Business Context and Reporting Period
Company: Hertz Global Holdings, Inc. (HERC)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2007
Hertz operates the largest worldwide general use car rental brand and one of the largest equipment rental businesses in the U.S. and Canada. The company operates through two primary segments: Car Rental and Equipment Rental (HERC). Following a leveraged buyout in 2005 and an IPO in 2006, the company is controlled by private equity sponsors (Clayton, Dubilier & Rice, The Carlyle Group, and Merrill Lynch Global Private Equity), who held approximately 55% of the common stock as of the filing date. The company maintains a significant presence at major airports globally and is expanding its off-airport and insurance replacement rental markets.
Key Financial Metrics (Year Ended Dec 31, 2007)
| Metric | 2007 (in millions) | 2006 (in millions) |
|---|---|---|
| Total Revenues | $8,685.6 | $8,058.4 |
| Net Income | $264.6 | $115.9 |
| Earnings Per Share (Diluted) | $0.81 | $0.48 |
| EBITDA | $3,485.6 | $3,100.7 |
| Corporate EBITDA | $1,541.5 | $1,378.7 |
| Cash from Operating Activities | $3,089.5 | $2,604.8 |
| Total Debt Outstanding | $11,960.1 | $12,276.2 |
| Cash and Equivalents | $730.2 | $674.5 |
| Stockholders' Equity | $2,913.4 | $2,534.6 |
Segment Performance: Car Rental revenues were $6,800.7 million (78.3% of total), and Equipment Rental revenues were $1,755.3 million (20.2% of total). Adjusted pre-tax income for the Car Rental segment was $609.1 million, and for the Equipment Rental segment was $373.8 million.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 7.8% year-over-year. Car rental revenue grew 8.4% driven by a 5.0% increase in volume and foreign currency translation effects. Equipment rental revenue grew 5.0% due to higher volumes and improved pricing.
- Profitability: Net income increased 128.2% to $264.6 million. Income before taxes rose 92.8% to $386.8 million. The effective tax rate decreased to 26.5% from 33.9% in 2006, aided by a reduction in global valuation allowances.
- Expense Management: Total expenses increased 5.6%, but as a percentage of revenue, they decreased from 97.5% to 95.5%. Depreciation of revenue earning equipment increased 14.0% due to higher vehicle costs and fleet size. Interest expense decreased 2.8% due to a lower weighted average debt balance, partially offset by higher interest rates and swap ineffectiveness costs.
- Restructuring: The company incurred $96.4 million in restructuring charges in 2007 related to job reductions and process improvements aimed at reducing operating costs.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
- Cost Reduction: Management expects to incur an additional $30 million to $40 million in restructuring costs in the first half of 2008 related to outsourcing initiatives and further efficiency measures.
- Fleet Costs: Net per-car depreciation costs for 2007 model year cars in the U.S. increased by less than 3%. Management expects 2008 model year vehicle depreciation costs in the U.S. to increase between 2% and 4%.
- Expansion: The company plans to add over 30 new equipment rental locations worldwide in 2008 and continue expanding its off-airport car rental network.
Key Risks and Contingencies
- Substantial Indebtedness: The company carries approximately $12 billion in debt. A significant portion is variable-rate debt, exposing the company to interest rate fluctuations. Covenants require maintaining specific leverage and coverage ratios based on Corporate EBITDA.
- Asset-Backed Financing: The company relies heavily on asset-backed securities (ABS) to finance its car fleet. Risks include the potential insolvency of financial guarantors (MBIA and Ambac), which could trigger amortization events and liquidity constraints.
- Manufacturer Dependence: Approximately 50% of the car fleet is subject to repurchase programs. Deterioration in the financial condition of manufacturers (specifically Ford and GM) could impact residual values and the ability to refinance fleet debt.
- Legal Proceedings: The company is involved in various class actions regarding fuel surcharges, concession fees, and loss damage waivers. It is also engaged in patent litigation with Enterprise Rent-A-Car regarding insurance replacement reservation systems.
Investor Verification Checklist
- Debt Covenants: Verify compliance with Senior Credit Facility covenants (leverage ratio and interest coverage) given the high debt load.
- Refinancing Needs: Assess the company's ability to refinance approximately $3.6 billion in debt maturing in 2008 and the $4.3 billion in U.S. Fleet Debt maturing between 2008 and 2010, particularly in light of credit market conditions.
- Guarantor Stability: Monitor the credit ratings and financial health of MBIA and Ambac, whose insolvency could trigger immediate debt repayment requirements.
- Residual Value Risk: Evaluate the exposure to residual value risk as the percentage of "program cars" (with manufacturer repurchase guarantees) decreases.
- Restructuring Execution: Track the realization of projected cost savings from the announced restructuring and outsourcing initiatives in 2008.