Hertz Global Holdings, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed February 25, 2019. The filing combines Hertz Global Holdings and its operating subsidiary, The Hertz Corporation. The period metadata says “2018 Q4,” but this is an annual 10-K; quarterly figures are noted separately below. Unless specified, amounts are U.S. dollars.
Business context and reporting period
Hertz operates vehicle rentals through Hertz, Dollar and Thrifty, with fleet leasing and management through Donlen. Its reportable segments are U.S. Rental Car (U.S. RAC), International Rental Car (International RAC) and All Other Operations, primarily Donlen. Hertz Global is the holding company; Hertz conducts nearly all operations and holds most operating assets and debt.
Key financial metrics
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Total revenue | $9.504 billion | $8.803 billion |
| Worldwide vehicle rental revenue | $8.756 billion | $8.163 billion |
| Income (loss) before tax — Hertz Global | $(257) million | $(575) million |
| Net income (loss) attributable to Hertz Global | $(225) million | $327 million |
| Diluted EPS — Hertz Global | $(2.68) | $3.94 |
| Adjusted pre-tax income (loss) — Hertz Global | $(19) million | $(210) million |
| Cash from operating activities — Hertz Global | $2.556 billion | $2.394 billion |
| Net cash used in investing activities | $(4.197) billion | $(3.000) billion |
| Total debt at year-end | $16.324 billion | $14.865 billion |
| Cash and cash equivalents at year-end | $1.127 billion | $1.072 billion |
Hertz Global reported $283 million of restricted cash in addition to cash and equivalents. Corporate liquidity, excluding unused vehicle-debt commitments, was $1.623 billion, comprising cash and $496 million available under the Senior Revolving Credit Facility. Total reported revolving-facility remaining capacity was $2.078 billion, but availability after borrowing-base limits was $587 million.
Vehicle depreciation and lease charges, net, were $2.690 billion, down 4%; direct vehicle and operating expenses were $5.355 billion, up 8%; SG&A was $1.017 billion, up 16%. Net interest expense was $739 million for Hertz Global and $732 million for Hertz. Operating cash flow was outweighed by vehicle and other investment: net revenue-earning-vehicle expenditures were $4.041 billion, versus $2.943 billion in 2017.
Material changes versus the prior comparable period
- Revenue grew 8%, with U.S. RAC revenue up 8%, International RAC up 5% (3% excluding foreign exchange), and All Other Operations up 17%.
- U.S. RAC transaction days rose 6%, Total RPD rose 1%, utilization increased to 81% from 79%, and net depreciation per unit per month fell to $276 from $327. U.S. RAC adjusted pre-tax income improved to $262 million from $13 million.
- International RAC adjusted pre-tax income was broadly stable at $204 million versus $203 million. Depreciation rose 8%, partly reflecting declining European diesel residual values.
- Company-wide adjusted pre-tax loss narrowed to $19 million from $210 million, while GAAP net income attributable to Hertz Global swung from income of $327 million to a loss of $225 million. The 2017 result included a $902 million tax benefit, substantially influenced by the Tax Cuts and Jobs Act (TCJA); 2018 included a $30 million income tax benefit for Hertz Global.
- Total debt increased $1.459 billion, driven principally by vehicle financing associated with a larger fleet and richer fleet mix. Cash, cash equivalents and restricted cash together declined to $1.410 billion from $1.504 billion.
Fourth quarter: Revenue was $2.294 billion, compared with $2.091 billion in Q4 2017. Hertz Global reported a $120 million pre-tax loss, a $101 million net loss attributable to the company and diluted loss per share of $1.20. Q4 2017 included $616 million net income attributable to Hertz Global, largely reflecting the tax-reform benefit.
Outlook, management commentary, risks and unusual items
- Management said operating cash generation, vehicle disposal proceeds, liquidity facilities and refinancing options should fund operating requirements for the next 12 months. It expected to remain within the Senior RCF and letter-of-credit covenant leverage limit of 3.00:1.00; the reported ratio at year-end was 1.39:1.00. The filing does not provide formal earnings or revenue guidance.
- Management planned to continue its multi-year IT and finance transformation through 2019. Related expense was $98 million in 2018, compared with $68 million in 2017.
- About $1.6 billion of vehicle debt and $16 million of non-vehicle debt were scheduled to mature in 2019. The company stated it intended and believed it probable it could repay or refinance obligations as appropriate. February 2019 fleet-financing extensions and issuances are described as subsequent events.
- Leverage and reliance on asset-backed and asset-based vehicle financing are central risks. Substantially all consolidated assets secure certain debt; financing access and collateral capacity may be affected by used-vehicle values, manufacturers’ repurchase obligations, credit markets and covenant compliance. Floating-rate debt also exposes results to interest rates; a hypothetical one-percentage-point increase was estimated to reduce pre-tax results by $52 million over 12 months.
- Other material risks include travel demand and seasonality, intense price competition, residual values for non-program vehicles, vehicle supply and recalls, foreign exchange, Brexit-related uncertainty, technology and cybersecurity, litigation and insurance claims, and potential future cash taxes following repeal of like-kind-exchange tax deferral.
- Hertz Global agreed to a $16 million SEC civil penalty in connection with an administrative order concerning prior reporting matters; $13.6 million was the company’s net obligation after the separation allocation. The penalty was paid in January 2019. The U.S. Attorney’s Office declined prosecution. Brazil-related local-law matters remained open, with the company noting a possible material adverse outcome despite a non-material accrual.
- The company adopted the new revenue standard in 2018; the modified-retrospective adoption reduced opening equity by $189 million, primarily related to loyalty points, and had no significant impact on 2018 operating results. It expected adoption of the new lease standard in 2019 to add $1.2–$1.6 billion of right-of-use assets and lease liabilities.
- PwC gave an unqualified opinion on the financial statements and internal control over financial reporting. Management reported effective controls and stated prior material weaknesses in risk assessment, IT controls and income-tax controls had been remediated.
Important facts for investors to verify
- Whether revenue growth and improved U.S. RAC utilization and depreciation trends persist, and whether they translate into sustained GAAP profitability and positive returns on the expanded fleet.
- Debt maturities, refinancing progress, borrowing-base availability and covenant headroom, distinguishing vehicle financing capacity from unrestricted corporate liquidity.
- Fleet residual values and used-car disposal proceeds, particularly European diesel values and exposure to non-program vehicles.
- Cash tax effects of the TCJA, including future tax payments from vehicle disposals and the realization of tax attributes.
- Developments in the SEC-related securities litigation motion, Brazil matters, public-liability reserves and other contingencies.
- Actual costs and operational benefits from the IT and finance transformation, and the balance-sheet effect of adopting the lease standard.