Hertz Global Holdings, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. Hertz Global is the holding company and The Hertz Corporation is its principal operating subsidiary. The results below are consolidated and largely reflect Hertz’s operations. Amounts are in millions of dollars unless otherwise stated.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change / context |
|---|---|---|---|
| Revenue | $1,916 | $1,983 | Down $67 (3%). Vehicle rental revenue was $1,764, versus $1,839. |
| Loss before income taxes | $(294) | $(76) | Pre-tax loss margin widened to about 15.3% from 3.8%. |
| Net loss | $(223) | $(51) | Net loss margin widened to about 11.6% from 2.6%. |
| Adjusted pre-tax loss, non-GAAP | $(213) | $(106) | Loss increased $107. |
| Vehicle depreciation and lease charges, net | $701 | $616 | Up 14%; U.S. Rental Car expense rose 19% to $499, primarily due to lower residual values on non-program vehicles. |
| Interest expense, net | $130 | $150 | Down $20, mainly reflecting prior debt refinancing; vehicle interest rose slightly. |
| Operating cash flow | $498 | $461 | Up $37. |
| Investing cash flow | $(926) | $(424) | Greater net vehicle investment and lower CAR Inc. sale proceeds. |
| Cash at period end | $785 | $816 at year-end 2016 | Quarterly decrease of $31; restricted cash was an additional $266. |
| Total debt | $14,008 | $13,541 at year-end 2016 | Vehicle debt $10,113; non-vehicle debt $3,895. |
Key operating trends and changes
- U.S. Rental Car: Revenue fell 4% to $1,353; total revenue per transaction day (RPD) declined 3% to $41.19, transaction days fell 1%, and utilization decreased to 75% from 78%. Adjusted pre-tax loss deteriorated to $116 from $4. Net depreciation per vehicle per month rose 15% to $348.
- International Rental Car: Revenue declined 5% to $411 (down 4% excluding currency effects). RPD fell 4% to $39.38, while transaction days rose 1%. Adjusted pre-tax result shifted to a $4 loss from $3 income.
- All Other Operations, primarily Donlen: Revenue rose 6% to $152 and adjusted pre-tax income rose 17% to $21, supported by leasing and fleet-management growth.
- Lower rental rates and a mix shift away from higher-yield corporate and retail customers weighed on U.S. pricing. The Easter holiday fell in Q2 in 2017 versus Q1 in 2016, negatively affecting year-over-year rental comparisons.
Liquidity, outlook, and notable items
- Management said cash from operations, vehicle disposals, credit facilities, and refinancing options should fund operating needs and maturities for the next 12 months. Corporate liquidity was approximately $1.7 billion, including $785 million unrestricted cash and $939 million available under the Senior RCF.
- The company described itself as highly leveraged. Approximately $790 million of vehicle debt and $257 million of non-vehicle debt were expected to mature during the 12 months following the report’s issuance; management said repayment or refinancing was probable and intended. About $744 million of vehicle debt was identified as maturing between April 1, 2017 and March 31, 2018. Management stated liquidity would also be sufficient to repay those maturities if refinancing were unavailable.
- Hertz was in compliance with its Senior RCF covenant at March 31, with a covenant leverage ratio of 2.41 versus a maximum of 3.25. The maximum falls to 3.00 for quarters beginning December 31, 2017.
- The quarter included a $30 million impairment of an equity-method investment. In Q1 2016, other income included a $75 million CAR Inc. share-sale gain and a $9 million eminent-domain settlement gain; the comparison therefore also reflects unusual prior-year income. Hertz sold its remaining CAR Inc. shares in February 2017.
- Brazil operations were held for sale; expected proceeds were approximately $117 million, including approximately $13 million to be placed in escrow. Closing was expected in Q2 2017, subject to regulatory approval and other conditions.
- Management expected a 2017 effective tax rate of approximately 27%. No specific earnings or revenue guidance was provided in the filing text.
- Disclosure controls were reported as ineffective because of previously identified material weaknesses in internal control over financial reporting. Remediation remained in progress.
Risks, contingencies, and other matters
- The company reported SEC and other governmental inquiries concerning prior restatements and related accounting, and separately disclosed self-reported Brazil activities raising potential Foreign Corrupt Practices Act and other legal issues. Outcomes and possible losses could not be estimated and could be material; the company had recorded a non-material reserve for the Brazil matters.
- Public-liability and property-damage reserves were $405 million and are subject to estimation uncertainty. The filing also discussed the Ryanair dispute, French road-tax litigation, and other claims; an adverse Ryanair outcome could exceed the non-material reserve and be material in a reporting period.
- The filing identifies risks related to residual values and vehicle costs, rental demand and pricing, competition, financing availability and refinancing, debt covenants, interest rates, foreign exchange, litigation and investigations, and remediation of control weaknesses.
- Management reported no significant change in market-risk disclosures from the 2016 Form 10-K. The rental business is seasonal, with demand generally higher in spring and summer.
Important facts for investors to verify
- Whether pricing, customer mix, utilization, and U.S. vehicle residual values improve, and whether depreciation expense stabilizes.
- Progress and final terms of the Brazil sale, including regulatory approval, proceeds, and escrowed amounts.
- Refinancing or repayment of near-term debt maturities, available borrowing-base capacity, and continued compliance with the tightening Senior RCF covenant.
- Developments in government investigations, Brazil-related compliance matters, and material weaknesses in financial reporting controls.
- Whether recurring operating performance supports liquidity needs, distinguishing core results from impairment charges, transformation costs, and prior-period asset-sale gains.