Hertz Global Holdings, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Hertz Global is the holding company; The Hertz Corporation accounts for nearly all consolidated operating activity. The company rents vehicles under the Hertz, Dollar and Thrifty brands. Donlen, its fleet-leasing business, was sold on March 30, 2021.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $2.226 billion | $1.268 billion | $5.387 billion | $4.023 billion |
| Net income (loss), Hertz Global | $608 million | ($223 million) | $627 million | ($1.432 billion) |
| Net income (loss) available to common shareholders | $571 million | ($222 million) | $592 million | ($1.425 billion) |
| Adjusted EBITDA | $860 million | ($26 million) | $1.502 billion | ($855 million) |
| Net cash from operating activities | Not presented quarterly | Not presented quarterly | $1.208 billion | $928 million |
Q3 revenue increased 75% year over year, reflecting stronger travel demand and higher pricing. Americas RAC revenue was $1.914 billion, up from $892 million; International RAC revenue was $312 million, up from $227 million. Segment Adjusted EBITDA was $830 million in Americas and $78 million in International. Q3 basic and diluted earnings per share were $1.21 and $1.13, respectively.
For the first nine months, revenue grew 34%. Net income included a $400 million gain on the Donlen sale; results also reflected $677 million of reorganization items and a $16 million gain from changes in the fair value of Public Warrants. The reported profit therefore includes material nonrecurring and non-operating items.
Q3 total revenue was approximately 34.5% of revenue as net income and 38.6% as Adjusted EBITDA; these are simple calculated ratios, not company-reported margins. Direct vehicle and operating expense was $1.131 billion in Q3, or about 50.8% of revenue. Vehicle depreciation and lease charges fell to $61 million from $347 million, helped by stronger used-vehicle residual values and constrained new-vehicle supply.
Cash, debt and liquidity
- At September 30, unrestricted cash and cash equivalents were $2.703 billion; restricted cash was $763 million. Corporate liquidity, including $1.144 billion available under the First Lien revolving credit facility, was $3.847 billion.
- Total debt was $8.718 billion: $7.207 billion of vehicle debt and $1.511 billion of non-vehicle debt. The company also reported $1.402 billion of operating lease liabilities and a $783 million Public Warrant liability.
- Nine-month investing cash outflow was $2.440 billion, including $5.196 billion of vehicle purchases and $1.945 billion of vehicle disposal proceeds; the Donlen sale generated $871 million net cash proceeds. Financing activities provided $3.142 billion.
- Management said available cash, operating cash generation, vehicle-sale proceeds and financing capacity should fund operating requirements for the next 12 months. The company reported compliance with its First Lien Credit Agreement covenants at quarter-end.
Changes and significant transactions
- The company emerged from Chapter 11 on June 30, 2021. It reported $7.5 billion of gross proceeds from new common and preferred equity and exit term loans, and repaid or terminated substantially all pre-emergence non-vehicle debt and prior U.S. vehicle ABS facilities.
- New financing included $1.5 billion of term loans, a $1.3 billion revolving facility and the HVF III vehicle ABS program, with up to $6.8 billion in aggregate principal capacity. Quarter-end debt was higher than December 2020, but the prior balance sheet included liabilities subject to compromise that were resolved through the reorganization.
- The Donlen sale produced a $400 million pretax gain. Reorganization items were $677 million for Hertz Global over nine months, including professional fees, debt-extinguishment losses, a $164 million backstop fee and a $77 million breakup fee.
- Existing equity was cancelled at emergence and reorganized common stock issued. Apollo received $1.5 billion of Series A preferred stock, accruing dividends at 9% annually before June 30, 2023; $34 million of dividends had accumulated by September 30. Cash payments, including dividends, are restricted before June 30, 2023 under the credit agreement.
Outlook, commentary and risks
- No specific earnings or revenue guidance is provided. Management described a strong rebound in travel, particularly U.S. domestic leisure travel, while noting uncertainty from COVID-19 and its variants.
- The global semiconductor shortage constrained new-vehicle production, affected fleet availability and contributed to higher rental pricing. Management said the shortage could continue through the first quarter of 2022 and could raise acquisition costs.
- In October 2021, Hertz announced plans to expand electric-vehicle rentals, support EV access for rideshare drivers and digitize vehicle disposition. Execution, vehicle supply, infrastructure, maintenance, residual values and customer demand are identified risks.
- International RAC restructuring affected approximately 700 employees and was expected to be completed within 12 months. The company also cited risks from substantial debt, variable rates, fleet financing access, residual values, litigation, and potential goodwill or intangible-asset impairment.
- A trustee for former unsecured notes sought a declaratory judgment concerning additional redemption premiums and post-petition interest, alleging $271.7 million, or alternatively $124.5 million plus interest. Hertz disputes the claims; the filing says outcome and timing are uncertain. Other creditors may assert additional interest or premiums.
- Disclosure controls were reported ineffective because of an existing material weakness in IT general controls. Remediation was ongoing and was not yet considered complete.
Most important facts for investors to verify
- Whether the travel rebound and elevated rental pricing persist as travel conditions and vehicle supply change.
- Cash generation, fleet acquisition costs and the company’s ability to maintain vehicle financing and covenant compliance.
- The outcome and potential financial exposure from the noteholder premium and post-petition interest litigation.
- Preferred-stock dividend accruals, redemption terms and their priority relative to common equity.
- Progress in remediating the IT-controls material weakness and any effects on financial reporting.
- Whether the Donlen gain and other emergence-related items obscure recurring operating performance; compare GAAP results with the company’s Adjusted EBITDA reconciliation.