Business Context and Reporting Period
This Form 8-K, filed on November 14, 2014, covers events occurring on November 10, 2014, for Hertz Global Holdings, Inc. and The Hertz Corporation. The filing addresses a significant accounting restatement, executive compensation changes, debt covenant waivers, and strategic fleet adjustments.
Key Financial Metrics and Restatement Impact
The filing details material accounting errors requiring the restatement of financial statements for 2011, 2012, and 2013. The filing does not provide current period revenue, cash flow, or liquidity figures, but quantifies the cumulative impact of errors on historical income:
| Year Ended Dec 31 | 2011 | 2012 | 2013 |
|---|---|---|---|
| Cumulative Error: Pre-tax Income | $(49) million | $(59) million | $(30) million |
| Cumulative Error: Net Income | $(32) million | $(35) million | $(20) million |
| Error as % of Pre-tax Income | (15)% | (13)% | (5)% |
| Error as % of Net Income | (18)% | (14)% | (6)% |
Errors relate to capitalization of non-fleet assets, depreciation timing, allowances for doubtful accounts (Brazil), uncollectible renter obligations, and lease restoration obligations.
Material Changes and Operational Updates
- Restatement Status: The Audit Committee concluded that 2012 and 2013 financial statements must be restated in addition to 2011. The company expects to file updated statements no earlier than mid-2015.
- Internal Controls: Management identified at least one material weakness in internal controls over financial reporting. The company expects an adverse opinion from PricewaterhouseCoopers LLP for the period ended December 31, 2013.
- Executive Compensation: Brian MacDonald was appointed Interim Chief Executive Officer on November 10, 2014. His compensation package includes a $1.1 million base salary, a $500,000 special cash incentive, a target bonus of 130% of base salary, and a special grant of 23,000 restricted stock units.
- Debt Waivers: The company obtained waivers from lenders regarding defaults arising from late filings and accounting issues. These waivers are effective through June 30, 2015, for most facilities, with some extending to December 31, 2014.
- Fleet Strategy: Hertz is increasing its U.S. vehicle purchases for model year 2015 to roughly 350,000 units (60% increase over 2014). The risk vehicle portion of the fleet is expected to drop to 70% in 2015 from 85% in 2014.
Guidance, Risks, and Contingencies
- SEC Investigation: The SEC New York Regional Office is investigating the events disclosed in the company's filings. The company is cooperating.
- Business Separation: Plans to separate the equipment rental business are delayed until the accounting review is complete and updated financial statements are filed.
- Debt Remedies: The company expects to seek additional waivers from lenders under the Senior Term Facility regarding defaults related to the restatement and late filings. There is a risk that lenders may exercise other remedies.
- Forward-Looking Uncertainty: Actual results may differ materially due to the ongoing review of financial records, the ability to remediate internal control weaknesses, and the outcome of the SEC inquiry.
Investor Verification Checklist
- Verify the timeline for the completion of the accounting review and the filing of restated 2012 and 2013 financial statements (expected mid-2015).
- Confirm the status of debt covenant waivers and whether lenders have granted extensions beyond June 30, 2015.
- Monitor the outcome of the SEC investigation regarding the accounting errors and internal control failures.
- Review the final terms of the separation of the equipment rental business once the accounting review concludes.
- Assess the impact of the increased fleet purchase volume (350,000 units) on future capital expenditures and liquidity.