Hertz Global Holdings, Inc. — Q2 2023 Form 10-Q
Business and period. Hertz operates vehicle rentals globally through Hertz, Dollar and Thrifty, and sells vehicles through Hertz Car Sales. This unaudited report covers the quarter and six months ended June 30, 2023; the comparable periods are 2022. Hertz Corporation is the principal operating subsidiary. Results are seasonal, with greater activity typically in spring and summer.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $2.437B | $2.344B | $4.484B | $4.154B |
| Hertz Global net income | $139M | $940M | $335M | $1.366B |
| Hertz Corporation net income | $240M | $480M | $554M | $856M |
| Adjusted Corporate EBITDA | $347M | $764M | $584M | $1.378B |
| Operating cash flow | Not separately presented for the quarter | Not separately presented for the quarter | $1.057B | $1.330B |
Q2 Hertz Global basic and diluted EPS were both $0.44, versus $2.36 basic and $1.13 diluted in Q2 2022. The differing net income figures for Hertz Global and Hertz primarily reflect Hertz Global’s accounting for Public Warrants. Revenue increased 4% in Q2 and 8% in the first half, while Adjusted Corporate EBITDA fell 55% and 58%, respectively. Q2 Adjusted Corporate EBITDA margin was approximately 14%, compared with approximately 33% a year earlier.
Operating indicators. Q2 transaction days rose 11% in Americas RAC and 15% in International RAC; utilization increased to 83% and 78%, respectively. Americas RAC total revenue per transaction day fell 8% to $62.03, while International RAC pricing was approximately flat at $57.16. International RAC Q2 revenue increased 14%, compared with 2% growth in Americas RAC.
Cash, debt and liquidity
- At June 30, cash and cash equivalents were $682M and restricted cash was $484M. Cash and restricted cash combined totaled $1.166B, down from $1.418B at year-end 2022.
- Total debt was $16.570B, up from $13.863B at December 31, 2022: $13.100B vehicle debt and $3.470B non-vehicle debt. Operating lease liabilities were an additional $2.072B.
- Corporate liquidity, excluding unused vehicle-debt commitments, was $1.426B: $681M cash and $745M available under the First Lien revolving credit facility. Vehicle facilities showed $773M of remaining capacity, but no availability under borrowing-base limits at quarter-end.
- First-half operating cash flow was $1.057B. Vehicle purchases were $6.543B and vehicle disposal proceeds were $2.766B, producing $3.777B of net vehicle investment. Investing cash outflow was $3.725B; financing cash inflow was $2.402B.
- First-half cash interest paid was $207M on vehicle debt and $117M on non-vehicle debt. The company said it was compliant with its First Lien financial covenant and other credit agreement covenants at June 30.
Changes, outlook and material items
- Profitability pressure: Higher direct vehicle and operating costs, increased interest expense, and much lower gains on vehicle disposals weighed on earnings. Q2 net vehicle depreciation and lease charges rose to $329M from $106M; first-half charges were $710M versus $47M. The prior-year comparison benefited from larger vehicle-disposal gains.
- Demand and costs: Management attributed revenue growth to higher travel demand and rental volume. It cited higher fleet-related damage costs, increased fleet levels, vehicle acquisition costs, and higher interest rates as pressures. Americas RAC adjusted EBITDA declined to $331M from $770M in Q2; International RAC rose to $96M from $92M.
- Unusual and nonrecurring items: First-half results included a $162M gain on non-vehicle asset sales, including a $133M gain on the sale-leaseback of a Los Angeles airport location and a $29M gain from final resolution of an eminent-domain sale. Hertz Global recorded a $100M Q2 loss and $218M first-half loss from changes in Public Warrant fair value; these are noncash fair-value items. First-half tax benefit reflected, among other factors, recognition of $163M of additional ordinary loss following an IRS agreement concerning European tax restructuring, as well as electric-vehicle credits.
- Financing and capital allocation: Hertz drew on its First Lien revolving facility during Q2. It issued $800M of vehicle-backed notes in March and amended several vehicle financing facilities. Hertz Global repurchased $200M of shares in the first half under its $2B repurchase authorization; $965M remained authorized at quarter-end. Additional repurchases after quarter-end were disclosed.
- Outlook: No earnings or revenue guidance was provided in the supplied filing text. Management stated that operating cash generation, vehicle-disposal proceeds, available liquidity facilities and refinancing options were expected to fund operating activities and obligations for the next 12 months.
- Risks and contingencies: Key risks include travel demand and pricing, vehicle supply and residual values, fleet sizing and utilization, interest rates and financing access, damage and insurance costs, foreign exchange, technology and electrification execution, and litigation. Most vehicle assets are pledged or held in special-purpose entities and are not available to unsecured creditors until secured lenders are paid.
- Legal matters: An appeal remains pending over unsecured-note holders’ claims for make-whole premiums and post-petition interest (asserted at approximately $272M, or alternatively $125M plus interest); oral argument was scheduled for October 2023. A stockholder suit challenges the share-repurchase programs. Most false-arrest-related claims were settled for approximately $168M in 2022, with a small number remaining.
Important facts for investors to verify
- Whether rental demand, pricing and utilization can sustain revenue growth as 2022 comparisons normalize.
- Future vehicle depreciation and disposal gains, residual values, fleet acquisition costs and damage-related operating costs.
- Debt growth, cash interest burden, borrowing-base availability and the extent to which pledged fleet assets constrain liquidity.
- The sustainability of reported earnings apart from asset-sale gains, tax benefits and Public Warrant fair-value movements.
- Developments in the noteholder appeal, remaining false-arrest claims and share-repurchase litigation, and any resulting cash exposure.