Hertz Global Holdings, Inc. — FY 2017 Form 10-K
Reporting period: Year ended December 31, 2017; filed February 27, 2018. The combined filing covers Hertz Global Holdings and its wholly owned operating subsidiary, The Hertz Corporation, which management operates as one enterprise. Unless noted, figures below are consolidated continuing operations and in U.S. dollars.
Business context and performance
Hertz rents vehicles worldwide through the Hertz, Dollar and Thrifty brands and provides fleet leasing and management through Donlen. FY 2017 revenue was $8.803 billion, unchanged from 2016. Rental revenue was $8.163 billion, down from $8.211 billion; other operations revenue was $640 million, up from $592 million.
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $8.803 billion | $8.803 billion |
| Loss before income taxes, continuing operations | $(575) million | $(470) million |
| Income tax benefit (provision) | $902 million benefit | $(4) million provision |
| Net income (loss), continuing operations | $327 million | $(474) million |
| Adjusted pre-tax income (loss), non-GAAP | $(205) million | $66 million |
| Cash provided by operating activities | $2.394 billion | $2.529 billion |
| Cash and cash equivalents at year-end | $1.072 billion | $816 million |
| Total debt at year-end | $14.865 billion | $13.541 billion |
Reported FY 2017 net income was driven by a provisional $679 million tax benefit from the Tax Cuts and Jobs Act (TCJA), despite the pre-tax loss. The reported net margin was approximately 3.7%; the pre-tax margin was approximately negative 6.5%. Adjusted pre-tax loss is a company-defined non-GAAP measure and should not be treated as a substitute for GAAP results.
Segments and changes from the prior year
- U.S. Rental Car: Revenue fell 2% to $5.994 billion; transaction days declined 1%, Total Revenue per Transaction Day (RPD) fell 1%, and adjusted pre-tax income dropped to $13 million from $298 million. Net depreciation per unit per month rose 9% to $327, reflecting vehicle mix, lower residual values and shorter holding periods.
- International Rental Car: Revenue rose 3% to $2.169 billion, including a $33 million favorable foreign-exchange effect; constant-currency revenue increased 2%. Adjusted pre-tax income was $203 million versus $194 million. Higher rental volume was partly offset by 1% lower RPD.
- All Other Operations, primarily Donlen: Revenue increased 8% to $640 million; adjusted pre-tax income increased to $80 million from $72 million, supported by leasing and services growth.
- Vehicle depreciation and lease charges increased 8% to $2.798 billion. Goodwill and intangible impairment charges fell to $86 million from $292 million; 2017 charges principally reflected impairment of the Dollar Thrifty tradenames. IT and finance transformation costs increased to $68 million from $53 million.
Cash flow, debt and liquidity
Operating cash flow was $2.394 billion. Investing activities used $3.147 billion, including $2.943 billion of net revenue-earning vehicle expenditures; financing activities provided $988 million. Cash increased $256 million during the year. Restricted cash was an additional $432 million and is not freely available for general use.
Total debt was $14.865 billion: $10.431 billion of vehicle debt and $4.434 billion of non-vehicle debt. Reported corporate liquidity was $1.624 billion, comprising cash and $552 million available under the Senior Revolving Credit Facility. Total remaining capacity across listed revolving facilities was $2.945 billion, but availability subject to borrowing-base limits was $569 million. Substantially all revenue-earning vehicles and certain other assets secure financing and are not available to general creditors.
At December 31, 2017, the company reported compliance with its 3.00-to-1.00 first-lien net leverage covenant, with a covenant ratio of 1.90-to-1.00. Approximately $2.2 billion of vehicle debt and $25 million of non-vehicle debt were due within the twelve months after filing; management said it expected to repay or refinance maturities and believed available cash, vehicle-sale proceeds and financing would cover requirements. In January 2018, the company issued approximately $1.1 billion of vehicle asset-backed notes, with $1.0 billion placed with third parties, and used proceeds to reduce outstanding revolving notes.
Outlook, risks and unusual items
- Management provided no specific revenue or earnings forecast in the supplied filing text. It stated that liquidity should be sufficient for operating requirements over the next twelve months. Management expected IT and finance transformation spending to continue increasing in 2018, with most program charges expected to be complete in 2019.
- The TCJA reduced the U.S. corporate tax rate to 21%, repealed like-kind-exchange tax deferral for personal property, and introduced other tax changes. Hertz recorded a provisional $679 million net tax benefit; its accounting for certain provisions, including GILTI and BEAT, remained incomplete and was to be finalized in 2018. Future cash taxes could be affected by repeal of like-kind-exchange deferrals and the scheduled phase-down of bonus depreciation.
- Key operating exposures include intense price competition, seasonal and travel-related demand, vehicle acquisition costs and used-car residual values, fleet utilization, manufacturer repurchase commitments and recalls, and reliance on secured vehicle financing. A one-percentage-point interest-rate increase was estimated to reduce pre-tax operating results by $44 million over twelve months.
- Hertz recorded approximately $16 million of hurricane-related expenses, net of expected insurance recoveries. It sold its Brazil operations to Localiza for $115 million, including $13 million held in escrow, and recognized a $6 million pre-tax gain.
- Material weaknesses in internal control over financial reporting remained at year-end, involving risk assessment, certain IT controls and income-tax accounting. Management and the auditor concluded internal control was not effective; the auditor nevertheless gave an unqualified opinion on the financial statements. Remediation remained ongoing.
- Legal and regulatory exposures include an SEC investigation and communications with the U.S. Attorney’s Office concerning prior financial reporting, self-reported potential Foreign Corrupt Practices Act issues in Brazil, and an appeal in securities litigation. The filing says the potential loss range for the government matters could not be estimated and an adverse outcome could be material. A separate Ryanair dispute was settled in February 2018 without payment by either side.
Most important facts for investors to verify
- Whether operating performance improves without reliance on the large, provisional TCJA tax benefit, particularly U.S. RAC profitability and vehicle depreciation/residual values.
- Debt refinancing progress and borrowing-base availability, given substantial leverage, near-term maturities and collateral encumbrances.
- Progress in remediating the disclosed material weaknesses, especially IT access/change controls and tax accounting controls.
- Final TCJA accounting and the resulting cash-tax consequences as like-kind-exchange deferrals end and bonus depreciation phases down.
- Developments, potential costs and any new accruals relating to the SEC/DOJ matters, Brazil compliance issues, securities litigation and other contingencies.