Hertz Global Holdings, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; unaudited. Hertz Global is the holding company; its operating subsidiary, The Hertz Corporation, represents nearly all consolidated operations. Unless noted, amounts below are in U.S. dollars and millions.
Financial and operating performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $2,511 | $2,389 | $4,618 | $4,452 |
| Income (loss) before tax | $44 | ($86) | ($104) | ($317) |
| Net income (loss) attributable to Hertz Global | $38 | ($63) | ($108) | ($265) |
| Basic and diluted EPS | $0.40 | ($0.66) | ($1.13) | ($2.78) |
| Operating cash flow | Not separately reported for Q2 | $1,054 | $942 | |
| Adjusted Corporate EBITDA (non-GAAP) | $207 | $93 | $203 | $33 |
Revenue grew 5% in Q2 and 4% in the first half. Approximate net margin, calculated as net income attributable to Hertz Global divided by revenue, was 1.5% in Q2 2019 versus (2.6)% in Q2 2018; for the first half it was (2.3)% versus (5.9)%. Adjusted Corporate EBITDA margin was approximately 8.2% in Q2 versus 3.9%, and 4.4% for the first half versus 0.7%. These EBITDA figures are non-GAAP and should not be viewed as substitutes for GAAP results.
Segment trends: U.S. Rental Car revenue increased 10% in Q2 and 8% in the first half; segment Adjusted EBITDA was $156 and $163, respectively, versus $18 and a $30 loss. Q2 U.S. transaction days rose 6%, pricing (Total RPD) rose 3%, and utilization improved to 82% from 81%. International Rental Car revenue declined 5% in Q2 and 6% in the first half, largely reflecting foreign exchange; excluding FX, revenue was flat. Its Adjusted EBITDA declined to $56 in Q2 and $42 for the first half from $81 in each comparable period. Donlen-led All Other Operations generated Adjusted EBITDA of $24 in Q2 and $45 in the first half.
Vehicle depreciation and lease charges fell 8% in Q2 and 9% in the first half. U.S. depreciation per unit per month declined 13% in Q2 to $247 and 14% in the first half to $251, which management attributed primarily to vehicle acquisition strategy and stronger residual values. Higher U.S. rental volume and pricing supported results, while direct operating costs rose with volume. First-half vehicle interest expense increased with higher average fleet and market rates.
Cash, debt, and liquidity
- At June 30, cash and cash equivalents were $415; restricted cash was $239. Combined cash and restricted cash was $654, down from $1,410 at year-end 2018.
- Total debt was $19,347, including $14,919 of vehicle debt and $4,428 of non-vehicle debt, versus $16,324 at year-end. Operating lease liabilities, newly recognized under Topic 842, were $1,538. Total assets were $26,354 and stockholders’ equity was $1,070.
- First-half operating cash flow was $1,054. Investing cash outflow was $4,832, including $8,947 of vehicle purchases and $4,212 of vehicle-sale proceeds. Financing cash inflow was $3,023. Net vehicle capital expenditures were $4,735.
- Corporate liquidity, defined by the company as cash plus availability under the Senior RCF and excluding unused vehicle-debt commitments, was $812. Total stated facility availability under borrowing-base limits was $416; facility remaining capacity before borrowing-base limits was $1,495. These measures are not interchangeable.
- Hertz described itself as highly leveraged. It reported compliance with its 3.00-to-1.00 first-lien net leverage covenant at quarter-end and expected continued compliance for at least 12 months. Management believed operating cash, vehicle-sale proceeds, facilities, and refinancing options would fund requirements for the next 12 months.
Outlook, material developments, and risks
- No specific earnings or revenue guidance is provided. Management’s liquidity and covenant statements are expectations, not guarantees. Results are seasonal, with higher rental activity and fleet needs generally in the second and third quarters.
- The July 2019 rights offering was fully subscribed, raising $750 million gross through 57.9 million new shares at $12.95 per share. In August, Hertz issued $500 million of 7.125% senior notes due 2026; it intended to use those proceeds and rights-offering proceeds to redeem its 2020 and 2021 notes. The redemptions were conditional, with an anticipated date of August 11, 2019, or later subject to stated conditions.
- Hertz cited approximately $2.7 billion of vehicle debt and $20 million of non-vehicle debt maturing from July 2019 through June 2020 as of June 30; excluding the contemplated note redemptions, the MD&A later cited about $2.3 billion and $18 million, respectively, over the 12 months after the report. The company said it intended and expected to refinance or repay obligations as appropriate.
- Topic 842 lease accounting was adopted January 1, 2019, adding lease assets and liabilities; management said adoption did not affect results or cash flows. The company also changed its segment profitability measure to Adjusted EBITDA and revised 2018 segment comparisons.
- Key risks include substantial debt and refinancing needs, vehicle residual-value and purchase-cost changes, interest rates, demand and pricing competition, fleet sizing, peak-season disruptions, foreign exchange, litigation and investigations, insurance claims, and technology, cybersecurity, and operational continuity. Most revenue-earning vehicles and related assets are pledged or held by special-purpose entities and are unavailable to general creditors.
- Contingencies include a $426 million public-liability and property-damage reserve, which is subject to estimation uncertainty; ongoing Brazil local-law matters with a nonmaterial accrued contingency; a pending motion seeking reinstatement of a securities case previously dismissed; and company litigation against former executives seeking compensation and other recoveries. The filing warns adverse outcomes in some matters could exceed recorded amounts.
- Related-party matters include purchases from Icahn-affiliated entities and the consolidated 767 Auto Leasing LLC vehicle-rental arrangement. The filing reports $45 million of contributions by an Icahn-affiliated entity to 767 in the first half.
Investor facts to verify
- Whether the planned 2020 and 2021 note redemptions closed on the stated terms, and how the rights offering and 2026 notes changed debt, interest expense, and share count.
- Current vehicle-debt refinancing requirements, borrowing-base availability, and unrestricted liquidity; restricted cash and collateralized fleet assets are not freely available to all creditors.
- Whether U.S. revenue, pricing, utilization, and lower vehicle depreciation remain sustainable, and whether International RAC profitability stabilizes.
- Developments in residual values, self-insured claims reserves, the securities-litigation motion, Brazil matters, and former-executive litigation.
- The quality of reported improvement: compare GAAP earnings and cash flows with non-GAAP Adjusted EBITDA and account for gains on marketable securities and asset sales.