Hertz Falls on Restatement, Weak Rentals Crimping Results
Hertz Global Holdings Inc. (HTZ), the car-and equipment-rental company that’s splitting in two, tumbled the most in seven months after saying it needs to fix three years of accounting and that quarterly results won’t meet consensus estimates on weak car-rental revenue.
The shares slumped 9.1 percent to $27.73 at the close in New York for the biggest one-day drop since Nov. 5. The stock has dropped 3.1 percent this year.
Hertz’s audit committee said financial statements for 2011 can’t be relied upon and should be restated, which will also require corrections to its 2012 and 2013 reports, according to a regulatory filing today. Hertz, based in Naples, Florida, will conduct a “thorough” review of all three years, which could result in material adjustments for the last two years.
“There’s clearly something deeper going on than we’ve seen,” said Maryann Keller, an auto-industry consultant and former director of Dollar Thrifty Automotive Group Inc., which Hertz acquired in 2012. “We have no idea what we’re dealing with here, no idea what this company’s financial condition is, what the past level of profitability is, and no basis on which to judge what its future profitability may be.”
Hertz also said first-quarter U.S. daily car-rental revenue fell 1.6 percent from a year earlier, including its new Firefly discount brand, as it carried excess fleet. The company’s namesake brand airport rentals rose 1 percent, according to the filing. Analysts had projected first-quarter earnings per share excluding certain items of 9 cents on revenue of $2.55 billion, according to data compiled by Bloomberg.
Hertz said it found errors while preparing its first quarter financials that included the capitalization and timing of depreciation for “certain non-fleet assets.” The company also said it found other mistakes in how it accounted for money it couldn’t collect from renters who damaged their rentals.
Hertz in recent years increased the number of cars it bought from automakers for its fleet. In the past, the company acquired most of the cars from the automakers and sold them back months later at predetermined prices.
Acquiring Dollar Thrifty expanded their fleet of owned cars, which requires a higher degree of expertise and management, Keller said.
While the accounting problems may delay the spinoff of its equipment-rental unit, originally planned for early next year, the move to separate the business remains on track, the company said. In that transaction, the car-rental business will keep the name Hertz and get cash proceeds of about $2.5 billion to pay down debt and support a $1 billion share buyback.
The cost to protect Hertz’s bonds against losses for five years rose 19 basis points to 204 basis points at 3:33 p.m. in New York, the highest intraday level since May 15, according to data provider CMA, which is owned by McGraw Hill Financial Inc. and compiles prices quoted by dealers in the privately negotiated market.
Hertz said today it is strengthening its accounting and finance departments by adding new personnel. Tom Kennedy, who took over as Hertz’s chief financial officer in December from Elyse Douglas, is leading that process.
The company said in September that Douglas wasn’t able to relocate to Florida from New Jersey with the rest of Hertz’s headquarters staff. She had been CFO since 2007 and received a severance of $3.75 million last year, according to a regulatory filing.
At their current level, “there is a great deal of unrealized value in HTZ shares,” Colin Daddino, an equity analyst with Gabelli & Co., wrote in a note today.
“While the continuing and increased accounting issues make us apprehensive, we would point out that so far they are all non-cash and non-fleet issues,” said Daddino, who has a buy rating on the shares.
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