant effect on 2019 results of operations or cash flows.
- Principal risks: The business is seasonal and sensitive to business and leisure travel, rental pricing and competition, fleet utilization and used-car residual values. High leverage, floating-rate borrowing, dependence on asset-backed vehicle financing, collateral availability and refinancing needs are key financial risks. The filing also identifies foreign-exchange, manufacturer repurchase-program, safety-recall, technology, cyber/privacy, labor, regulatory, environmental, tax and litigation risks. A one-percentage-point increase in interest rates was estimated to reduce pretax results by $52 million over 12 months.
- Contingencies and audit matters: Public-liability and property-damage reserves were $399 million and rely on actuarial estimates. The company disclosed ongoing litigation, including an appeal in securities litigation and claims against former executives, and continuing cooperation regarding Brazil-related matters; it described the related Brazil contingency accrual as not material. Auditors issued unqualified opinions on the financial statements and internal control. Critical audit matters included lease-standard adoption, non-program vehicle depreciation estimates and self-insurance liabilities.
Important facts for investors to verify
- Whether operating performance and U.S. RAC gains can be sustained, particularly given lower international Adjusted EBITDA and softer utilization.
- How 2020 debt maturities were refinanced and whether vehicle-financing capacity and collateral values remain adequate.
- Whether residual values, fleet depreciation and vehicle disposal proceeds support reported costs and cash generation.
- How much of reported liquidity is unrestricted and available to the parent and operating entities, given restricted cash, structural limits and debt covenants.
- How tax valuation allowances, deferred tax assets and the corrected prior-period tax item develop, and whether litigation or self-insurance losses exceed reserves.