Hertz Global Holdings, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Hertz Global and its principal operating subsidiary, The Hertz Corporation, reported results for the period in which they emerged from Chapter 11 on June 30. Unless noted, financial amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $1.873 billion | $832 million | $3.161 billion | $2.755 billion |
| Hertz Global net income (loss) attributable to parent | $(168) million | $(847) million | $21 million | $(1.203) billion |
| Hertz Global basic and diluted EPS | $(1.05) | $(5.86) | $0.13 | $(8.39) |
| Adjusted EBITDA, a non-GAAP measure | $639 million | $(587) million | $642 million | $(830) million |
| Operating cash flow | Not provided for the quarter | $465 million | $626 million |
Q2 revenue increased 125% year over year, reflecting rebounding travel and higher rental pricing against a severely disrupted 2020 comparison. The Q2 GAAP loss included $633 million of Hertz Global reorganization expense, principally bankruptcy-related fees, debt extinguishment costs, a prior plan sponsor breakup fee and the backstop fee. For Hertz Corporation alone, Q2 net loss was $5 million and first-half net income was $183 million; its reorganization expense was $469 million in Q2 and $513 million in the first half.
Q2 Americas RAC revenue was $1.643 billion and Adjusted EBITDA was $664 million, compared with revenue of $543 million and an EBITDA loss of $485 million a year earlier. Americas RAC Total RPD rose 72% to $65.42 and vehicle utilization was 78%, versus 28%. International RAC Q2 revenue rose 84% to $230 million; Adjusted EBITDA improved to a $1 million loss from a $112 million loss. For the first half, International RAC revenue fell 8% to $415 million and transaction days declined 22%.
At June 30, Hertz Global reported $1.820 billion of unrestricted cash and $875 million of restricted cash; corporate liquidity, including $1.185 billion available under the First Lien revolving credit facility, was $3.005 billion. Total debt was $8.549 billion, including $7.035 billion of vehicle debt and $1.514 billion of non-vehicle debt. Net operating cash flow was $465 million for the first half; investing cash outflow was $2.316 billion, including $4.136 billion of vehicle purchases and $1.199 billion of vehicle disposal proceeds. Financing cash inflow was $2.976 billion.
Total assets were $19.007 billion at June 30, versus $16.908 billion at December 31, 2020. Stockholders’ equity was $3.639 billion, with an additional $1.433 billion of preferred stock classified as mezzanine equity. Vehicle assets are substantially pledged or held in special-purpose entities and are not generally available to unsecured creditors unless secured lenders are paid in full.
Material changes and emergence from Chapter 11
- The company emerged from Chapter 11 on June 30 after plan confirmation on June 10. Management stated that emergence removed substantial doubt about the company’s ability to continue as a going concern.
- Emergence generated approximately $7.5 billion of cash proceeds from sponsor and other common-equity investments, the rights offering, preferred stock and exit term loans. The proceeds funded creditor payments, refinancing, fees and working capital.
- Old Hertz Global equity was cancelled. Reorganized Hertz Global issued approximately 471.1 million common shares and 1.5 million Series A preferred shares. It also issued 89.0 million public warrants with a $13.80 initial exercise price and a 30-year term; the warrants were recorded as an $800 million liability at issuance.
- New facilities included $1.5 billion of term loans, a $1.3 billion First Lien RCF, and the $6.8 billion HVF III vehicle ABS program. The new term loans mature in 2028; the RCF matures in 2026. First-half results also included a $400 million gain on the March 30 sale of Donlen, subject to post-closing adjustments.
Outlook, risks and unusual items
Management reported improving travel demand and pricing, with demand appearing to accelerate into Q3. It expected demand and pricing to remain stronger for the rest of 2021, particularly if business travel recovered, but qualified this outlook on the absence of a material COVID-19 resurgence. No quantified revenue, earnings or cash-flow guidance was provided. Management said cash, operating cash generation, vehicle-sale proceeds and financing availability should fund operating requirements for the next 12 months.
- The semiconductor chip shortage constrained new-vehicle supply and could continue through Q1 2022, potentially raising acquisition and maintenance costs. The company bought used vehicles to support fleet capacity and reported $4.136 billion of vehicle purchases in the first half.
- COVID-19 variants, renewed travel restrictions, uneven international recovery, seasonality and competition could reverse demand or pricing gains. Fleet residual values and the ability to finance or dispose of vehicles are important sensitivities.
- Credit agreement financial covenants begin in Q3 2021: minimum liquidity requirements apply during the relief period; afterward, first-lien leverage limits apply. The company reported $1.374 billion of total facility availability under borrowing-base limits, including vehicle facilities.
- Hertz Global faces a disputed creditor action seeking $271.7 million plus interest for alleged note redemption premiums and post-petition interest, or alternatively $124.5 million plus interest. The company disputes liability and moved to dismiss; it cannot predict the outcome. Other creditors may assert additional claims.
- The Series A preferred stock has senior liquidation rights, compounding cash dividends if unpaid and an approximate 1.30x minimum redemption multiple; holders are entitled generally to an overall return of approximately 30% on investment.
- Disclosure controls were reported ineffective because of an unresolved material weakness in IT general controls. Remediation was ongoing and had not been demonstrated effective.
- Goodwill and indefinite-lived tradenames were not impaired in Q2, but the filing notes future impairment could be material if operating assumptions, cash flows or financing costs worsen. The company also disclosed potential restrictions on use of tax attributes following the ownership change.
Important facts for investors to verify
- Whether post-emergence travel demand, pricing and fleet utilization persist, and whether the chip shortage limits fleet growth or increases costs.
- Cash availability and borrowing-base capacity after restricted cash, vehicle-fleet collateral requirements, letters of credit and new covenant testing are considered.
- The final outcome and potential financial exposure from the noteholder premiums and post-petition interest litigation and any other creditor claims.
- The economic and dilution effects of the Series A preferred stock, public warrants and any future management equity incentive plan.
- Progress in remediating the ITGC material weakness and any subsequent impairment, tax-attribute or liquidity developments.