Hertz Global Holdings, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Hertz Global’s results largely reflect its operating subsidiary, The Hertz Corporation. Both reported as debtors-in-possession after filing Chapter 11 petitions on May 22, 2020.
Business context and financial performance
COVID-19 travel restrictions sharply reduced rental demand during the normally strong spring and summer period. Unless otherwise stated, figures below are in U.S. dollars and millions.
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $832 | $2,511 | $2,755 | $4,618 |
| Net income (loss) attributable to Hertz Global | $(847) | $38 | $(1,203) | $(108) |
| Diluted earnings (loss) per share | $(5.86) | $0.40 | $(8.39) | $(1.13) |
| Adjusted EBITDA | $(587) | $207 | $(830) | $203 |
| Operating cash flow | Not separately provided for the quarter | $626 | $1,054 |
- Q2 revenue fell 67%; first-half revenue fell 40%. Worldwide vehicle rental revenue was $668 in Q2 versus $2,344 a year earlier. All other operations revenue was $164 versus $167.
- Q2 expenses included $193 of technology-related asset impairments and $23 of Chapter 11 reorganization costs. Hertz also recorded a $133 write-off of an intercompany loan; this was specific to The Hertz Corporation.
- First-half interest expense, net, was $351 for Hertz Global, compared with $382 a year earlier. Interest on certain non-vehicle debt was suspended after the bankruptcy filing.
Liquidity, debt and balance sheet
- At June 30, Hertz Global had $1.366 billion of unrestricted cash and $945 million of restricted cash and cash equivalents. Total cash including restricted amounts was $2.311 billion. Restricted cash is not freely available for general operations.
- Reported debt not subject to compromise was $12.982 billion, including $12.924 billion of vehicle debt. A further $4.312 billion of non-vehicle debt was classified as liabilities subject to compromise. These are separate balance-sheet classifications; the filing reports $17.405 billion of total nominal unpaid principal across vehicle and non-vehicle debt.
- Total liabilities subject to compromise were $4.912 billion for Hertz Global. They include pre-petition obligations whose amounts and ultimate settlement remain subject to the bankruptcy process.
- At June 30, total assets were $23.116 billion and stockholders’ equity was $673 million, down from $1.888 billion at December 31, 2019. Net revenue-earning vehicles declined to $12.065 billion from $13.789 billion.
- Almost all revolving-facility capacity was terminated following the Chapter 11 filing. The filing showed only $98 million of remaining vehicle-facility capacity and $2 million available under borrowing-base limits.
- First-half investing cash flow was positive $100 million, reflecting vehicle disposal proceeds broadly matching vehicle expenditures. Financing cash flow was positive $222 million. Total cash, including restricted cash, increased $951 million during the half.
Material changes and operating trends
- U.S. Rental Car revenue declined 70% in Q2 and 42% in the first half. Q2 transaction days fell 69%, total revenue per transaction day fell 10%, and vehicle utilization dropped to 28% from 82%.
- International Rental Car revenue declined 76% in Q2 and 49% in the first half. Q2 transaction days fell 68%, revenue per transaction day fell 24%, and utilization fell to 36% from 77%.
- Segment direct vehicle and operating expenses remained high relative to sharply reduced revenue: 105% of U.S. Rental Car revenue and 101% of International Rental Car revenue in Q2, versus 59% for each segment a year earlier.
- Management reduced U.S. vehicle purchase commitments by approximately $4.0 billion, cut Q2 vehicle expenditures by 88% year over year, and reduced non-vehicle capital expenditures by 80%. Approximately 20,000 employees were furloughed worldwide; a restructuring program affected approximately 11,000 U.S. rental-car and corporate employees.
- Management cited strong residual values as supporting higher U.S. vehicle sales during Q2, while warning that used-vehicle values and fleet disposal conditions could change.
Outlook, bankruptcy developments and risks
- Management estimated that June 30 unrestricted cash would fund operations through approximately December 31, 2020, assuming no unforeseen liquidity needs. It warned that cash and operating cash generation would not fund the next 12 months if international debt waivers were not extended, a reorganization plan could not be implemented, and major markets did not recover significantly. The company was seeking debtor-in-possession financing and additional vehicle financing.
- A July 24, 2020 court order required $650 million of base-rent payments in six monthly installments of approximately $108 million from July through December, and disposition of at least 182,521 lease vehicles by year-end, with proceeds generally directed to lease-related debt. Approximately 100,000 such vehicles had been disposed of by July 31.
- Waivers for certain European vehicle notes, European ABS and U.K. financing were due to expire September 30, 2020; the filing does not establish whether they would be extended. Other facility defaults and amortization events restrict the company’s access to financing and vehicle-sale proceeds.
- The filing states that substantial doubt exists about the company’s ability to continue as a going concern within one year from the report’s issuance. Outcomes depend on the Chapter 11 process, liquidity, financing access, travel demand and vehicle values. No quantified operating guidance was provided.
- Hertz warned that common stock could be cancelled or become worthless in reorganization unless senior claims are paid in full. NYSE delisting proceedings were under appeal, with a hearing scheduled for October 15, 2020.
- Other risks include potential further goodwill or intangible impairments, uncertainty in vehicle depreciation and self-insurance estimates, possible limits on tax attributes following a potential ownership change, and legal claims whose outcomes may not be predictable.
Investor verification priorities
- Track Chapter 11 developments, including the proposed reorganization, creditor recoveries, any DIP financing and the treatment of existing equity.
- Verify liquidity against cash burn, restricted-cash availability, required rent payments and vehicle-sale proceeds directed to secured debt.
- Confirm extensions or replacement arrangements for international financing waivers expiring September 30, 2020, and monitor remaining access to fleet financing.
- Monitor rental demand, transaction days, pricing, utilization and used-vehicle residual values, particularly through the third quarter and peak season.
- Assess the final allowed amounts of liabilities subject to compromise, further impairment exposure and any material changes in the going-concern assessment.