Hertz Global Holdings, Inc. — Q2 2017 Form 10-Q
Business context and reporting period. Hertz Global is the holding company for The Hertz Corporation, its primary operating business. The filing covers the quarter and six months ended June 30, 2017; comparisons are with 2016. Hertz rents vehicles globally under the Hertz, Dollar and Thrifty brands and provides fleet leasing and management through Donlen. Dollar amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $2,224 | $2,270 | $4,140 | $4,253 |
| Net loss | $(158) | $(43) | $(381) | $(93) |
| Loss per share, basic and diluted | $(1.90) | $(0.51) | $(4.59) | $(1.09) |
| Adjusted pretax income (loss), non-GAAP | $(81) | $55 | $(293) | $(53) |
| Net interest expense | $157 | $174 | $287 | $325 |
| Cash provided by operating activities | Not separately reported | Not separately reported | $984 | $1,014 |
- Revenue fell 2% in Q2 and 3% in the first half. Net loss as a share of revenue was approximately 7.1% in Q2 2017 versus 1.9% in Q2 2016; for the first half, approximately 9.2% versus 2.2%.
- Vehicle depreciation and lease charges rose 18% to $743 in Q2 and 16% to $1,444 in the first half. U.S. net depreciation per unit per month increased 27% to $353 in Q2 and 21% to $351 in the first half.
- At June 30, total debt was $16,809, including $11,176 of vehicle debt and $5,633 of non-vehicle debt, up from $13,541 at year-end 2016. Cash and cash equivalents were $1,141; restricted cash was another $1,062, including approximately $834 of restricted proceeds from the June debt issuance.
- Equity was $756, down from $1,075 at year-end 2016. Net cash from operating activities was $984; investing activities used $2,904, including $6,709 of vehicle purchases and $3,835 of vehicle-sale proceeds; financing activities provided $2,233.
Material changes and operating trends
- U.S. Rental Car weakened materially: Q2 revenue declined 4% to $1,519, with transaction days down 3%, pricing (Total RPD) down 2%, and utilization down to 80% from 82%. Adjusted pretax loss was $37 versus income of $143. First-half adjusted pretax loss was $152 versus income of $138.
- Management attributed U.S. pressure to lower ancillary revenue and a shift toward lower-yield customer mix, lower volume, and sharply higher vehicle depreciation. It cited shortened holding periods for some non-program vehicles, a richer mix of premium 2017 vehicles, and falling residual values.
- International Rental Car improved in Q2: revenue rose 1% to $543, or 4% excluding currency effects, as transaction days increased 6%; Total RPD declined 1%. Adjusted pretax income rose to $56 from $34. First-half reported revenue declined 2%, while adjusted pretax income rose to $52 from $36.
- Donlen and other operations grew: revenue increased 11% in Q2 and 8% in the first half, primarily from leasing and services volume. Adjusted pretax income increased to $19 in Q2 and $39 in the first half.
- Cash from operations decreased $30 year over year in the first half. Net fleet capital expenditures increased to $2,874 from $2,100, as vehicle-sale proceeds fell by $952, partly offset by $178 lower vehicle-purchase outflows.
Debt, liquidity, outlook and risks
- In June, Hertz issued $1.25 billion of 7.625% Senior Second Priority Secured Notes due 2022, redeemed $250 million of 4.25% notes due 2018, and reduced Senior RCF commitments by $150 million. Approximately $834 million of issuance proceeds remained restricted at quarter-end. Management was evaluating whether to use the proceeds for debt repayment, note repurchases, or further revolver commitment reductions.
- At June 30, total remaining borrowing capacity was $1,213, but availability under borrowing-base limits was only $39, including $9 under the Senior RCF. The company reported $804 of outstanding letters of credit, of which $791 was under the Senior RCF.
- Hertz said it was highly leveraged and dependent on vehicle-backed financing and refinancing. Approximately $1.6 billion of vehicle debt and $7 million of non-vehicle debt were due within the twelve months following the report; management said repayment or refinancing was probable and intended. It stated liquidity should be sufficient for the next twelve months. The Senior RCF leverage covenant was 2.56 to 1.00 against a maximum of 3.25 to 1.00 for June and September 2017; Hertz was in compliance and expected continued compliance.
- No specific earnings or revenue guidance was provided. Management expected higher IT-related SG&A investment for the remainder of 2017 and in 2018. It also said results are seasonal, with higher rental activity typically in spring and summer, and that 70%–75% of annual operating costs are variable.
- Unusual items: Q2 included an $86 impairment of the Dollar Thrifty tradename, following lower long-term revenue projections and a higher discount rate. A one-percentage-point change in the weighted average cost of capital could change the impairment by approximately $80. First-half impairments also included a $30 equity-method investment charge. The company recorded $8 of debt-extinguishment-related charges and $39 of finance and IT transformation costs in the first half.
- The company corrected a prior-period income-tax error in Q2, increasing cumulative net loss by approximately $10; management said it was not material to prior periods or the 2017 interim periods. It also revised 2016 cash-flow classifications, with no effect on total cash flows.
- Disclosure controls were deemed ineffective because material weaknesses in internal control over financial reporting remained. Remediation steps were underway but not yet demonstrated effective. The SEC and other authorities continued to investigate prior accounting/restatement matters; the company said potential losses could be material but could not be estimated. It also disclosed a continuing investigation of Brazil activities that may implicate anti-corruption laws. The Brazil business sale, expected to close in Q3 2017 after regulatory approval, was expected to yield approximately $108, with about $12 held in escrow.
- Other risks include vehicle residual values, rental pricing and demand, debt refinancing and interest rates, vehicle supply and recalls, litigation and claims reserves, foreign exchange, and execution of finance and IT transformation programs. Public liability and property damage reserves were $423 at quarter-end.
Most important facts for investors to verify
- Whether U.S. pricing, rental volume, utilization and vehicle depreciation stabilize, and whether management’s residual-value estimates prove accurate.
- How Hertz deploys the restricted note proceeds and whether it refinances upcoming vehicle maturities while maintaining covenant compliance and adequate usable liquidity.
- Whether the remaining internal-control material weaknesses are remediated and whether any further accounting corrections or investigation outcomes arise.
- The final proceeds, escrow terms and closing of the Brazil sale, and any material exposure from Brazil-related investigations or other legal matters.
- The quantified effect of the new loyalty-reward revenue accounting standard and the company’s ability to deliver planned technology and process improvements.