Hertz Global Holdings, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Amounts are in U.S. dollars; financial figures are in millions unless otherwise stated. Hertz Global consolidates The Hertz Corporation, its principal operating subsidiary, so their results are substantially similar.
Business context and financial performance
Hertz rents vehicles globally under the Hertz, Dollar and Thrifty brands and provides fleet leasing and management through Donlen. Results are seasonal, with higher fleet and staffing needs during the spring and summer peak season.
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Total revenue | $2,389 | $2,224 | $4,452 | $4,140 |
| Net loss, Hertz Global | $(63) | $(158) | $(265) | $(381) |
| Loss per share, basic and diluted | $(0.75) | $(1.90) | $(3.19) | $(4.59) |
| Adjusted pre-tax loss, non-GAAP | $(21) | $(82) | $(197) | $(295) |
- Revenue grew 7% in Q2 and 8% in the first half. U.S. Rental Car growth was driven primarily by higher rental volume; International Rental Car growth included a material foreign-exchange benefit.
- Q2 vehicle depreciation and lease charges declined 8% to $687; first-half charges fell 7% to $1,348. Management attributed the U.S. improvement principally to stronger vehicle residual values and more dealer-direct and retail dispositions.
- Direct vehicle and operating expense rose 7% in Q2 and 8% for the first half. SG&A rose 19% and 13%, respectively, including higher marketing, incentive compensation, and technology and finance transformation costs.
- Net interest expense increased 26% in Q2 to $198 and 27% in the first half to $364. Higher vehicle interest costs reflected greater debt, higher market rates and funding margins, and a shift toward medium-term funding.
- Segment adjusted pre-tax results improved: U.S. Rental Car reported Q2 income of $24 versus a loss of $37 a year earlier, but remained loss-making for the first half at $(24). International Rental Car earned $74 in Q2 and $69 in the first half; All Other Operations earned $24 and $47, respectively. Corporate adjusted pre-tax losses were $(143) in Q2 and $(289) in the first half.
Cash flow, debt and liquidity
- First-half operating cash flow was $942, versus $963 in 2017. Vehicle purchases and disposals drove investing cash outflow of $4,055, compared with $2,940 in 2017. Financing provided $2,540; total cash, cash equivalents and restricted cash declined $583 to $921.
- At June 30, total debt was $17,364: $12,933 of vehicle debt and $4,431 of non-vehicle debt, up from $14,865 at year-end 2017. Cash and cash equivalents were $685, plus $236 of restricted cash.
- Corporate liquidity was $1,187, consisting of $685 cash and $502 available under the Senior RCF. Across facilities, remaining capacity was $1,736, but availability under borrowing-base limitations was $508. Much of the vehicle fleet and related assets is pledged or held in special-purpose entities and is not available to general creditors.
- Management described the company as highly leveraged. It reported approximately $2.5 billion of vehicle debt and $25 million of non-vehicle debt maturing in the twelve months after the report, and said it expected to repay or refinance maturities and believed liquidity would be adequate for the next twelve months. The filing separately cites approximately $2.2 billion of vehicle maturities for July 2018–June 2019.
- Hertz was in compliance with its 3.00-to-1.00 maximum first-lien net leverage covenant at June 30, with a reported ratio of 1.60-to-1.00.
Material changes, outlook and risks
- Performance improved from the prior year, but Hertz Global remained loss-making. U.S. rental volume and utilization rose, while U.S. pricing was flat; International Rental Car pricing improved, but first-half utilization declined and depreciation per unit increased, partly reflecting weaker European diesel residual values.
- There is no specific earnings or revenue guidance in the provided filing text. Management expects available operating cash, vehicle-disposal proceeds, financing facilities and refinancing options to support operations and debt maturities over the next twelve months; this outlook depends on access to financing and actual operating results.
- Hertz accrued the minimum of a probable-loss range during Q2 for ongoing SEC staff discussions concerning historical restatement matters; it could not estimate a best amount within the range. An adverse outcome could exceed the accrual and be material. Related securities litigation remained pending. Brazilian local-law matters also remained open, although U.S. FCPA and other federal matters were resolved without further action.
- Public-liability and property-damage reserves were $421. The company noted that claims estimates are uncertain and may change. French road-tax disputes and other legal matters could also result in losses; outcomes are not predictable.
- Disclosure controls were reported ineffective at June 30 because of existing material weaknesses in internal control over financial reporting. Remediation work was underway, but the weaknesses were not yet considered remediated.
- Topic 606 adoption reduced opening equity by $189, primarily due to loyalty-program accounting. At June 30, the loyalty-points liability was $261 and total customer contract liabilities were $412. Management said the new standard did not significantly affect Q2 or first-half operating results.
- Other notable items included $20 of charges for redeeming European vehicle notes early; a $17 gain on marketable securities and a $6 legal settlement received in Q2; and $29 of Q2 technology and finance transformation expenses. Hertz also reported related-party activity involving the Icahn Group, including a $36 sale of marketable securities and a vehicle-leasing arrangement with Icahn-affiliated 767 Auto Leasing, which Hertz consolidated as a variable interest entity.
Most important facts for investors to verify
- Whether rental growth and utilization can translate into sustainable profitability while U.S. operating costs and interest expense rise.
- Vehicle residual values, depreciation per unit, fleet purchases and disposal proceeds, particularly given the filing’s discussion of large-SUV and European diesel residuals.
- Refinancing progress and terms for near-term vehicle maturities, actual borrowing-base availability, and the effect of higher interest rates on debt service.
- The outcome and potential financial exposure from SEC-related investigations, securities litigation, Brazilian matters and other claims; the filing does not disclose a clear best-estimate loss for the SEC matter.
- Progress in remediating material weaknesses and whether disclosure controls become effective after testing.
- The economic substance, performance and governance of related-party arrangements, including the 767 vehicle program and Icahn Group transactions.