HERTZ GLOBAL HOLDINGS, INC quarterly report, Q3 FY2022

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Hertz Global Holdings, Inc. — Q3 2022 Form 10-Q

Reporting period: Three and nine months ended September 30, 2022; filed October 27, 2022. Hertz Global is the parent holding company and consolidates The Hertz Corporation, its principal operating company. The business primarily rents vehicles under the Hertz, Dollar and Thrifty brands, and also sells rental vehicles. The figures below identify Hertz Global where parent-level results differ.

Financial performance and position

  • Revenue: Q3 revenue was $2.496 billion, up 12% from $2.226 billion. For the first nine months, revenue was $6.650 billion, up 23% from $5.387 billion. Management attributed growth mainly to stronger travel demand, higher rental volume and pricing; International RAC also faced unfavorable foreign-exchange effects.
  • Profit and earnings: Hertz Global Q3 net income was $577 million versus $608 million; basic EPS was $1.62 versus $1.21, and diluted EPS was $1.33 versus $1.13. Nine-month net income was $1.943 billion versus $627 million; basic EPS was $4.92 versus $2.25, and diluted EPS was $3.22 versus $2.14. Hertz Global’s Q3 income before tax was $647 million. The filing reports a $73 million Q3 and $584 million nine-month gain from changes in the fair value of Public Warrants, which is a significant noncash item in parent-company results.
  • Operating performance: Adjusted Corporate EBITDA, a non-GAAP measure, was $618 million in Q3, down 28% from $860 million; nine-month EBITDA was $1.996 billion, up 33% from $1.502 billion. Q3 segment EBITDA was $564 million for Americas RAC, down from $830 million, and $150 million for International RAC, up from $78 million. Americas RAC’s higher fleet-related costs and vehicle depreciation weighed on quarterly performance.
  • Cash flow: In the first nine months, operating cash flow was $2.261 billion, investing cash outflow was $3.473 billion, and financing cash inflow was $119 million. Vehicle purchases totaled $7.853 billion and vehicle-disposal proceeds were $4.470 billion. Cash and restricted cash together declined by $1.143 billion to $1.508 billion.
  • Debt and liquidity: Total debt was $13.076 billion at September 30, 2022, compared with $10.907 billion at year-end 2021; this comprised $10.097 billion of vehicle debt and $2.979 billion of non-vehicle debt. Cash and cash equivalents were $1.006 billion, with another $502 million restricted. Corporate liquidity, defined as cash plus available First Lien RCF capacity and excluding unused vehicle-debt commitments, was $2.578 billion. The company reported $1.572 billion available under the First Lien RCF and compliance with its financial and other covenants.
  • Balance sheet: Total assets were $21.694 billion and stockholders’ equity was $2.761 billion. Net revenue-earning vehicles were $12.023 billion, up from $9.226 billion at year-end 2021. Public Warrants were recorded as a $737 million liability, down from $1.324 billion.

Changes versus the comparable period

  • Q3 revenue growth did not translate into higher reported net income: Hertz Global net income fell 5%, while Adjusted Corporate EBITDA fell 28%. Direct vehicle and operating expense rose 13%, SG&A rose 39%, and net vehicle depreciation and lease charges increased to $294 million from $61 million. Management cited higher vehicle acquisition costs, fleet costs and elevated out-of-service levels; increased gains on vehicle disposals partly offset depreciation expense.
  • International RAC grew faster than Americas RAC. Q3 International revenue rose 46% to $454 million, with transaction days up 27% and Total RPD up 31% in constant-currency terms. Americas revenue rose 7% to $2.042 billion; transaction days rose 7%, while Total RPD was broadly flat.
  • Nine-month 2022 comparisons include no repeat of 2021’s $513 million of Hertz reorganization charges or $400 million Donlen-sale gain. Hertz Global also recorded $677 million of 2021 reorganization charges. The company emerged from Chapter 11 in June 2021, and Donlen was sold in March 2021; these items affect period comparability.
  • Hertz Global repurchased $2.152 billion of shares in the first nine months under its repurchase programs. During Q3 it repurchased 27.2 million shares for $500 million at an average $18.36 per share. It reported further repurchases of $123 million between October 1 and October 20, 2022.

Outlook, risks and unusual items

  • Outlook: The filing provides no numeric earnings or revenue guidance. Management said operating cash generation, vehicle-disposal proceeds, liquidity facilities and potential capital-markets refinancing should be sufficient to fund operations and obligations for the next 12 months.
  • Business risks: Management highlighted uncertainty in travel demand; inflation, labor and supply-chain costs; semiconductor and vehicle supply constraints; vehicle acquisition costs and used-vehicle residual values; fleet availability and utilization; competition and pricing; and the Russia-Ukraine conflict’s potential effects on automotive supply chains, costs and travel demand. The business is seasonal, with higher activity generally in spring and summer.
  • Legal and insurance contingencies: A trustee’s remaining claims concerning redemption premiums on certain 2026 and 2028 notes could involve amounts within a broader asserted claim of up to $271.7 million; claims for the 2022 and 2024 notes and contractual-rate post-petition interest were dismissed. The company said the case’s outcome and timing could not be predicted. It also faces false-arrest claims relating to reports of rental cars as stolen; the company said it believes resolution will not materially adversely affect it. Self-insured liabilities were $484 million, based on estimates subject to uncertainty.
  • Other notable items: The company reported $633 million of outstanding standby letters of credit, none drawn at quarter-end. Substantially all revenue-earning vehicles and certain related assets are pledged to vehicle-financing lenders. The IRS review of the tax treatment of a European restructuring-related capital loss was ongoing; a favorable outcome could release some or all of the associated valuation allowance.
  • Control assessment: Management concluded disclosure controls and procedures were effective as of September 30, 2022, and reported no material change in internal control over financial reporting during Q3.

Important facts for investors to verify

  • How much of reported earnings and EPS depends on noncash warrant fair-value changes, and how results look excluding those changes.
  • Whether the sharp Q3 rise in Americas RAC vehicle depreciation and fleet-related costs persists, and how vehicle acquisition costs and resale proceeds affect unit economics.
  • Whether operating cash generation and disposal proceeds can support fleet investment while cash balances have declined and debt has increased.
  • The status and potential financial exposure from the noteholder litigation, false-arrest claims and self-insurance estimates.
  • The pace and funding of further share repurchases, and the effect of repurchases on liquidity, debt capacity and per-share results.
  • Whether travel demand, vehicle supply constraints, residual values and foreign-exchange movements support or pressure pricing and fleet availability.