Hertz Global Holdings, Inc. — Q1 2018 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2018. Hertz Global is the holding company for The Hertz Corporation, its principal operating subsidiary. The business rents vehicles under the Hertz, Dollar and Thrifty brands, and provides leasing and fleet management through Donlen. Unless noted, financial amounts below are in millions of dollars and refer to Hertz Global consolidated results.
Financial results and key metrics
| Metric | Q1 2018 | Q1 2017 | Change or context |
|---|---|---|---|
| Total revenue | $2,063 | $1,916 | Up 8% |
| Worldwide vehicle rental revenue | $1,894 | $1,764 | Up 7% |
| Direct vehicle and operating expense | $1,236 | $1,132 | Up 9% |
| Vehicle depreciation and lease charges, net | $661 | $701 | Down 6% |
| Net interest expense | $166 | $130 | Up 28% |
| Net loss | $(202) | $(223) | Loss narrowed 9%; diluted loss per share was $(2.43) vs. $(2.69) |
| Operating cash flow | $401 | $485 | Down $84 |
| Investing cash flow | $(1,850) | $(927) | Higher vehicle investment |
| Total debt at quarter-end | $16,811 | $14,865 at Dec. 31, 2017 | Increase mainly in vehicle debt |
Segment adjusted pre-tax results, a non-GAAP measure, were a $48 loss in U.S. Rental Car, a $6 loss in International Rental Car, and $22 income in All Other Operations; corporate costs were $143. Consolidated adjusted pre-tax loss was $175, compared with $213 in Q1 2017. It excludes specified items and is not a substitute for GAAP results.
U.S. Rental Car revenue rose 5%, with transaction days up 6%, utilization at 79% versus 75%, and total revenue per transaction day (RPD) down 1%. International Rental Car revenue rose 14% as reported, but 3% excluding $45 of favorable foreign exchange; RPD increased 5% and transaction days fell 2%. U.S. net depreciation per unit per month fell 13% to $302, while International net depreciation rose 9% to $222.
Liquidity, debt and cash flow
At March 31, cash and cash equivalents were $1,046 and restricted cash was $894; total cash, cash equivalents and restricted cash were $1,940. Some cash is held outside the U.S. and some is restricted or held in financing structures. Corporate liquidity was $1,565, comprising cash and $519 available under the Senior Revolving Credit Facility. Although total remaining capacity across listed facilities was $2,110, availability under borrowing-base limits was only $521.
Vehicle debt was $12,379 and non-vehicle debt was $4,432. The company reported it was highly leveraged; substantially all revenue-earning vehicles and certain related assets are pledged or otherwise unavailable to general creditors. Approximately $2.0 billion of vehicle debt and $23 of non-vehicle debt was expected to mature in the twelve months following the filing; the debt note separately cites approximately $2.6 billion of vehicle debt and $23 of non-vehicle debt maturing April 2018 through March 2019. Management said refinancing was probable and intended, and believed cash generation, vehicle-sale proceeds and financing access would meet needs.
Operating activities provided $401, while vehicle purchases of $3,565 less vehicle disposal proceeds of $1,782 drove most of the $1,850 investing cash outflow. Financing provided $1,877, primarily reflecting vehicle-backed and other debt issuance. Cash paid for interest was $110. The reported first-lien net leverage covenant ratio was 1.76:1 against a maximum 3.00:1; management expected continued compliance for at least twelve months.
Changes, outlook, risks and unusual items
- Revenue growth and lower vehicle depreciation helped narrow the quarterly loss, but operating cash flow declined, operating expenses increased, and interest expense rose materially.
- U.S. rental growth included increased off-airport activity, particularly TNC and insurance replacement rentals; associated personnel, maintenance and other operating costs also increased. International results benefited from currency translation, while higher vehicle depreciation reflected, among other factors, declining European diesel residual values.
- Management provided no specific earnings or revenue guidance in the supplied filing text. It said liquidity should be sufficient for operating requirements over the next twelve months, subject to refinancing and financing availability.
- Adoption of ASC 606 on January 1, 2018 reduced opening equity by $189, primarily from loyalty-program accounting. The filing says adoption increased Q1 revenue by $3 and improved net income by $2 versus legacy accounting; prior-year results were not restated. Unredeemed loyalty points were a $266 contract liability at quarter-end.
- Hertz recorded $23 of IT and finance transformation costs, versus $19 a year earlier. Q1 2017 included a $30 impairment of an equity-method investment; no comparable impairment was recorded in Q1 2018.
- Material weaknesses in internal control over financial reporting remained unremediated, and management concluded disclosure controls were ineffective at March 31, 2018. Remediation efforts were ongoing.
- Contingencies include a securities-litigation appeal, ongoing SEC and U.S. Attorney communications concerning prior accounting matters, self-reported Brazil activities that may implicate anti-corruption laws, and French road-tax disputes. The company said outcomes could be adverse and losses could exceed recorded reserves; for the governmental investigations it could not estimate a reasonably possible loss range.
- Key risks include high leverage and refinancing needs, interest-rate and residual-value exposure, rental demand and pricing competition, vehicle supply and costs, foreign exchange, litigation and investigations, and execution of systems and control remediation. Vehicle-rental activity is seasonal, with peak demand generally in the second and third quarters.
Most important facts for investors to verify
- How effectively the company refinances near-term maturities and maintains borrowing-base availability, covenant headroom and unrestricted liquidity.
- Whether operating cash flow improves as seasonal demand rises, given heavy fleet purchases and lower year-over-year operating cash flow.
- Whether U.S. utilization and rental volume can sustain growth without further pressure on pricing and direct operating costs.
- Whether depreciation assumptions and vehicle residual values—especially for U.S. large SUVs and European diesel vehicles—remain appropriate.
- Progress in remediating material weaknesses, and developments in the securities appeal, government investigations, Brazil matters and French tax disputes.
- The effects of loyalty-point liabilities and future lease-accounting adoption; management expected Topic 842 to materially increase lease assets and liabilities, with no material effect on results of operations.