Hertz Global Holdings, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; compared with Q1 2018. Amounts are in U.S. dollars. Hertz Global consolidates The Hertz Corporation, its primary operating company, so their results are substantially the same.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 / prior period |
|---|---|---|
| Revenue | $2.107 billion | $2.063 billion; up 2% |
| Operating expenses: direct vehicle and operating | $1.266 billion | $1.236 billion |
| Vehicle depreciation and lease charges | $592 million | $661 million; down 10% |
| Net interest expense | $183 million | $166 million |
| Loss before income taxes | $149 million | $231 million loss |
| Net loss attributable to Hertz Global | $147 million; $1.75 per share | $202 million; $2.43 per share |
| Adjusted pre-tax loss (non-GAAP) | $111 million | $175 million |
| Operating cash flow | $514 million | $401 million |
| Investing cash flow | $(1.855) billion | $(1.850) billion |
| Financing cash flow | $939 million | $1.877 billion |
| Total cash, cash equivalents and restricted cash | $1.006 billion at March 31 | $1.410 billion at December 31, 2018 |
| Total debt | $17.257 billion | $16.324 billion at December 31, 2018 |
Revenue-earning vehicle purchases were $3.973 billion and disposal proceeds were $2.153 billion, producing $1.820 billion of net vehicle investment. Corporate liquidity, defined as cash and Senior RCF availability and excluding unused vehicle-debt commitments, was $1.013 billion: $554 million cash and $459 million revolver availability. Total debt comprised $12.827 billion of vehicle debt and $4.430 billion of non-vehicle debt. The company also reported $1.513 billion of operating lease liabilities following adoption of the new lease standard.
Changes and operating results
- U.S. Rental Car: Revenue rose 7% to $1.520 billion. Transaction days increased 4%, and Total RPD and RPU each rose 2%. Adjusted pre-tax income improved to $25 million from a $48 million loss. Vehicle depreciation per unit per month fell 15% to $256.
- International Rental Car: Revenue declined 7% to $433 million, primarily due to foreign exchange; excluding currency effects, revenue was flat. Adjusted pre-tax loss widened to $18 million from $6 million. Total RPD fell 2% and utilization declined to 74% from 75%.
- All Other Operations, primarily Donlen: Revenue decreased 9% to $154 million, while adjusted pre-tax income rose to $25 million from $22 million. The company attributed lower revenue and depreciation partly to a change in presentation for certain leased vehicles.
- Consolidated revenue increased $44 million. Lower vehicle depreciation and lease charges and stronger U.S. results helped narrow the net loss; higher vehicle interest expense, up 19% to $112 million, was a partial offset, reflecting higher average fleet and market interest rates.
Outlook, commentary, risks and unusual items
- Management said operating cash, vehicle disposal proceeds, available financing and refinancing options should be sufficient to fund operations for the next 12 months. About $2.6 billion of vehicle debt and $19 million of non-vehicle debt mature in that period; management said refinancing or repayment is probable and intended. No specific earnings guidance was provided.
- The company described the business as seasonal, with demand generally strongest in the spring and summer. It noted that 70%–75% of annual operating costs are variable, while some facility, technology and staffing costs remain fixed or semi-fixed.
- Hertz was highly leveraged. At March 31, it was compliant with the Senior RCF and letter-of-credit financial covenant: a 1.21-to-1.00 first-lien net leverage ratio versus a 3.00-to-1.00 maximum. Management expected continued compliance for at least 12 months. Substantially all revenue-earning vehicles and certain related assets are pledged or held in special-purpose entities and are not available to general creditors.
- Borrowing availability under listed facilities was $2.121 billion of remaining capacity, but only $531 million was available under borrowing-base limits. Approximately $714 million of standby letters of credit were outstanding and none had been drawn.
- Topic 842 lease accounting was adopted January 1, 2019. It added $1.585 billion of right-of-use assets and $1.588 billion of lease liabilities at adoption and did not affect reported operations or cash flows. The filing states disclosure controls were effective; implementation of lease-accounting control activities was a material change in internal control.
- Q1 included $23 million of information-technology and finance-transformation costs, $7 million of restructuring and related charges, and $19 million of other income, including an $11 million marketable-securities gain and an $8 million gain on asset sales.
- Contingencies include public-liability and property-damage reserves of $411 million; ongoing Brazil-related matters for which the accrued amount was described as not material but an adverse outcome could be material; and litigation seeking recovery from former executives of incentive compensation and other damages. Plaintiffs also sought to reinstate claims in a previously dismissed securities case.
- Key risks cited include travel demand, competition and rental pricing, vehicle residual values and supply, refinancing and liquidity, interest and foreign-exchange rates, litigation and investigations, and operational, technology and cybersecurity disruptions.
Investor verification priorities
- Track whether the company refinances or repays the near-term maturities and preserves liquidity, particularly borrowing-base availability and covenant headroom.
- Check whether U.S. revenue and vehicle-cost improvements persist, and whether international pricing, utilization and profitability recover.
- Assess vehicle depreciation and residual-value trends, fleet investment, and the effect of higher debt and interest costs on earnings and cash generation.
- Monitor outcomes or reserve changes for Brazil-related matters, public-liability claims, the securities litigation motion and the former-executive recovery actions.
- Review the non-GAAP Adjusted Pre-tax Income reconciliation and the recurring or nonrecurring nature of the quarter’s gains and transformation and restructuring costs.