Hertz Global Holdings, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Hertz Global is the holding company; Hertz Corporation comprises nearly all consolidated operations. The companies were operating as debtors-in-possession after filing Chapter 11 petitions on May 22, 2020.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $1.268 billion | $2.836 billion | $4.023 billion | $7.454 billion |
| Net income (loss) attributable to Hertz Global | $(222) million | $169 million | $(1.425) billion | $61 million |
| Adjusted Corporate EBITDA | $(26) million | $392 million | $(855) million | $595 million |
| Net interest expense | $127 million | $204 million | $478 million | $586 million |
- Revenue fell 55% in Q3 and 46% year to date, principally because of reduced travel and rental demand. Q3 U.S. Rental Car revenue declined 56%; International Rental Car revenue declined 64%.
- Q3 U.S. Rental Car vehicle utilization was 52%, down from 79%; International utilization was 65%, down from 80%. Transaction days declined 57% and 60%, respectively.
- Cost ratios worsened as volumes contracted: direct vehicle and operating expense was 75% of U.S. RAC revenue in Q3 versus 56% a year earlier, and 71% of International RAC revenue versus 55%. SG&A was 5% of U.S. RAC revenue versus 6%, and 22% of International RAC revenue versus 9%.
- Q3 depreciation of rental vehicles and lease charges was $347 million, down 48%. Lower fleet levels and stronger residual values contributed to the decline. Nine-month results included a $193 million technology-related asset impairment and a $133 million write-off of an intercompany loan at Hertz.
- At September 30, cash and cash equivalents were $1.137 billion, including approximately $1.1 billion unrestricted; restricted cash was $745 million at Hertz Global. Nine-month operating cash flow was $928 million, investing cash flow was $3.622 billion, and financing cash outflow was $4.046 billion. Vehicle sales proceeds and sharply reduced vehicle purchases drove positive investing cash flow.
- Balance-sheet debt was $8.771 billion, compared with $17.089 billion at year-end 2019. Separately, $5.001 billion of Hertz Global liabilities were subject to compromise, including $4.404 billion of non-vehicle debt. Total stockholders’ equity was $400 million, down from $1.888 billion at year-end.
Material changes and developments
- COVID-19 sharply reduced travel, bookings, rental volume and revenue. Management furloughed approximately 20,000 employees worldwide and began a restructuring affecting approximately 11,000 U.S. RAC and corporate employees.
- The fleet and spending response included reducing U.S. RAC vehicle purchase commitments by approximately $4.0 billion, substantially cutting capital expenditures, and disposing of vehicles. The company disposed of approximately 165,000 vehicles associated with the court’s lease order through September 30.
- The July interim lease order required $650 million of base rent in six monthly payments through December 2020 and disposal of at least 182,521 lease vehicles by year-end, with disposition proceeds applied as specified by the order.
- Almost all revolving credit capacity was terminated or unavailable following the Chapter 11 filing. Remaining reported vehicle-facility capacity was $480 million, but availability under borrowing-base limits was only $2 million.
- After quarter-end, Hertz entered into a court-authorized DIP credit agreement for up to $1.65 billion. A separate $4 billion fleet-financing commitment was announced November 5, subject to Bankruptcy Court approval; the filing said this and eligible DIP proceeds could provide up to $5 billion for fleet financing.
Outlook, risks and unusual items
- Management said September 30 unrestricted cash was expected to fund operations through approximately December 31, 2020, absent unforeseen liquidity needs. It warned that cash and operating cash generation would not fund the next twelve months if international debt waivers were not extended, a reorganization plan could not be implemented, and major-market conditions did not significantly recover.
- The filing states that substantial doubt exists about the company’s ability to continue as a going concern for one year from the report’s issuance date. Continued operations depend on a successful reorganization and adequate financing, among other factors.
- European vehicle debt, European ABS and U.K. facility waivers were extended to December 31, 2020, subject to conditions. Failure to extend or satisfy these arrangements could create significant liquidity and operational risks.
- The company reported approximately 13,400 bankruptcy proofs of claim totaling about $104.9 billion, including duplicates across debtor entities; the claims review was incomplete and amounts may be adjusted.
- Hertz Global common stock was suspended from NYSE trading after October 29, 2020 and began trading OTC as HTZGQ on October 30. The filing warns that existing common equity may receive no recovery and could become worthless under a reorganization or liquidation.
- Other material uncertainties include residual vehicle values, further impairment of goodwill or indefinite-lived brand assets, lease-payment disputes, creditor remedies, employee retention, and the duration and effects of COVID-19. The filing provides no conventional forward earnings guidance.
Important facts for investors to verify
- Current cash availability and actual liquidity runway, including restrictions on cash and vehicle-sale proceeds.
- Bankruptcy plan progress, treatment and reconciliation of creditor claims, and potential recovery for existing equity and debt holders.
- Final approval, terms, availability and actual draws of the DIP and fleet-financing facilities.
- Extensions and compliance with international debt waivers, and lease-order payment and vehicle-disposition requirements.
- Travel demand, pricing, utilization, fleet residual values and any subsequent impairment charges.