Hertz Global Holdings, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Unless otherwise stated, amounts are in U.S. dollars and millions. Results are presented for continuing vehicle rental and leasing operations; the equipment rental business was reported as discontinued operations.
Business context
Hertz completed the spin-off of its equipment rental business on June 30, 2016, becoming an independent public company. For accounting purposes, Hertz is the successor to Old Hertz Holdings, so comparative periods include the equipment rental business as discontinued operations. The separation and associated financing materially affect balance-sheet and cash-flow comparisons.
Financial performance and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $2,270 | $2,317 | $4,253 | $4,415 |
| Continuing operations pretax income (loss) | $(35) | $38 | $(112) | $(71) |
| Continuing operations net income (loss) | $(28) | $13 | $(80) | $(65) |
| Total net income (loss), including discontinued operations | $(43) | $36 | $(93) | $(34) |
| Adjusted pretax income (loss), non-GAAP | $55 | $118 | $(53) | $77 |
Q2 basic and diluted loss per share was $0.51; six-month loss per share was $1.09. The filing does not provide a single consolidated operating-margin measure.
- Rental segments: U.S. Rental Car revenue fell 2% in Q2 and 5% for the first half; adjusted pretax income declined to $143 from $195 in Q2 and to $138 from $265 for the first half. International Rental Car revenue fell 3% in Q2 and 2% for the first half; adjusted pretax income was $34 versus $45 in Q2 and $36 versus $52 for the first half.
- Pricing and fleet: U.S. total revenue per transaction day declined 8% in Q2 and 9% for the first half, while transaction days rose 6% and 4%, respectively. U.S. net depreciation per unit per month increased 12% in Q2 to $278 and 9% for the first half to $290. U.S. utilization improved to 82% in Q2 from 75%.
- Cash flow, first half: Continuing-operations operating cash flow was $1,014, investing cash outflow was $1,929, and financing cash inflow was $1,718. Vehicle purchases net of disposal proceeds were $2,100. Cash and cash equivalents increased to $1,285 from $474 at year-end.
- Balance sheet at June 30: Total debt was $15,392 ($10,801 vehicle debt and $4,591 non-vehicle debt); total assets were $22,020 and equity was $1,609. Restricted cash was $318. The company describes itself as highly leveraged.
- Available borrowing: Reported remaining capacity was $2,254, but availability under borrowing-base limitations was $1,104, chiefly the $1,094 Senior RCF; vehicle-facility availability under those limitations was only $10. Outstanding letters of credit totaled $618. These measures are not equivalent to unrestricted cash.
Material changes and unusual items
- Herc transferred approximately $2.0 billion to Hertz in connection with the spin-off; Hertz used the proceeds to repay non-vehicle debt. Total debt was down from $15,770 at December 31, 2015, although vehicle debt increased.
- Hertz sold CAR Inc. shares, recognizing a $75 pretax gain, and recorded a $9 settlement gain related to an airport eminent-domain matter. These gains contributed to first-half other income.
- Q2 included a $20 write-off of deferred financing costs. Depreciation and lease charges increased 5% in Q2, with U.S. rental-car depreciation pressure attributed to weaker residual values and higher program-vehicle acquisition costs.
- International public-liability and property-damage expense rose $20 in Q2, largely reflecting historical claims experience in the United Kingdom. Restructuring charges were $18 in Q2 and $24 for the first half; finance and IT transformation costs were $19 and $26, respectively.
- In July, Hertz redeemed $700 of 7.50% Senior Notes due 2018 using term-loan proceeds and cash, paying a $13 redemption premium plus $12 accrued interest. The filing says there are no significant non-vehicle debt maturities until 2019.
Outlook, risks and contingencies
- Management expected the 2016 full-year effective tax rate to be approximately 47% and said cash, operating cash flow, vehicle-sale proceeds, facilities and refinancing options should cover requirements and debt maturities over the next 12 months.
- Management estimated that Europe’s inbound-travel weakness following 2016 terror attacks could reduce full-year 2016 Europe operating results by approximately $10–$15 on a constant-currency basis, with effects expected to continue into Q3. It reported no material Brexit impact to date, while noting uncertainty.
- Competitive pricing pressure, declining U.S. non-program vehicle residual values, rental-demand and seasonal disruption, vehicle financing access, floating-rate exposure and substantial secured debt are significant operating and financial risks. Moody’s proposed rental-fleet securitization rating methodology could also lead to downgrades of certain vehicle-note tranches.
- Disclosure controls were deemed ineffective at June 30 because material weaknesses in internal control over financial reporting remained unremediated. Remediation, including IT and accounts-payable outsourcing, was ongoing.
- Significant unresolved matters include securities litigation and government investigations related to prior financial restatements, SEC and other government inquiries, potential Brazil FCPA issues, and French competition proceedings. The company said potential losses could be material but were not reasonably estimable for certain matters. Public-liability reserves were $410.
- The spin-off created ongoing transition, tax, indemnification and shared-liability arrangements with Herc. The filing also warns that a determination that the spin-off is taxable could create significant liabilities.
Important facts for investors to verify
- Whether U.S. rental pricing and residual-value trends stabilize, and whether higher utilization and cost savings can offset lower rates and depreciation pressure.
- How much borrowing capacity is actually usable after collateral and borrowing-base constraints, and the cash impact of the July note redemption and seasonal fleet funding.
- Progress in remediating internal-control material weaknesses and developments in restatement-related investigations, Brazil compliance matters and litigation.
- Actual Europe travel impact versus the stated $10–$15 full-year estimate, along with any effects from Brexit or further travel disruptions.
- Whether the spin-off’s tax-free treatment and shared-liability arrangements remain intact, and whether any legal or insurance exposures require additional reserves.