UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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| |
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 20162017 |
| OR |
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 001-07541
HERTZ GLOBAL HOLDINGS, INC.
THE HERTZ CORPORATION
(Exact name of registrant as specified in its charter)
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| | | | |
Delaware
DELAWARE | | 001-37665 | | 61-1770902 |
| DELAWARE | | 001-07541 | | 13-1938568 |
(State or other jurisdiction of incorporation or organization) | | (Commission File Number) | | (I.R.S Employer Identification No.) |
| | | | |
| | 13-19385688501 Williams Road
(I.R.S. EmployerEstero, Florida 33928
Identification Number)(239) 301-7000
| | |
| | 8501 Williams Road Estero, Florida 33928 (239) 301-7000 | | |
| | (Address, including Zip Code, and telephone number, including area code, of registrant's principal executive offices) | | |
| | | | |
| | Not Applicable | | |
| | Not Applicable | | |
| | (Former name, former address and former fiscal year, if changed since last report.) | | |
8501 Williams Road
Estero, Florida 33928
(239) 301-7000
(Address, including Zip Code, and telephone number,
including area code, of registrant's principal executive offices)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Hertz Global Holdings, Inc. Yes x No o
The Hertz Corporation Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Hertz Global Holdings, Inc. Yes x No o
The Hertz Corporation Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company" and "smaller reporting"emerging growth company" in Rule 12b-2 of the Exchange Act.
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| | | | | | | |
| Hertz Global Holdings, Inc. | Large accelerated filer | ¨o | Accelerated filer | o | Non-accelerated filer
(Do not check if a smaller reporting company) | x |
| Smaller reporting company | o |
| Emerging growth company | o | | |
| | If an emerging growth company, indicate by checkmark if the registrant has not elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | o | | |
| The Hertz Corporation | Large accelerated filer | o | Accelerated filer | o | Non-accelerated filer
(Do not check if a smaller
reporting company) | x |
| Smaller reporting company | o | Emerging growth company | o | | |
| If an emerging growth company, indicate by checkmark if the registrant has not elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | o | | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Hertz Global Holdings, Inc. Yes o No x
AsThe Hertz Corporation Yes o No x
Indicate the number of August 8, 2016, 100 shares of common stock (par value $0.01)outstanding as of the registrant were outstanding and owned by its affiliate, Rental Car Intermediate Holdings, LLC.latest practicable date.
|
| | | | | |
| | Class | | Shares Outstanding at | July 31, 2017 |
| Hertz Global Holdings, Inc. | | Common Stock, par value $0.01 per share | | 83,716,852 |
| The Hertz Corporation | | Common Stock, par value $0.01 per share | | 100 (100% owned by Rental Car Intermediate Holdings, LLC) |
| | | | | |
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
INDEX
TABLE OF CONTENTS
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
PART I—FINANCIAL INFORMATION
ITEM l.1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Index
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| Hertz Global Holdings, Inc. and Subsidiaries | |
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| The Hertz Corporation and Subsidiaries | |
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| Notes to the Condensed Consolidated Financial Statements | |
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HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited
(In millions, except par value) |
| | | | | | | |
| | June 30,
2017 | | December 31, 2016 |
| ASSETS | | | |
| Cash and cash equivalents | $ | 1,141 |
| | $ | 816 |
|
| Restricted cash and cash equivalents: | | | |
| Vehicle | 183 |
| | 235 |
|
| Non-vehicle | 879 |
| | 43 |
|
| Total restricted cash and cash equivalents | 1,062 |
| | 278 |
|
| Receivables: | | | |
| Vehicle | 282 |
| | 546 |
|
| Non-vehicle, net of allowance of $37 and $42, respectively | 928 |
| | 737 |
|
| Total receivables, net | 1,210 |
| | 1,283 |
|
| Prepaid expenses and other assets | 565 |
| | 578 |
|
| Revenue earning vehicles: | | | |
| Vehicles | 16,149 |
| | 13,655 |
|
| Less accumulated depreciation | (2,963 | ) | | (2,837 | ) |
| Total revenue earning vehicles, net | 13,186 |
| | 10,818 |
|
| Property and equipment: | | | |
| Land, buildings and leasehold improvements | 1,188 |
| | 1,165 |
|
| Service equipment and other | 771 |
| | 724 |
|
| Less accumulated depreciation | (1,120 | ) | | (1,031 | ) |
| Total property and equipment, net | 839 |
| | 858 |
|
| Other intangible assets, net | 3,239 |
| | 3,332 |
|
| Goodwill | 1,082 |
| | 1,081 |
|
| Assets held for sale | 109 |
| | 111 |
|
| Total assets | $ | 22,433 |
| | $ | 19,155 |
|
| LIABILITIES AND EQUITY | | | |
| Accounts payable: | | | |
| Vehicle | $ | 677 |
| | $ | 258 |
|
| Non-vehicle | 704 |
| | 563 |
|
| Total accounts payable | 1,381 |
| | 821 |
|
| Accrued liabilities | 963 |
| | 980 |
|
| Accrued taxes, net | 166 |
| | 165 |
|
| Debt: | | | |
| Vehicle | 11,176 |
| | 9,646 |
|
| Non-vehicle | 5,633 |
| | 3,895 |
|
| Total debt | 16,809 |
| | 13,541 |
|
| Public liability and property damage | 423 |
| | 407 |
|
| Deferred income taxes, net | 1,922 |
| | 2,149 |
|
| Liabilities held for sale | 13 |
| | 17 |
|
| Total liabilities | 21,677 |
| | 18,080 |
|
| Commitments and contingencies |
| |
|
| Equity: | | | |
| Preferred Stock, $0.01 par value, no shares issued and outstanding | — |
| | — |
|
| Common Stock, $0.01 par value, 86 and 85 shares issued and 84 and 83 shares outstanding | 1 |
| | 1 |
|
| Additional paid-in capital | 2,234 |
| | 2,227 |
|
| Accumulated deficit | (1,214 | ) | | (882 | ) |
| Accumulated other comprehensive income (loss) | (165 | ) | | (171 | ) |
| | 856 |
| | 1,175 |
|
| Treasury Stock, at cost, 2 shares and 2 shares | (100 | ) | | (100 | ) |
| Total equity | 756 |
| | 1,075 |
|
| Total liabilities and equity | $ | 22,433 |
| | $ | 19,155 |
|
The accompanying notes are an integral part of these financial statements.
2
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
(In millions, except per share data)
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Revenues: | | | | | | | |
| Worldwide vehicle rental | $ | 2,062 |
| | $ | 2,124 |
| | $ | 3,827 |
| | $ | 3,963 |
|
| All other operations | 162 |
| | 146 |
| | 313 |
| | 290 |
|
| Total revenues | 2,224 |
| | 2,270 |
| | 4,140 |
| | 4,253 |
|
| Expenses: | | | | | | | |
| Direct vehicle and operating | 1,255 |
| | 1,267 |
| | 2,387 |
| | 2,425 |
|
| Depreciation of revenue earning vehicles and lease charges, net | 743 |
| | 629 |
| | 1,444 |
| | 1,245 |
|
| Selling, general and administrative | 223 |
| | 234 |
| | 442 |
| | 459 |
|
| Interest expense, net: | | | | | | | |
| Vehicle | 82 |
| | 72 |
| | 153 |
| | 140 |
|
| Non-vehicle | 76 |
| | 102 |
| | 136 |
| | 185 |
|
| Total interest expense, net | 158 |
| | 174 |
| | 289 |
| | 325 |
|
| Intangible asset impairments | 86 |
| | — |
| | 86 |
| | — |
|
| Other (income) expense, net | 4 |
| | 1 |
| | 31 |
| | (89 | ) |
| Total expenses | 2,469 |
| | 2,305 |
| | 4,679 |
| | 4,365 |
|
| Income (loss) from continuing operations before income taxes | (245 | ) | | (35 | ) | | (539 | ) | | (112 | ) |
| Income tax (provision) benefit | 87 |
| | 7 |
| | 158 |
| | 32 |
|
| Net income (loss) from continuing operations | (158 | ) | | (28 | ) | | (381 | ) | | (80 | ) |
| Net income (loss) from discontinued operations | — |
| | (15 | ) | | — |
| | (13 | ) |
| Net income (loss) | $ | (158 | ) | | $ | (43 | ) | | $ | (381 | ) | | $ | (93 | ) |
| | | | | | | | |
| Weighted average shares outstanding: | | | | | | | |
| Basic | 83 |
| | 85 |
| | 83 |
| | 85 |
|
| Diluted | 83 |
| | 85 |
| | 83 |
| | 85 |
|
| | | | | | | | |
| Earnings (loss) per share - basic and diluted: | | | | | | | |
| Basic earnings (loss) per share from continuing operations | $ | (1.90 | ) | | $ | (0.33 | ) | | $ | (4.59 | ) | | $ | (0.94 | ) |
| Basic earnings (loss) per share from discontinued operations | — |
| | (0.18 | ) | | — |
| | (0.15 | ) |
| Basic earnings (loss) per share | $ | (1.90 | ) | | $ | (0.51 | ) | | $ | (4.59 | ) | | $ | (1.09 | ) |
| | | | | | | | |
| Diluted earnings (loss) per share from continuing operations | $ | (1.90 | ) | | $ | (0.33 | ) | | $ | (4.59 | ) | | $ | (0.94 | ) |
| Diluted earnings (loss) per share from discontinued operations | — |
| | (0.18 | ) | | — |
| | (0.15 | ) |
| Diluted earnings (loss) per share | $ | (1.90 | ) | | $ | (0.51 | ) | | $ | (4.59 | ) | | $ | (1.09 | ) |
The accompanying notes are an integral part of these financial statements.
3
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Unaudited
(In millions)
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Net income (loss) | $ | (158 | ) | | $ | (43 | ) | | $ | (381 | ) | | $ | (93 | ) |
| Other comprehensive income (loss): | | | | | | | |
| Foreign currency translation adjustments | (4 | ) | | (18 | ) | | 12 |
| | 18 |
|
| Unrealized holding gains (losses) on securities | — |
| | (8 | ) | | — |
| | 9 |
|
| Reclassification of realized gain on securities to other (income) expense | — |
| | — |
| | (3 | ) | | — |
|
| Net gain (loss) on defined benefit pension plans | (3 | ) |
| (34 | ) |
| (4 | ) |
| (34 | ) |
| Reclassification from other comprehensive income (loss) to selling, general and administrative expense for amortization of actuarial (gains) losses on defined benefit pension plans | 1 |
| | 2 |
| | 2 |
| | 4 |
|
| Total other comprehensive income (loss) before income taxes | (6 | ) | | (58 | ) | | 7 |
| | (3 | ) |
| Income tax (provision) benefit related to net gains and losses on defined benefit pension plans | — |
| | 14 |
| | — |
| | 14 |
|
| Income tax (provision) benefit related to reclassified amounts of net periodic costs on defined benefit pension plans | (1 | ) | | (1 | ) | | (1 | ) | | (2 | ) |
| Total other comprehensive income (loss) | (7 | ) | | (45 | ) | | 6 |
| | 9 |
|
| Total comprehensive income (loss) | $ | (165 | ) | | $ | (88 | ) | | $ | (375 | ) | | $ | (84 | ) |
The accompanying notes are an integral part of these financial statements.
4
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In millions)
|
| | | | | | | |
| | Six Months Ended
June 30, |
| | 2017 | | 2016 |
| Cash flows from operating activities: | | | |
| Net income (loss) | $ | (381 | ) | | $ | (93 | ) |
| Less: Net income (loss) from discontinued operations | — |
| | (13 | ) |
| Net income (loss) from continuing operations | (381 | ) | | (80 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | |
| Depreciation of revenue earning vehicles, net | 1,410 |
| | 1,212 |
|
| Depreciation and amortization, non-vehicle | 120 |
| | 128 |
|
| Amortization and write-off of deferred financing costs | 20 |
| | 22 |
|
| Amortization and write-off of debt discount (premium) | 1 |
| | 3 |
|
| Loss on extinguishment of debt | 8 |
| | 20 |
|
| Stock-based compensation charges | 12 |
| | 12 |
|
| Provision for receivables allowance | 17 |
| | 24 |
|
| Deferred income tax, net | (175 | ) | | (49 | ) |
| Impairment charges and asset write-downs | 116 |
| | 3 |
|
| (Gain) loss on sale of shares in equity investment | (3 | ) | | (75 | ) |
| Other | 7 |
| | (4 | ) |
| Changes in assets and liabilities | | | |
| Non-vehicle receivables | (180 | ) | | (214 | ) |
| Prepaid expenses and other assets | (71 | ) | | (48 | ) |
| Non-vehicle accounts payable | 134 |
| | 43 |
|
| Accrued liabilities | (53 | ) | | (15 | ) |
| Accrued taxes, net | (1 | ) | | 14 |
|
| Public liability and property damage | 1 |
| | 18 |
|
| Net cash provided by (used in) operating activities | 982 |
| | 1,014 |
|
| Cash flows from investing activities: | | | |
| Net change in restricted cash and cash equivalents, vehicle | 55 |
| | 18 |
|
| Net change in restricted cash and cash equivalents, non-vehicle | — |
| | (2 | ) |
| Revenue earning vehicles expenditures | (6,709 | ) | | (6,887 | ) |
| Proceeds from disposal of revenue earning vehicles | 3,835 |
| | 4,787 |
|
| Capital asset expenditures, non-vehicle | (103 | ) | | (72 | ) |
| Proceeds from disposal of property and other equipment | 11 |
| | 39 |
|
| Sales of shares in equity investment, net of amounts invested | 9 |
| | 188 |
|
| Other | (2 | ) | | — |
|
| Net cash provided by (used in) investing activities | (2,904 | ) | | (1,929 | ) |
The accompanying notes are an integral part of these financial statements.
5
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Unaudited
(In millions)
|
| | | | | | | |
| | Six Months Ended
June 30, |
| | 2017 | | 2016 |
| Cash flows from financing activities: | | | |
| Net change in restricted cash and cash equivalents, non-vehicle | (834 | ) | | — |
|
| Proceeds from issuance of vehicle debt | 5,028 |
| | 6,079 |
|
| Repayments of vehicle debt | (3,665 | ) | | (5,078 | ) |
| Proceeds from issuance of non-vehicle debt | 2,100 |
| | 1,477 |
|
| Repayments of non-vehicle debt | (354 | ) | | (2,843 | ) |
| Payment of financing costs | (34 | ) | | (51 | ) |
| Early redemption premium payment | (5 | ) | | — |
|
| Transfers from discontinued entities | — |
| | 2,122 |
|
| Other | (1 | ) | | 12 |
|
| Net cash provided by (used in) financing activities | 2,235 |
| | 1,718 |
|
| Effect of foreign currency exchange rate changes on cash and cash equivalents from continuing operations | 12 |
| | 8 |
|
| Net increase (decrease) in cash and cash equivalents during the period from continuing operations | 325 |
| | 811 |
|
| Cash and cash equivalents at beginning of period | 816 |
| | 474 |
|
| Cash and cash equivalents at end of period | $ | 1,141 |
| | $ | 1,285 |
|
| |
| |
|
| Cash flows from discontinued operations: | | | |
| Cash flows provided by (used in) operating activities | $ | — |
| | $ | 205 |
|
| Cash flows provided by (used in) investing activities | — |
| | (78 | ) |
| Cash flows provided by (used in) financing activities | — |
| | (96 | ) |
| Net increase (decrease) in cash and cash equivalents during the period from discontinued operations | $ | — |
| | $ | 31 |
|
| | | | |
| Supplemental disclosures of cash information for continuing operations: | | | |
| Cash paid during the period for: | | | |
| Interest, net of amounts capitalized: | | | |
| Vehicle | $ | 130 |
| | $ | 115 |
|
| Non-vehicle | 128 |
| | 167 |
|
| Income taxes, net of refunds | 29 |
| | 25 |
|
| Supplemental disclosures of non-cash information for continuing operations: | | | |
| Purchases of revenue earning vehicles included in accounts payable and accrued liabilities | $ | 546 |
| | $ | 560 |
|
| Sales of revenue earning vehicles included in receivables | 151 |
| | 392 |
|
| Purchases of property and other equipment included in accounts payable | 22 |
| | 19 |
|
| Sales of property and other equipment included in receivables | 5 |
| | 17 |
|
| Revenue earning vehicles and property and equipment acquired through capital lease | 13 |
| | — |
|
The accompanying notes are an integral part of these financial statements.
6
THE HERTZ CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited
(In millions, except par value and share data)
| | | | June 30,
2016 | | December 31,
2015 | June 30,
2017 | | December 31,
2016 |
| ASSETS | | | | | | |
| Cash and cash equivalents | $ | 1,285 |
| | $ | 474 |
| $ | 1,141 |
| | $ | 816 |
|
| Restricted cash and cash equivalents: | | | | | | |
| Vehicle | 272 |
| | 289 |
| 183 |
| | 235 |
|
| Non-vehicle | 46 |
| | 44 |
| 879 |
| | 43 |
|
| Total restricted cash and cash equivalents | 318 |
| | 333 |
| 1,062 |
| | 278 |
|
| Receivables: | | | | | | |
| Vehicle | 480 |
| | 1,137 |
| 282 |
| | 546 |
|
| Non-vehicle, net of allowance of $45 and $36, respectively | 843 |
| | 649 |
| |
| Non-vehicle, net of allowance of $37 and $42, respectively | | 928 |
| | 737 |
|
| Total receivables, net | 1,323 |
| | 1,786 |
| 1,210 |
| | 1,283 |
|
| Inventories, net | 43 |
| | 29 |
| |
| Prepaid expenses and other assets | 594 |
| | 966 |
| 565 |
| | 578 |
|
| Revenue earning vehicles: | | | | | | |
| Vehicles | 15,418 |
| | 13,441 |
| 16,149 |
| | 13,655 |
|
| Less accumulated depreciation | (2,609 | ) | | (2,695 | ) | (2,963 | ) | | (2,837 | ) |
| Total revenue earning vehicles, net | 12,809 |
| | 10,746 |
| 13,186 |
| | 10,818 |
|
| Property and equipment: | | | | | | |
| Land, buildings and leasehold improvements | 1,152 |
| | 1,171 |
| 1,188 |
| | 1,165 |
|
| Service equipment and other | 758 |
| | 809 |
| 771 |
| | 724 |
|
| Less accumulated depreciation | (998 | ) | | (978 | ) | (1,120 | ) | | (1,031 | ) |
| Total property and equipment, net | 912 |
| | 1,002 |
| 839 |
| | 858 |
|
| Other intangible assets, net | 3,479 |
| | 3,522 |
| 3,239 |
| | 3,332 |
|
| Goodwill | 1,257 |
| | 1,261 |
| 1,082 |
| | 1,081 |
|
| Assets of discontinued operations | — |
| | 3,390 |
| |
| Assets held for sale | | 109 |
| | 111 |
|
| Total assets | $ | 22,020 |
| | $ | 23,509 |
| $ | 22,433 |
| | $ | 19,155 |
|
| LIABILITIES AND EQUITY | | | | | | |
| Accounts payable: | | | | | | |
| Vehicle | $ | 647 |
| | $ | 207 |
| $ | 677 |
| | $ | 258 |
|
| Non-vehicle | 592 |
| | 559 |
| 704 |
| | 563 |
|
| Total accounts payable | 1,239 |
| | 766 |
| 1,381 |
| | 821 |
|
| Accrued liabilities | 1,037 |
| | 1,035 |
| 963 |
| | 980 |
|
| Accrued taxes, net | 179 |
| | 128 |
| 166 |
| | 165 |
|
| Debt: | | | | | | |
| Vehicle | 10,801 |
| | 9,823 |
| 11,176 |
| | 9,646 |
|
| Non-vehicle | 4,591 |
| | 5,947 |
| 5,633 |
| | 3,895 |
|
| Total debt | 15,392 |
| | 15,770 |
| 16,809 |
| | 13,541 |
|
| Public liability and property damage | 410 |
| | 394 |
| 423 |
| | 407 |
|
| Deferred taxes on income, net | 2,154 |
| | 2,168 |
| |
| Liabilities of discontinued operations | — |
| | 1,300 |
| |
| Deferred income taxes, net | | 1,923 |
| | 2,149 |
|
| Liabilities held for sale | | 13 |
| | 17 |
|
| Total liabilities | 20,411 |
| | 21,561 |
| 21,678 |
| | 18,080 |
|
| Commitments and contingencies |
| |
|
| |
|
| Equity: | | | | | | |
| Common Stock, $0.01 par value, 3,000 shares authorized, 100 shares issued and outstanding | — |
| | — |
| — |
| | — |
|
| Additional paid-in capital | 3,134 |
| | 3,583 |
| 3,158 |
| | 3,150 |
|
| Due to (from) affiliate | 66 |
| | (345 | ) | |
| Due from affiliate | | (40 | ) | | (37 | ) |
| Accumulated deficit | (1,470 | ) | | (1,045 | ) | (2,198 | ) | | (1,867 | ) |
| Accumulated other comprehensive income (loss) | (121 | ) | | (245 | ) | (165 | ) | | (171 | ) |
| Total equity | 1,609 |
| | 1,948 |
| 755 |
| | 1,075 |
|
| Total liabilities and equity | $ | 22,020 |
| | $ | 23,509 |
| $ | 22,433 |
| | $ | 19,155 |
|
The accompanying notes are an integral part of these financial statements.
7
1
THE HERTZ CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
(In millions)
| | | | Three Months Ended
June 30, | | Six Months Ended
June 30, | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| | 2016 | | 2015 | | 2016 | | 2015 | 2017 | | 2016 | | 2017 | | 2016 |
| Revenues: | | | | | | | | | | | | | | |
| Worldwide vehicle rental | $ | 2,124 |
| | $ | 2,171 |
| | $ | 3,963 |
| | $ | 4,127 |
| $ | 2,062 |
| | $ | 2,124 |
| | $ | 3,827 |
| | $ | 3,963 |
|
| All other operations | 146 |
| | 146 |
| | 290 |
| | 288 |
| 162 |
| | 146 |
| | 313 |
| | 290 |
|
| Total revenues | 2,270 |
| | 2,317 |
| | 4,253 |
| | 4,415 |
| 2,224 |
| | 2,270 |
| | 4,140 |
| | 4,253 |
|
| Expenses: | | | | | | | | | | | | | | |
| Direct vehicle and operating | 1,267 |
| | 1,290 |
| | 2,425 |
| | 2,492 |
| 1,255 |
| | 1,267 |
| | 2,387 |
| | 2,425 |
|
| Depreciation of revenue earning vehicles and lease charges, net | 629 |
| | 597 |
| | 1,245 |
| | 1,228 |
| 743 |
| | 629 |
| | 1,444 |
| | 1,245 |
|
| Selling, general and administrative | 234 |
| | 251 |
| | 459 |
| | 471 |
| 223 |
| | 234 |
| | 442 |
| | 459 |
|
| Interest expense, net: | | | | | | | | | | | | | | |
| Vehicle | 72 |
| | 62 |
| | 140 |
| | 123 |
| 82 |
| | 72 |
| | 153 |
| | 140 |
|
| Non-vehicle | 102 |
| | 87 |
| | 185 |
| | 173 |
| 75 |
| | 102 |
| | 134 |
| | 185 |
|
| Total interest expense, net | 174 |
| | 149 |
| | 325 |
| | 296 |
| 157 |
| | 174 |
| | 287 |
| | 325 |
|
| Intangible asset impairments | | 86 |
| | — |
| | 86 |
| | — |
|
| Other (income) expense, net | 1 |
| | (8 | ) | | (89 | ) | | (1 | ) | 4 |
| | 1 |
| | 31 |
| | (89 | ) |
| Total expenses | 2,305 |
| | 2,279 |
| | 4,365 |
| | 4,486 |
| 2,468 |
| | 2,305 |
| | 4,677 |
| | 4,365 |
|
| Income (loss) from continuing operations before income taxes | (35 | ) | | 38 |
| | (112 | ) | | (71 | ) | (244 | ) | | (35 | ) | | (537 | ) | | (112 | ) |
| (Provision) benefit for taxes on income (loss) of continuing operations | 7 |
| | (25 | ) | | 32 |
| | 6 |
| |
| Income tax (provision) benefit | | 86 |
| | 7 |
| | 157 |
| | 32 |
|
| Net income (loss) from continuing operations | (28 | ) | | 13 |
| | (80 | ) | | (65 | ) | (158 | ) | | (28 | ) | | (380 | ) | | (80 | ) |
| Net income (loss) from discontinued operations | (15 | ) | | 23 |
| | (11 | ) | | 32 |
| — |
| | (15 | ) | | — |
| | (11 | ) |
| Net income (loss) | $ | (43 | ) | | $ | 36 |
| | $ | (91 | ) | | $ | (33 | ) | $ | (158 | ) | | $ | (43 | ) | | $ | (380 | ) | | $ | (91 | ) |
The accompanying notes are an integral part of these financial statements.
8
THE HERTZ CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Unaudited
(In millions)
| | | | Three Months Ended
June 30, | | Six Months Ended
June 30, | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| | 2016 | | 2015 | | 2016 | | 2015 | 2017 | | 2016 | | 2017 | | 2016 |
| Net income (loss) | $ | (43 | ) | | $ | 36 |
| | $ | (91 | ) | | $ | (33 | ) | $ | (158 | ) | | $ | (43 | ) | | $ | (380 | ) | | $ | (91 | ) |
| Other comprehensive income (loss): | | | | | | | | | | | | | | |
| Foreign currency translation adjustments | (18 | ) | | 9 |
| | 18 |
| | (39 | ) | (4 | ) | | (18 | ) | | 12 |
| | 18 |
|
| Unrealized holding gains (losses) on securities | (8 | ) | | — |
| | 9 |
| | — |
| — |
| | (8 | ) | | — |
| | 9 |
|
| Reclassification of realized gain on securities to other (income) expense | | — |
| | — |
| | (3 | ) | | — |
|
| Net gain (loss) on defined benefit pension plans | (34 | ) | | — |
| | (34 | ) | | — |
| (3 | ) | | (34 | ) | | (4 | ) | | (34 | ) |
| Reclassification from other comprehensive income (loss) to selling, general and administrative expense for amortization of actuarial (gains) losses on defined benefit pension plans | 2 |
| | 4 |
| | 4 |
| | 6 |
| 1 |
| | 2 |
| | 2 |
| | 4 |
|
| Total other comprehensive income (loss) before income taxes | (58 | ) | | 13 |
| | (3 | ) | | (33 | ) | (6 | ) | | (58 | ) | | 7 |
| | (3 | ) |
| Income tax (provision) benefit related to net gains and losses on defined benefit pension plans | 14 |
| | — |
| | 14 |
| | — |
| — |
| | 14 |
| | — |
| | 14 |
|
| Income tax (provision) benefit related to reclassified amounts of net periodic costs on defined benefit pension plans | (1 | ) | | (2 | ) | | (2 | ) | | (2 | ) | (1 | ) | | (1 | ) | | (1 | ) | | (2 | ) |
| Total other comprehensive income (loss) | (45 | ) | | 11 |
| | 9 |
| | (35 | ) | (7 | ) | | (45 | ) | | 6 |
| | 9 |
|
| Total comprehensive income (loss) | $ | (88 | ) | | $ | 47 |
| | $ | (82 | ) | | $ | (68 | ) | $ | (165 | ) | | $ | (88 | ) | | $ | (374 | ) | | $ | (82 | ) |
The accompanying notes are an integral part of these financial statements.
9
THE HERTZ CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In millions)
| | | | Six Months Ended
June 30, | Six Months Ended
June 30, |
| | 2016 | | 2015 | 2017 | | 2016 |
| Cash flows from operating activities: | | | | | | |
| Net income (loss) | $ | (91 | ) | | $ | (33 | ) | $ | (380 | ) | | $ | (91 | ) |
| Less: Net income (loss) from discontinued operations | (11 | ) | | 32 |
| — |
| | (11 | ) |
| Net income (loss) from continuing operations | (80 | ) | | (65 | ) | (380 | ) | | (80 | ) |
| Adjustments to reconcile net income (loss) from continuing operations to net cash provided by (used in) operating activities: | | | | |
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | |
| Depreciation of revenue earning vehicles, net | 1,212 |
| | 1,191 |
| 1,410 |
| | 1,212 |
|
| Depreciation and amortization, non-vehicle | 128 |
| | 131 |
| 120 |
| | 128 |
|
| Amortization and write-off of deferred financing costs | 22 |
| | 29 |
| 20 |
| | 22 |
|
| Amortization and write-off of debt discount (premium) | 3 |
| | (2 | ) | 1 |
| | 3 |
|
| Loss on extinguishment of debt | 20 |
| | — |
| 8 |
| | 20 |
|
| Stock-based compensation charges | 12 |
| | 8 |
| 12 |
| | 12 |
|
| Provision for receivables allowance | 24 |
| | 16 |
| 17 |
| | 24 |
|
| Deferred taxes on income | (49 | ) | | 8 |
| |
| Deferred income taxes, net | | (174 | ) | | (49 | ) |
| Impairment charges and asset write-downs | 3 |
| | 20 |
| 116 |
| | 3 |
|
| (Gain) loss on sale of shares in equity method investment | (75 | ) | | — |
| |
| (Gain) loss on sale of shares in equity investment | | (3 | ) | | (75 | ) |
| Other | (4 | ) | | (6 | ) | 7 |
| | (4 | ) |
| Changes in assets and liabilities | | | | | | |
| Non-vehicle receivables | (214 | ) | | (168 | ) | (180 | ) | | (214 | ) |
| Inventories, prepaid expenses and other assets | (48 | ) | | (61 | ) | |
| Prepaid expenses and other assets | | (71 | ) | | (48 | ) |
| Non-vehicle accounts payable | 43 |
| | 36 |
| 134 |
| | 43 |
|
| Accrued liabilities | (15 | ) | | 21 |
| (53 | ) | | (15 | ) |
| Accrued taxes | 14 |
| | (8 | ) | |
| Accrued taxes, net | | (1 | ) | | 14 |
|
| Public liability and property damage | 18 |
| | 11 |
| 1 |
| | 18 |
|
| Net cash provided by (used in) operating activities | 1,014 |
| | 1,161 |
| 984 |
| | 1,014 |
|
| Cash flows from investing activities: | | | | | | |
| Net change in restricted cash and cash equivalents, vehicle | 18 |
| | 137 |
| 55 |
| | 18 |
|
| Net change in restricted cash and cash equivalents, non-vehicle | (2 | ) | | (4 | ) | — |
| | (2 | ) |
| Revenue earning vehicles expenditures | (7,268 | ) | | (7,639 | ) | (6,709 | ) | | (6,887 | ) |
| Proceeds from disposal of revenue earning vehicles | 5,168 |
| | 4,816 |
| 3,835 |
| | 4,787 |
|
| Capital asset expenditures, non-vehicle | (72 | ) | | (121 | ) | (103 | ) | | (72 | ) |
| Proceeds from disposal of property and other equipment | 39 |
| | 44 |
| 11 |
| | 39 |
|
| Acquisitions, net of cash acquired | — |
| | (95 | ) | |
| Purchases of shares in equity method investment | (45 | ) | | — |
| |
| Sales of shares in equity method investment | 233 |
| | — |
| |
| Advances to Old Hertz Holdings | — |
| | (6 | ) | |
| Sales of shares in equity investment, net of amounts invested | | 9 |
| | 188 |
|
| Other | | (2 | ) | | — |
|
| Net cash provided by (used in) investing activities | (1,929 | ) | | (2,868 | ) | (2,904 | ) | | (1,929 | ) |
The accompanying notes are an integral part of these financial statements.
410
THE HERTZ CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Unaudited
(In millions)
| | | | Six Months Ended
June 30, | Six Months Ended
June 30, |
| | 2016 | | 2015 | 2017 | | 2016 |
| Cash flows from financing activities: | | | | | | |
| Proceeds from issuance of long-term debt | 2,185 |
| | 1,069 |
| |
| Repayments of long-term debt | (2,404 | ) | | (1,032 | ) | |
| Short-term borrowings: | | | | |
| Proceeds | 312 |
| | 383 |
| |
| Payments | (263 | ) | | (258 | ) | |
| Proceeds under the revolving lines of credit | 5,058 |
| | 5,307 |
| |
| Payments under the revolving lines of credit | (5,253 | ) | | (3,683 | ) | |
| Net change in restricted cash and cash equivalents, non-vehicle | | (834 | ) | | — |
|
| Proceeds from issuance of vehicle debt | | 5,028 |
| | 6,079 |
|
| Repayments of vehicle debt | | (3,665 | ) | | (5,078 | ) |
| Proceeds from issuance of non-vehicle debt | | 2,100 |
| | 1,477 |
|
| Repayments of non-vehicle debt | | (354 | ) | | (2,843 | ) |
| Payment of financing costs | (51 | ) | | (8 | ) | (34 | ) | | (51 | ) |
| Early redemption premium payment | | (5 | ) | | — |
|
| Transfers from discontinued entities | 2,122 |
| | — |
| — |
| | 2,122 |
|
| Advances to Hertz Global/Old Hertz Holdings | | (3 | ) | | — |
|
| Other | 12 |
| | (1 | ) | — |
| | 12 |
|
| Net cash provided by (used in) financing activities | 1,718 |
| | 1,777 |
| 2,233 |
| | 1,718 |
|
| Effect of foreign exchange rate changes on cash and cash equivalents from continuing operations | 8 |
| | (16 | ) | |
| Effect of foreign currency exchange rate changes on cash and cash equivalents from continuing operations | | 12 |
| | 8 |
|
| Net increase (decrease) in cash and cash equivalents during the period from continuing operations | 811 |
| | 54 |
| 325 |
| | 811 |
|
| Cash and cash equivalents at beginning of period | 474 |
| | 474 |
| 816 |
| | 474 |
|
| Cash and cash equivalents at end of period | $ | 1,285 |
| | $ | 528 |
| $ | 1,141 |
| | $ | 1,285 |
|
| | | | | | | |
| Cash flows from discontinued operations: | | | | | | |
| Cash flows provided by operating activities | $ | 207 |
| | $ | 292 |
| |
| Cash flows used in investing activities | (77 | ) | | (295 | ) | |
| Cash flows used in financing activities | (94 | ) | | (3 | ) | |
| Effect of foreign exchange rate changes on cash and cash equivalents | — |
| | (1 | ) | |
| Cash flows provided by (used in) operating activities | | $ | — |
| | $ | 207 |
|
| Cash flows provided by (used in) investing activities | | — |
| | (77 | ) |
| Cash flows provided by (used in) financing activities | | — |
| | (94 | ) |
| Net increase (decrease) in cash and cash equivalents during the period from discontinued operations | $ | 36 |
| | $ | (7 | ) | $ | — |
| | $ | 36 |
|
| | | | | | | |
| Supplemental disclosures of cash information for continuing operations: | | | | |
| Supplemental disclosures of cash flow information for continuing operations: | | | | |
| Cash paid during the period for: | | | | | | |
| Interest, vehicle | $ | 115 |
| | $ | 93 |
| |
| Interest, non-vehicle | 167 |
| | 188 |
| |
| Interest, net of amounts capitalized: | | | | |
| Vehicle | | $ | 130 |
| | $ | 115 |
|
| Non-vehicle | | 128 |
| | 167 |
|
| Income taxes, net of refunds | 25 |
| | 12 |
| 29 |
| | 25 |
|
| Supplemental disclosures of non-cash information: | | | | |
| Supplemental disclosures of non-cash information for continuing operations: | | | | |
| Purchases of revenue earning vehicles included in accounts payable and accrued liabilities | $ | 560 |
| | $ | 386 |
| $ | 546 |
| | $ | 560 |
|
| Sales of revenue earning vehicles included in receivables | 392 |
| | 150 |
| 151 |
| | 392 |
|
| Purchases of property and other equipment included in accounts payable | 19 |
| | 47 |
| 22 |
| | 19 |
|
| Sales of property and other equipment included in receivables | 17 |
| | 5 |
| 5 |
| | 17 |
|
| Revenue earning vehicles and property and equipment acquired through capital lease | | 13 |
| | — |
|
| Non-cash dividend paid to affiliate | 334 |
| | — |
| — |
| | 334 |
|
The accompanying notes are an integral part of these financial statements.
511
THE HERTZ CORPORATIONGLOBAL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Unaudited
(In millions)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock Shares | | Common Stock Amount | | Additional
Paid-In Capital | | Due From Affiliate | | Accumulated
Deficit | | Accumulated
Other
Comprehensive
Income (Loss) | | Total
Equity |
| Balance at: | | | | | | |
| December 31, 2015 | 100 |
| | $ | — |
| | $ | 3,583 |
| | $ | (345 | ) | | $ | (1,045 | ) | | $ | (245 | ) | | $ | 1,948 |
|
| Net income (loss) | — |
| | — |
| | — |
| | — |
| | (91 | ) | | — |
| | (91 | ) |
| Due from affiliate | — |
| | — |
| | — |
| | 77 |
| | — |
| | — |
| | 77 |
|
| Dividends paid to Old Hertz Holdings | — |
| | — |
| | — |
| | 334 |
| | (334 | ) | | — |
| | — |
|
| Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | 9 |
| | 9 |
|
| Stock-based employee compensation charges | — |
| | — |
| | 13 |
| | — |
| | — |
| | — |
| | 13 |
|
| Old Hertz Holdings common shares issued to directors | — |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| | 1 |
|
| Distribution of Herc Rentals Inc. | — |
| | — |
| | (463 | ) | | — |
| | — |
| | 115 |
| | (348 | ) |
| June 30, 2016 | 100 |
| | $ | — |
| | $ | 3,134 |
| | $ | 66 |
| | $ | (1,470 | ) | | $ | (121 | ) | | $ | 1,609 |
|
The accompanying notes are an integral part of these financial statements.
6
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
Note 1—Background
Hertz Global Holdings, Inc. ("Hertz Global" when including its subsidiaries and "Hertz Holdings" excluding its subsidiaries) was incorporated in Delaware in 2015 to serve as the top-level holding company for Rental Car Intermediate Holdings, LLC which wholly owns The Hertz Corporation (together("Hertz" and interchangeably with its subsidiaries,Hertz Global, the "Company" or "Hertz"), Hertz Global's primary operating company. Hertz was incorporated in Delaware in 1967 and is a successor to corporations that have been engaged in the vehicle rental and leasing business since 1918. Hertz operates its vehicle rental business globally primarily through the Hertz, Dollar and Thrifty brands from company-owned, licensee and franchisee locations in the U.S., Africa, Asia, Australia, Canada, The Caribbean, Europe, Latin America, the Middle East and New Zealand. Through its Donlen subsidiary, Hertz provides vehicle leasing and fleet management services.
All of the Company's outstanding common stock is owned by Rental Car Intermediate Holdings, LLC, which is wholly owned by Hertz Global Holdings, Inc. ("Hertz Global"). Hertz is the primary operating company for Hertz Global.
On June 30, 2016, former Hertz Global Holdings, Inc., the former top level holding company for Hertz (for periods on or prior to June 30, 2016, “Old Hertz Holdings” and for periods after June 30, 2016, “Herc Holdings”) completed a spin-off (the “Spin-Off”) of its global vehicle rental business through a dividend to stockholders of record of Old Hertz Holdings as of the close of business on June 22, 2016, the record date for the distribution, of all of the issued and outstanding common stock of Hertz Rental Car Holding Company, Inc. (“New Hertz”), which was re-named Hertz Global Holdings, Inc. in connection with the Spin-Off, on a one-to-five basis. Hertz Global is now an independent public company and trades on the New York Stock Exchange under the symbol "HTZ". Herc Holdings, which changed its name to Herc Holdings Inc. on June 30, 2016, trades on the New York Stock Exchange under the symbol “HRI”.
Despite the fact that Hertz Global was spun off from Old Hertz Holdings in the Spin-Off and was the legal spinnee in the transaction, for accounting purposes, due to the relative significance of New Hertz to Old Hertz Holdings, Hertz Global is considered the spinnor or divesting entity and Herc Holdings is considered the spinnee or divested entity. As a result, despite the legal form of the transaction, New Hertz, or Hertz Global, is the “accounting successor” to Old Hertz Holdings. As such, the historical financial information of the CompanyHertz reflects the financial information of the equipment rental business as a discontinued operation.operation and the historical financial information of Hertz Global reflects the equipment rental business and certain parent legal entities as discontinued operations. See Note 3, "Discontinued Operations," for additional information. Unless noted otherwise, information disclosed in these notes to the consolidated financial statements pertain to the continuing operations of Hertz and Hertz Global.
Note 2—Basis of Presentation and Recently Issued Accounting Pronouncements
Basis of Presentation
The Company prepares its unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments of a normal recurring nature that are necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and footnotes. Actual results could differ materially from those estimates.
The year-endDecember 31, 2016 condensed consolidated balance sheet data of the Company was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. The information included in this Form 10‑Q10-Q should be read in conjunction with information included in the Company’sCompany's Form 10‑K for the year ended December 31, 2015,2016 (the "2016 Form 10-K"), as filed with the Securities and Exchange Commission ("SEC") on February 29, 2016 (the "2015 Form 10‑K"), and as amended on March 4, 2016 (the "2015 Form 10‑K/A").6, 2017.
As described in Note 1, "Background" and Note 3, "Discontinued Operations", Hertz Global is the accounting successorCertain prior period amounts have been reclassified to Old Hertz Holdings. As such, the historical financial information of the Company reflects the financial information of the equipment rental business as a discontinued operation. Unless noted otherwise, information disclosed in these notes to the condensed consolidated financial statements of the Company pertain to its continuing operations.
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
As disclosed below in "Recently Issued Accounting Pronouncements," the Company retrospectively adopted the guidance "Simplifying the Presentation of Debt Issuance Costs" on January 1, 2016.conform with current period presentation.
Principles of Consolidation
The unaudited condensed consolidated financial statements of Hertz Global include the accounts of Hertz Global and its wholly owned and majority owned U.S. and international subsidiaries. The unaudited condensed consolidated financial statements of Hertz include the accounts of Hertz and its wholly owned and majority owned domesticU.S. and international subsidiaries. In the event that the Company is a primary beneficiary of a variable interest entity, the assets, liabilities, and results of operations of the variable interest entity are included in the Company's condensed consolidated financial statements. The Company accounts for its investmentsinvestment in joint ventures using the equity method when it has significant
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
influence but not control and is not the primary beneficiary. All significant intercompany transactions have been eliminated in consolidation.
Out Of Period Adjustments
The Company has identified a misstatement in its prior period financial statements, related to the income tax provision, that it has corrected in the second quarter of 2017. The cumulative impact of the adjustment was an increase in net loss of approximately $10 million. There was no impact to pre-tax loss from continuing operations. The misstatement relates to an error in the tax provision for U.S. income of a foreign equity investment transaction for fiscal year 2016. The Company considered both quantitative and qualitative factors in assessing the materiality of the item and determined that the misstatement was not material to any prior period and not material to the three and six months ended June 30, 2017.
Correction of Errors
The Company identified classification errors within the investing section of the condensed consolidated statement of cash flows for the six months ended June 30, 2016. One of the errors related to the Company's Donlen operations and was previously disclosed in the Company's 2016 Form 10‑K. The second error related to the Company's operations in Brazil and was identified during the preparation of the condensed consolidated statement of cash flows for the six months ended June 30, 2017.
The Company considered both quantitative and qualitative factors in assessing the materiality of the classification errors individually, and in the aggregate, and determined that the classification errors were not material and revised the accompanying condensed consolidated statement of cash flows for the six months ended June 30, 2016 accordingly. Correction of the errors decreased both revenue earning vehicles expenditures and proceeds from disposals of revenue earning vehicles by $381 million for the six months ended June 30, 2016 and did not impact total operating, investing or financing cash flows. These revisions had no impact on the Company's condensed consolidated balance sheet at December 31, 2016 or its condensed consolidated statement of operations for the three and six months ended June 30, 2016.
Recently Issued Accounting Pronouncements
Adopted
Accounting forImprovements to Employee Share-Based Payments When the Terms of an Award Provide That a Performance Target Could be Achieved after the Requisite Service PeriodPayment Accounting
In June 2014,March 2016, the FASB issued guidance that requires that a performance targetsimplifies several areas of employee share-based payment accounting, including income taxes, forfeitures, minimum statutory withholding requirements, and classifications within the statement of cash flows. Most significantly, the new guidance eliminates the need to track tax “windfalls” in a share-based payment award that affects vestingseparate pool within additional paid-in capital; instead, excess tax benefits and that can be achieved after the requisite service period is completed is to be accounted for as a performance condition; therefore, compensation cost should be recognized in the period in which it becomes probable that the performance targettax deficiencies will be achieved, and the amount of compensation cost recognized should be based on the portion of the service period fulfilled.recorded within income tax expense. The Company adopted this guidance prospectively on January 1, 2016 in accordance with the effective date. Adoption of this new guidance did not impact the Company’s financial position, results of operations or cash flows.
Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items
In January 2015, the FASB issued guidance that eliminates the concept of an event or transaction that is unusual in nature and occurs infrequently being treated as an extraordinary item. The Company adopted this guidance prospectivelydate on January 1, 2016 in accordance2017. The method of adoption with the effective date. Adoption of this new guidance did not impact the Company’s financial position, results of operations or cash flows.
Amendmentsrespect to the Consolidation Analysis
In February 2015, the FASB issued guidance that changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The Company adopted this guidance retrospectively on January 1, 2016, in accordance with the effective date. Adoption of this new guidance did not impact the Company’s financial position, results of operations or cash flows.
Simplifying the Presentation of Debt Issuance Costs
In April 2015, the FASB issued guidance requiring debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. In August 2015, the FASB issued guidance clarifying that debt issuance costs related to line-of-credit and other revolving debt arrangements may be deferred and presented as an asset. The Company adopted this guidance retrospectively on January 1, 2016 in accordance with the effective date.
Adoption of this guidance required the Company to reclassify $73 million of debt issuance costs from prepaid expenses and other assets to debt in its condensed consolidated balance sheet aswas a modified retrospective basis. Upon adoption, the Company recorded a deferred tax asset with an offsetting entry to the opening accumulated deficit to recognize net operating loss carryforwards, net of December 31, 2015. Adoption of this new guidance dida valuation allowance, attributable to excess tax benefits on stock compensation that had not impactbeen previously recognized. Additionally, the Company’s results of operations or cash flows.Company has elected to continue to estimate forfeitures expected to occur.
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
Customer’s Accounting for Fees Paid inThe impact to the condensed consolidated opening balance sheet as of January 1, 2017 of adopting this guidance was as follows (in millions):
Hertz Global
|
| | | | | | | | | | | | | | | | | | | |
| | Deferred income taxes, net | | Total liabilities | | Accumulated deficit | | Total equity | | Total liabilities and equity |
| As of December 31, 2016 | $ | 2,149 |
| | $ | 18,080 |
| | $ | (882 | ) | | $ | 1,075 |
| | $ | 19,155 |
|
| Record deferred tax asset | (49 | ) | | (49 | ) | | 49 |
| | 49 |
| | — |
|
| As of January 1, 2017 | $ | 2,100 |
| | $ | 18,031 |
| | $ | (833 | ) | | $ | 1,124 |
| | $ | 19,155 |
|
Hertz
|
| | | | | | | | | | | | | | | | | | | |
| | Deferred income taxes, net | | Total liabilities | | Accumulated deficit | | Total equity | | Total liabilities and equity |
| As of December 31, 2016 | $ | 2,149 |
| | $ | 18,080 |
| | $ | (1,867 | ) | | $ | 1,075 |
| | $ | 19,155 |
|
| Record deferred tax asset | (49 | ) | | (49 | ) | | 49 |
| | 49 |
| | — |
|
| As of January 1, 2017 | $ | 2,100 |
| | $ | 18,031 |
| | $ | (1,818 | ) | | $ | 1,124 |
| | $ | 19,155 |
|
The method of adoption with respect to the condensed consolidated statement of operations and the condensed consolidated statements of cash flows pertaining to excess tax benefits or deficiencies is on a Cloud Computing Arrangementprospective basis. The method of adoption with respect to the condensed consolidated statements of cash flows pertaining to employee taxes paid is on a retrospective basis and adoption of the guidance did not impact the Company's cash flows.
Classification of Certain Cash Receipts and Cash Payments
In April 2015,August 2016, the FASB issued guidance for customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, thenthat addresses the customer should account for the software license elementtreatment of the arrangement consistentcertain transactions in statements of cash flows, with the acquisitionobjective of other software licenses. If a cloud computing arrangement does notreducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified. These items include a software license,debt prepayment or debt extinguishment costs, proceeds from the customer should account forsettlement of life insurance claims, proceeds from the arrangement as a service contract.settlement of corporate-owned life insurance policies, and distributions received from equity method investees. The Company adopted this guidance prospectivelyearly, as permitted, on a retrospective basis, on January 1, 2016, in accordance with the effective date.2017. Adoption of this new guidance did not impact the Company’s financial position, results of operations or cash flows.
Simplifying the Accounting for Measurement Period Adjustments for Business CombinationsGoodwill Impairment
In September 2015,January 2017, the FASB issued guidance that eliminates the second step of the two-step goodwill impairment test, which requires adjustmentsthe determination of the implied fair value of goodwill to provisional amounts duringmeasure an impairment. Rather, a goodwill impairment charge will be calculated as the measurement period ofamount by which a business combinationreporting unit's carrying amount exceeds its fair value. An entity still has the option to be recognized inperform the qualitative assessment for a reporting period in whichunit to determine if the adjustments are determined, rather than retrospectively.quantitative impairment test is necessary. The Company adopted this guidance prospectivelyearly, as permitted, on a prospective basis, on January 1, 2016 in accordance with the effective date.2017. Adoption of this new guidance did not impact the Company’s financial position, results of operations or cash flows.
Scope of Modification Accounting for Share-Based Payment Awards
In May 2017, the FASB issued guidance that amends the scope of modification accounting for share-based payment arrangements. The guidance describes the types of changes to the terms or conditions of share-based payment awards where modification accounting is required to be applied. Modification accounting is not required if the fair value, vesting conditions and classification of the awards are the same immediately before and after the modification. The Company adopted this guidance early, as permitted, on a prospective basis, on April 1, 2017. Adoption of this guidance did not impact the Company’s financial position, results of operations or cash flows.
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
Not Yet Adopted
Revenue from Contracts with Customers
In May 2014, the FASB issued guidance that will replace most existing revenue recognition guidance in U.S. GAAP. The new guidance applies to all contracts with customers except for leases, insurance contracts, financial instruments, certain nonmonetary exchanges and certain guarantees. The core principle of the guidance is that an entity should recognize revenue from customers for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. The new principles-based revenue recognition model requires an entity to perform five steps: 1) identify the contract(s) with a customer, 2) identify the performance obligations in the contract, 3) determine the transaction price, 4) allocate the transaction price to the performance obligations in the contract, and 5) recognize revenue when (or as) the entity satisfies a performance obligation. Under the new guidance, performance obligations in a contract will be separately identified, which may impact the timing of recognition of the revenue allocated to each obligation. The measurement of revenue recognized may also be impacted by identification of new performance obligations and other provisions, such as collectability and variable consideration. The guidance will impact the Company’s accounting for certain contracts and its Hertz #1 Gold Plus Rewards liability. Also, additional disclosures are required about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. The FASB has issued several amendments and updates to the new revenue standard (collectively, “Topic 606”), including guidance may be adopted on eitherrelated to when an entity should recognize revenue gross as a fullprincipal or modified retrospective basis.net as an agent and how an entity should identify performance obligations. As originally issued, the guidanceamended, Topic 606 is effective for annual reportingand interim periods beginning after December 15, 2016, including interim2017, with early adoption permitted, and allows for full retrospective adoption applied to all periods within those reporting periods. In July 2015,presented or a modified retrospective adoption with the FASB deferredcumulative effect of initially applying the effectivenew guidance as an adjustment to the opening balance of retained earnings recognized at the date of initial application. The Company intends to adopt Topic 606 when effective on January 1, 2018 using a modified retrospective approach applied to all contracts. Prior periods will not be retrospectively adjusted. The Company has reached conclusions on several key accounting assessments related to its revenue recognition, however, it is still finalizing its assessment and quantifying the guidance until annualimpacts that adoption of Topic 606 will have on the accounting for its loyalty programs, such as Hertz Gold Plus Rewards, as further described below. The Company is still in the process of determining the level of disaggregated revenue information that it will include in its disclosures and interimcontinues to evaluate its internal controls over financial reporting periods beginning after December 15, 2017.to ensure that controls are in place to prevent or detect material misstatements to the consolidated financial statements upon adoption of Topic 606.
In March 2016,Vehicle Rental Operations
The Company has concluded that revenue earned by operations for the FASB issued clarifyingrental of vehicles and from other forms of rental related activities wherein an identified asset is transferred to the customer and the customer has the ability to control that asset is outside of the scope of Topic 606 and will be evaluated under the new lease guidance on assessing whether an entitydescribed in more detail in the “Leases” disclosure below.
Recognition of revenue from other forms of rental related activities that represent a service will not be materially impacted by adoption of Topic 606.
The Company is still in the process of evaluating the breakdown of its vehicle rental revenues into lease and non-lease components.
Recognition of revenue earned through the licensing of the Hertz, Dollar and Thrifty brands under franchise agreements (“franchise fees”) is expected to remain consistent with current revenue recognition guidance except for initial and renewal franchise fees. Currently, initial franchise fees are recorded as deferred income when received and are recognized as revenue when all material upfront services and conditions related to the franchise fee have been substantially performed and renewal franchise fees are recognized as revenue when the license agreements are effective and collectability is reasonably assured. Upon adoption, revenue from initial and renewal franchise fees that relate to a principal or an agentfuture contract term, for franchises in a revenueeffect as of January 1, 2018, will be deferred and recognized over the remaining contract term. However, this amount will not be material.
The Company believes that the most significant impact relates to its accounting for reward points earned by customers under its loyalty programs. Upon adoption of Topic 606, each transaction which impacts whethergenerates reward points will result in the deferral of revenue equivalent to the retail value of the redemption of the loyalty reward points. The associated revenue will be recognized at the time the customer redeems the loyalty reward points. Under the current guidance, there is no revenue deferral and the Company records an entity reports revenue on a gross or net basis. In April 2016,expense associated with the FASB issued guidance that reduces incremental cost of providing
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
the complexity for identifying performance obligations and clarifiesfuture rental at the implementation guidance on licensing for intellectual property. In May 2016,time when the FASB issued guidance that clarifies the collectability criterion, the presentation of sales taxes, and noncash consideration, and provides additional implementation practical expedients.reward points are earned. The Company is in the process of determiningquantifying the method and timingimpact of adoption of Topic 606.
Fleet Leasing and assessingManagement Operations
The Company has concluded that revenue earned by operations for the overall impactsleasing of adoptingvehicles and from other forms of rental related activities wherein an identified asset is transferred to the customer and the customer has the ability to control that asset is outside of the scope of Topic 606 and will be evaluated under the new lease guidance described in more detail in the “Leases” disclosure below. Administration fees and service revenue attributable to the Company's Donlen operations will not be materially impacted by adoption of Topic 606.
Leases
In February 2016, the FASB issued guidance that replaces the existing lease guidance in U.S. GAAP. The new guidance establishes a right-of-use (“ROU”) model that requires a lessee to record on the balance sheet a ROU asset and corresponding lease liability based on the present value of future lease payments for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. This guidance also expands the requirements for lessees to record leases embedded in other arrangements. Additionally, enhanced quantitative and qualitative disclosures surrounding leases are required which provide financial statement users the ability to assess the amount, timing and uncertainty of cash flows arising from leases. This guidance is effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods with early adoption permitted. A modified retrospective transition approach is required for both lessees and lessors for existing leases at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is still in the process of evaluating whether to avail itself of allowable practicable expedients during transition.
Lessee
Adoption of this guidance will result in a material increase in the Company's lease-related assets and liabilities on its financial position,balance sheet, primarily for leases of rental locations and other assets. Additionally, adoption of this guidance will impact the statement of cash flows with respect to the presentation of the Company's operating activities, but is not expected to impact its presentation of investing or financing activities. Adoption of this guidance is not expected to have a material impact on the Company’s results of operations. The Company has reached conclusions on key accounting assessments related to its leases and is performing an analysis of its lease portfolio to ensure proper application of the new guidance including implementation of internal controls over financial reporting.
Lessor
The Company has concluded that revenue earned by operations for the rental and cash flows.leasing of vehicles and from other forms of rental related activities wherein an identified asset is transferred to the customer and the customer has the ability to control that asset is within the scope of this guidance and that additional disclosures regarding lease revenue are required upon adoption. There is no impact to the nature, timing or recognition of rental lease revenue upon adoption of this guidance.
Recognition and Measurement of Financial Assets and Financial Liabilities
In January 2016, the FASB issued guidance that makes several changes to the manner in which financial assets and liabilities are accounted for, including, among other things, a requirement to measure most equity investments at fair value with changes in fair value recognized in net income (with the exception of investments that are consolidated or accounted for using the equity method or a fair value practicability exception), and amends certain disclosure
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
requirements related to fair value measurements and financial assets and liabilities. This guidance is effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods using a modified retrospective transition method for most of the requirements. Based on current operations, no materialadoption of this guidance is not expected to impact to the Company’s financial position, results of operations and cash flows is expected upon adoption of this guidance.
Leases
In February 2016, the FASB issued guidance that replaces the existing lease guidance. The new guidance establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and lease liability on the balance sheet for all leases with terms longer than 12 months. The guidance will impact leases of our rental locations, as we own approximately 3% of the locations from which we operate our vehicle rental business, in addition to leases of other assets. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. This guidance also expands the requirements for lessees to record leases embedded in other arrangements and the required quantitative and qualitative disclosures surrounding leases. Accounting guidance for lessors is largely unchanged. This guidance is effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods using a modified retrospective transition approach. The Company is in the process of assessing the potential impacts of adopting this guidance on its financial position, results of operations and cash flows.
Simplifying the Transition to the Equity Method of Accounting16
In March 2016, the FASB issued guidance that eliminates the requirement to apply the equity methodHERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
Improvements to Employee Share-Based Payment Accounting
In March 2016, the FASB issued guidance that simplifies several areas of employee share-based payment accounting, including income taxes, forfeitures, minimum statutory withholding requirements, and classifications within the statement of cash flows. Most significantly, the new guidance eliminates the need to track tax “windfalls” in a separate pool within additional paid-in capital; instead, excess tax benefits and tax deficiencies will be recorded within income tax expense. This will result in the Company reclassifying excess tax benefits from additional paid-in capital to retained earnings on the balance sheet. The new guidance also gives entities the ability to elect whether to estimate forfeitures or account for them as they occur. Different adoption methods are required for the various aspects of the new guidance, including the retrospective, modified retrospective and prospective approaches, effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. The Company is in the process of assessing the impacts of adopting this guidance on its financial position, results of operations and cash flows.
Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued guidance that sets forth a current expected credit loss (“CECL”) impairment model for financial assets, which replaces the current incurred loss model. This model requires a financial asset (or group of financial assets), including trade receivables, measured at amortized cost to be presented at the net amount expected to be collected with an allowance for credit losses deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. This guidance is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods using a modified retrospective transition method. The Company is in the processBased on current operations, adoption of assessing the potential impacts of adopting this guidance is not expected to impact the Company's financial position, results of operations or cash flows.
Tax Consequences of Intra-Entity Transfers of Assets Other Than Inventory
In October 2016, the FASB issued guidance that requires the tax consequences of intra-entity asset transfers, other than intra-entity asset transfers of inventory, to be recognized when the transfers occur although the profits on itsthe sales of the assets are eliminated in consolidation. Current guidance requires the tax effects of the transfer be recognized later when the assets are sold to a third party or otherwise disposed of. Under the new guidance, the seller's tax expense on the profit and the buyer's deferred tax benefit on the increased tax basis are recognized within the consolidated group when the transfers occur. The guidance is effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods using a modified retrospective transition method. Based on current operations, adoption of this guidance is not expected to have a material impact on the Company's financial position, results of operations, and cash flows.
Restricted Cash
In November 2016, the FASB issued guidance that clarifies existing guidance on the classification and presentation of restricted cash in the statement of cash flows. The guidance requires entities to include restricted cash and restricted cash equivalents in its cash and cash equivalents balances in the statement of cash flows. Under current guidance, the Company presents these transfers within the cash flows from investing and financing sections in its consolidated statements of cash flows. The guidance is effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods using a retrospective transition method. Adoption of this guidance will impact the reconciliation of the beginning-of-period and end-of-period total amounts shown on the Company's statement of cash flows. For the six months ended June 30, 2017, the amount of cash and cash equivalents as presented on the statement of cash flows will increase by $1.1 billion. Additionally, transfers between restricted and unrestricted cash will no longer be a component of the Company's investing or financing activities.
Clarifying the Definition of a Business
In January 2017, the FASB issued guidance that clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance requires an evaluation of whether substantially all of the fair value of assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets. If so, the transaction does not qualify as a business. The guidance also requires an acquired business to include at least one substantive process and narrows the definition of outputs. The guidance is effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods using a prospective transition method. Based on current operations, adoption of this guidance is not expected to impact the Company's financial position, results of operations or cash flows.
Clarifying the Scope of Nonfinancial Asset Derecognition and Accounting for Partial Sales of Nonfinancial Assets
In February 2017, the FASB issued guidance that clarifies the scope of the established guidance on nonfinancial asset derecognition as well as the accounting for partial sales of nonfinancial assets. The guidance is effective for annual reporting periods beginning after December 15, 2017 and interim periods within those annual periods. The new guidance
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
may be adopted on either a full or modified retrospective basis. Based on current operations, adoption of this guidance is not expected to impact the Company's financial position, results of operations or cash flows.
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
In March 2017, the FASB issued guidance that requires entities to (1) disaggregate the current-service-cost component from the other components of net benefit cost (the “other components”) and present the current-service-cost component with other current compensation costs for related employees in the income statement and (2) present the other components elsewhere in the income statement and outside of income from operations if such a subtotal is presented. The guidance also requires entities to disclose the income statement lines that contain the other components if they are not presented on described separate lines. In addition, only the service-cost component of net benefit cost is eligible for capitalization, which is a change from current practice, under which entities capitalize the aggregate net benefit cost when applicable. The guidance is effective for annual reporting periods beginning after December 15, 2017 and interim periods within those annual periods. The guidance affecting the presentation of the components of net periodic benefit cost in the income statement requires use of the retrospective method of adoption and the guidance limiting the capitalization of net periodic benefit cost to the service cost component requires use of the prospective method of adoption. Adoption of this guidance will result in a reclassification of certain amounts from direct vehicle and operating expense and selling, general and administrative expense to other (income) expense, net which does not impact the Company's financial position, results of operations or cash flows. The Company does not expect the reclassified amounts to be material.
Note 3—Discontinued Operations
As further described in Note 1, "Background," on June 30, 2016, the separation of Old Hertz Holdings' global vehicle rental and equipment rental businesses was completed.
Results of Discontinued Operations - Hertz Global
The following table summarizes the results of the equipment rental business and certain parent legal entities which are presented as discontinued operations in 2016:
|
| | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| (In millions) | 2016 | | 2016 |
| Total revenues | $ | 349 |
| | $ | 677 |
|
| Direct operating expenses | 182 |
| | 366 |
|
| Depreciation of revenue earning equipment and lease charges, net | 91 |
| | 181 |
|
| Selling, general and administrative | 81 |
| | 123 |
|
Interest expense, net(1) | 11 |
| | 17 |
|
| Other (income) expense, net | — |
| | (1 | ) |
| Income (loss) from discontinued operations before income taxes | (16 | ) | | (9 | ) |
| (Provision) benefit for taxes on discontinued operations | 1 |
| | (4 | ) |
| Net income (loss) from discontinued operations | $ | (15 | ) | | $ | (13 | ) |
(1) In addition to interest expense directly associated with Herc Holdings, the Company allocated interest expense related to certain debt repaid in connection with the Spin-Off Hertz Global and Herc Holdings have entered into multiple agreements that provide a framework forto discontinued operations. For the relationships betweenthree months ended June 30, 2016, the parties going forward. Asamount allocated was $3 million. For the primary operating company for Hertz Global,six months ended June 30, 2016, the agreements that follow also apply to Hertz directly.
Separation and Distribution Agreement
Hertz Global entered into a separation and distribution agreement (the “Separation Agreement”) with Herc Holdings which, among other things, sets forth other agreements that govern the aspects of the relationship as follows:
Internal Reorganization and Related Financing Transactions - Provides for the transfers of entities and assets and the assumption of liabilities necessary to complete the Spin-Off, including the series of internal reorganization transactions such that Hertz Global holds the entities associated with Old Hertz Holdings’ global vehicle rental business, including Hertz, and Herc Holdings holds the entities associated with Old Hertz Holdings’ global equipment rental business, including Herc Rentals Inc. (“Herc”, formerly known as Hertz Equipment Rental Corporation, or “HERC”).
Pursuant to the Separation Agreement, Herc made certain cash transfers in the total amount of approximately $2.0 billion to Hertz Global and its subsidiaries in June 2016. To fund, among other things, such transfers, in connection with, and prior to, the Spin-Off, Herc issued senior secured second priority notes and entered into a new asset-based revolving credit agreement. Hertz Global and Hertz used the cash proceeds from these transfers to pay off the Senior Term Facility.
Legal Matters and Claims; Sharing of Certain Liabilities - Subject to any specified exceptions, each party to the Separation Agreement has assumed the liability for, and control of, all pending and threatened legal matters related to its own business, as well as assumed or retained liabilities, and has indemnified the other party for any liability arising out of or resulting from such assumed legal matters.
The Separation Agreement provides for certain liabilities to be shared by the parties. Hertz Global and Herc Holdings are each responsible for a portion of these shared liabilities. The division of these shared liabilities are set forth in the Separation Agreement. Hertz Global is responsible for managing the settlement or other disposition of such shared liabilities.
Other Matters - In addition to those matters discussed above, the Separation Agreement, among other things, (i) governs the transfer of assets and liabilities generally, (ii) terminates all intercompany arrangements between Hertz Global and Herc Holdings except for specified agreements and arrangements that follow the Spin-Off, (iii) contains further assurances, terms and conditions that require Hertz Global and Herc Holdings to use commercially reasonable efforts to consummate the transactions contemplated by the Separation Agreement and the ancillary agreements, (iv) releases certain claims between the parties and their affiliates, successors and assigns, (v) contains mutual indemnification clauses and (vi) allocates expenses of the Spin-Off between the parties.allocated was $5 million.
THE HERTZ CORPORATIONGLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
Transition Services Agreement
Hertz Global entered into a transition services agreement (the “Transition Services Agreement”) pursuant to which Hertz Global or its affiliates, including Hertz, will provide Herc Holdings specified services on a transitional basis for a term of up to two years following the Spin-off, though Hertz Global may request certain transition services to be performed by Herc Holdings. The services to be provided by Hertz Global primarily include information technology and network and telecommunications systems support, human resources, payroll and benefits, accounting and finance, treasury, tax matters and administrative services. With certain exceptions, Hertz Global and Herc Holdings have agreed to charge for the services rendered the allocated costs associated with rendering these services, including a mark-up for certain services, which the Company will record as a reduction to the associated expenses.
Tax Matters Agreement
Hertz Global and Hertz entered into a tax matters agreement (the “Tax Matters Agreement”) with Herc Holdings and Herc that governs the parties’ respective rights, responsibilities and obligations after the Spin-Off with respect to tax liabilities and benefits, tax attributes, tax contests and other tax matters regarding income taxes, other taxes and related tax returns.
Under the Tax Matters Agreement, Herc Holdings, Herc, Hertz Global and Hertz are responsible for their respective tax liabilities. The agreement provides for no compensation due to any change in a tax attribute, such as a net operating loss ("NOL"). Tax attributes are allocated between the entities based on the applicable federal or state income tax law and regulations. The Tax Matters Agreement also requires that an unqualified opinion from a nationally recognized law firm, supplemental ruling from the Internal Revenue Service, or waiver from the other party be obtained upon the occurrence or contemplated occurrence of certain events which could impact the taxability of the transaction under the U.S. federal income tax law. The 2016 tax return when filed will include six months activity of Hertz Global and 12 months activity of Herc Holdings.
Employee Matters Agreement
Hertz Global and Herc Holdings entered into an employee matters agreement (the “Employee Matters Agreement”) to allocate liabilities and responsibilities relating to employment matters, employee compensation, benefit plans and programs and other related matters. The Employee Matters Agreement governs Hertz Global's and Herc Holdings’ obligations with respect to such matters for current and former employees of the vehicle rental business and the equipment rental business.
Intellectual Property Agreement
Hertz Global and Herc Holdings entered into an intellectual property agreement (the “Intellectual Property Agreement”) that provides for ownership, licensing and other arrangements regarding the trademarks and related intellectual property that Hertz Global and Herc Holdings use in conducting their respective businesses. The agreement provides that, following the Spin-Off, Herc Holdings will continue to have the right to use certain intellectual property associated with the Hertz brand for a period of four years on a royalty free basis.
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
Results of Discontinued Operations - Hertz
The following table summarizes the results of the equipment rental business which is presented as discontinued operations. The operations of Hertz that are discontinued are comprised of the Company's former Worldwide Equipment Rental segment.
in 2016:
| | | | Three Months Ended
June 30, | | Six Months Ended
June 30, | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| (In millions) | 2016 | | 2015 | | 2016 | | 2015 | 2016 | | 2016 |
| Total revenues | $ | 349 |
| | $ | 375 |
| | $ | 677 |
| | $ | 730 |
| $ | 349 |
| | $ | 677 |
|
| Direct operating expenses | 182 |
| | 212 |
| | 366 |
| | 418 |
| 182 |
| | 366 |
|
| Depreciation of revenue earning equipment and lease charges, net | 91 |
| | 81 |
| | 181 |
| | 157 |
| 91 |
| | 181 |
|
| Selling, general and administrative | 82 |
| | 45 |
| | 124 |
| | 89 |
| 82 |
| | 124 |
|
Interest expense, net(1) | 10 |
| | 6 |
| | 13 |
| | 12 |
| 10 |
| | 13 |
|
| Other (income) expense, net | — |
| | (2 | ) | | (1 | ) | | (3 | ) | — |
| | (1 | ) |
| Income (loss) from discontinued operations before income taxes | (16 | ) | | 33 |
| | (6 | ) | | 57 |
| (16 | ) | | (6 | ) |
| (Provision) benefit for taxes on discontinued operations | 1 |
| | (10 | ) | | (5 | ) | | (25 | ) | 1 |
| | (5 | ) |
| Net income (loss) from discontinued operations | $ | (15 | ) | | $ | 23 |
| | $ | (11 | ) | | $ | 32 |
| $ | (15 | ) | | $ | (11 | ) |
(1) In addition to interest expense directly associated with Herc Holdings, the Company allocated all interest expense associated with the Senior ABL Facilityrelated to discontinued operations as thiscertain debt was repaid in connection with the Spin-Off in accordance with requirements as disclosed in Note 6, "Debt."to discontinued operations. For the three months ended June 30, 2016, and 2015, the amount allocated was $3 million and $4 million, respectively.million. For the six months ended June 30, 2016, and 2015, the amount allocated was $5 million and $8 million, respectively.
The carrying amounts of the major classes of assets and liabilities of discontinued operations as of December 31, 2015 consisted of the following:
|
| | | |
| (In millions) | December 31, 2015 |
| ASSETS | |
| Cash and cash equivalents | $ | 5 |
|
| Restricted cash and cash equivalents | 16 |
|
| Receivables, net of allowance | 288 |
|
| Inventories, net | 22 |
|
| Prepaid expenses and other assets | 38 |
|
| Revenue earning equipment, net | 2,382 |
|
| Property and other equipment, net | 246 |
|
| Other intangible assets, net | 300 |
|
| Goodwill | 93 |
|
| Total assets of discontinued operations | $ | 3,390 |
|
| LIABILITIES | |
| Accounts payable | $ | 109 |
|
| Accrued liabilities and other | 71 |
|
| Accrued taxes, net | 273 |
|
| Debt | 64 |
|
| Public liability and property damage | 8 |
|
| Deferred taxes on income, net | 775 |
|
| Total liabilities of discontinued operations | $ | 1,300 |
|
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
As a result of the Spin-Off, the Company distributed $348 million in net assets of Herc Holdings, which has been reflected as a reduction to additional paid in capital and accumulated other comprehensive (income) loss in the accompanying condensed consolidated balance sheet and statement of changes in equity as of June 30, 2016. Also in connection with the Spin-Off, there was a $229 million reclassification related to the resulting continuing operations presentation of tax accounts from accrued taxes, net to prepaid expenses and other assets in the accompanying condensed consolidated balance sheets as of December 31, 2015.million.
Note 4—Acquisitions and Divestitures
Acquisitions
Equity Investment
During the three months ended June 30, 2016, the Company paid $45 million for investments in entities which are accounted for under the equity method. These investments are presented within prepaid expenses and other assets in the accompanying condensed consolidated balance sheets.
Hertz Franchises
In February 2015, the Company acquired substantially all of the assets of certain Hertz-branded franchises, including existing vehicles and contract and concession rights, for $87 million. The franchises acquired include on airport locations in Indianapolis, South Bend and Ft. Wayne, Indiana and in Memphis, Tennessee, as well as several smaller off airport locations. The acquisition was part of a strategic decision at the time to increase the number of Hertz-owned locations and capitalize on certain benefits of ownership not available under a franchise agreement.
The acquisition was accounted for utilizing the acquisition method of accounting where the purchase price of the reacquired franchises was allocated based on estimated fair values of the assets acquired and liabilities assumed. The excess of the purchase price over the estimated fair value of the net tangible and intangible assets acquired was recorded as goodwill. The purchase price was allocated as follows:
|
| | | |
| (In millions) | U.S. Rental Car |
| Revenue earning vehicles | $ | 71 |
|
| Property and equipment | 6 |
|
| Other intangible assets | 9 |
|
| Goodwill | 1 |
|
| Total | $ | 87 |
|
Divestitures
CAR Inc. Investment
In March 2016, the Company sold 204 million shares of common stock of CAR Inc., a publicly traded company on the Hong Kong Stock Exchange and extended its commercial agreement with CAR Inc. to 2023, in exchange for $240 million, of which $233 million was allocated to the sale of shares based on the fair value of those shares. The sale of shares resulted in a pre-tax gain of $75 million which has been recognized and recorded in the Company's corporate operations and is included in other (income) expense, net in the accompanying condensed consolidated statements of operations. Additionally, $7 million of the proceeds were allocated to the extension of the commercial agreement which have been deferred and are being recognized over the remaining term of the commercial agreement.
The sale of the shares reduced the Company's ownership interest in CAR Inc. to 1.7%. Additionally, and eliminated the Company is no longer ableCompany's ability to exercise significant influence over CAR Inc. and asAs a result, discontinued the equity method of accounting for this investment andCompany classifies the investment as an available for sale security. This investmentsecurity which is presented within prepaid expenses and other assets in the accompanying condensed consolidated balance sheets.sheet as of December 31, 2016.
In February 2017, the Company sold its remaining shares of common stock of CAR Inc. and no longer has an ownership interest in the entity.
Brazil Operations
During the fourth quarter of 2016, the Company, along with certain of its wholly owned subsidiaries, entered into a definitive stock purchase agreement ("Purchase Agreement") to sell Car Rental Systems do Brasil Locação de Veiculos Ltd., a wholly owned subsidiary of the Company located in Brazil ("Brazil Operations"), to Localiza Fleet S.A. (“Localiza”), a corporation headquartered in Brazil. As part of the overall agreement, the Company intends to enter into certain ancillary agreements with Localiza, including co-branding in Brazil and use of the Localiza brand in other select markets, customer referrals and the exchange of technology and information, at the closing date of the Purchase Agreement. The proceeds from the sale are expected to be approximately $108 million, which is subject to change in accordance with the terms of the Purchase Agreement. Approximately $12 million of the proceeds will be placed into escrow to secure certain indemnification obligations as defined in the Purchase Agreement. In July 2017, the Company received
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
See Note 13, "Fair Value Measurements,"regulatory approval for the fair valuesale which is expected to close during the third quarter of 2017. The Brazil Operations are included in the Company's International Rental Car segment.
The Brazil operations are classified as held for sale in the accompanying condensed consolidated balance sheets.
The carrying amounts of the Company's available for sale securities at June 30, 2016.major classes of assets and liabilities of the Brazil Operations are as follows:
|
| | | | | | | |
| (In millions) | June 30, 2017 | | December 31, 2016 |
| ASSETS | | | |
| Cash and cash equivalents | $ | 4 |
| | $ | 1 |
|
| Receivables, net | 12 |
| | 11 |
|
| Prepaid expenses and other assets | 3 |
| | 5 |
|
| Revenue earning vehicles, net | 81 |
| | 86 |
|
| Property and equipment, net | 1 |
| | 1 |
|
| Intangibles | 2 |
| | 1 |
|
| Deferred income taxes, net | 6 |
| | 6 |
|
| Assets held for sale | $ | 109 |
| | $ | 111 |
|
| LIABILITIES | | | |
| Accounts payable | $ | 6 |
| | $ | 11 |
|
| Accrued liabilities | 7 |
| | 6 |
|
| Liabilities held for sale | $ | 13 |
| | $ | 17 |
|
Note 5—Revenue Earning Vehicles
The components of revenue earning vehicles, net are as follows:
| | | (In millions) | June 30, 2016 | | December 31, 2015 | June 30, 2017 | | December 31, 2016 |
| Revenue earning vehicles | $ | 15,081 |
| | $ | 13,242 |
| $ | 15,739 |
| | $ | 13,287 |
|
| Less: Accumulated depreciation | (2,502 | ) | | (2,631 | ) | (2,843 | ) | | (2,678 | ) |
| | 12,579 |
| | 10,611 |
| 12,896 |
| | 10,609 |
|
| Revenue earning vehicles held for sale, net | 230 |
| | 135 |
| 290 |
| | 209 |
|
| Revenue earning vehicles, net | $ | 12,809 |
| | $ | 10,746 |
| $ | 13,186 |
| | $ | 10,818 |
|
The above amounts exclude revenue earning vehicles of the Company's Brazil Operations which are deemed held for sale as further described in Note 4, "Acquisitions and Divestitures".
Depreciation of revenue earning vehicles and lease charges, net includes the following:
| | | | Three Months Ended
June 30, | | Six Months Ended
June 30, | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| (In millions) | 2016 | | 2015 | | 2016 | | 2015 | 2017 | | 2016 | | 2017 | | 2016 |
| Depreciation of revenue earning vehicles | $ | 576 |
| | $ | 575 |
| | $ | 1,135 |
| | $ | 1,167 |
| $ | 660 |
| | $ | 576 |
| | $ | 1,265 |
| | $ | 1,135 |
|
(Gain) loss on disposal of revenue earning vehicles(a) | 35 |
| | 4 |
| | 77 |
| | 24 |
| 66 |
| | 35 |
| | 145 |
| | 77 |
|
| Rents paid for vehicles leased | 18 |
| | 18 |
| | 33 |
| | 37 |
| 17 |
| | 18 |
| | 34 |
| | 33 |
|
| Depreciation of revenue earning vehicles and lease charges, net | $ | 629 |
| | $ | 597 |
| | $ | 1,245 |
| | $ | 1,228 |
| $ | 743 |
| | $ | 629 |
| | $ | 1,444 |
| | $ | 1,245 |
|
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
(a) (Gain) loss on disposal of revenue earning vehicles by segment is as follows:
| | | | Three Months Ended
June 30, | | Six Months Ended
June 30, | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| (In millions) | 2016 | | 2015 | | 2016 | | 2015 | 2017 | | 2016 | | 2017 | | 2016 |
U.S. Rental Car | $ | 38 |
| | $ | 5 |
| | $ | 81 |
| | $ | 25 |
| $ | 67 |
| | $ | 38 |
| | $ | 145 |
| | $ | 81 |
|
| International Rental Car | (3 | ) | | (1 | ) | | (4 | ) | | (1 | ) | (1 | ) | | (3 | ) | | — |
| | (4 | ) |
| Total | $ | 35 |
| | $ | 4 |
| | $ | 77 |
| | $ | 24 |
| $ | 66 |
| | $ | 35 |
| | $ | 145 |
| | $ | 77 |
|
(i) Includes costs associated with the Company's U.S. vehicle sales operations of $34 million and $27 million for the three months ended June 30, 2017 and 2016, respectively, and $63 million and $53 million, for the six months ended June 30, 2017 and 2016, respectively.
Depreciation rates are reviewed on a quarterly basis based on management's ongoing assessment of present and estimated future market conditions, their effect on residual values at the time of disposal and the estimated holding periods for the vehicles. The cumulative impact of depreciation rate changes is as follows:
| | | Increase (decrease) | Three Months Ended
June 30, | | Six Months Ended
June 30, | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| (In millions) | 2016 | | 2015 | | 2016 | | 2015 | 2017 | | 2016 | | 2017 | | 2016 |
U.S. Rental Car (a) | $ | 19 |
| | $ | 27 |
| | $ | 45 |
| | $ | 57 |
| $ | 36 |
| | $ | 19 |
| | $ | 62 |
| | $ | 45 |
|
| International Rental Car | 1 |
| | — |
| | 2 |
| | — |
| 1 |
| | 1 |
| | 1 |
| | 2 |
|
| Total | $ | 20 |
| | $ | 27 |
| | $ | 47 |
| | $ | 57 |
| $ | 37 |
| | $ | 20 |
| | $ | 63 |
| | $ | 47 |
|
| |
| (a) | The depreciation rate changes in the U.S. Rental Car operations for the three and six months ended June 30, 2017 include a net increase in depreciation expense of $24 million based on the review completed during the second quarter of 2017. The depreciation rate changes in the U.S. Rental Car operations for the three and six months ended June 30, 2016 include a net increase in depreciation expense of $12 million based on the review completed during the second quarter of 2016. The depreciation rate changes in the U.S. Rental Car operations for the three and six months ended June 30, 2015 include a net increase in depreciation expense of $13 million based on the review completed during the second quarter of 2015. |
Note 6—Goodwill and Intangible Assets
As a result of declines in revenue and profitability of the Company and a decline in the share price of Hertz Global's common stock, the Company tested the recoverability of its goodwill and indefinite-lived intangible assets as of June 30, 2017 as further described below.
Goodwill
The Company performed a goodwill impairment analysis using the income approach, a measurement using level 3 inputs under the GAAP fair value hierarchy. In performing the impairment analysis, the Company leveraged long-term strategic plans, which are based on strategic initiatives for future profitability growth. The weighted average cost of capital used in the discounted cash flow model was calculated based upon the fair value of the Company's debt and stock price with a debt to equity ratio comparable to the vehicle rental car industry. The results of the Company's analysis indicated that the estimated fair value of each reporting unit was substantially in excess of its carrying value, therefore, the Company determined that no goodwill impairment existed as of June 30, 2017.
Intangible Assets
The Company performed an impairment analysis of its indefinite-lived intangible assets using the relief from royalty method, a measurement using level 3 inputs under the GAAP fair value hierarchy. As a result of the analysis, the Company concluded that there was an impairment of the Dollar Thrifty tradename in its U.S. Rental Car segment and recorded a charge of $86 million. The impairment was largely due to a decrease in long-term revenue projections coupled with an increase in the weighted average cost of capital. The carrying value of the Dollar Thrifty tradename at June 30, 2017 is approximately $934 million, representing its estimated fair value. A change of 1 percentage point to the weighted average cost of capital assumption used in the impairment analysis could impact the impairment charge by approximately $80 million.
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
Note 6—7—Debt
As discussed in Note 3, "Discontinued Operations," on June 30, 2016, the Company completed a Spin-Off of the equipment rental business. Amounts presented herein relate to the debt associated with the vehicle rental business.
The Company's debt, including its available credit facilities, consists of the following (in millions):
| | | Facility | | Weighted Average Interest Rate at June 30, 2016 | | Fixed or
Floating
Interest
Rate | | Maturity | | June 30,
2016 | | December 31,
2015 | | Weighted Average Interest Rate at June 30, 2017 | | Fixed or
Floating
Interest
Rate | | Maturity | | June 30,
2017 | | December 31,
2016 |
| Non-Vehicle Debt | | | | | | | | |
| Senior Term Loan | | 3.50% | | Floating | | 6/2023 | | $ | 700 |
| | $ | — |
| | 3.98% | | Floating | | 6/2023 | | $ | 693 |
| | $ | 697 |
|
| Senior RCF | | N/A | | Floating | | 6/2021 | | — |
| | — |
| | 4.41% | | Floating | | 6/2021 | | 750 |
| | — |
|
| Senior Term Facility | | N/A | | N/A | | N/A | | — |
| | 2,062 |
| |
| Senior ABL Facility | | N/A | | N/A | | N/A | | — |
| | — |
| |
Senior Notes(1) | | 6.58% | | Fixed | | 4/2018–10/2022 | | 3,900 |
| | 3,900 |
| | 6.22% | | Fixed | | 4/2019–10/2024 | | 2,950 |
| | 3,200 |
|
| Senior Second Priority Secured Notes | | | 7.63% | | Fixed | | 6/2022 | | 1,250 |
| | — |
|
| Promissory Notes | | 7.00% | | Fixed | | 1/2028 | | 27 |
| | 27 |
| | 7.00% | | Fixed | | 1/2028 | | 27 |
| | 27 |
|
| Other Non-Vehicle Debt | | 6.71% | | Fixed | | Various | | 2 |
| | 2 |
| | 1.98% | | Fixed | | Various | | 9 |
| | 10 |
|
| Unamortized Debt Issuance Costs and Net (Discount) Premium | | (38 | ) | | (44 | ) | | (46 | ) | | (39 | ) |
| Total Non-Vehicle Debt | | 4,591 |
| | 5,947 |
| | 5,633 |
| | 3,895 |
|
| Vehicle Debt | | | | | | | | |
| HVF U.S. Vehicle Medium Term Notes | HVF U.S. Vehicle Medium Term Notes | | | | | HVF U.S. Vehicle Medium Term Notes | | | | |
HVF Series 2010-1(2) | | 4.96% | | Fixed | | 2/2018 | | 115 |
| | 240 |
| | 4.96% | | Fixed | | 2/2018 | | 115 |
| | 115 |
|
HVF Series 2011-1(2) | | 3.51% | | Fixed | | 3/2017 | | 230 |
| | 230 |
| | N/A | | N/A | | N/A | | — |
| | 115 |
|
HVF Series 2013-1(2) | | 1.81% | | Fixed | | 8/2016–8/2018 | | 733 |
| | 950 |
| | 1.91% | | Fixed | | 8/2018 | | 625 |
| | 625 |
|
| | | 1,078 |
| | 1,420 |
| | 740 |
| | 855 |
|
| HVF II U.S. ABS Program | | | | | | | | |
| HVF II U.S. Vehicle Variable Funding Notes | HVF II U.S. Vehicle Variable Funding Notes | | | | | HVF II U.S. Vehicle Variable Funding Notes | | | | |
HVF II Series 2013-A(2) | | 1.50% | | Floating | | 10/2017 | | 1,816 |
| | 980 |
| | 2.39% | | Floating | | 1/2019 | | 3,223 |
| | 1,844 |
|
HVF II Series 2013-B(2) | | 1.58% | | Floating | | 10/2017 | | 953 |
| | 1,308 |
| | 2.34% | | Floating | | 1/2019 | | 268 |
| | 626 |
|
HVF II Series 2014-A(2) | | 2.33% | | Floating | | 10/2016 | | 403 |
| | 1,737 |
| |
HVF II Series 2017-A(2) | | | N/A | | Floating | | 10/2018 | | — |
| | — |
|
| | | 3,172 |
| | 4,025 |
| | 3,491 |
| | 2,470 |
|
| HVF II U.S. Vehicle Medium Term Notes | HVF II U.S. Vehicle Medium Term Notes | | | | | HVF II U.S. Vehicle Medium Term Notes | | | | |
HVF II Series 2015-1(2) | | 2.93% | | Fixed | | 3/2020 | | 780 |
| | 780 |
| | 2.93% | | Fixed | | 3/2020 | | 780 |
| | 780 |
|
HVF II Series 2015-2(2) | | 2.30% | | Fixed | | 9/2018 | | 250 |
| | 250 |
| | 2.30% | | Fixed | | 9/2018 | | 250 |
| | 250 |
|
HVF II Series 2015-3(2) | | 2.96% | | Fixed | | 9/2020 | | 350 |
| | 350 |
| | 2.96% | | Fixed | | 9/2020 | | 350 |
| | 350 |
|
HVF II Series 2016-1(2) | | 2.72% | | Fixed | | 3/2019 | | 439 |
| | — |
| | 2.72% | | Fixed | | 3/2019 | | 439 |
| | 439 |
|
HVF II Series 2016-2(2) | | 3.25% | | Fixed | | 3/2021 | | 561 |
| | — |
| | 3.25% | | Fixed | | 3/2021 | | 561 |
| | 561 |
|
HVF II Series 2016-3(2) | | 2.56% | | Fixed | | 7/2019 | | 400 |
| | — |
| | 2.56% | | Fixed | | 7/2019 | | 400 |
| | 400 |
|
HVF II Series 2016-4(2) | | 2.91% | | Fixed | | 7/2021 | | 400 |
| | — |
| | 2.91% | | Fixed | | 7/2021 | | 400 |
| | 400 |
|
| | | 3,180 |
| | 1,380 |
| | 3,180 |
| | 3,180 |
|
| Donlen ABS Program | | | | | | | | |
| HFLF Variable Funding Notes | | | | | | | | |
HFLF Series 2013-2(2) | | 1.49% | | Floating | | 9/2017 | | 175 |
| | 370 |
| | 2.11% | | Floating | | 9/2018 | | 150 |
| | 410 |
|
| | | 175 |
| | 370 |
| | 150 |
| | 410 |
|
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
| | | Facility | | Weighted Average Interest Rate at June 30, 2016 | | Fixed or
Floating
Interest
Rate | | Maturity | | June 30,
2016 | | December 31,
2015 | | Weighted Average Interest Rate at June 30, 2017 | | Fixed or
Floating
Interest
Rate | | Maturity | | June 30,
2017 | | December 31,
2016 |
| HFLF Medium Term Notes | | | | | | | | |
HFLF Series 2013-3(2)(5) | | 1.21% | | Floating | | 9/2016–11/2016 | | 171 |
| | 270 |
| | N/A | | N/A | | N/A | | — |
| | 96 |
|
HFLF Series 2014-1(2)(5) | | 1.06% | | Floating | | 12/2016–3/2017 | | 209 |
| | 288 |
| | 2.06% | | Floating | | 7/2017-12/2017 | | 82 |
| | 148 |
|
HFLF Series 2015-1(2)(5) | | 1.12% | | Floating | | 3/2018–5/2018 | | 295 |
| | 295 |
| | 1.84% | | Floating | | 7/2017-8/2019 | | 198 |
| | 248 |
|
HFLF Series 2016-1(2)(5) | | 1.80% | | Floating | | 2/2019–4/2019 | | 386 |
| | — |
| | 2.35% | | Both | | 7/2017-2/2019 | | 387 |
| | 385 |
|
HFLF Series 2017-1(5) | | | 2.18% | | Both | | 6/2018-5/2020 | | 500 |
| | — |
|
| | | 1,061 |
| | 853 |
| | 1,167 |
| | 877 |
|
| Other Vehicle Debt | | | | | | | | |
U.S. Vehicle RCF(3) | | 3.50% | | Floating | | 6/2021 | | 185 |
| | — |
| | 3.55% | | Floating | | 6/2021 | | 168 |
|
| 193 |
|
| U.S. Vehicle Financing Facility | | N/A | | N/A | | N/A | | — |
| | 190 |
| |
| European Revolving Credit Facility | | 2.13% | | Floating | | 10/2017 | | 376 |
| | 273 |
| | 2.75% | | Floating | | 1/2019 | | 284 |
| | 147 |
|
European Vehicle Notes | | 4.38% | | Fixed | | 1/2019 | | 470 |
| | 464 |
| | 4.29% | | Fixed | | 1/2019–10/2021 | | 740 |
| | 677 |
|
European Securitization(2) | | 1.55% | | Floating | | 10/2018 | | 415 |
| | 267 |
| | 1.55% | | Floating | | 10/2018 | | 454 |
| | 312 |
|
Canadian Securitization(2) | | 1.88% | | Floating | | 1/2018 | | 253 |
| | 148 |
| | 2.19% |
| Floating |
| 1/2019 |
| 268 |
|
| 162 |
|
Australian Securitization(2) | | 3.51% | | Floating | | 12/2016 | | 89 |
| | 98 |
| | 3.12% | | Floating | | 7/2018 | | 122 |
| | 117 |
|
| Brazilian Vehicle Financing Facility | | 17.63% | | Floating | | 10/2016 | | 9 |
| | 7 |
| |
| New Zealand RCF | | | 4.30% | | Floating | | 9/2018 | | 35 |
| | 41 |
|
| Capitalized Leases | | 2.61% | | Floating | | 7/2016–3/2020 | | 383 |
| | 362 |
| | 2.74% | | Floating | | 7/2017–4/2021 | | 412 |
| | 244 |
|
| | | 2,180 |
| | 1,809 |
| | 2,483 |
| | 1,893 |
|
| Unamortized Debt Issuance Costs and Net (Discount) Premium | | (45 | ) | | (34 | ) | | (35 | ) | | (39 | ) |
| Total Vehicle Debt | | 10,801 |
| | 9,823 |
| | 11,176 |
| | 9,646 |
|
| Total Debt | | $ | 15,392 |
| | $ | 15,770 |
| | $ | 16,809 |
| | $ | 13,541 |
|
N/A - Not Applicable
| |
| (1) | References to the "Senior Notes" include the series of Hertz's unsecured senior notes set forth on the table below. Outstanding principal amounts for each such series of the Senior Notes is also specified below: |
| | | (In millions) | Outstanding Principal | Outstanding Principal |
| Senior Notes | June 30, 2016 | | December 31, 2015 | June 30, 2017 | | December 31, 2016 |
| 4.25% Senior Notes due April 2018 | $ | 250 |
| | $ | 250 |
| $ | — |
| | $ | 250 |
|
| 7.50% Senior Notes due October 2018 | 700 |
| | 700 |
| |
| 6.75% Senior Notes due April 2019 | 1,250 |
| | 1,250 |
| 450 |
| | 450 |
|
| 5.875% Senior Notes due October 2020 | 700 |
| | 700 |
| 700 |
| | 700 |
|
| 7.375% Senior Notes due January 2021 | 500 |
| | 500 |
| 500 |
| | 500 |
|
| 6.25% Senior Notes due October 2022 | 500 |
| | 500 |
| 500 |
| | 500 |
|
| 5.50% Senior Notes due October 2024 | | 800 |
| | 800 |
|
| | $ | 3,900 |
| | $ | 3,900 |
| $ | 2,950 |
| | $ | 3,200 |
|
$700 million of 7.50% Senior Notes due October 2018 were paid in July 2016 as further described in Note 19, "Subsequent Events."
| |
| (2) | Maturity reference is to the earlier "expected final maturity date" as opposed to the subsequent "legal maturity date." The expected final maturity date is the date by which Hertz and investors in the relevant indebtedness expect the relevant indebtedness to be repaid, which in the case of the HFLF Medium Term Notes was based upon various assumptions made at the time of the pricing of such notes.repaid. The legal final maturity date is the date on which the relevant indebtedness is legally due and payable. |
| |
| (3) | Approximately $67 million of the aggregate maximum borrowing capacity under the U.S. Vehicle RCF is scheduled to expire in January 2018. 2018. |
23
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
| |
| (4) | References to the "European Vehicle Notes" include the series of Hertz Holdings Netherlands B.V.'s, an indirect wholly-owned subsidiary of Hertz organized under the laws of The Netherlands (“HHN BV”), unsecured senior notes (converted from Euros to U.S. dollars at a rate of 1.14 to 1 and 1.04 to 1 as of June 30, 2017 and December 31, 2016, respectively) set forth on the table below. Outstanding principal amounts for each such series of the European Vehicle Notes is also specified below: |
|
| | | | | | | |
| (In millions) | Outstanding Principal |
| European Vehicles Notes | June 30, 2017 | | December 31, 2016 |
| 4.375% Senior Notes due January 2019 (€425 million aggregate principal amount) | $ | 484 |
| | $ | 443 |
|
| 4.125% Senior Notes due October 2021 (€225 million aggregate principal amount) | 256 |
| | 234 |
|
| | $ | 740 |
| | $ | 677 |
|
| |
| (5) | In the case of the Hertz Fleet Lease Funding LP ("HFLF") Medium Term Notes, such notes are repayable from cash flows derived from third-party leases comprising the underlying HFLF collateral pool. The initial maturity date referenced for each series of HFLF Medium Term Notes represents the end of the revolving period for such series, at which time the related notes begin to amortize monthly by an amount equal to the lease collections payable to that series. To the extent the revolving period already has ended, the initial maturity date reflected is July 2017. The second maturity date referenced for each series of HFLF Medium Term Notes represents the date by which Hertz and the investors in the related series expect such series of notes to be repaid in full, which is based upon various assumptions made at the time of pricing of such notes, including the contractual amortization of the underlying leases as well as the assumed rate of prepayments of such leases. Such maturity reference is to the “expected final maturity date” as opposed to the subsequent “legal final maturity date”. The legal final maturity date is the date on which the relevant indebtedness is legally due and payable. Although the underlying lease cash flows that support the repayment of the HFLF Medium Term Notes may vary, the cash flows generally are expected to approximate a straight line amortization of the related notes from the initial maturity date through the expected final maturity date. |
The Company is highly leveraged and a substantial portion of its liquidity needs arise from debt service on its indebtedness and from the funding of its costs of operations, acquisitions and capital expenditures. The Company’s practice is to maintain sufficient liquidity through cash from operations, credit facilities and other financing arrangements, to mitigate any adverse impact on its operations resulting from adverse financial market conditions. Approximately $1.4 billion of vehicle debt will mature between July 1, 2017 and June 30, 2018. The Company has reviewed the vehicle debt that will mature within this timeframe and determined that it is probable that the Company will be able, and has the intent, to refinance these maturities. If the Company were not able to refinance these maturities, it has available liquidity sufficient to repay them at the maturity date. As of June 30, 2017, the Company was in compliance with its financial maintenance covenant under the senior secured revolving credit facility ("Senior RCF"), see "Covenant Compliance" below.
In June 2016,2017, the Company paid offredeemed all $250 million of its outstanding 4.25% Senior Term FacilitiesNotes due April 2018 and refinanced certain vehicle debt,terminated $150 million of commitments under the Senior RCF, as further discloseddescribed below, and wroterecorded $8 million of charges for early redemption premiums and the write off $20 million inof deferred financing costs.
Non-Vehicle Debt
Senior Credit Facilities
In June 2016, in connection with the Spin-Off of the equipment rental business, the Senior Term Facility and the Senior ABL Facility were terminated.
Senior Facilities
In June 2016, in connection with the Spin-Off of the equipment rental business,2017, Hertz as parent borrower, entered into a credit agreement with respect to a new senior secured term facility (the “Senior Term Loan”) and a new senior secured revolving credit facility (the “Senior RCF”) and, together with the Senior Term Loan, (the “Senior Facilities”). At Hertz’s option and subject to certain conditions, certain of Hertz’s domestic subsidiaries may also become party to the Senior Facilities from time to time, as subsidiary borrowers. The Senior Facilities are comprised of a Senior Term Loan, with a $700terminated $150 million initial principal balance, and a Senior RCF consisting of a $1.7 billion revolving credit facility, with a portion of the Senior RCF available for the issuance of letters of credit and the issuance of swing line loans. The proceeds from the issuance of the Senior Term Loan were subsequently used to redeem all of the outstanding 7.50% Senior Notes due 2018. Subject to the satisfaction of certain conditions and limitations, the Senior Facilities allow for the addition of incremental term and/or revolving loan commitments and incremental term and/or revolving loans.
The interest rate applicable to the loans under the Senior Term Loan is based on a floating rate (subject to a LIBOR floor of 0.75%) that varies depending on Hertz’s consolidated total net corporate leverage ratio. The interest rates applicable to the loans under the Senior RCF are based on a floating rate that varies depending on Hertz’s consolidated total net corporate leverage ratio and corporate ratings.
Vehicle Debt
HVF II U.S. Vehicle Variable Funding Notes
In June 2016, HVF II terminated $1.8 billion of commitments under the HVF II Series 2014-A Class A Notes, which commitments would have otherwise terminated as previously scheduled in October 2016,Senior RCF, such that after giving effect to such termination the aggregate maximum principalSenior RCF consists of a $1.55 billion senior secured revolving credit facility.
In February 2017, certain terms of the credit agreement governing the $700 million senior secured term facility (the "Senior Term Loan") and the Senior RCF (together, the "Senior Facilities") were amended with the consent of the required lenders under the Senior RCF and such credit agreement. The amendment, among other things, (i) amends the terms of the financial maintenance covenant for the Senior RCF to test, when applicable, Hertz’s consolidated first lien net leverage ratio in lieu of Hertz’s consolidated total net corporate leverage ratio, (ii) provides that Hertz shall not make dividends and certain restricted payments until a leverage ratio test is satisfied, (iii) adds a new covenant restricting the incurrence of certain corporate indebtedness, (iv) caps the amount of unrestricted cash that may be netted for purposes of calculating the HVF II Series 2014-A Class A Notes wasconsolidated first lien net leverage ratio at $500 million (subject to borrowing base availability). HVF II also terminated $20 million of commitments under the HVF II Series 2013-B Class B Notesunless a specified consolidated total gross corporate leverage ratio is met for a specified period and $20 million of commitments under the HVF II Series 2014-A Class B Notes, such that after giving effect to such terminations the aggregate maximum principal amount of the HVF II Series 2013-B Class B Notes and the HVF II Series 2014-A Class B Notes were $55 million and $20 million, respectively (in each case, subject to borrowing base availability).
In addition, in June 2016 HVF II transitioned approximately $500 million of commitments available under the HVF II Series 2013-B Class A Notes(v) amends certain financial definitions relating to the HVF II Series 2013-A Class A Notes, such that after giving effect to such transition the aggregate maximum principal amount of the HVF II Series 2013-A Class A Notes and the HVF II Series 2013-B Class A Notes were $2.2 billion and $1.0 billion, respectively (in each case, subject to borrowing base availability).
The net proceeds from the sale of the HVF II Series 2016-3 Notes and HVF II Series 2016-4 Notes (as defined below), together with available cash, were used to repay $820 million of the outstanding principal amount of the HVF IIforegoing.
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
Series 2014-A
Senior Notes
In June 2017, Hertz redeemed all $250 million of its outstanding 4.25% Senior Notes due April 2018 (the "April 2018 Notes").
Senior Second Priority Secured Notes
In June 2017, Hertz issued $1.25 billion in aggregate principal amount of 7.625% Senior Second Priority Secured Notes due 2022 (the "Senior Second Priority Secured Notes"), the proceeds of which are restricted under the terms of the credit agreement governing the Senior Facilities, primarily related to the repayment of indebtedness. In June 2017, the Company utilized approximately $266 million of the proceeds to pay the outstanding principal and early redemption premium in connection with the redemption of the April 2018 Notes and fees and expenses in connection with the issuance of the Senior Second Priority Secured Notes. In June 2017, the Company also exercised its right to reduce the amount of available commitments under its Senior RCF by $150 million. As of June 30, 2017, approximately $834 million in proceeds remained from the issuance of the Senior Second Priority Secured Notes and is included in restricted cash and cash equivalents, non-vehicle in the accompanying condensed consolidated balance sheet.
In July 2017, the Company rescinded a conditional notice of full redemption previously delivered in May 2017 to the holders of its 6.75% Senior Notes due April 2019. The netCompany is continuing to evaluate its use of the proceeds from the issuance of the Senior Second Priority Secured Notes to either repay certain of its indebtedness, which may include, among other options, repayments of outstanding borrowings under the Senior Term Loan and/or repurchases of certain of Hertz’s Senior Notes, or make additional commitment reductions under the Senior RCF.
Vehicle Debt
HVF II U.S. Vehicle Variable Funding Notes
In May 2017, Hertz Vehicle Financing II LP, a bankruptcy remote, indirect, wholly-owned, special purpose subsidiary of Hertz ("HVF II") issued the Series 2016-12017-A Variable Funding Rental Car Asset Backed Notes (the “HVF II Series 2017-A Notes”) with an aggregate maximum principal amount of $500 million and a maturity date of October 2018.
In February 2017, HVF II Series 2016-2 Notes (as defined below), together with available cash, were used to repay approximately $741 million ofextended the outstanding principal amountmaturities of the HVF II Series 2014-A2013-A Notes and approximately $264 millionthe HVF II Series 2013-B (the "HVF II Series 2013 Notes") Notes from October 2017 to January 2019. In April 2017, HVF II increased the commitments of the outstandingHVF II Series 2013 Notes by $250 million, such that after giving effect to such increase the aggregate maximum principal amount of the HVF II Series 2013-A Notes.
HVF II U.S. Vehicle Medium Term Notes
In June 2016, HVF II issued the Series 2016-3 Rental Car Asset Backed Notes Class A, Class B, Class C and Class D (collectively, the "HVF II Series 2016-3 Notes") and Series 2016-4 Rental Car Asset Backed Notes, Class A, Class B, Class C and Class D (collectively, the "HVF II Series 2016-4 Notes") in an aggregate principal amount ofwas approximately $848 million. The expected maturities of the Series 2016-3 Notes$3.1 billion and the Series 2016-4 Notes are July 2019 and July 2021, respectively. There is subordination within the HVF II Series 2016-3 Notes and the HVF II Series 2016-4 Notes based on class. An affiliate of HVF II purchased the Class D Notes of each such series, and as a result, approximately $48 million of the aggregate maximum principal amount is eliminated in consolidation.
In February 2016, HVF II issued the Series 2016-1 Rental Car Asset Backed Notes, Class A, Class B, Class C and Class D (collectively, the “HVF II Series 2016-1 Notes”) and Series 2016-2 Rental Car Asset Backed Notes, Class A, Class B, Class C and Class D (collectively, the “HVF II Series 2016-2 Notes”) in an aggregate principal amount of approximately $1.06 billion. The expected maturities of the HVF II Series 2016-12013-B Notes andwas approximately $581 million. In June 2017, HVF II transitioned approximately $300 million of commitments available under the HVF II Series 2016-22013-B Notes are March 2019 and March 2021, respectively. There is subordination withinto the HVF II Series 2016-1 Notes and the HVF II Series 2016-2 Notes based on class. An affiliate of HVF II purchased the Class D Notes of each such series, and as a result approximately $61 million of the aggregate principal amount is eliminated in consolidation.2013-A Notes.
HFLF Medium Term Notes
In May 2017, an affiliate of HFLF sold approximately $15 million of the HFLF Series 2016-1 Class E Notes to third parties which it had previously purchased in the initial offering in April 2016 and previously was eliminated in consolidation.
In April 2016,2017, HFLF, a bankruptcy remote, indirect, wholly-owned, special purpose subsidiary of Donlen, issued the Series 2016-12017-1 Asset-Backed Notes, Class A, Class B, Class C, Class D, and Class E (collectively, the “HFLF Series 2016-12017-1 Notes”) in an aggregate principal amount of $400$500 million. The expected maturity of the HFLF Series 2016-1 Notes is February 2019 to April2019, based upon assumptions made at the time of the pricing of the HFLF Series 2016-1 Notes. The HFLF Series 2016-12017-1 Notes (other thanare fixed rate, except for the Class A-2A-1 Notes which are fixed rate) are floating rate and carry an interest rate based upon a spread to one-month LIBOR. An affiliateThe proceeds of HFLF purchased the Class E Notes, and as a result approximately $15 million of the aggregate principal amount is eliminated in consolidation.
The net proceeds from thethis issuance, of the HFLF Series 2016-1 Notes, together with available cash, were used to repay $400 million ofreduce amounts then-outstandingoutstanding under the HFLF Series 2013-2 Notes.
U.S. Vehicle Revolving Credit Facility
In June 2016, in connection with the Spin-Off, Hertz executed a U.S. Vehicle Revolving Credit Facility of $200 million (the “U.S. Vehicle RCF”). Eligible vehicle collateral for the U.S. Vehicle RCF includes retail vehicle sales inventory, certain vehicles in Hawaii and Kansas and other vehicles owned by certain of the Company’s U.S. operating companies.
U.S. Vehicle Financing Facility
In June 2016, in anticipation of the Spin-Off, the U.S. Vehicle Financing Facility was terminated. Vehicles that, prior to the Spin-Off, would have been financed under the U.S. Vehicle Financing Facility will be financed under the U.S. Vehicle RCF or the HVF II U.S. ABS Program going forward, as applicable.
European Revolving Credit Facility
In June 2016, HHN BV amended the European Revolving Credit Facility to provide for aggregate maximum borrowings (subject to borrowing base availability) of up to €340 million during the peak season, for a seasonal commitment period through December 2016. Following the expiration of the seasonal commitment period, aggregate maximum borrowings
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
available under the Vehicle Debt-Other
European Revolving Credit Facility will revert to up to €250 million (subject to borrowing base availability).
European Securitization
In June 2016, certainFebruary 2017, HHN BV amended its credit agreement (the "European Revolving Credit Facility") to extend the maturity of Hertz’s foreign subsidiaries entered into an agreement pursuant to which certain terms€235 million of the European Securitization were amended. The amendment provides for, among other things, aggregate maximum borrowings (subject to borrowing base availability) of up to €460 million and an extension of the maturityavailable from October 2017 to October 2018.January 2019.
Brazilian Vehicle Financing FacilityCanadian Securitizations
In April 2016, the Company entered into an agreement pursuantFebruary 2017, TCL Funding Limited Partnership, a bankruptcy remote, indirect, wholly-owned, special purpose subsidiary of Hertz ("Funding LP") amended its securitization platform in Canada (the "Canadian Securitization") to whichextend the maturity of the Brazilian Vehicle Financing Facility was extendedCAD$350 million aggregate maximum borrowings available from April 2016January 2018 to October 2016.January 2019.
Capitalized Leases-U.K. Leveraged Financing
In June 2016,February 2017, the capitalized lease financings outstanding in the United Kingdom ("U.K. Leveraged Financing") were amended to extend the maturity of £250 million aggregate maximum borrowings available from October 2017 to January 2019. In May 2017, the U.K. Leveraged Financing was amended to provide for aggregate maximum leasing capacity (subject to asset availability) of up to £300£287.5 million during the peak season, for a seasonal commitment period through October 2016.into September 2017. Following the expiration of the seasonal commitment period, aggregate maximum borrowings available under the U.K Leveraged Financing will revert to up to £250 million (subject to borrowing base availability).
See also Note 19, "Subsequent Events," regarding financing transactions occurring subsequent to June 30, 2016.million.
Borrowing Capacity and Availability
Borrowing capacity and availability comes from the Company's "revolving credit facilities," which are a combination of variable funding asset-backed securitization facilities, cash-flow-based revolving credit facilities and asset-based revolving credit facilities. Creditors under each such asset-backed securitization facility and asset-based revolving credit facility have a claim on a specific pool of assets as collateral. The Company's ability to borrow under each such asset-backed securitization facility and asset-based revolving credit facility is a function of, among other things, the value of the assets in the relevant collateral pool. With respect to each such asset-backed securitization facility and asset-based revolving credit facility, the Company refers to the amount of debt it can borrow given a certain pool of assets as the borrowing base.
The Company refers to "Remaining Capacity" as the maximum principal amount of debt permitted to be outstanding under the respective facility (i.e., with respect to a variable funding asset-backed securitization facility or asset-based revolving credit facility, the amount of debt wethe Company could borrow assuming weit possessed sufficient assets as collateral) less the principal amount of debt then-outstanding under such facility. With respect to a variable funding asset-backed securitization facility or asset-based revolving credit facility, the Company refers to "Availability Under Borrowing Base Limitation" as the lower of Remaining Capacity or the borrowing base less the principal amount of debt then-outstanding under such facility (i.e., the amount of debt that can be borrowed given the collateral possessed at such time). With respect to the Senior RCF, "Availability Under Borrowing Base Limitation" is the same as "Remaining Capacity" since borrowings under the Senior RCF are not subject to a borrowing base.
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
The following facilities were available to the Company as of June 30, 2016:2017, and are presented net of any outstanding letters of credit:
| | | (In millions) | Remaining
Capacity | | Availability Under
Borrowing Base
Limitation | Remaining Capacity | | Availability Under Borrowing Base Limitation |
| Non-Vehicle Debt | | | | | | |
| Senior RCF | $ | 1,094 |
| | $ | 1,094 |
| $ | 9 |
| | $ | 9 |
|
| Total Non-Vehicle Debt | 1,094 |
| | 1,094 |
| 9 |
| | 9 |
|
| Vehicle Debt | | | | | | |
| U.S. Vehicle RCF | — |
| | — |
| 32 |
| | 10 |
|
| HVF II U.S. Vehicle Variable Funding Notes | 613 |
| | — |
| 674 |
| | 20 |
|
| HFLF Variable Funding Notes | 325 |
| | — |
| 350 |
| | — |
|
| European Revolving Credit Facility | — |
| | — |
| — |
| | — |
|
| European Securitization | 94 |
| | — |
| 69 |
| | — |
|
| Canadian Securitization | 16 |
| | — |
| — |
| | — |
|
| Australian Securitization | 96 |
| | 2 |
| 70 |
| | — |
|
| Capitalized Leases | 16 |
| | 8 |
| — |
| | — |
|
| New Zealand RCF | | 9 |
| | — |
|
| Total Vehicle Debt | 1,160 |
| | 10 |
| 1,204 |
| | 30 |
|
| Total | $ | 2,254 |
| | $ | 1,104 |
| $ | 1,213 |
| | $ | 39 |
|
Letters of Credit
As of June 30, 2016,2017, there were outstanding standby letters of credit totaling $618$804 million. Such letters of credit have been issued primarily to support the Company's insurance programs, vehicle rental concessions and leaseholds and its insurance programs as well as to provide credit enhancement for its asset-backed securitization facilities. Of this amount $606$791 million was issued under the Senior RCF, which has a $1 billion letter of credit sublimit, resulting in $394 million of availability under such sublimit.RCF. As of June 30, 2016,2017, none of the letters of credit have been drawn upon.
Special Purpose Entities
Substantially all of the revenue earning vehicles and certain related assets are owned by special purpose entities, or are encumbered in favor of the lenders under the various credit facilities, other secured financings and asset-backed securities programs. None of such assets (including the assets owned by Hertz Vehicle Financing II LP, Hertz Vehicle Financing LLC, Rental Car Finance LLC, DNRS II LLC, HFLF, Donlen Trust and various international subsidiaries that facilitate the Company's international securitizations) are available to satisfy the claims of general creditors.
Some of theseThese special purpose entities are consolidated variable interest entities, of which the Company is the primary beneficiary, whose sole purpose is to provide commitments to lend in various currencies subject to borrowing bases comprised of revenue earning vehicles and related assets of certain of Hertz International, Ltd.'s subsidiaries. As of June 30, 20162017 and December 31, 2015, the Company's2016, its International FleetVehicle Financing No. 1 B.V., International FleetVehicle Financing No. 2 B.V. and HA Funding Pty, Ltd. variable interest entities had total assets of $619$655 million and $418$454 million, respectively, primarily comprised of loans receivable and revenue earning vehicles, and total liabilities of $619$654 million and $418$454 million, respectively, primarily comprised of debt.
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
Financial Covenant Compliance
The Company refers toIn February 2017, Hertz and its subsidiaries asamended the Hertz credit group. The indenturesterms of the financial maintenance covenant for the Senior Notes contain covenantsRCF to test, when applicable, Hertz’s consolidated first lien net leverage ratio. The amended financial covenant provides that among other things, limit or restrict the ability of the Hertz credit group to incur additional indebtedness, incur guarantee obligations, prepay certain indebtedness, make certain restricted payments (including paying dividends, redeeming stock or making other distributions to parent entities of Hertz and other persons outside of the Hertz credit group), make investments, create liens, transfer or sell assets, merge or consolidate, and enter into certain transactions with Hertz's affiliates that are not members of the Hertz credit group.
Certain other debt instruments and credit facilities (including the Senior Facilities) contain a number of covenants that, among other things, limit or restrict the ability of the borrowers and the guarantors to dispose of assets, incur additional indebtedness, incur guarantee obligations, prepay certain indebtedness, make certain restricted payments (including paying dividends, share repurchases or making other distributions), create liens, make investments, make acquisitions, engage in mergers, fundamentally change the nature of their business, make capital expenditures, or engage in certain transactions with certain affiliates.
The Senior RCF contains a financial maintenance covenant, which is a maximumHertz’s consolidated totalfirst lien net corporate leverage ratio, as defined in the Senior RCF and is only applicable to the Senior RCF. Hertz’s consolidated total net corporate leverage ratioCredit Agreement, as of the last day of any fiscal quarter commencing with September 30, 2016,(the "Covenant Leverage Ratio"), may not exceed the ratios indicated below:
|
| | |
Fiscal Quarter(s) Ending | | Maximum Ratio |
September 30, 2016 | | 5.25 to 1.00 |
December 31, 2016 through March 31, 2017 | | 4.75 to 1.00 |
June 30, 2017 through September 30, 2017 | | 5.25 to 1.00 |
December 31, 2017 | | 4.75 to 1.00 |
March 31, 2018 | | 4.50 to 1.00 |
June 30, 2018 through September 30, 2018 | | 5.00 to 1.00 |
December 31, 2018 through March 31, 2019 | | 4.50 to 1.00 |
June 30, 2019 through September 30, 2019 | | 5.00 to 1.00 |
December 31, 2019 through March 31, 2020 | | 4.50 to 1.00 |
June 30, 2020 through September 30, 2020 | | 5.00 to 1.00 |
December 31, 2020 through March 31, 2021 | | 4.50 to 1.00 |
|
| | | | |
| Fiscal Quarter(s) Ending | | Maximum Ratio |
| June 30, 2017 | | 3.25 | to | 1.00 |
| September 30, 2017 | | 3.25 | to | 1.00 |
| December 31, 2017 and each March 31, June 30, September 30 and December 31 ending thereafter | | 3.00 | to | 1.00 |
Note 7—8—Employee Retirement Benefits
Effective December 31, 2014,The following tables sets forth the Company amended the Hertz Corporation Account Balance Defined Benefit Pension Plan to permanently discontinue future benefit accruals and participation under the plan for non-union employees. While compensation credits are no longer provided under the plan, interest credits continue to be credited on existing participant account balances under the plan until benefits are distributed, and service continues to be recognized for vesting and retirement eligibility requirements.net periodic pension expense:
Employee Matters Agreement
As described in Note 3, "Discontinued Operations," Hertz Global and Herc Holdings entered into the “Employee Matters Agreement” to allocate liabilities and responsibilities relating to employment matters, employee compensation, benefit plans and programs and other related matters in connection with the Spin-Off of the equipment rental business. The Employee Matters Agreement governs Hertz Global's and Herc Holdings’ obligations with respect to such matters for current and former employees of the vehicle rental business and the equipment rental business. The Employee Matters Agreement specifies the method by which the pension plans are split in connection with the Spin-Off. Pension liabilities |
| | | | | | | | | | | | | | | |
| | Pension Benefits |
| | U.S. | | Non-U.S. |
| | Three Months Ended June 30, |
| (In millions) | 2017 | | 2016 | | 2017 | | 2016 |
| Components of Net Periodic Benefit Cost: | | | | | | | |
| Service cost | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | 1 |
|
| Interest cost | 6 |
| | 7 |
| | 1 |
| | 2 |
|
| Expected return on plan assets | (7 | ) | | (7 | ) | | (3 | ) | | (3 | ) |
| Net amortizations | 1 |
| | 1 |
| | 1 |
| | — |
|
| Net periodic pension expense (benefit) | $ | — |
| | $ | 1 |
| | $ | — |
| | $ | — |
|
|
| | | | | | | | | | | | | | | |
| | Pension Benefits |
| | U.S. | | Non-U.S. |
| | Six Months Ended June 30, |
| (In millions) | 2017 | | 2016 | | 2017 | | 2016 |
| Components of Net Periodic Benefit Cost: | | | | | | | |
| Service cost | $ | — |
| | $ | 1 |
| | $ | 1 |
| | $ | 1 |
|
| Interest cost | 11 |
| | 11 |
| | 3 |
| | 4 |
|
| Expected return on plan assets | (13 | ) | | (14 | ) | | (5 | ) | | (6 | ) |
| Net amortizations | 2 |
| | 4 |
| | 1 |
| | — |
|
| Settlement loss | 1 |
| | 1 |
| | — |
| | — |
|
| Net periodic pension expense (benefit) | $ | 1 |
| | $ | 3 |
| | $ | — |
| | $ | (1 | ) |
Note 9—Stock-Based Compensation
The non-cash stock-based compensation expense associated with the Hertz Holdings stock-based compensation plans is recorded at the Hertz level.
Effective January 1, 2017, the Company's board of directors adopted the 2017 Executive Incentive Compensation Plan ("2017 EICP"). The provisions of the plan provide for the pay out of any bonus earned in either cash or performance stock units ("PSUs") for certain groups of employees. The decision regarding the form of payout will be made after the bonus has been earned and as such, the grant date of the PSUs is not established until vested. The potential PSU awards will be based on a monetary amount equivalent to a percentage of employees’ salaries that will be based on
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
the achievement of specific performance metrics in 2017. The specific monetary amount will be calculated at the time of grant. The PSUs are intended to be granted in place of cash bonus awards and, an associated asset allocation related to employeestherefore, qualify as equity awards. Compensation cost for these awards is recognized over the requisite service period based on the fair value of the equipment rental businessaward at the end of each reporting period. The Company calculates the anticipated number of awards to be granted based on the bonus dollars expected to be earned divided by the stock price as of the reporting date. The anticipated awards are used to estimate the compensation expense as of the reporting date. Compensation charges will accumulate as a liability until the grant date, at which time the liability will be transferredreclassified to a new plan. Amounts presented herein relate to pension expense associated with currentequity. During the three and former employees of the vehicle rental business.
Onsix months ended June 30, 2016, in connection with the Spin-Off and transfer of assets and liabilities from combined U.S. pension and other post-retirement benefit plans to newly created Herc Holdings plans,2017, the Company remeasured pensionrecognized approximately $2 million and other post-retirement liabilities and assets for several$3 million, respectively, of its U.S. plans. The remeasurement resulted in an increase to the Company's continuing operations net pension liability of $23 million compared to the net pension liability as of December 31, 2015. The significant weighted-average assumptions used at the June 30, 2016 measurement date were as follows.
|
| | |
Discount rate | | 3.5% |
Expected rate of return on plan assets | | 7.2% |
Average salary increase | | 4.3% |
The following table sets forth the net periodic pension expense:
|
| | | | | | | | | | | | | | | |
| | Pension Benefits |
| | U.S. | | Non-U.S. |
| | Three Months Ended June 30, |
| (In millions) | 2016 | | 2015 | | 2016 | | 2015 |
| Components of Net Periodic Benefit Cost: | | | | | | | |
| Service cost | $ | — |
| | $ | 1 |
| | $ | 1 |
| | $ | — |
|
| Interest cost | 7 |
| | 6 |
| | 2 |
| | 2 |
|
| Expected return on plan assets | (7 | ) | | (8 | ) | | (3 | ) | | (4 | ) |
| Net amortizations | 1 |
| | 1 |
| | — |
| | 1 |
|
| Settlement loss | — |
| | 1 |
| | — |
| | — |
|
| Net periodic pension expense (benefit) | $ | 1 |
| | $ | 1 |
| | $ | — |
| | $ | (1 | ) |
|
| | | | | | | | | | | | | | | |
| | Pension Benefits |
| | U.S. | | Non-U.S. |
| | Six Months Ended June 30, |
| (In millions) | 2016 | | 2015 | | 2016 | | 2015 |
| Components of Net Periodic Benefit Cost: | | | | | | | |
| Service cost | $ | 1 |
| | $ | 2 |
| | $ | 1 |
| | $ | 1 |
|
| Interest cost | 11 |
| | 11 |
| | 4 |
| | 4 |
|
| Expected return on plan assets | (14 | ) | | (16 | ) | | (6 | ) | | (8 | ) |
| Net amortizations | 4 |
| | 2 |
| | — |
| | 1 |
|
| Settlement loss | 1 |
| | 2 |
| | — |
| | — |
|
| Net periodic pension expense (benefit) | $ | 3 |
| | $ | 1 |
| | $ | (1 | ) | | $ | (2 | ) |
Note 8—Stock-Based Compensation
The non-cash stock-based compensation expense associated with the Hertz Global's stock-based compensation plans is pushed down from Hertz Global and recorded2017 EICP. The Company expects approximately 540,000 shares will be granted in connection with this program based on the books at the Hertz level.Company’s stock price as of June 30, 2017.
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
In accordance with the Employee Matters Agreement entered into between Hertz Global and Herc Holdings, as further described in Note 3, "Discontinued Operations," previously outstanding stock-based compensation awards granted under Old Hertz Holdings' equity compensation programs prior to the Spin-Off and held by certain executives and employees of HERC and Old Hertz Holdings were adjusted to reflect the impact of the Spin-Off on these awards. To preserve the aggregate intrinsic value of these stock-based compensation awards, as measured immediately before and immediately after the Spin-Off, each holder of Old Hertz Holdings stock-based compensation awards received an adjusted award consisting of a stock-based compensation award denominated in the equity of the company at which the person was employed following the Spin-Off. In the Spin-Off, the determination as to which type of adjustment applied to a holder’s previously outstanding Old Hertz Holdings award was based upon the type of stock-based compensation award that was to be adjusted and the date on which the award was originally granted under the Old Hertz Holdings equity compensation programs prior to the Spin-Off.
Under the Hertz Global Holdings, Inc. 20082016 Omnibus Incentive Plan, and prior to the consummation of the Spin-Off,(the "2016 Omnibus Plan"), during the six months ended June 30, 2016, the Company2017, Hertz Global granted 794,149557,882 non-qualified stock options to certain executives and employees at a weighted average grant date fair value of $3.99$9.44 as determined using the Black Scholes option pricing model; 1,114,527545,283 restricted stock units ("RSUs") at a weighted average grant date fair value of $9.78$20.26; 423,052 PSUs at a weighted average grant date fair value of $22.08 and 2,075,328664,643 performance stock unitsawards ("PSUs"PSAs") at a weighted average grant date fair value of $9.93$22.19, with vesting terms of three to five years. In connectionNone of the PSUs associated with the Spin-Off on2017 EICP plan are included in the grant amounts above. During the three and six months ended June 30, 2016 as further described in Note 1, "Background," outstanding2017, the Company recognized approximately $3 million and $9 million, respectively, of stock-based compensation awards for employees ofexpense associated with the global vehicle rental business were converted at a ratio of 1 former unit to 0.2523 new units, with a corresponding change in the exercise price of outstanding options. There are no significant changes to assumptions used to fair value the options, nor is there material incremental compensation expense as a result of the Spin-Off.2016 Omnibus Plan.
A summary of the total compensation expense and associated income tax benefits recognized under all plans, including the cost of stock options, RSUs, PSUs and PSUs,PSAs is as follows:
| | | | Three Months Ended
June 30, | | Six Months Ended
June 30, | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| (In millions) | 2016 | | 2015 | | 2016 | | 2015 | 2017 | | 2016 | | 2017 | | 2016 |
| Compensation expense | $ | 6 |
| | $ | 5 |
| | $ | 12 |
| | $ | 8 |
| $ | 5 |
| | $ | 6 |
| | $ | 12 |
| | $ | 12 |
|
| Income tax benefit | (2 | ) | | (2 | ) | | (5 | ) | | (3 | ) | (2 | ) | | (2 | ) | | (5 | ) | | (5 | ) |
| Total | $ | 4 |
| | $ | 3 |
| | $ | 7 |
| | $ | 5 |
| $ | 3 |
| | $ | 4 |
| | $ | 7 |
| | $ | 7 |
|
As of June 30, 2016,2017, there was $55$26 million of total unrecognized compensation cost related to non-vested stock options, RSUs, PSUs and PSUsPSAs granted by Old Hertz HoldingsGlobal under all plans. The total unrecognized compensation cost is expected to be recognized over the remaining 2.141.7 years, on a weighted average basis, of the requisite service period that began on the grant dates.
Note 9—10—Restructuring
During 2016, theThe Company evaluatedcontinuously evaluates its workforce, product offerings and operations and initiated approximately $31 million in restructuring programs that includeto determine when headcount reductions, business process re-engineering, asset impairments or outsourcing arrangements are necessary. There were no significant restructuring programs initiated during the three and outsourcing certain information technology application and infrastructure functions to a third party service provider. These programssix months ended June 30, 2017.
Restructuring charges for the periods shown are expected to be completed within the next twelve months.as follows:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| (In millions) | 2017 | | 2016 | | 2017 | | 2016 |
| By Type: | | | | | | | |
| Termination benefits | $ | 2 |
| | $ | 10 |
| | $ | 3 |
| | $ | 16 |
|
| Impairments and asset write-downs | — |
| | 3 |
| | — |
| | 3 |
|
| Facility closure and lease obligation costs | — |
| | 5 |
| | — |
| | 5 |
|
| Total | $ | 2 |
| | $ | 18 |
| | $ | 3 |
| | $ | 24 |
|
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
Restructuring charges under these programs for the periods shown are as follows:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| (In millions) | 2016 | | 2015 | | 2016 | | 2015 |
| By Type: | | | | | | | |
| Termination benefits | $ | 10 |
| | $ | 6 |
| | $ | 16 |
| | $ | 12 |
|
| Impairments and asset write-downs | 3 |
| | — |
| | 3 |
| | 1 |
|
| Facility closure and lease obligation costs | 5 |
| | 14 |
| | 5 |
| | 14 |
|
| Other | — |
| | (1 | ) | | — |
| | (2 | ) |
| Total | $ | 18 |
| | $ | 19 |
| | $ | 24 |
| | $ | 25 |
|
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| (In millions) | 2017 | | 2016 | | 2017 | | 2016 |
| By Caption: | | | | | | | |
| Direct vehicle and operating | $ | — |
| | $ | 8 |
| | $ | — |
| | $ | 9 |
|
| Selling, general and administrative | 2 |
| | 10 |
| | 3 |
| | 15 |
|
| Total | $ | 2 |
| | $ | 18 |
| | $ | 3 |
| | $ | 24 |
|
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| (In millions) | 2016 | | 2015 | | 2016 | | 2015 |
| By Caption: | | | | | | | |
| Direct vehicle and operating | $ | 8 |
| | $ | 14 |
| | $ | 9 |
| | $ | 15 |
|
| Selling, general and administrative | 10 |
| | 5 |
| | 15 |
| | 10 |
|
| Total | $ | 18 |
| | $ | 19 |
| | $ | 24 |
| | $ | 25 |
|
| | | | Three Months Ended
June 30, | | Six Months Ended
June 30, | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| (In millions) | 2016 | | 2015 | | 2016 | | 2015 | 2017 | | 2016 | | 2017 | | 2016 |
| By Segment: | | | | | | | | | | | | | | |
| U.S. Rental Car | $ | 15 |
| | $ | 14 |
| | $ | 21 |
| | $ | 16 |
| $ | 1 |
| | $ | 15 |
| | $ | 1 |
| | $ | 21 |
|
| International Rental Car | 3 |
| | 5 |
| | 3 |
| | 7 |
| — |
| | 3 |
| | 1 |
| | 3 |
|
| Corporate | — |
| | — |
| | — |
| | 2 |
| 1 |
| | — |
| | 1 |
| | — |
|
| Total | $ | 18 |
| | $ | 19 |
| | $ | 24 |
| | $ | 25 |
| $ | 2 |
| | $ | 18 |
| | $ | 3 |
| | $ | 24 |
|
The following table sets forth the activity during the six months ended June 30, 2017 affecting the restructuring accrual, which is included in accrued liabilities in the accompanying condensed consolidated balance sheets duringsheets. The Company expects to pay the six months ended June 30, 2016.remaining restructuring obligations relating to termination benefits within the next two years. Other is primarily comprised of future lease obligations which will be paid over the remaining term of the applicable leases.
| | | (In millions) | Termination
Benefits | | Other | | Total | Termination
Benefits | | Other | | Total |
| Balance as of December 31, 2015 | $ | 9 |
| | $ | 15 |
| | $ | 24 |
| |
| Balance as of December 31, 2016 | | $ | 13 |
| | $ | 14 |
| | $ | 27 |
|
| Charges incurred | 16 |
| | 8 |
| | 24 |
| 3 |
| | — |
| | 3 |
|
| Cash payments | (8 | ) | | (7 | ) | | (15 | ) | (4 | ) | | (2 | ) | | (6 | ) |
| Other non-cash changes | (1 | ) | | 1 |
| | — |
| |
| Balance as of June 30, 2016 | $ | 16 |
| | $ | 17 |
| | $ | 33 |
| |
| Balance as of June 30, 2017 | | $ | 12 |
| | $ | 12 |
| | $ | 24 |
|
Note 10—Tangible Asset Impairments and Asset Write-downs11—Income Tax (Provision) Benefit
In the first quarter of 2015, the Company performed an impairment assessment of the Dollar Thrifty headquarters campus in Tulsa, Oklahoma, which is part of the U.S. Rental Car segment. Based on the impairment assessment, the Company recorded a charge of $6 million which is included in selling, general and administrative expense in the accompanying condensed consolidated statements of operations. The building was sold in December 2015.
In the first quarter of 2015, the Company recorded $11 million in charges associated with U.S. Rental Car service
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
equipment and assets deemed to have no future use, of which $4 million is included in direct vehicle and operating expense and $7 million is included in other (income) expense, net in the accompanying condensed consolidated statements of operations.
Note 11—Taxes on Income (Loss)Hertz Global
The effective tax rate for the three months ended June 30, 2017 and 2016 was 36% and 2015 was 20% and 66%, respectively. The effective tax rate for the six months ended June 30, 20162017 and 20152016 was 29% and 8%29%, respectively. The effective tax rate for the full fiscal year 2016 is expected to be approximately 47%.
The Company recorded a tax benefit of $87 million for the three months ended June 30, 2017, compared to $7 million for the three months ended June 30, 2016 compared to a tax provision of $25 million for the three months ended June 30, 2015.2016. The change was the result of composition of earnings and lower worldwide pre-tax income, offset by discrete items in the impact of tax law changes, principally in Louisiana, for approximately $2 million and charges relatedquarter, attributable to the Spin-Offout of $2 million recordedperiod adjustment as disclosed in the second quarterNote 2, "Basis of 2016.Presentation and Recently Issued Accounting Pronouncements" and due in part to tax charges from stock compensation.
The Company recorded a tax benefit of $158 million for the six months ended June 30, 2017, compared to $32 million for the six months ended June 30, 2016. The change was the result of composition of earnings and lower worldwide pre-tax income, offset by discrete items in the first half of 2017, attributable to the out of period adjustment as disclosed in Note 2, "Basis of Presentation and Recently Issued Accounting Pronouncements" and due in part to tax charges from stock compensation.
Hertz
The effective tax rate for the three months ended June 30, 2017 and 2016 compared to awas 35% and 20%, respectively. The effective tax benefit of $6 millionrate for the six months ended June 30, 2015. The change2017 and 2016 was the result of a higher loss from continuing operations before income taxes, the impact of tax law changes, principally in Louisiana, for approximately $2 million29% and charges related to the Spin-Off of $2 million recorded in the second quarter of 2016.
Tax Matters Agreement
As described in Note 3, "Discontinued Operations"29%, Hertz Global and Hertz entered into the Tax Matters Agreement with Herc Holdings and Herc Rentals to govern the parties’ respective rights, responsibilities and obligations after the Spin-Off with respect to tax liabilities and benefits, tax attributes, tax contests and other tax matters regarding income taxes, other taxes and related tax returns.
Note 12—Financial Instruments
The Company has risk exposures that it has historically used financial instruments to manage. None of the instruments have been designated in a hedging relationship as of June 30, 2016.
Interest Rate Risk
The Company’s objective in managing exposure to interest rate changes is to minimize the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve these objectives, the Company uses interest rate caps and other instruments to manage the mix of floating and fixed-rate debt.
Currency Exchange Rate Risk
The Company’s objective in managing exposure to currency fluctuations is to limit the exposure of certain cash flows and earnings from changes associated with currency exchange rate changes through the use of various derivative contracts. The Company experiences currency risks in its global operations as a result of various factors including intercompany local currency denominated loans, rental operations in various currencies and purchasing vehicles in various currencies.respectively.
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
The following table summarizesCompany recorded a tax benefit of $86 million for the estimated fair valuethree months ended June 30, 2017, compared to $7 million for the three months ended June 30, 2016. The change was the result of financial instruments:
|
| | | | | | | | | | | | | | | |
| | Fair Value of Financial Instruments |
| | Asset Derivatives(1) | | Liability Derivatives(1) |
| (In millions) | June 30,
2016 | | December 31,
2015 | | June 30,
2016 | | December 31,
2015 |
| Interest rate instruments | $ | 2 |
| | $ | 9 |
| | $ | 1 |
| | $ | 9 |
|
| Foreign currency forward contracts | 6 |
| | 3 |
| | 3 |
| | 1 |
|
| Total | $ | 8 |
| | $ | 12 |
| | $ | 4 |
| | $ | 10 |
|
| |
(1) | All asset derivatives are recordedcomposition of earnings and lower worldwide pre-tax income, offset by discrete items in prepaid expenses and other assets and all liability derivatives are recorded in accrued liabilities in the accompanying condensed consolidated balance sheets. |
While the Company's foreign currency forward contractsquarter, attributable to the out of period adjustment as disclosed in Note 2, "Basis of Presentation and certain interest rate instruments are subjectRecently Issued Accounting Pronouncements" and due in part to enforceable master netting agreements with their counterparties, the Company does not offset the derivative assets and liabilities in its condensed consolidated balance sheets.tax charges from stock compensation.
The following table summarizes the gains or (losses) on financial instrumentsCompany recorded a tax benefit of $157 million for the six months ended June 30, 2017, compared to $32 million for the six months ended June 30, 2016. The change was the result of composition of earnings and lower worldwide pre-tax income, offset by discrete items in the first half of 2017, attributable to the out of period indicated.
|
| | | | | | | | | |
| | Location of Gain or (Loss) Recognized on Derivatives | | Amount of Gain or (Loss) Recognized
in Income on Derivatives |
| | | | Three Months Ended
June 30, |
| (In millions) | | | 2016 | | 2015 |
| Foreign currency forward contracts | Selling, general and administrative | | $ | (1 | ) | | $ | (3 | ) |
|
| | | | | | | | | |
| | Location of Gain or (Loss) Recognized on Derivatives | | Amount of Gain or (Loss) Recognized
in Income on Derivatives |
| | | | Six Months Ended
June 30, |
| (In millions) | | | 2016 | | 2015 |
| Foreign currency forward contracts | Selling, general and administrative | | $ | 1 |
| | $ | (3 | ) |
Note 13—12—Fair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The fair value of accounts receivable, accounts payable and accrued expenses, to the extent the underlying liability will be settled in cash, approximates the carrying values because of the short-term nature of these instruments.
Cash Equivalents and Investments
The Company’s cash equivalents primarily consist of money market accounts which the Company measures at fair value on a recurring basis.accounts. The Company determines the fair value of cash equivalents using a market approach based on quoted prices in active markets.
Investments in equity and other securities that are measured at fair value on a recurring basis consist of various mutual funds and available for sale securities. The valuation of these securities is based on pricing modelsLevel 1 inputs whereby all significant inputs are observable or can be derived from or corroborated by observable market data.
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
The following table summarizes the ending balances of the Company's cash equivalents and investments.investments:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | June 30, 2016 | | December 31, 2015 |
| (In millions) | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| Money market funds | | $ | 205 |
| | $ | 406 |
| | $ | — |
| | $ | 611 |
| | $ | 181 |
| | $ | 49 |
| | $ | — |
| | $ | 230 |
|
| Equity and other securities | | 40 |
| | 100 |
| | — |
| | 140 |
| | — |
| | 111 |
| | — |
| | 111 |
|
| Total | | $ | 245 |
| | $ | 506 |
| | $ | — |
| | $ | 751 |
| | $ | 181 |
| | $ | 160 |
| | $ | — |
| | $ | 341 |
|
CAR Inc.
As further described in Note 4, "Acquisitions and Divestitures," the Company holds an investment in CAR Inc. that was previously accounted for under the equity method and is now accounted for as an available for sale security. As such, the balance of our investment is included in the table above under equity and other securities (Level 1) as of June 30, 2016.
Financial Instruments
The fair value of the Company's financial instruments as of June 30, 2016 are shown in Note 12, "Financial Instruments." The Company's financial instruments are classified as Level 2 assets and liabilities and are priced using quoted market prices for similar assets or liabilities in active markets. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | June 30, 2017 | | December 31, 2016 |
| (In millions) | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| Money market funds | | $ | 72 |
| | $ | 476 |
| | $ | — |
| | $ | 548 |
| | $ | 213 |
| | $ | 393 |
| | $ | — |
| | $ | 606 |
|
| Equity and other securities | | — |
| | — |
| | — |
| | — |
| | 9 |
| | — |
| | — |
| | 9 |
|
| Total | | $ | 72 |
| | $ | 476 |
| | $ | — |
| | $ | 548 |
| | $ | 222 |
| | $ | 393 |
| | $ | — |
| | $ | 615 |
|
Debt Obligations
The fair value of debt is estimated based on quoted market rates as well as borrowing rates currently available to the Company for loans with similar terms and average maturities (Level 2 inputs).
| | | | As of June 30, 2016 | | As of December 31, 2015 | As of June 30, 2017 | | As of December 31, 2016 |
| (In millions) | Nominal Unpaid Principal Balance | | Aggregate Fair Value | | Nominal Unpaid Principal Balance | | Aggregate Fair Value | Nominal Unpaid Principal Balance | | Aggregate Fair Value | | Nominal Unpaid Principal Balance | | Aggregate Fair Value |
| Non-vehicle Debt | $ | 4,629 |
| | $ | 4,726 |
| | $ | 5,991 |
| | $ | 6,070 |
| $ | 5,679 |
| | $ | 5,401 |
| | $ | 3,934 |
| | $ | 3,791 |
|
| Vehicle Debt | 10,846 |
| | 10,927 |
| | 9,857 |
| | 9,854 |
| 11,211 |
| | 11,190 |
| | 9,685 |
| | 9,670 |
|
| Total | $ | 15,475 |
| | $ | 15,653 |
| | $ | 15,848 |
| | $ | 15,924 |
| $ | 16,890 |
| | $ | 16,591 |
| | $ | 13,619 |
| | $ | 13,461 |
|
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
Assets and liabilities measured at fair value during the six months ended June 30, 2016 are as follows:
|
| | | | | | | | | | | | | | | | | | | |
| (In millions) | Balance as of June 30, 2016 | | Level 1 | | Level 2 | | Level 3 | | Total Loss Adjustments Recorded for the Six Months ended June 30, 2016 |
| Long-lived assets held for sale | $ | 9 |
| | $ | — |
| | $ | — |
| | $ | 9 |
| | $ | 3 |
|
During the first quarter of 2016, the Company reclassified an asset in its U.S. Rental Car segment with a fair value of $9 million to held and used. The asset was previously classified as held for sale at December 31, 2015. During the second quarter of 2016, the Company sold its previous corporate headquarters building in Park Ridge, New Jersey.
The Company's long-lived assets held for sale are primarily comprised of property in its U.S. Rental Car segment recorded in property and equipment, net in the accompanying condensed consolidated balance sheets. The fair value less cost to sell of the long-lived asset held for sale was assessed at June 30, 2016. The Company uses market and income approaches to value long-lived assets, including inputs such as expected cash flows and recent comparable transactions.
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
|
| | | | | | | | | | | | | | | | | | | |
| (In millions) | Carrying Value as of June 30, 2017 | | Level 1 | | Level 2 | | Level 3 | | Total Fair Value (Income)/Loss Adjustments Recorded for the Six Months Ended June 30, 2017 |
| Long-lived assets held for sale | $ | 109 |
| | $ | — |
| | $ | 109 |
| | $ | — |
| | $ | — |
|
| Liabilities held for sale | $ | 13 |
| | $ | — |
|
| $ | 13 |
| | $ | — |
| | $ | — |
|
| Equity method investments | $ | 4 |
| | $ | — |
| | $ | — |
| | $ | 4 |
| | $ | 30 |
|
| Intangible assets | $ | 934 |
| | $ | — |
| | $ | — |
| | $ | 934 |
| | $ | 86 |
|
Assets and Liabilities Held for Sale
Assets and liabilities held for sale are associated with the Company's Brazil Operations as further described in Note 4, "Acquisitions and Divestitures."
Investments in Related Parties
Investments in related parties are accounted for under the equity method and are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. The Company recognizes an impairment charge whenever there is a decline in value that is determined to be other than temporary.
In April 2016, the Company paid approximately $45 million for an equity method investment. In March 2017, the Company determined it had an other than temporary loss in value of its investment and recorded an impairment charge of $30 million which is included in other (income) expense in the accompanying condensed consolidated statement of operations for the six months ended June 30, 2017.
Intangible Assets
In June 2017, the Company recorded impairment charges for the Dollar Thrifty tradename as further described in Note 6, "Goodwill and Intangible Assets".
Note 14—Accumulated Other Comprehensive Income
Accumulated Other Income (Loss)
Changes in the accumulated other comprehensive income (loss) balance by component (net of tax) are as follows:
|
| | | | | | | | | | | | | | | | | | | |
| (In millions) | Pension and Other Post-Employment Benefits | | Foreign Currency Items | | Unrealized Losses on Terminated Net Investment Hedges | | Unrealized Gains on Available for Sale Securities | | Accumulated Other Comprehensive Income (Loss) |
| Balance as of December 31, 2015 | $ | (102 | ) | | $ | (124 | ) | | $ | (19 | ) | | $ | — |
| | $ | (245 | ) |
| Other comprehensive income (loss) before reclassification | (20 | ) | | 18 |
| | — |
| | 9 |
| | 7 |
|
| Amounts reclassified from accumulated other comprehensive loss | 2 |
| | — |
| | — |
| | — |
| | 2 |
|
| Distribution of Herc Rentals Inc | 20 |
| | 95 |
| | — |
| | — |
| | 115 |
|
| Balance as of June 30, 2016 | $ | (100 | ) | | $ | (11 | ) | | $ | (19 | ) | | $ | 9 |
| | $ | (121 | ) |
| | | | | | | | | | |
| Balance as of December 31, 2014 | $ | (101 | ) | | $ | 5 |
| | $ | (19 | ) | | $ | — |
| | $ | (115 | ) |
| Other comprehensive income (loss) before reclassification | — |
| | (39 | ) | | — |
| | — |
| | (39 | ) |
| Amounts reclassified from accumulated other comprehensive loss | 4 |
| | — |
| | — |
| | — |
| | 4 |
|
| Balance as of June 30, 2015 | $ | (97 | ) | | $ | (34 | ) | | $ | (19 | ) | | $ | — |
| | $ | (150 | ) |
Note 15—13—Contingencies and Off-Balance Sheet Commitments
Legal Proceedings
Public Liability and Property Damage
The Company is currently a defendant in numerous actions and has received numerous claims on which actions have not yet been commenced for public liability and property damage arising from the operation of motor vehicles rented from the Company. The obligation for public liability and property damage on self-insured U.S. and international vehicles, as stated on the Company'saccompanying condensed consolidated balance sheet,sheets, represents an estimate for both reported accident claims not yet paid and claims incurred but not yet reported. The related liabilities are recorded on a non-discounted basis. Reserve requirements are based on rental volume and actuarial evaluations of historical accident claim experience and trends, as well as future projections of ultimate losses, expenses, premiums and administrative costs. At June 30, 20162017 and December 31, 2015,2016, the Company's liability recorded for public liability and property damage matters was $410$423 million and $394$407 million, respectively. The Company believes that its analysis is based on the most relevant information available, combined with reasonable assumptions, and that the Company may prudently rely on this information to determine the estimated liability. The liability is subject to significant uncertainties. The adequacy of the liability reserve is regularly monitored based on evolving accident claim history and insurance related state legislation changes. If the Company's estimates change or if actual results differ from these assumptions, the amount of the recorded liability is adjusted to reflect these results.
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
Other Matters
From time to time the Company is a party to various legal proceedings. The Company has summarized below the most significant legal proceedings to which the Company was and/or is a party to during the six months ended June 30, 20162017 or the period after June 30, 2016,2017, but before the filing of this Report on Form 10‑Q.
Concession Fee Recoveries - In October 2006, Janet Sobel, Daniel Dugan, PhD. and Lydia Lee, individually and on behalf of all others similarly situated v. The Hertz Corporation and Enterprise Rent-A-Car Company (“Enterprise”) was filed in the U.S. District Court for the District of Nevada (Enterprise became a defendant in a separate action which they have now settled.) The Sobel case is a consumer class action on behalf of all persons who rented vehicles from Hertz at airports in Nevada and were separately charged airport concession
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
recovery fees by Hertz as part of their rental charges during the class period. In October 2014, the court entered final judgment against the Company and directed Hertz to pay the class approximately $42 million in restitution and $11 million in prejudgment interest, and to pay attorney's fees of $3.1$3 million with an additional $3.1$3 million to be paid to class counsel from the restitution fund. In DecemberNovember 2014, Hertz timely filed an appeal of that final judgment with the U.S. Court of Appeals for the Ninth Circuit and the plaintiffs cross appealed the court's judgment seeking to challenge the lower court's ruling that Hertz did not deceive or mislead the class members. Following briefing and oral argument, on January 5, 2017, the Ninth Circuit issued an opinion reversing the District Court’s holdings on liability and remedy and vacating the judgment. The matter has now been fully briefedNinth Circuit also rejected plaintiffs’ cross-appeal, finding that Hertz’s actions were not deceptive or misleading. On January 19, 2017, plaintiffs asked the entire Ninth Circuit, sitting en banc, to rehear the appeal. That petition was rejected on February 15, 2017. Plaintiffs elected not to file a petition seeking a non-mandatory further review by the parties. No oral argument date has been set. The Company continues to believe the outcome ofUnited States Supreme Court, so this case will not be material to its financial condition, results of operations or cash flows.matter is now concluded.
In re Hertz Global Holdings, Inc. Securities Litigation - In November 2013, a purported shareholder class action, Pedro Ramirez, Jr. v. Hertz Global Holdings, Inc., et al., was commenced in the U.S. District Court for the District of New Jersey naming Old Hertz Holdings and certain of its officers as defendants and alleging violations of the federal securities laws. The complaint alleged that Old Hertz Holdings made material misrepresentations and/or omissions of material fact in its public disclosures during the period from February 25, 2013 through November 4, 2013, in violation of Section 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. The complaint sought an unspecified amount of monetary damages on behalf of the purported class and an award of costs and expenses, including counsel fees and expert fees. In June 2014, Old Hertz Holdings responded to the amended complaint by filing a motion to dismiss. After a hearing in October 2014, the court granted Old Hertz Holdings'Holdings’ motion to dismiss the complaint. The dismissal was without prejudice and plaintiff was granted leave to file a second amended complaint within 30 days of the order. In November 2014, plaintiff filed a second amended complaint which shortened the putative class period such that it was not alleged to have commenced until May 18, 2013 and made allegations that were not substantively very different than the allegations in the prior complaint. In early 2015, this case was assigned to a new federal judge in the District of New Jersey, and Old Hertz Holdings responded to the second amended complaint by filing another motion to dismiss. On July 22, 2015, the court granted Old Hertz Holdings’ motion to dismiss without prejudice and ordered that plaintiff could file a third amended complaint on or before August 22, 2015. On August 21, 2015, plaintiff filed a third amended complaint. The third amended complaint included additional allegations, named additional current and former officers as defendants and expanded the putative class period such that it was alleged to span from February 14, 2013 to July 16, 2015. On November 4, 2015, Old Hertz Holdings filed its motion to dismiss. Thereafter, a motion was made by plaintiff to add a new plaintiff, because of challenges to the standing of the first plaintiff. The court granted plaintiffs leave to file a fourth amended complaint to add the new plaintiff, and the new complaint was filed on March 1, 2016. Old Hertz Holdings and the individual defendants moved to dismiss the fourth amended complaint in its entirety with prejudice on March 24, 2016, and plaintiff filed its opposition to same on May 6, 2016. On June 13, 2016, Old Hertz Holdings and the individual defendants filed their reply briefs in support of their motions to dismiss. The matter is now fully briefed. NewOn April 28, 2017, the court issued an order wherein Old Hertz and Herc Holdings are each responsible for a portion of the matter and Hertz Global will be responsible for managing the settlement or other disposition of the matter. Hertz Global believes that it has valid and meritorious defenses and it intends to vigorously defend against the complaint, but litigation is subject to many uncertaintiesHoldings' and the outcomeindividual defendants' motions to dismiss were granted and the plaintiffs’ fourth amended complaint to add a new plaintiff was dismissed with prejudice (the “Order”). On May 30, 2017, the plaintiffs filed a Notice of this matter isAppeal with the U. S. Court of Appeals for the Third Circuit. However, the court has not predictable with assurance. It is possible that this matter could be decided unfavorably to Hertz Global. However, we are currently unable to estimate the range of these possible losses, but they could be materialyet released to the Company's consolidated financial condition, results of operations or cash flows in any particular reporting period.parties the expected briefing schedule for this appeal.
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
Ryanair - In July 2015, Ryanair Ltd. ("Ryanair") filed a complaint against Hertz Europe Limited, a subsidiary of the Company, in the High Court of Justice, Queen’s Bench Division, Commercial Court, Royal Courts of Justice of the United Kingdom alleging breach of contract in connection with Hertz Europe Limited’s termination of its vehicle hire agreement with Ryanair following a contractual dispute with respect to Ryanair’s agreement to begin using third party ticket distributors. The complaint seeks damages, interest and costs, together with attorney fees. The Company believes that it has valid and meritorious defenses and, to that end, it intendshas filed a Defense and Counterclaim. In addition, there have been detailed and intensive exchanges of documents by both parties and taking and exchanging of Witness Statements. The Court has decided to vigorously defend against these allegations, but litigation is subjectpostpone the next
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
hearing date to many uncertainties andMarch/April 2018. In the outcome of this matter is not predictable with assurance.meantime, the parties participated in a mediation in late July 2017. The Company has established a reserve for thisthe matter which is not material. However, it is possible that this matter could be decided unfavorably to the Company, accordingly, it is possible that an adverse outcome could exceed the amount accrued in an amount that could be material to the Company's consolidated financial condition, results of operations or cash flows in any particular reporting period.
The Company intends to assert that it has meritorious defenses in the foregoing matters and the Company intends to defend itself vigorously.
Governmental Investigations - In June 2014, the Company was advised by the staff of the New York Regional Office of the SECSecurities and Exchange Commission (“SEC”) that it is investigating the events disclosed in certain of the Company’s filings with the SEC. In addition, in December 2014 a state securities regulator requested information and starting in June 2016 the Company has had communications with the United States Attorney'sAttorney’s Office for the District of New Jersey regarding the same or similar events. The investigations and communications generally involve the restatements included in the Company's 2014Old Hertz Holdings Form 10‑K10-K for the year ended December 31, 2014, as filed with the Securities and Exchange Commission ("SEC")SEC on July 16, 2015 (the “Old Hertz Holdings 2014 10-K”) and related accounting for prior periods. The Company has and intends to continue to cooperate with all requests related to the foregoing. Due to the stage at which the proceedings are, Hertz is currently unable to predict the likely outcome of the proceedings or estimate the range of reasonably possible losses, which may be material. Among other matters, the restatements included in the Company’sOld Hertz Holdings 2014 Form 10‑K10-K addressed a variety of accounting matters involving the Company’s Brazil vehicle rental operations. The
Additionally, the Company has identified certain activities in Brazil that may raise issues under the Foreign Corrupt Practices Act and may raise issues under other federal and local laws, which the Company has self-reported to appropriate government entities.entities and the processes with these government entities continue. The Company is continuing to investigate these issues. At this time,The Company has established a reserve relating to the Companyactivities in Brazil which is unablenot material. However, it is possible that an adverse outcome with respect to predict the outcome of theseactivities in Brazil and the other issues or estimatediscussed herein could exceed the range of reasonably possible losses, whichamount accrued in an amount that could be material.material to the Company's consolidated financial condition, results of operations or cash flows in any particular reporting period.
French Antitrust - In February 2015, the French Competition Authority issued a Statement of Objections claiming that several vehicle rental companies, including Hertzthe Company and certain of its subsidiaries, violated French competition law by receiving historic market information from twelve French airports relating to the vehicle rental companies operating at those airports and by engaging in a concerted practice relating to train station surcharges. Hertz believes that it has valid defenses and intends to vigorously defendIn February 2017, the French Competition Authority issued a decision dismissing all such claims against the allegations, but, due to the early stage at which the proceedings are, Hertz is currently unable to predict the likely outcome of the proceedings or range of reasonably possible losses, which could be material.Company and its subsidiaries.
French Road Tax - The French Tax Authority has challenged the historic practice of several vehicle rental companies, including Hertz France, of registering vehicles in jurisdictions where it is established and where the road tax payable with respect to those vehicles is lower than the road tax payable in the jurisdictions where the vehicles will primarily be used. In respect of a period in 2005, the Company has unsuccessfully appealed the French Tax assessment to the highest Administrative court in France. In respect of a period from 2003 to 2005, following an adverse judgment, the Company appealed the French Tax Authority’s assessment to the Civil Court of Appeal. ThisOn March 2, 2017, the Company received an adverse judgment in the road tax appeal is currently awaiting judgment.from the Civil Court of Appeal in the 2003 to 2005 years. In the third quarter of 2015, following an adverse decision against another industry participant involved in a similar action, the Company recorded charges with respect to this matter of approximately $23 million. In January 2016, the Company made a payment of approximately $9 million.
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
The Company has established reserves for matters where the Company believes that losses are probable and can be reasonably estimated. Other than the aggregate reserve established for claims for public liability and property damage, none of those reserves are material. For matters, including certain of those described above, where the Company has not established a reserve, the ultimate outcome or resolution cannot be predicted at this time, or the amount of ultimate loss, if any, cannot be reasonably estimated. Litigation is subject to many uncertainties and the outcome of the individual litigated matters is not predictable with assurance. It is possible that certain of the actions, claims, inquiries or proceedings, including those discussed above, could be decided unfavorably to the Company or
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
any of its subsidiaries involved. Accordingly, it is possible that an adverse outcome from such a proceeding could exceed the amount accrued in an amount that could be material to the Company'saccompanying consolidated financial condition, results of operations or cash flows in any particular reporting period.
In March 2016, the Company, as plaintiff, received a $9 million settlement related to a 2013 eminent domain case associated with one of the Company’s airport locations. The settlement gain is included in other (income) expense, net in the accompanying condensed consolidated statements of operations.
Separation and Distribution Agreement
As described in Note 3, "Discontinued Operations", Hertz Global entered into the Separation and Distribution Agreement with Herc Holdings, which sets forth the terms agreed to by the parties regarding legal matters and claims relating to pending and threatened litigation and pre Spin-Off liabilities.
Indemnification Obligations
As describedIn the ordinary course of business, the Company executed contracts involving indemnification obligations customary in Note 3, "Discontinued Operations", the Separationrelevant industry and Distribution Agreementindemnifications specific to a transaction such as the sale of a business. These indemnification obligations might include claims relating to the following: environmental matters; intellectual property rights; governmental regulations and employment-related matters; customer, supplier and other commercial contractual relationships; and financial matters. Specifically, the Company has indemnified various parties for the costs associated with remediating numerous hazardous substance storage, recycling or disposal sites in many states and, in some instances, for natural resource damages. The amount of any such expenses or related natural resource damages for which the Company may be held responsible could be substantial. In addition, Hertz entered into customary indemnification agreements with Hertz Holdings and certain of the Company's stockholders and their affiliates pursuant to which Hertz Holdings and Hertz will indemnify those entities and their respective affiliates, directors, officers, partners, members, employees, agents, representatives and controlling persons, against certain liabilities arising out of performance of a consulting agreement with Hertz Holdings and each of such entities and certain other claims and liabilities, including liabilities arising out of financing arrangements or securities offerings. The Company has entered into customary indemnification agreements with each of its directors and certain of its officers. Performance under these indemnification obligations would generally be triggered by a breach of terms of the contract or by a third party claim. In connection with the Spin-Off, the Company executed an agreement with Herc Holdings that contains mutual indemnification clauses and a customary indemnification provision with respect to liability arising out of or resulting from assumed legal matters.
Other than as described above, there have been no significant changes to the Company's indemnification obligations as compared to those disclosed in Note 16, "Contingencies and Off-Balance Sheet Commitments" of the Notes to consolidated financial statements included in the 2015 Form 10‑K under the caption Item 8, "Financial Statements and Supplementary Data."
matters. The Company regularly evaluates the probability of having to incur costs associated with these indemnification obligations and will accruehave accrued for expected losses when theythat are probable and estimable.
Note 14—Related Party Transactions
Agreements with the Icahn Group
In the normal course of business, the Company purchases goods and services from entities controlled by Carl C. Icahn and his affiliates, including The Pep Boys - Manny, Moe & Jack. During the three and six months ended June 30, 2017, the Company purchased approximately $2 million and $4 million, respectively, worth of goods and services from these related parties.
Transactions between Hertz Holdings and Hertz
On June 30, 2016, Hertz signed a master loan agreement with Hertz Global for a facility size of $425 million with an expiration in June 2017 (the "Old Master Loan"). The interest rate is based on the U.S. Dollar LIBOR rate plus a margin.
In June 2017, upon expiration of the Old Master Loan, Hertz signed a new master loan agreement with Hertz Global for a facility size of $425 million with an expiration in June 2018 (the "Master Loan" and together with the Old Master Loan, the "Loan") where amounts outstanding under the Old Master Loan were transferred to the Master Loan. The interest rate is based on the U.S. Dollar LIBOR rate plus a margin. As of June 30, 2017 and December 31, 2016, there was $105 million and $102 million, respectively outstanding under the Loan representing advances and any accrued but unpaid interest.
As of both periods ended June 30, 2017 and December 31, 2016, Hertz has a due to affiliate in the amount of $65 million which represents its tax related liability to Hertz Holdings.
The above amounts are included in equity in the accompanying condensed consolidated balance sheets of Hertz.
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
Note 15—Earnings (Loss) Per Share - Hertz Global
Basic earnings (loss) per share has been computed based upon the weighted average number of common shares outstanding. Diluted earnings (loss) per share has been computed based upon the weighted average number of common shares outstanding plus the effect of all potentially dilutive common stock equivalents, except when the effect would be anti-dilutive.
As described in Note 9, "Stock-Based Compensation", the Company adopted the 2017 EICP on January 1, 2017. PSU awards issued under the 2017 EICP will be included in the denominator of diluted earnings (loss) per share when the required minimum threshold to receive the awards is met. There are no PSU awards issued under the 2017 EICP included in the computation of diluted earnings (loss) per share during the three and six months ended June 30, 2017.
The following table sets forth the computation of basic and diluted earnings (loss) per share:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| (In millions, except per share data) | 2017 | | 2016 | | 2017 | | 2016 |
| Basic and diluted earnings (loss) per share: | | | | | | | |
| Numerator: | | | | | | | |
| Net income (loss) from continuing operations | $ | (158 | ) | | $ | (28 | ) | | $ | (381 | ) | | $ | (80 | ) |
| Net income (loss) from discontinued operations | — |
| | (15 | ) | | — |
| | (13 | ) |
| Net income (loss), basic | $ | (158 | ) | | $ | (43 | ) | | $ | (381 | ) | | $ | (93 | ) |
| Denominator: | | | | | | | |
| Basic weighted average common shares | 83 |
| | 85 |
| | 83 |
| | 85 |
|
| Dilutive stock options, RSUs, PSUs and PSAs | — |
| | — |
| | — |
| | — |
|
| Weighted average shares used to calculate diluted earnings per share | 83 |
| | 85 |
| | 83 |
| | 85 |
|
| Antidilutive stock options, RSUs, PSUs and PSAs | 3 |
| | 1 |
| | 3 |
| | 2 |
|
| Earnings (loss) per share: | | | | | | | |
| Basic earnings (loss) per share from continuing operations | $ | (1.90 | ) | | $ | (0.33 | ) | | $ | (4.59 | ) | | $ | (0.94 | ) |
| Basic earnings (loss) per share from discontinued operations | — |
| | (0.18 | ) | | — |
| | (0.15 | ) |
| Basic earnings (loss) per share | $ | (1.90 | ) | | $ | (0.51 | ) | | $ | (4.59 | ) | | $ | (1.09 | ) |
| | | | | | | | |
| Diluted earnings (loss) per share from continuing operations | $ | (1.90 | ) | | $ | (0.33 | ) | | $ | (4.59 | ) | | $ | (0.94 | ) |
| Diluted earnings (loss) per share from discontinued operations | — |
| | (0.18 | ) | | — |
| | (0.15 | ) |
| Diluted earnings (loss) per share | $ | (1.90 | ) | | $ | (0.51 | ) | | $ | (4.59 | ) | | $ | (1.09 | ) |
Note 16—Segment Information
The Company has identified three reportable segments, which are organized based on the products and services provided by its operating segments and the geographic areas in which its operating segments conduct business, as follows:
U.S. Rental Car ("U.S. RAC") - rental of vehicles (cars, crossovers and light trucks), as well as sales of ancillary products and services, in the United States and consists of the Company's United States operating segment;
International Rental Car ("International RAC") - rental and leasing of vehicles (cars, vans, crossovers and light trucks), as well as sales of ancillary products and services, internationally and consists of the Company's Europe and Other International operating segments, which are aggregated into a reportable segment based
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
primarily upon similar economic characteristics, products and services, customers, delivery methods and general regulatory environments;
All Other Operations - includesprimarily consists of the Company's Donlen operating segmentbusiness, which provides vehicle leasing and fleet management services, and is not considered a separate reportable segment in accordance with applicable accounting standards, together with other business activities.
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
revenues and expenses of the segment.
In addition to the above reportable segments, the Company has corporate operations ("Corporate") which includes general corporate assets and expenses and certain interest expense (including net interest on non-vehicle debt).
Adjusted pre-taxThe following tables provide significant statement of operations and balance sheet information by segment for each of Hertz Global and Hertz, as well as adjusted pretax income (loss) is calculated as income (loss) from continuing operations before income taxes plus non-cash acquisition accounting charges, debt-related charges relating to the amortization and write-off of debt financing costs and debt discounts and certain one-time charges and non-operational items. Adjusted pre-tax income (loss) is important because it allows management to assess operational performance of its business, exclusive of the items mentioned above. It also allows management to assess the performance of the entire business on the same basis as, the segment measure of profitability. Management believes that it is important to investors for the same reasons it is important to management and because it allows them to assess the Company's operational performance on the same basis that management uses internally. When evaluating the Company's operating performance, investors should not consider adjusted pre-tax income (loss) in isolation of, or as a substitute for, measures of the Company's financial performance, such as net income (loss) from continuing operations or income (loss) from continuing operations before income taxes.
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| (In millions) | 2017 | | 2016 | | 2017 | | 2016 |
| Revenues | | | | | | | |
| U.S. Rental Car | $ | 1,519 |
| | $ | 1,584 |
| | $ | 2,872 |
| | $ | 2,990 |
|
| International Rental Car | 543 |
| | 540 |
| | 955 |
| | 973 |
|
| All Other Operations | 162 |
| | 146 |
| | 313 |
| | 290 |
|
| Total Hertz Global and Hertz | $ | 2,224 |
| | $ | 2,270 |
| | $ | 4,140 |
| | $ | 4,253 |
|
| Depreciation of revenue earning vehicles and lease charges, net | | | | | | | |
| U.S. Rental Car | $ | 524 |
| | $ | 417 |
| | $ | 1,023 |
| | $ | 836 |
|
| International Rental Car | 100 |
| | 98 |
| | 185 |
| | 184 |
|
| All Other Operations | 119 |
| | 114 |
| | 236 |
| | 225 |
|
| Total Hertz Global and Hertz | $ | 743 |
| | $ | 629 |
| | $ | 1,444 |
| | $ | 1,245 |
|
Adjusted pre-tax income (loss)(a) | | | | | | | |
| U.S. Rental Car | $ | (37 | ) | | $ | 143 |
| | $ | (152 | ) | | $ | 138 |
|
| International Rental Car | 56 |
| | 34 |
| | 52 |
| | 36 |
|
| All Other Operations | 19 |
| | 17 |
| | 39 |
| | 35 |
|
| Corporate | (120 | ) | | (139 | ) | | (234 | ) | | (262 | ) |
| Total Hertz Global | (82 | ) | | 55 |
| | (295 | ) | | (53 | ) |
| Corporate - Hertz | 1 |
| | — |
| | 2 |
| | — |
|
| Total Hertz | $ | (81 | ) | | $ | 55 |
| | $ | (293 | ) | | $ | (53 | ) |
|
| | | | | | | |
| (In millions) | June 30, 2017 | | December 31, 2016 |
| Total Assets | | | |
| U.S. Rental Car | $ | 13,639 |
| | $ | 12,876 |
|
| International Rental Car | 4,852 |
| | 3,578 |
|
| All other operations | 1,646 |
| | 1,612 |
|
| Corporate | 2,296 |
| | 1,089 |
|
| Total Hertz Global and Hertz | $ | 22,433 |
| | $ | 19,155 |
|
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
| |
| (a) | Adjusted pre-tax income (loss), the Company's segment profitability measure, is calculated as income (loss) from continuing operations before income taxes plus non-cash acquisition accounting charges, debt-related charges relating to the amortization and write-off of debt financing costs and debt discounts, intangible and tangible asset impairments and write downs and certain one-time charges and non-operational items. |
Reconciliation of adjusted pre-tax income (loss) by segment and the reconciliation to consolidated amounts are summarized below.
Hertz Global
| | | | Three Months Ended June 30, | | | | | | | | | |
| | Revenues | | Adjusted Pre-Tax Income (Loss) | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| (In millions) | 2016 | | 2015 | | 2016 | | 2015 | 2017 | | 2016 | | 2017 | | 2016 |
| Adjusted pre-tax income (loss): | | | | | | | | |
| U.S. Rental Car | $ | 1,584 |
| | $ | 1,615 |
| | $ | 143 |
| | $ | 195 |
| $ | (37 | ) | | $ | 143 |
| | $ | (152 | ) | | $ | 138 |
|
| International Rental Car | 540 |
| | 556 |
| | 34 |
| | 45 |
| 56 |
| | 34 |
| | 52 |
| | 36 |
|
| All Other Operations | 146 |
| | 146 |
| | 17 |
| | 17 |
| 19 |
| | 17 |
| | 39 |
| | 35 |
|
| Total reportable segments | $ | 2,270 |
| | $ | 2,317 |
| | 194 |
| | 257 |
| 38 |
| | 194 |
| | (61 | ) | | 209 |
|
Corporate(1) | | | | | (139 | ) | | (139 | ) | (120 | ) | | (139 | ) | | (234 | ) | | (262 | ) |
| Consolidated adjusted pre-tax income (loss) | | | | | 55 |
| | 118 |
| |
| Adjusted pre-tax income (loss) | | (82 | ) | | 55 |
| | (295 | ) | | (53 | ) |
| Adjustments: | | | | | | | | | | | | | | |
Acquisition accounting(2) | | | | | (18 | ) | | (23 | ) | (16 | ) | | (18 | ) | | (31 | ) | | (34 | ) |
Debt-related charges(3) | | | | | (12 | ) | | (15 | ) | (10 | ) | | (12 | ) | | (21 | ) | | (25 | ) |
Loss on extinguishment of debt(4) | | | | | (20 | ) | | — |
| (8 | ) | | (20 | ) | | (8 | ) | | (20 | ) |
Restructuring and restructuring related charges(5) | | | | | (18 | ) | | (41 | ) | (5 | ) | | (18 | ) | | (13 | ) | | (29 | ) |
Sale of CAR Inc. common stock(6) | | — |
| | — |
| | 3 |
| | 75 |
|
Impairment charges and asset write-downs(7) | | | | | (3 | ) | | — |
| (86 | ) | | (3 | ) | | (116 | ) | | (3 | ) |
Finance and information technology transformation costs(8) | | | | | (19 | ) | | — |
| (20 | ) | | (19 | ) | | (39 | ) | | (26 | ) |
Other(9) | | | | | — |
| | (1 | ) | (18 | ) | | — |
| | (19 | ) | | 3 |
|
| Income (loss) from continuing operations before income taxes | | | | | $ | (35 | ) | | $ | 38 |
| |
| Income (loss) before income taxes | | $ | (245 | ) | | $ | (35 | ) | | $ | (539 | ) | | $ | (112 | ) |
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
Hertz
| | | | Six Months Ended June 30, | | | | | | | | | |
| | Revenues | | Adjusted Pre-Tax Income (Loss) | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| (In millions) | 2016 | | 2015 | | 2016 | | 2015 | 2017 | | 2016 | | 2017 | | 2016 |
| Adjusted pre-tax income (loss): | | | | | | | | |
| U.S. Rental Car | $ | 2,990 |
| | $ | 3,135 |
| | $ | 138 |
| | $ | 265 |
| $ | (37 | ) | | $ | 143 |
| | $ | (152 | ) | | $ | 138 |
|
| International Rental Car | 973 |
| | 992 |
| | 36 |
| | 52 |
| 56 |
| | 34 |
| | 52 |
| | 36 |
|
| All Other Operations | 290 |
| | 288 |
| | 35 |
| | 31 |
| 19 |
| | 17 |
| | 39 |
| | 35 |
|
| Total reportable segments | $ | 4,253 |
| | $ | 4,415 |
| | 209 |
| | 348 |
| 38 |
| | 194 |
| | (61 | ) | | 209 |
|
Corporate(1) | | | | | (262 | ) | | (271 | ) | (119 | ) | | (139 | ) | | (232 | ) | | (262 | ) |
| Consolidated adjusted pre-tax income (loss) | | | | | (53 | ) | | 77 |
| |
| Adjusted pre-tax income (loss) | | (81 | ) | | 55 |
| | (293 | ) | | (53 | ) |
| Adjustments: | | | | | | | | | | | | | | |
Acquisition accounting(2) | | | | | (34 | ) | | (45 | ) | (16 | ) | | (18 | ) | | (31 | ) | | (34 | ) |
Debt-related charges(3) | | | | | (25 | ) | | (29 | ) | (10 | ) | | (12 | ) | | (21 | ) | | (25 | ) |
Loss on extinguishment of debt(4) | | | | | (20 | ) | | — |
| (8 | ) | | (20 | ) | | (8 | ) | | (20 | ) |
Restructuring and restructuring related charges(5) | | | | | (29 | ) | | (59 | ) | (5 | ) | | (18 | ) | | (13 | ) | | (29 | ) |
Sale of CAR Inc. common stock(6) | | | | | 75 |
| | — |
| — |
| | — |
| | 3 |
| | 75 |
|
Impairment charges and asset write-downs(7) | | | | | (3 | ) | | (9 | ) | (86 | ) | | (3 | ) | | (116 | ) | | (3 | ) |
Finance and information technology transformation costs(8) | | | | | (26 | ) | | — |
| (20 | ) | | (19 | ) | | (39 | ) | | (26 | ) |
Other(9) | | | | | 3 |
| | (6 | ) | (18 | ) | | — |
| | (19 | ) | | 3 |
|
| Income (loss) from continuing operations before income taxes | | | | | $ | (112 | ) | | $ | (71 | ) | |
| Income (loss) before income taxes | | $ | (244 | ) | | $ | (35 | ) | | $ | (537 | ) | | $ | (112 | ) |
| |
| (1) | Represents general corporate expenses, non-vehicle interest expense, as well as other business activities. |
| |
| (2) | Represents incremental expense associated with amortization of other intangible assets and depreciation of property and other equipment and accretion of revalued liabilities relating to acquisition accounting. |
| |
| (3) | Represents debt-related charges relating to the amortization of deferred debt financing costs and debt discounts and premiums. |
| |
| (4) | RepresentsIn 2017, represents $6 million of early redemption premium and write off of deferred financing costs associated with the redemption of the outstanding 4.25% Senior Notes due April 2018 and a $2 million write-off of deferred financing costs associated with the termination of commitments under the Senior RCF. In 2016, represents the write-off of deferred debt financing costs in the second quarter of 2016 as a result of paying off the Senior Term Facility and various vehicle debt refinancings. |
| |
| (5) | Represents expenses incurred under restructuring actions as defined in U.S. GAAP.GAAP, excluding impairments and asset write-downs, when applicable. For further information on restructuring costs, see Note 9,10, "Restructuring." Also represents certain other charges such as incremental costs incurred directly supporting business transformation initiatives. Such costs include transition costs incurred in connection with business process outsourcing arrangements and incremental costs incurred to facilitate business process re-engineering initiatives that involve significant organization redesign and extensive operational process changes. Also includes consulting costs and legal fees related to the previously disclosed accounting review and investigation. |
| |
| (6) | Represents the pre-tax gain on the sale of CAR Inc. common stock. |
| |
| (7) | In the first half of 2015,2017, primarily represents a $6second quarter $86 million impairment onof the former Dollar Thrifty headquarters in Tulsa, Oklahoma.tradename and a first quarter impairment of $30 million related to an equity method investment. |
| |
| (8) | Represents external costs associated with the Company’s finance and information technology transformation programs, both of which are multi-year initiatives that commenced in 2016 to upgrade and modernize the Company’s systems and processes. In the three months ended June 30, 2016, $5 million was incurred by U.S. RAC and $14 million was incurred by Corporate and in the six months ended June 30, 2016, $9 million was incurred by U.S. RAC and $17 million was incurred by Corporate. |
| |
| (9) | IncludesRepresents miscellaneous, and non-recurring items including but not limited to acquisition charges, integration charges, and other non-cash items. In 2017, includes first and second quarter adjustments, as applicable, to the carrying value of the Company's Brazil operations in connection with its classification as held for sale and second quarter charges of $6 million for labor-related matters and $5 million relating to PLPD as a result of a terrorist event. For the six months ended June 30, 2016, also includes a $9 million settlement gain from an eminent domain case related to one of ourthe Company's airport locations. In the 2015 periods, includes charges incurred in connection with relocating the Company's corporate headquarters to Estero, Florida. |
Note 17—Guarantor and Non-Guarantor Condensed Consolidating Financial Information - Hertz
The following condensed consolidating financial information presents the Condensed Consolidating Balance Sheets as of June 30, 2017 and December 31, 2016, the Condensed Consolidating Statements of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2017 and 2016 and the Statements of Cash Flows for the six months ended June 30, 2017 and 2016 of (a) The Hertz Corporation, ("Parent”); (b) the Parent's
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
Depreciation of revenue earning vehicles and lease charges, net
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| (In millions) | 2016 | | 2015 | | 2016 | | 2015 |
| U.S. Rental Car | $ | 417 |
| | $ | 380 |
| | $ | 836 |
| | $ | 801 |
|
| International Rental Car | 98 |
| | 101 |
| | 184 |
| | 196 |
|
| All Other Operations | 114 |
| | 116 |
| | 225 |
| | 231 |
|
| Total | $ | 629 |
| | $ | 597 |
| | $ | 1,245 |
| | $ | 1,228 |
|
Total assets
|
| | | | | | | |
| (In millions) | June 30, 2016 | | December 31, 2015 |
| U.S. Rental Car | $ | 14,049 |
| | $ | 13,614 |
|
| International Rental Car | 4,416 |
| | 3,002 |
|
| All Other Operations | 1,583 |
| | 1,520 |
|
| Corporate | 1,972 |
| | 1,983 |
|
| Assets of discontinued operations | — |
| | 3,390 |
|
| Total | $ | 22,020 |
| | $ | 23,509 |
|
The increase in total assets for International RAC is due to an increase in cash as a result of the proceeds received from the sale of CAR Inc. shares in 2016 and an increase in the number of revenue earning vehicles acquired to meet seasonal leisure demand during the summer period. Refer to Note 4, "Acquisitions and Divestitures," for additional information related to the CAR Inc. share sale. The increase in total assets for U.S. RAC is the result of an increase in the number of revenue earning vehicles acquired in order to meet upcoming seasonal demands, partially offset by lower receivables from vehicle sales.
Note 17—Related Party Transactions
In November 2015, the Company signed a master loan agreement with Old Hertz Holdings for a facility size of $650 million with an expiration in November 2016 (the "Old Master Loan"). Prior to the Spin-Off on June 30, 2016, the board of directors of the Company approved, and Hertz paid, a non-cash dividend to Hertz Investors, Inc. consisting of the full rights to the receivable due from Old Hertz Holdings under the Old Master Loan in the amount of $334 million plus accrued interest. Hertz Investors, Inc. declared and paid the same dividend to Old Hertz Holdings; thereby settling the amount receivable from Old Hertz Holdings.
On June 30, 2016, the Company signed a master loan agreement with Hertz Global for a facility size of $425 million with an expiration in June 2017 (the "Master Loan"). The interest rate is based on the U.S. Dollar LIBOR rate plus a margin. There were no amounts outstanding under the Master Loan as of June 30, 2016.
Icahn Agreements
On June 30, 2016, Hertz Global entered into a confidentiality agreement (the “Confidentiality Agreement”) with Carl C. Icahn and certain related parties (the “Icahn Group”). Pursuant to the Confidentiality Agreement, Vincent J. Intrieri, Samuel Merksamer and Daniel A. Ninivaggi, each of whom was appointed as a director of Hertz Global, are designees of the Icahn Group on the Hertz Global board of directors. Until the date that the Icahn Group no longer has a designee on the Hertz Global board of directors, the Icahn Group agrees to vote all of its shares of common stock of Hertz Global in favor of the election of all of Hertz Global’s director nominees at each annual or special meeting of Hertz Global.
In addition, Hertz Global, High River Limited Partnership, Icahn Partners LP and Icahn Partners Master Fund LP entered into a registration rights agreement, dated June 30, 2016 (the “Registration Rights Agreement”). Pursuant to the Registration Rights Agreement, among other things, and subject to certain exceptions, Hertz Global agreed to effect up to two demand registrations with respect to shares of Hertz Global common stock held by members of the Icahn
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
Group. Hertz Global also agreed to provide, with certain exceptions, certain piggyback registration rights with respect to common stock held by members of the Icahn Group.
Note 18—Guarantor and Non-Guarantor Condensed Consolidating Financial Statements
The following condensed consolidating financial information presents the Condensed Consolidating Balance Sheets as of June 30, 2016 and December 31, 2015, the Condensed Consolidating Statements of Operations and Comprehensive Income (Loss) for the three and six monthsended June 30, 2016 and 2015 and the Statements of Cash Flows for the six months ended June 30, 2016 and 2015 of (a) The Hertz Corporation, ("Parent”); (b) the Parent's subsidiaries that guarantee the Parent's indebtednessSenior Notes issued by the Parent ("Guarantor Subsidiaries"); (c) the Parent's subsidiaries that do not guarantee the Parent's indebtednessSenior Notes issued by the Parent ("Non-Guarantor Subsidiaries"); (d) elimination entries necessary to consolidate the Parent with the Guarantor Subsidiaries and Non-Guarantor Subsidiaries ("Eliminations"); and of (e) the CompanyHertz on a consolidated basis.
Investments in subsidiaries are accounted for using the equity method for purposes of the consolidating presentation. The principal elimination entries relate to investments in subsidiaries and intercompany balances and transactions. The Guarantor Subsidiaries are 100% owned by the Parent and all guarantees are full and unconditional and joint and several. Additionally, substantially all of the assets of the Guarantor Subsidiaries are pledged under the Senior Facilities and Senior Second Priority Secured Notes, and consequently will not be available to satisfy the claims of the Company'sHertz's general creditors. In lieu of providing separate unaudited financial statements for the Guarantor Subsidiaries, we haveHertz has included the accompanying condensed consolidating financial statements based on Rule 3-10 of the SEC's Regulation S-X. Management of Hertz does not believe that separate financial statements of the Guarantor Subsidiaries are material to ourHertz's investors; therefore, separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented.
As describedDuring the preparation of the condensed consolidating financial information of The Hertz Corporation and Subsidiaries as of and for the three months ended March 31, 2017, it was determined that prepaid expenses and other assets, deferred income taxes, net, due from affiliates and due to affiliates, and the related eliminations at December 31, 2016 as filed in Note 1, "Background"the Company’s 2016 Form 10-K were improperly calculated, resulting in a $915 million overstatement of prepaid expenses and Note 3, "Discontinued Operations", Hertz completed the Spin-Off of its equipment rental business on June 30, 2016. In connection with the Spin-Off, certain amounts that were historically recorded on the balance sheetother assets and due to affiliates of the Parent were distributed with the discontinued entities. These amounts primarily related to defined benefit pension plans, workers’ compensation liabilities, and an overstatement of due from affiliates and deferred income taxes. These amounts have been reclassified in the 2015 condensed consolidating financial statements to reflect the balances transferred intaxes, net of the Guarantor Subsidiaries'Subsidiaries. The errors, which the Company has determined are not material to this disclosure, had no impact on the net assets of the Parent or the Guarantor Subsidiaries and Non-Guarantor Subsidiaries'are eliminated upon consolidation, and therefore have no impact on the Company’s consolidated financial statements based on which discontinued entity receivedcondition, results of operations or cash flows. The Company has revised the distribution inCondensed Consolidating Balance Sheets for the Spin-Off.Parent, Guarantor Subsidiaries and Eliminations as of December 31, 2016 to correct for these errors.
During the preparation of the condensed consolidating financial information of The Hertz Corporation and Subsidiaries as of and for the three and sixnine months ended JuneSeptember 30, 2016, it was determined that investments in subsidiaries at December 31, 2015cash flows from operating activities and investing activities for the Parent and Non-Guarantor Subsidiaries were misstated as filed in the Company's 2015second quarter 2016 Form 10-K were improperly classified,10-Q, resulting in a $453$411 million understatement of investments in subsidiaries and stockholder's equity for the Non-Guarantor Subsidiaries, and an understatement of investments in subsidiaries and an overstatement of prepaid expensesnet cash used in operating activities and other assets fora $411 million overstatement of net cash provided by investing activities of the GuarantorParent, and a $411 million overstatement of net cash provided by operating activities and a $411 million overstatement of net cash used in investing activities of the Non-Guarantor Subsidiaries. These errors had no impact to total assets, total liabilities or stockholder's equity of the Guarantor Subsidiaries.Subsidiaries and no impact to financing activities. These errors, which the Company determined are not material, are eliminated upon consolidation and, therefore, have no impact on the Company's consolidated financial condition, results of operations, or cash flows. The Company has revised the Guarantor, Non-Guarantor, and Eliminations Condensed Consolidating Balance Sheets asStatements of December 31, 2015Cash Flows for Parent and Guarantor Subsidiaries for the six months ended June 30, 2016 to correct for these errors.
40
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
THE HERTZ CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
June 30, 20162017
(In millions)
| | | | Parent (The Hertz Corporation) | | Guarantor Subsidiaries | | Non- Guarantor Subsidiaries | | Eliminations | | The Hertz Corporation & Subsidiaries | Parent (The Hertz Corporation) | | Guarantor Subsidiaries | | Non- Guarantor Subsidiaries | | Eliminations | | The Hertz Corporation & Subsidiaries |
| ASSETS | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | $ | 811 |
| | $ | 11 |
| | $ | 463 |
| | $ | — |
| | $ | 1,285 |
| $ | 841 |
| | $ | 11 |
| | $ | 289 |
| | $ | — |
| | $ | 1,141 |
|
| Restricted cash and cash equivalents | 68 |
| | 4 |
| | 246 |
| | — |
| | 318 |
| 888 |
| | 7 |
| | 167 |
| | — |
| | 1,062 |
|
| Receivables, net of allowance | 588 |
| | 207 |
| | 528 |
| | — |
| | 1,323 |
| 271 |
| | 160 |
| | 779 |
| | — |
| | 1,210 |
|
| Due from affiliates | 3,263 |
| | 3,233 |
| | 7,684 |
| | (14,180 | ) | | — |
| 3,400 |
| | 4,176 |
| | 9,158 |
| | (16,734 | ) | | — |
|
| Inventories, net | 19 |
| | 4 |
| | 20 |
| | — |
| | 43 |
| |
| Prepaid expenses and other assets | 4,541 |
| | 50 |
| | 277 |
| | (4,274 | ) | | 594 |
| 5,410 |
| | 77 |
| | 236 |
| | (5,158 | ) | | 565 |
|
| Revenue earning vehicles, net | 324 |
| | 8 |
| | 12,477 |
| | — |
| | 12,809 |
| 317 |
| | 3 |
| | 12,866 |
| | — |
| | 13,186 |
|
| Property and equipment, net | 698 |
| | 64 |
| | 150 |
| | — |
| | 912 |
| 631 |
| | 65 |
| | 143 |
| | — |
| | 839 |
|
| Investment in subsidiaries, net | 5,951 |
| | 545 |
| | — |
| | (6,496 | ) | | — |
| 6,201 |
| | 694 |
| | — |
| | (6,895 | ) | | — |
|
| Other intangible assets, net | 127 |
| | 3,327 |
| | 25 |
| | — |
| | 3,479 |
| 112 |
| | 3,111 |
| | 16 |
| | — |
| | 3,239 |
|
| Goodwill | 102 |
| | 943 |
| | 212 |
| | — |
| | 1,257 |
| 102 |
| | 943 |
| | 37 |
| | — |
| | 1,082 |
|
| Assets held for sale | | — |
| | — |
| | 109 |
| | — |
| | 109 |
|
| Total assets | $ | 16,492 |
| | $ | 8,396 |
| | $ | 22,082 |
| | $ | (24,950 | ) | | $ | 22,020 |
| $ | 18,173 |
| | $ | 9,247 |
| | $ | 23,800 |
| | $ | (28,787 | ) | | $ | 22,433 |
|
| LIABILITIES AND EQUITY | | | | | | | | | | | | | | | | | | |
| Due to affiliates | $ | 8,976 |
| | $ | 1,350 |
| | $ | 3,854 |
| | $ | (14,180 | ) | | $ | — |
| $ | 10,461 |
| | $ | 1,990 |
| | $ | 4,283 |
| | $ | (16,734 | ) | | $ | — |
|
| Accounts payable | 303 |
| | 95 |
| | 841 |
| | — |
| | 1,239 |
| 380 |
| | 97 |
| | 904 |
| | — |
| | 1,381 |
|
| Accrued liabilities | 605 |
| | 103 |
| | 329 |
| | — |
| | 1,037 |
| 529 |
| | 90 |
| | 344 |
| | — |
| | 963 |
|
| Accrued taxes, net | 75 |
| | 22 |
| | 2,468 |
| | (2,386 | ) | | 179 |
| 86 |
| | 23 |
| | 3,225 |
| | (3,168 | ) | | 166 |
|
| Debt | 4,772 |
| | — |
| | 10,620 |
| | — |
| | 15,392 |
| 5,800 |
| | — |
| | 11,009 |
| | — |
| | 16,809 |
|
| Public liability and property damage | 152 |
| | 46 |
| | 212 |
| | — |
| | 410 |
| 162 |
| | 42 |
| | 219 |
| | — |
| | 423 |
|
| Deferred taxes on income, net | — |
| | 2,061 |
| | 1,981 |
| | (1,888 | ) | | 2,154 |
| |
| Deferred income taxes, net | | — |
| | 2,077 |
| | 1,836 |
| | (1,990 | ) | | 1,923 |
|
| Liabilities held for sale | | — |
| | — |
| | 13 |
| | — |
| | 13 |
|
| Total liabilities | 14,883 |
| | 3,677 |
| | 20,305 |
| | (18,454 | ) | | 20,411 |
| 17,418 |
| | 4,319 |
| | 21,833 |
| | (21,892 | ) | | 21,678 |
|
| Equity: | | | | | | | | | | | | | | | | | | |
| Stockholder's equity | 1,609 |
| | 4,719 |
| | 1,777 |
| | (6,496 | ) | | 1,609 |
| 755 |
| | 4,928 |
| | 1,967 |
| | (6,895 | ) | | 755 |
|
| Total liabilities and equity | $ | 16,492 |
| | $ | 8,396 |
| | $ | 22,082 |
| | $ | (24,950 | ) | | $ | 22,020 |
| $ | 18,173 |
| | $ | 9,247 |
| | $ | 23,800 |
| | $ | (28,787 | ) | | $ | 22,433 |
|
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
THE HERTZ CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 20152016
(In millions)
| | | | Parent (The Hertz Corporation) | | Guarantor Subsidiaries | | Non- Guarantor Subsidiaries | | Eliminations | | The Hertz Corporation & Subsidiaries | Parent (The Hertz Corporation) | | Guarantor Subsidiaries | | Non- Guarantor Subsidiaries | | Eliminations | | The Hertz Corporation & Subsidiaries |
| ASSETS | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | $ | 179 |
| | $ | 17 |
| | $ | 278 |
| | $ | — |
| | $ | 474 |
| $ | 458 |
| | $ | 12 |
| | $ | 346 |
| | $ | — |
| | $ | 816 |
|
| Restricted cash and cash equivalents | 57 |
| | 3 |
| | 273 |
| | — |
| | 333 |
| 53 |
| | 5 |
| | 220 |
| | — |
| | 278 |
|
| Receivables, net of allowance | 399 |
| | 183 |
| | 1,204 |
| | — |
| | 1,786 |
| 752 |
| | 167 |
| | 364 |
| | — |
| | 1,283 |
|
| Due from affiliates | 4,158 |
| | 3,238 |
| | 7,543 |
| | (14,939 | ) | | — |
| 3,668 |
| | 3,823 |
| | 9,750 |
| | (17,241 | ) | | — |
|
| Inventories, net | 15 |
| | 3 |
| | 11 |
| | — |
| | 29 |
| |
| Prepaid expenses and other assets | 4,503 |
| | 695 |
| | 450 |
| | (4,682 | ) | | 966 |
| 4,821 |
| | 83 |
| | 199 |
| | (4,525 | ) | | 578 |
|
| Revenue earning vehicles, net | 388 |
| | 6 |
| | 10,352 |
| | — |
| | 10,746 |
| 361 |
| | 7 |
| | 10,450 |
| | — |
| | 10,818 |
|
| Property and equipment, net | 777 |
| | 74 |
| | 151 |
| | — |
| | 1,002 |
| 656 |
| | 70 |
| | 132 |
| | — |
| | 858 |
|
| Investment in subsidiaries, net | 7,457 |
| | 1,614 |
| | — |
| | (9,071 | ) | | — |
| 6,114 |
| | 598 |
| | — |
| | (6,712 | ) | | — |
|
| Other intangible assets, net | 142 |
| | 3,350 |
| | 30 |
| | — |
| | 3,522 |
| 89 |
| | 3,223 |
| | 20 |
| | — |
| | 3,332 |
|
| Goodwill | 102 |
| | 942 |
| | 217 |
| | — |
| | 1,261 |
| 102 |
| | 943 |
| | 36 |
| | — |
| | 1,081 |
|
| Assets of discontinued operations | — |
| | 2,989 |
| | 401 |
| | — |
| | 3,390 |
| |
| Assets held for sale | | — |
| | — |
| | 111 |
| | — |
| | 111 |
|
| Total assets | $ | 18,177 |
| | $ | 13,114 |
| | $ | 20,910 |
| | $ | (28,692 | ) | | $ | 23,509 |
| $ | 17,074 |
| | $ | 8,931 |
| | $ | 21,628 |
| | $ | (28,478 | ) | | $ | 19,155 |
|
| LIABILITIES AND EQUITY |
| |
| |
| |
| | | | | | | | | | | |
| Due to affiliates | $ | 8,888 |
| | $ | 1,465 |
| | $ | 3,961 |
| | $ | (14,314 | ) | | $ | — |
| $ | 10,833 |
| | $ | 1,900 |
| | $ | 4,508 |
| | $ | (17,241 | ) | | $ | — |
|
| Accounts payable | 262 |
| | 81 |
| | 423 |
| | — |
| | 766 |
| 279 |
| | 90 |
| | 452 |
| | — |
| | 821 |
|
| Accrued liabilities | 584 |
| | 114 |
| | 337 |
| | — |
| | 1,035 |
| 557 |
| | 103 |
| | 320 |
| | — |
| | 980 |
|
| Accrued taxes, net | 223 |
| | 19 |
| | 2,849 |
| | (2,963 | ) | | 128 |
| 78 |
| | 18 |
| | 2,881 |
| | (2,812 | ) | | 165 |
|
| Debt | 6,126 |
| | — |
| | 9,644 |
| | — |
| | 15,770 |
| 4,086 |
| | — |
| | 9,455 |
| | — |
| | 13,541 |
|
| Public liability and property damage | 146 |
| | 48 |
| | 200 |
| | — |
| | 394 |
| 166 |
| | 43 |
| | 198 |
| | — |
| | 407 |
|
| Deferred taxes on income, net | — |
| | 2,005 |
| | 1,882 |
| | (1,719 | ) | | 2,168 |
| |
| Liabilities of discontinued operations | — |
| | 1,915 |
| | 9 |
| | (624 | ) | | 1,300 |
| |
| Deferred income taxes, net | | — |
| | 2,065 |
| | 1,797 |
| | (1,713 | ) | | 2,149 |
|
| Liabilities held for sale | | — |
| | — |
| | 17 |
| | — |
| | 17 |
|
| Total liabilities | 16,229 |
| | 5,647 |
| | 19,305 |
| | (19,620 | ) | | 21,561 |
| 15,999 |
| | 4,219 |
| | 19,628 |
| | (21,766 | ) | | 18,080 |
|
| Equity: |
| |
| |
| |
| | | | | | | | | | | |
| Stockholder's equity | 1,948 |
| | 7,467 |
| | 1,605 |
| | (9,072 | ) | | 1,948 |
| 1,075 |
| | 4,712 |
| | 2,000 |
| | (6,712 | ) | | 1,075 |
|
| Total liabilities and equity | $ | 18,177 |
| | $ | 13,114 |
| | $ | 20,910 |
| | $ | (28,692 | ) | | $ | 23,509 |
| $ | 17,074 |
| | $ | 8,931 |
| | $ | 21,628 |
| | $ | (28,478 | ) | | $ | 19,155 |
|
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
THE HERTZ CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
For the Three Months Ended June 30, 2017
(In millions)
|
| | | | | | | | | | | | | | | | | | | |
| | Parent (The Hertz Corporation) | | Guarantor Subsidiaries | | Non- Guarantor Subsidiaries | | Eliminations | | The Hertz Corporation & Subsidiaries |
| Total revenues | $ | 1,170 |
| | $ | 354 |
| | $ | 1,871 |
| | $ | (1,171 | ) | | $ | 2,224 |
|
| Expenses: | | | | | | | | | |
| Direct vehicle and operating | 741 |
| | 181 |
| | 333 |
| | — |
| | 1,255 |
|
| Depreciation of revenue earning vehicles and lease charges, net | 1,024 |
| | 113 |
| | 714 |
| | (1,108 | ) | | 743 |
|
| Selling, general and administrative | 156 |
| | 8 |
| | 59 |
| | — |
| | 223 |
|
| Interest expense, net | 101 |
| | (25 | ) | | 81 |
| | — |
| | 157 |
|
| Intangible asset impairments | — |
| | 86 |
| | — |
| | — |
| | 86 |
|
| Other (income) expense, net | — |
| | — |
| | 4 |
| | — |
| | 4 |
|
| Total expenses | 2,022 |
| | 363 |
| | 1,191 |
| | (1,108 | ) | | 2,468 |
|
| Income (loss) from continuing operations before income taxes and equity in earnings (losses) of subsidiaries | (852 | ) | | (9 | ) | | 680 |
| | (63 | ) | | (244 | ) |
| Income tax (provision) benefit | 358 |
| | 1 |
| | (273 | ) | | — |
| | 86 |
|
| Equity in earnings (losses) of subsidiaries, net of tax | 336 |
| | 30 |
| | — |
| | (366 | ) | | — |
|
| Net income (loss) from continuing operations | (158 | ) | | 22 |
| | 407 |
| | (429 | ) | | (158 | ) |
| Net income (loss) from discontinued operations | — |
| | — |
| | — |
| | — |
| | — |
|
| Net income (loss) | (158 | ) | | 22 |
| | 407 |
| | (429 | ) | | (158 | ) |
| Other comprehensive income (loss), net of tax | (7 | ) | | 3 |
| | (8 | ) | | 5 |
| | (7 | ) |
| Comprehensive income (loss) | $ | (165 | ) | | $ | 25 |
| | $ | 399 |
| | $ | (424 | ) | | $ | (165 | ) |
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
THE HERTZ CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
For the Three Months Ended June 30, 2016
(In millions)
| | | | Parent (The Hertz Corporation) | | Guarantor Subsidiaries | | Non- Guarantor Subsidiaries | | Eliminations | | The Hertz Corporation & Subsidiaries | Parent (The Hertz Corporation) | | Guarantor Subsidiaries | | Non- Guarantor Subsidiaries | | Eliminations | | The Hertz Corporation & Subsidiaries |
| Total revenues | $ | 1,192 |
| | $ | 385 |
| | $ | 1,636 |
| | $ | (943 | ) | | $ | 2,270 |
| $ | 1,192 |
| | $ | 385 |
| | $ | 1,636 |
| | $ | (943 | ) | | $ | 2,270 |
|
| Expenses: | | | | | | | | | | | | | | | | | | |
| Direct vehicle and operating | 732 |
| | 192 |
| | 343 |
| | — |
| | 1,267 |
| 732 |
| | 192 |
| | 343 |
| | — |
| | 1,267 |
|
| Depreciation of revenue earning vehicles and lease charges, net | 759 |
| | 214 |
| | 599 |
| | (943 | ) | | 629 |
| 759 |
| | 214 |
| | 599 |
| | (943 | ) | | 629 |
|
| Selling, general and administrative | 158 |
| | 11 |
| | 65 |
| | — |
| | 234 |
| 158 |
| | 11 |
| | 65 |
| | — |
| | 234 |
|
| Interest expense, net | 119 |
| | (21 | ) | | 76 |
| | — |
| | 174 |
| 119 |
| | (21 | ) | | 76 |
| | — |
| | 174 |
|
| Other (income) expense, net | 1 |
| | (1 | ) | | 1 |
| | — |
| | 1 |
| 1 |
| | (1 | ) | | 1 |
| | — |
| | 1 |
|
| Total expenses | 1,769 |
| | 395 |
| | 1,084 |
| | (943 | ) | | 2,305 |
| 1,769 |
| | 395 |
| | 1,084 |
| | (943 | ) | | 2,305 |
|
| Income (loss) from continuing operations before income taxes and equity in earnings (losses) of subsidiaries | (577 | ) | | (10 | ) | | 552 |
| | — |
| | (35 | ) | (577 | ) | | (10 | ) | | 552 |
| | — |
| | (35 | ) |
| (Provision) benefit for taxes on income (loss) of continuing operations | 227 |
| | 3 |
| | (223 | ) | | — |
| | 7 |
| |
| Income tax (provision) benefit | | 227 |
| | 3 |
| | (223 | ) | | — |
| | 7 |
|
| Equity in earnings (losses) of subsidiaries, net of tax | 307 |
| | 144 |
| | — |
| | (451 | ) | | — |
| 307 |
| | 144 |
| | — |
| | (451 | ) | | — |
|
| Net income (loss) from continuing operations | (43 | ) | | 137 |
| | 329 |
| | (451 | ) | | (28 | ) | (43 | ) | | 137 |
| | 329 |
| | (451 | ) | | (28 | ) |
| Net income (loss) from discontinued operations | — |
| | (4 | ) | | (11 | ) | | — |
| | (15 | ) | — |
| | (4 | ) | | (11 | ) | | — |
| | (15 | ) |
| Net income (loss) | (43 | ) | | 133 |
| | 318 |
| | (451 | ) | | (43 | ) | (43 | ) | | 133 |
| | 318 |
| | (451 | ) | | (43 | ) |
| Other comprehensive income (loss), net of tax | (45 | ) | | (5 | ) | | (23 | ) | | 28 |
| | (45 | ) | (45 | ) | | (5 | ) | | (23 | ) | | 28 |
| | (45 | ) |
| Comprehensive income (loss) | $ | (88 | ) | | $ | 128 |
| | $ | 295 |
| | $ | (423 | ) | | $ | (88 | ) | $ | (88 | ) | | $ | 128 |
| | $ | 295 |
| | $ | (423 | ) | | $ | (88 | ) |
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
THE HERTZ CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
For the ThreeSix Months Ended June 30, 20152017
(In millions)
| | | | Parent (The Hertz Corporation) | | Guarantor Subsidiaries | | Non- Guarantor Subsidiaries | | Eliminations | | The Hertz Corporation & Subsidiaries | Parent (The Hertz Corporation) | | Guarantor Subsidiaries | | Non- Guarantor Subsidiaries | | Eliminations | | The Hertz Corporation & Subsidiaries |
| Total revenues | $ | 1,181 |
| | $ | 408 |
| | $ | 1,310 |
| | $ | (582 | ) | | $ | 2,317 |
| $ | 2,220 |
| | $ | 661 |
| | $ | 3,248 |
| | $ | (1,989 | ) | | $ | 4,140 |
|
| Expenses: | | | | | | | | | | | | | | | | | | |
| Direct vehicle and operating | 719 |
| | 223 |
| | 349 |
| | (1 | ) | | 1,290 |
| 1,429 |
| | 350 |
| | 608 |
| | — |
| | 2,387 |
|
| Depreciation of revenue earning vehicles and lease charges, net | 434 |
| | 137 |
| | 607 |
| | (581 | ) | | 597 |
| 1,761 |
| | 215 |
| | 1,335 |
| | (1,867 | ) | | 1,444 |
|
| Selling, general and administrative | 157 |
| | 18 |
| | 76 |
| | — |
| | 251 |
| 306 |
| | 19 |
| | 117 |
| | — |
| | 442 |
|
| Interest expense, net | 95 |
| | (4 | ) | | 58 |
| | — |
| | 149 |
| 183 |
| | (47 | ) | | 151 |
| | — |
| | 287 |
|
| Intangible asset impairments | | — |
| | 86 |
| | — |
| | — |
| | 86 |
|
| Other (income) expense, net | (3 | ) | | (1 | ) | | (4 | ) | | — |
| | (8 | ) | 33 |
| | — |
| | (2 | ) | | — |
| | 31 |
|
| Total expenses | 1,402 |
| | 373 |
| | 1,086 |
| | (582 | ) | | 2,279 |
| 3,712 |
| | 623 |
| | 2,209 |
| | (1,867 | ) | | 4,677 |
|
| Income (loss) from continuing operations before income taxes and equity in earnings (losses) of subsidiaries | (221 | ) | | 35 |
| | 224 |
| | — |
| | 38 |
| (1,492 | ) | | 38 |
| | 1,039 |
| | (122 | ) | | (537 | ) |
| (Provision) benefit for taxes on income (loss) of continuing operations | 75 |
| | (16 | ) | | (84 | ) | | — |
| | (25 | ) | |
| Income tax (provision) benefit | | 572 |
| | (14 | ) | | (401 | ) | | — |
| | 157 |
|
| Equity in earnings (losses) of subsidiaries, net of tax | 182 |
| | 68 |
| | — |
| | (250 | ) | | — |
| 540 |
| | 62 |
| | — |
| | (602 | ) | | — |
|
| Net income (loss) from continuing operations | 36 |
| | 87 |
| | 140 |
| | (250 | ) | | 13 |
| (380 | ) | | 86 |
| | 638 |
| | (724 | ) | | (380 | ) |
| Net income (loss) from discontinued operations | — |
| | 23 |
| | — |
| | — |
| | 23 |
| — |
| | — |
| | — |
| | — |
| | — |
|
| Net income (loss) | 36 |
| | 110 |
| | 140 |
| | (250 | ) | | 36 |
| (380 | ) | | 86 |
| | 638 |
| | (724 | ) | | (380 | ) |
| Other comprehensive income (loss), net of tax | 11 |
| | — |
| | 7 |
| | (7 | ) | | 11 |
| 6 |
| | 3 |
| | 4 |
| | (7 | ) | | 6 |
|
| Comprehensive income (loss) | $ | 47 |
| | $ | 110 |
| | $ | 147 |
| | $ | (257 | ) | | $ | 47 |
| $ | (374 | ) | | $ | 89 |
| | $ | 642 |
| | $ | (731 | ) | | $ | (374 | ) |
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
THE HERTZ CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
For the Six Months Ended June 30, 2016
(In millions)
| | | | Parent (The Hertz Corporation) | | Guarantor Subsidiaries | | Non- Guarantor Subsidiaries | | Eliminations | | The Hertz Corporation & Subsidiaries | Parent (The Hertz Corporation) | | Guarantor Subsidiaries | | Non- Guarantor Subsidiaries | | Eliminations | | The Hertz Corporation & Subsidiaries |
| Total revenues | $ | 2,258 |
| | $ | 725 |
| | $ | 2,932 |
| | $ | (1,662 | ) | | $ | 4,253 |
| $ | 2,258 |
| | $ | 725 |
| | $ | 2,932 |
| | $ | (1,662 | ) | | $ | 4,253 |
|
| Expenses: | | | | | | | | | | | | | | | | | | |
| Direct vehicle and operating | 1,417 |
| | 381 |
| | 627 |
| | — |
| | 2,425 |
| 1,417 |
| | 381 |
| | 627 |
| | — |
| | 2,425 |
|
| Depreciation of revenue earning vehicles and lease charges, net | 1,380 |
| | 349 |
| | 1,177 |
| | (1,661 | ) | | 1,245 |
| 1,380 |
| | 349 |
| | 1,177 |
| | (1,661 | ) | | 1,245 |
|
| Selling, general and administrative | 304 |
| | 24 |
| | 132 |
| | (1 | ) | | 459 |
| 304 |
| | 24 |
| | 132 |
| | (1 | ) | | 459 |
|
| Interest expense, net | 207 |
| | (22 | ) | | 140 |
| | — |
| | 325 |
| 207 |
| | (22 | ) | | 140 |
| | — |
| | 325 |
|
| Other (income) expense, net | 1 |
| | (10 | ) | | (80 | ) | | — |
| | (89 | ) | 1 |
| | (10 | ) | | (80 | ) | | — |
| | (89 | ) |
| Total expenses | 3,309 |
| | 722 |
| | 1,996 |
| | (1,662 | ) | | 4,365 |
| 3,309 |
| | 722 |
| | 1,996 |
| | (1,662 | ) | | 4,365 |
|
| Income (loss) from continuing operations before income taxes and equity in earnings (losses) of subsidiaries | (1,051 | ) | | 3 |
| | 936 |
| | — |
| | (112 | ) | (1,051 | ) | | 3 |
| | 936 |
| | — |
| | (112 | ) |
| (Provision) benefit for taxes on income (loss) of continuing operations | 415 |
| | (2 | ) | | (381 | ) | | — |
| | 32 |
| |
| Income tax (provision) benefit | | 415 |
| | (2 | ) | | (381 | ) | | — |
| | 32 |
|
| Equity in earnings (losses) of subsidiaries, net of tax | 545 |
| | 201 |
| | — |
| | (746 | ) | | — |
| 545 |
| | 201 |
| | — |
| | (746 | ) | | — |
|
| Net income (loss) from continuing operations | (91 | ) | | 202 |
| | 555 |
| | (746 | ) | | (80 | ) | (91 | ) | | 202 |
| | 555 |
| | (746 | ) | | (80 | ) |
| Net income (loss) from discontinued operations | — |
| | (1 | ) | | (10 | ) | | — |
| | (11 | ) | — |
| | (1 | ) | | (10 | ) | | — |
| | (11 | ) |
| Net income (loss) | (91 | ) | | 201 |
| | 545 |
| | (746 | ) | | (91 | ) | (91 | ) | | 201 |
| | 545 |
| | (746 | ) | | (91 | ) |
| Other comprehensive income (loss), net of tax | 9 |
| | (5 | ) | | 29 |
| | (24 | ) | | 9 |
| 9 |
| | (5 | ) | | 29 |
| | (24 | ) | | 9 |
|
| Comprehensive income (loss) | $ | (82 | ) | | $ | 196 |
| | $ | 574 |
| | $ | (770 | ) | | $ | (82 | ) | $ | (82 | ) | | $ | 196 |
| | $ | 574 |
| | $ | (770 | ) | | $ | (82 | ) |
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
THE HERTZ CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)CASH FLOWS
For the Six Months Ended June 30, 20152017
(In millions)
|
| | | | | | | | | | | | | | | | | | | |
| | Parent (The Hertz Corporation) | | Guarantor Subsidiaries | | Non- Guarantor Subsidiaries | | Eliminations | | The Hertz Corporation & Subsidiaries |
| Total revenues | $ | 2,296 |
| | $ | 791 |
| | $ | 2,506 |
| | $ | (1,178 | ) | | $ | 4,415 |
|
| Expenses: | | | | | | | | | |
| Direct vehicle and operating | 1,415 |
| | 446 |
| | 633 |
| | (2 | ) | | 2,492 |
|
| Depreciation of revenue earning vehicles and lease charges, net | 889 |
| | 262 |
| | 1,253 |
| | (1,176 | ) | | 1,228 |
|
| Selling, general and administrative | 271 |
| | 42 |
| | 158 |
| | — |
| | 471 |
|
| Interest expense, net | 193 |
| | (9 | ) | | 112 |
| | — |
| | 296 |
|
| Other (income) expense, net | (2 | ) | | — |
| | 1 |
| | — |
| | (1 | ) |
| Total expenses | 2,766 |
| | 741 |
| | 2,157 |
| | (1,178 | ) | | 4,486 |
|
| Income (loss) from continuing operations before income taxes and equity in earnings (losses) of subsidiaries | (470 | ) | | 50 |
| | 349 |
| | — |
| | (71 | ) |
| (Provision) benefit for taxes on income (loss) of continuing operations | 55 |
| | (12 | ) | | (37 | ) | | — |
| | 6 |
|
| Equity in earnings (losses) of subsidiaries, net of tax | 382 |
| | 114 |
| | — |
| | (496 | ) | | — |
|
| Net income (loss) from continuing operations | (33 | ) | | 152 |
| | 312 |
| | (496 | ) | | (65 | ) |
| Net income (loss) from discontinued operations | — |
| | 33 |
| | (1 | ) | | — |
| | 32 |
|
| Net income (loss) | (33 | ) | | 185 |
| | 311 |
| | (496 | ) | | (33 | ) |
| Other comprehensive income (loss), net of tax | (35 | ) | | (4 | ) | | (39 | ) | | 43 |
| | (35 | ) |
| Comprehensive income (loss) | $ | (68 | ) | | $ | 181 |
| | $ | 272 |
| | $ | (453 | ) | | $ | (68 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| | Parent (The Hertz Corporation) | | Guarantor Subsidiaries | | Non- Guarantor Subsidiaries | | Eliminations | | The Hertz Corporation & Subsidiaries |
| Net cash provided by (used in) operating activities from continuing operations | $ | (377 | ) | | $ | 15 |
| | $ | 2,168 |
| | $ | (822 | ) | | $ | 984 |
|
| Cash flows from investing activities: | | | | | | | | | |
| Net change in restricted cash and cash equivalents, vehicle | (1 | ) | | (1 | ) | | 57 |
| | — |
| | 55 |
|
| Revenue earning vehicle expenditures | (171 | ) | | (5 | ) | | (6,533 | ) | | — |
| | (6,709 | ) |
| Proceeds from disposal of revenue earning vehicles | 91 |
| | — |
| | 3,744 |
| | — |
| | 3,835 |
|
| Capital asset expenditures, non-vehicle | (75 | ) | | (5 | ) | | (23 | ) | | — |
| | (103 | ) |
| Proceeds from disposal of property and other equipment | 6 |
| | — |
| | 5 |
| | — |
| | 11 |
|
| Sales of shares in equity investment | — |
| | — |
| | 9 |
| | — |
| | 9 |
|
| Other | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) |
| Capital contributions to subsidiaries | (1,419 | ) | | — |
| | — |
| | 1,419 |
| | — |
|
| Return of capital from subsidiaries | 1,898 |
| | — |
| | — |
| | (1,898 | ) | | — |
|
| Loan to Parent/Guarantor from Non-Guarantor | — |
| | — |
| | 431 |
| | (431 | ) | | — |
|
| Net cash provided by (used in) investing activities from continuing operations | 329 |
| | (11 | ) | | (2,312 | ) | | (910 | ) | | (2,904 | ) |
| Cash flows from financing activities: | | | | | | | | | |
| Net change in restricted cash and cash equivalents, non-vehicle | (834 | ) | | (1 | ) | | 1 |
| | — |
| | (834 | ) |
| Proceeds from issuance of vehicle debt | 631 |
| | — |
| | 4,397 |
| | — |
| | 5,028 |
|
| Repayments of vehicle debt | (657 | ) | | — |
| | (3,008 | ) | | — |
| | (3,665 | ) |
| Proceeds from issuance of non-vehicle debt | 2,100 |
| | — |
| | — |
| | — |
| | 2,100 |
|
| Repayments of non-vehicle debt | (354 | ) | | — |
| | — |
| | — |
| | (354 | ) |
| Payment of financing costs | (16 | ) | | (4 | ) | | (14 | ) | | — |
| | (34 | ) |
| Early redemption premium payment | (5 | ) | | — |
| | — |
| | — |
| | (5 | ) |
| Advances to Hertz Global | (3 | ) | | — |
| | — |
| | — |
| | (3 | ) |
| Capital contributions received from parent | — |
| | — |
| | 1,419 |
| | (1,419 | ) | | — |
|
Payment of dividends and return of capital
| — |
| | — |
| | (2,720 | ) | | 2,720 |
| | — |
|
| Loan to Parent/Guarantor from Non-Guarantor | (431 | ) | | — |
| | — |
| | 431 |
| | — |
|
| Net cash provided by (used in) financing activities from continuing operations | 431 |
| | (5 | ) | | 75 |
| | 1,732 |
| | 2,233 |
|
| Effect of foreign currency exchange rate changes on cash and cash equivalents from continuing operations | — |
| | — |
| | 12 |
| | — |
| | 12 |
|
| Net increase (decrease) in cash and cash equivalents during the period from continuing operations | 383 |
| | (1 | ) | | (57 | ) | | — |
| | 325 |
|
| Cash and cash equivalents at beginning of period | 458 |
| | 12 |
| | 346 |
| | — |
| | 816 |
|
| Cash and cash equivalents at end of period | $ | 841 |
| | $ | 11 |
| | $ | 289 |
| | $ | — |
| | $ | 1,141 |
|
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
THE HERTZ CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 2016
(In millions)
| | | | Parent (The Hertz Corporation) | | Guarantor Subsidiaries | | Non- Guarantor Subsidiaries | | Eliminations | | The Hertz Corporation & Subsidiaries | Parent (The Hertz Corporation) | | Guarantor Subsidiaries | | Non- Guarantor Subsidiaries | | Eliminations | | The Hertz Corporation & Subsidiaries |
| Net cash provided by (used in) operating activities from continuing operations | $ | (1,903 | ) | | $ | 40 |
| | $ | 3,316 |
| | $ | (439 | ) | | $ | 1,014 |
| $ | (1,492 | ) | | $ | 37 |
| | $ | 2,908 |
| | $ | (439 | ) | | $ | 1,014 |
|
| Cash flows from investing activities: | | | | | | | | | | | | | | | | | | |
| Net change in restricted cash and cash equivalents | (10 | ) | | (2 | ) | | 28 |
| | — |
| | 16 |
| |
| Net change in restricted cash and cash equivalents, vehicle | | (10 | ) | | (2 | ) | | 30 |
| | — |
| | 18 |
|
| Net change in restricted cash and cash equivalents, non-vehicle | | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) |
| Revenue earning vehicle expenditures | (176 | ) | | (43 | ) | | (7,049 | ) | | — |
| | (7,268 | ) | (176 | ) | | (34 | ) | | (6,677 | ) | | — |
| | (6,887 | ) |
| Proceeds from disposal of revenue earning vehicles | 542 |
| | 6 |
| | 4,620 |
| | — |
| | 5,168 |
| 131 |
| | — |
| | 4,656 |
| | — |
| | 4,787 |
|
| Capital asset expenditures, non-vehicle | (41 | ) | | (8 | ) | | (23 | ) | | — |
| | (72 | ) | |
| Capital assets expenditures, non-vehicle | | (41 | ) | | (8 | ) | | (23 | ) | | — |
| | (72 | ) |
| Proceeds from disposal of property and other equipment | 12 |
| | 3 |
| | 24 |
| | — |
| | 39 |
| 12 |
| | 3 |
| | 24 |
| | — |
| | 39 |
|
| Purchases of shares in equity method investment | (45 | ) | | — |
| | — |
| | — |
| | (45 | ) | |
| Sales of shares in equity method investment | — |
| | — |
| | 233 |
| | — |
| | 233 |
| |
| Sales of shares in equity investment, net of amounts invested | | (45 | ) | | — |
| | 233 |
| | — |
| | 188 |
|
| Capital contributions to subsidiaries | (514 | ) | | — |
| | — |
| | 514 |
| | — |
| (514 | ) | | — |
| | — |
| | 514 |
| | — |
|
| Return of capital from subsidiaries | 1,623 |
| | — |
| | — |
| | (1,623 | ) | | — |
| 1,623 |
| | — |
| | — |
| | (1,623 | ) | | — |
|
| Loan to Parent / Guarantor from Non-Guarantor | — |
| | — |
| | (405 | ) | | 405 |
| | — |
| |
| Loan to Parent/Guarantor from Non-Guarantor | | — |
| | — |
| | (405 | ) | | 405 |
| | — |
|
| Net cash provided by (used in) investing activities from continuing operations | 1,391 |
| | (44 | ) | | (2,572 | ) | | (704 | ) | | (1,929 | ) | 980 |
| | (41 | ) | | (2,164 | ) | | (704 | ) | | (1,929 | ) |
| Cash flows from financing activities: | | | | | | | | | | | | | | | | | | |
| Proceeds from issuance of long-term debt | — |
| | — |
| | 2,185 |
| | — |
| | 2,185 |
| |
| Repayments of long-term debt | (2,062 | ) | | — |
| | (342 | ) | | — |
| | (2,404 | ) | |
| Short-term borrowings: | | | | | | | | | | |
| Proceeds | — |
| | — |
| | 312 |
| | — |
| | 312 |
| |
| Payments | — |
| | — |
| | (263 | ) | | — |
| | (263 | ) | |
| Proceeds under the revolving lines of credit | 1,663 |
| | — |
| | 3,395 |
| | — |
| | 5,058 |
| |
| Payments under the revolving lines of credit | (964 | ) | | — |
| | (4,289 | ) | | — |
| | (5,253 | ) | |
| Capital contributions received from parent | — |
| | — |
| | 514 |
| | (514 | ) | | — |
| |
| Loan to Parent / Guarantor from Non-Guarantor | 405 |
| | — |
| | — |
| | (405 | ) | | — |
| |
Payment of dividends and return of capital
| — |
| | — |
| | (2,062 | ) | | 2,062 |
| | — |
| |
| Proceeds from issuance of vehicle debt | | 186 |
| | — |
| | 5,893 |
| | — |
| | 6,079 |
|
| Repayments of vehicle debt | | (183 | ) | | — |
| | (4,895 | ) | | — |
| | (5,078 | ) |
| Proceeds from issuance of non-vehicle debt | | 1,477 |
| | — |
| | — |
| | — |
| | 1,477 |
|
| Repayments of non-vehicle debt | | (2,843 | ) | | — |
| | — |
| | — |
| | (2,843 | ) |
| Payment of financing costs | (31 | ) | | (3 | ) | | (17 | ) | | — |
| | (51 | ) | (31 | ) | | (3 | ) | | (17 | ) | | — |
| | (51 | ) |
| Transfers from discontinued entities | 2,122 |
| | — |
| | — |
| | — |
| | 2,122 |
| 2,122 |
| | — |
| | — |
| | — |
| | 2,122 |
|
| Other | 11 |
| | 1 |
| | — |
| | — |
| | 12 |
| 11 |
| | 1 |
| | — |
| | — |
| | 12 |
|
| Capital contributions received from parent | | — |
| | — |
| | 514 |
| | (514 | ) | | — |
|
| Payment of dividends and return of capital | | — |
| | — |
| | (2,062 | ) | | 2,062 |
| | — |
|
| Loan to Parent/Guarantor from Non-Guarantor | | 405 |
| | — |
| | — |
| | (405 | ) | | — |
|
| Net cash provided by (used in) financing activities from continuing operations | 1,144 |
| | (2 | ) | | (567 | ) | | 1,143 |
| | 1,718 |
| 1,144 |
| | (2 | ) | | (567 | ) | | 1,143 |
| | 1,718 |
|
| Effect of foreign exchange rate changes on cash and cash equivalents from continuing operations | — |
| | — |
| | 8 |
| | — |
| | 8 |
| |
| Effect of foreign currency exchange rate changes on cash and cash equivalents from continuing operations | | — |
| | — |
| | 8 |
| | — |
| | 8 |
|
| Net increase (decrease) in cash and cash equivalents during the period from continuing operations | 632 |
| | (6 | ) | | 185 |
| | — |
| | 811 |
| 632 |
| | (6 | ) | | 185 |
| | — |
| | 811 |
|
| Cash and cash equivalents at beginning of period | 179 |
| | 17 |
| | 278 |
| | — |
| | 474 |
| 179 |
| | 17 |
| | 278 |
| | — |
| | 474 |
|
| Cash and cash equivalents at end of period | $ | 811 |
| | $ | 11 |
| | $ | 463 |
| | $ | — |
| | $ | 1,285 |
| $ | 811 |
| | $ | 11 |
| | $ | 463 |
| | $ | — |
| | $ | 1,285 |
|
| | | | | | | | | | | | | | | | | | | |
| Cash flows from discontinued operations: | | | | | | | | | | | | | | | | | | |
| Cash flows provided by operating activities | — |
| | 59 |
| | 148 |
| | — |
| | 207 |
| |
| Cash flows used in investing activities | — |
| | (75 | ) | | (2 | ) | | — |
| | (77 | ) | |
| Cash flows provided by (used in) operating activities | | $ | — |
| | $ | 59 |
| | $ | 148 |
| | $ | — |
| | $ | 207 |
|
| Cash flows provided by (used in) investing activities | | — |
| | (75 | ) | | (2 | ) | | — |
| | (77 | ) |
| Cash flows provided by (used in) financing activities | — |
| | 44 |
| | (138 | ) | | — |
| | (94 | ) | — |
| | 44 |
| | (138 | ) | | — |
| | (94 | ) |
| Net increase (decrease) in cash and cash equivalents during the period from discontinued operations | — |
| | 28 |
| | 8 |
| | — |
| | 36 |
| $ | — |
| | $ | 28 |
| | $ | 8 |
| | $ | — |
| | $ | 36 |
|
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
48
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 2015
(In millions)
|
| | | | | | | | | | | | | | | | | | | |
| | Parent (The Hertz Corporation) | | Guarantor Subsidiaries | | Non- Guarantor Subsidiaries | | Eliminations | | The Hertz Corporation & Subsidiaries |
| Net cash provided by (used in) operating activities from continuing operations | $ | (810 | ) | | $ | (13 | ) | | $ | 2,663 |
| | $ | (679 | ) | | $ | 1,161 |
|
| Cash flows from investing activities: | | | | | | | | | |
| Net change in restricted cash and cash equivalents | (60 | ) | | 1 |
| | 192 |
| | — |
| | 133 |
|
| Revenue earning vehicle expenditures | (298 | ) | | (63 | ) | | (7,278 | ) | | — |
| | (7,639 | ) |
| Proceeds from disposal of revenue earning vehicles | 160 |
| | 51 |
| | 4,605 |
| | — |
| | 4,816 |
|
| Capital assets expenditures, non-vehicle | (87 | ) | | — |
| | (34 | ) | | — |
| | (121 | ) |
| Proceeds from disposal of property and other equipment | 27 |
| | 5 |
| | 12 |
| | — |
| | 44 |
|
| Capital contributions to subsidiaries | (1,544 | ) | | — |
| | — |
| | 1,544 |
| | — |
|
| Return of capital from subsidiaries | 2,043 |
| | 37 |
| | — |
| | (2,080 | ) | | — |
|
| Acquisitions, net of cash acquired | (17 | ) | | (3 | ) | | (75 | ) | | — |
| | (95 | ) |
| Loan to Parent / Guarantor from Non-Guarantor | — |
| | — |
| | (506 | ) | | 506 |
| | — |
|
| Advances to Old Hertz Holdings | (6 | ) | | — |
| | — |
| | — |
| | (6 | ) |
| Net cash provided by (used in) investing activities from continuing operations | 218 |
| | 28 |
| | (3,084 | ) | | (30 | ) | | (2,868 | ) |
| Cash flows from financing activities: | | | | | | | | | |
| Proceeds from issuance of long-term debt | — |
| | — |
| | 1,069 |
| | — |
| | 1,069 |
|
| Repayments of long-term debt | (11 | ) | | — |
| | (1,021 | ) | | — |
| | (1,032 | ) |
| Short-term borrowings: | | | | | | | | | |
| Proceeds | — |
| | — |
| | 383 |
| | — |
| | 383 |
|
| Payments | — |
| | — |
| | (258 | ) | | — |
| | (258 | ) |
| Proceeds under the revolving lines of credit | 1,206 |
| | — |
| | 4,101 |
| | — |
| | 5,307 |
|
| Payments under the revolving lines of credit | (970 | ) | | — |
| | (2,713 | ) | | — |
| | (3,683 | ) |
| Capital contributions received from parent | — |
| | — |
| | 1,544 |
| | (1,544 | ) | | — |
|
| Loan to Parent / Guarantor from Non-Guarantor | 506 |
| | — |
| | — |
| | (506 | ) | | — |
|
| Payment of dividends and return of capital | — |
| | — |
| | (2,759 | ) | | 2,759 |
| | — |
|
| Payment of financing costs | — |
| | (1 | ) | | (7 | ) | | — |
| | (8 | ) |
| Other | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) |
| Net cash provided by (used in) financing activities from continuing operations | 731 |
| | (1 | ) | | 338 |
| | 709 |
| | 1,777 |
|
| Effect of foreign exchange rate changes on cash and cash equivalents from continuing operations | — |
| | — |
| | (16 | ) | | — |
| | (16 | ) |
| Net increase (decrease) in cash and cash equivalents during the period from continuing operations | 139 |
| | 14 |
| | (99 | ) | | — |
| | 54 |
|
| Cash and cash equivalents at beginning of period | 2 |
| | 11 |
| | 461 |
| | — |
| | 474 |
|
| Cash and cash equivalents at end of period | 141 |
| | 25 |
| | 362 |
| | — |
| | 528 |
|
| | | | | | | | | | |
| Cash flows from discontinued operations: | | | | | | | | | |
| Cash flows provided by operating activities | — |
| | 252 |
| | 40 |
| | — |
| | 292 |
|
| Cash flows used in investing activities | — |
| | (258 | ) | | (37 | ) | | — |
| | (295 | ) |
| Cash flows provided by (used in) financing activities | — |
| | (4 | ) | | 1 |
| | — |
| | (3 | ) |
| Effect of foreign exchange rate changes on cash and cash equivalents | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) |
| Net increase (decrease) in cash and cash equivalents during the period from discontinued operations | — |
| | (10 | ) | | 3 |
| | — |
| | (7 | ) |
THE HERTZ CORPORATIONGLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
Note 19—Subsequent Events
Non-Vehicle Debt
Senior Notes
In July 2016, Hertz completed the redemption of all its outstanding 7.50% Senior Notes due 2018 (the "7.50% Senior Notes") using proceeds received from the issuance of the Senior Term Loan and available cash to fund the redemption. Consequently, Hertz terminated, cancelled and discharged all of its obligations under the 7.50% Senior Notes and under the Indenture dated as of September 30, 2010 (as supplemented). In addition to the payment of $700 million in principal amount of the 7.50% Senior Notes, Hertz paid an additional $25 million, comprised of $13 million for an early redemption premium of 1.875% of the principal amount outstanding and $12 million for accrued and unpaid interest through the date of redemption.
Vehicle Debt
Australian Securitization
In July 2016, the Company entered into an agreement pursuant to which the maturity of the Australian Securitization was extended from December 2016 to July 2018.
THE HERTZ CORPORATION AND SUBSIDIARIES
| |
| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Hertz Global Holdings, Inc. (together with its consolidated subsidiaries, "Hertz Global" or the "Company") is a holding company and its principal, wholly-owned subsidiary is The Hertz Corporation Inc. (together with its consolidated subsidiaries, "Hertz"). As Hertz Global consolidates Hertz for financial statement purposes, disclosures that relate to activities of Hertz also apply to Hertz Global, unless otherwise noted. Hertz comprises approximately the entire balance of Hertz Global's assets, liabilities and operating cash flows. In addition, Hertz's operating revenues and operating expenses comprise nearly 100% of Hertz Global's revenues and operating expenses. As such, Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") that follows for Hertz also applies to Hertz Global in all material respects and differences between the operations and results of Hertz and Hertz Global are separately disclosed and explained. We sometimes use the words "we", "our," "us," and the "Company" in this MD&A for disclosures that relate to all of Hertz and Hertz Global.
Management’s discussion and analysis ("MD&A") should be read in conjunction with the MD&A presented in the 2015our 2016 Form 10‑K filed on February 29, 2016 and the unaudited condensed consolidated financial statements and accompanying notes included in Part I, Item 1 of this Report on Form 10-Q for the quarterly period ended June 30, 2017 (this "Report"), which include additional information about our accounting policies, practices and the transactions underlying our financial results. The preparation of our unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts in our unaudited condensed consolidated financial statements and the accompanying notes including vehicle depreciation and various claims and contingencies related to lawsuits, taxes, environmental and other matters arising during the normal course of business. We apply our best judgment, our knowledge of existing facts and circumstances and our knowledge of actions that we may undertake in the future in determining the estimates that will affect our unaudited condensed consolidated financial statements. We evaluate our estimates on an ongoing basis using our historical experience, as well as other factors we believe to be appropriate under the circumstances, such as current economic conditions, and adjust or revise our estimates as circumstances change. As future events and their effects cannot be determined with precision, actual results may differ from these estimates.
In this MD&A we refer to certain key metrics and Non-GAAP measures, including the following:
Adjusted Pre-Tax Income - important to management because it allows management to assess the operational performance of our business, exclusive of certain items and allows management to assess the performance of the entire business on the same basis as the segment measure of profitability. Management believes that it is important to investors for the same reasons it is important to management and because it allows them to assess our operational performance on the same basis that management uses internally.
Total Revenue Per Transaction Day ("Total RPD", also referred to as "pricing") - important to management and investors as it represents a measurement of the changes in underlying pricing in the vehicle rental business and encompasses the elements in vehicle rental pricing that management has the ability to control.
Total Revenue Per Available Car DayUnit Per Month ("RACD"Total RPU") - important to management and investors as it represents a measurement of the changes in underlying pricing in the vehicle rental business and provides a measure of revenue productionproductivity relative to overall capacity.the total number of vehicles in our fleet whether owned or leased ("average vehicles" or "fleet capacity").
Transaction Days - important to management and investors as it represents the number of revenue generating days ("volume"). It is used as a component to measure Total RPD and vehicle utilization. Transaction days represent the total number of 24-hour periods, with any partial period counted as one transaction day, that vehicles were on rent (the period between when a rental contract is opened and closed) in a given period. Thus, it is possible for a vehicle to attain more than one transaction day in a 24-hour period. Late in the third quarter of 2015 we fully integrated the Dollar Thrifty and Hertz counter systems and as a result aligned the transaction day calculation in the Hertz system. As a result of this alignment, we determined that there was an impact to the calculation and we estimate that transaction days for the US RAC segment will increase by approximately 1% prospectively relative to historical calculations through the third quarter of 2016. This will also prospectively impact key metrics calculations that utilize transaction days, although to a lesser extent.
Vehicle Utilization - important to management and investors because it is the measurement of the proportion of our vehicles that are being used to generate revenues relative to the total number of vehicles available for rent ("fleet capacity.") Higher vehicle utilization means more vehicles are being utilized to generate revenue.
Net Depreciation Per Unit Per Month - important to management and investors as depreciation of revenue earning vehicles and lease charges, is one of our largest expenses for the vehicle rental business and is driven by the number of vehicles, expected residual values at the time of disposal and expected hold period of the vehicles. Net depreciation per unit per month is reflective of how we are managing the costs of our vehicles and facilitates a comparison with other participants in the vehicle rental industry.
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
| |
| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
Key metrics and Non-GAAP measures should not be considered in isolation and should not be considered superior to, or a substitute for, financial measures calculated in accordance with U.S. GAAP. The above key metrics and Non-GAAP measures are defined, and the Non-GAAP measures are reconciled to their most comparable U.S. GAAP measure, in the "Footnotes to the Results of Operations and Selected Operating Data by Segment Tables" section of this MD&A.
THE HERTZ CORPORATION AND SUBSIDIARIES
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ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
OUR COMPANY
Hertz Global Holdings, Inc. was incorporated in Delaware in 2015 to serve as the top-level holding company for Rental Car Intermediate Holdings, LLC which wholly owns Hertz, Hertz Global's primary operating company. Hertz was incorporated in Delaware in 1967 and its predecessorsis a successor to corporations that have been engaged in the vehicle rental and leasing business since 1918.
We operate our vehicle rental business globally through the Hertz, Dollar and Thrifty brands from approximately 10,0009,700 corporate and franchisee locations in North America, Europe, Latin America, Africa, Asia, Australia, The Caribbean, the Middle East and New Zealand. We are one of the largest worldwide airport general use vehicle rental companies and our Hertz brand name is one of the most recognized in the world, signifying leadership in quality rental services and products. We have an extensive network of rental locations in the United States ("U.S.") and in all major European markets. We believe that we maintain one of the leading airport vehicle rental brand market shares, by overall reported revenues, in the U.S. and at approximately 125 major airports in Europe where data regarding vehicle rental concessionaire activity is available. We are a leading provider of comprehensive, integrated vehicle leasing and fleet management solutions through our Donlen subsidiary.
Equipment Rental Spin-Off
On June 30, 2016, former Hertz Global Holdings, Inc., the former top level holding company for Hertz (for periods on or prior to June 30, 2016, “Old Hertz Holdings” and for periods after June 30, 2016, “Herc Holdings”) completed a spin-off (the “Spin-Off”) of its global vehicle rental business through a dividend to stockholders of record of Old Hertz Holdings as of the close of business on June 22, 2016, the record date for the distribution, of all of the issued and outstanding common stock of Hertz Rental Car Holding Company, Inc. (“New Hertz”), which was re-named Hertz Global Holdings, Inc. in connection with the Spin-Off ("Hertz Global"), on a one-to-five basis. Hertz Global is now an independent public company and trades on the New York Stock Exchange under the symbol "HTZ". Herc Holdings, which changed its name to Herc Holdings Inc. on June 30, 2016, trades on the New York Stock Exchange under the symbol “HRI”.
Despite the fact that Hertz Global was spun off from Old Hertz Holdings in the Spin-Off and was the legal spinnee in the transaction, for accounting purposes, due to the relative significance of New Hertz to Old Hertz Holdings, Hertz Global is considered the spinnor or divesting entity and Herc Holdings is considered the spinnee or divested entity. As a result, despite the legal form of the transaction, New Hertz, or Hertz Global, is the “accounting successor” to Old Hertz Holdings. As such, the historical financial information of the Company reflects the financial information of the equipment rental business as a discontinued operation.
Unless noted otherwise, discussion in this MD&A pertains to the Company's vehicle rental and leasing business, its continuing operations.
OVERVIEW OF OUR BUSINESS AND OPERATING ENVIRONMENT
We are engaged principally in the business of renting and leasing vehicles primarily through our Hertz, Dollar and Thrifty brands. In addition to vehicle rental, we provide comprehensive, integrated vehicle leasing and fleet management solutions through our Donlen subsidiary. We have a diversified revenue base and a highly variable cost structure and are able to dynamically manageadjust fleet capacity, the most significant determinant of our costs.costs, over time to meet expectations of market demand. Our profitability is primarily a function of the volume, mix and pricing of rental transactions and the utilization of vehicles, the related ownership cost of vehicles and other operating costs. Significant changes in the purchase price or residual values of vehicles or interest rates can have a significant effect on our profitability depending on our ability to adjust pricing for these changes. We continue to balance our mix of non-program and program vehicles based on market conditions. Our business requires significant expenditures for vehicles, and consequently we require substantial liquidity to finance such expenditures. See "Liquidity and Capital Resources" below.
Our strategy includes optimization of our on airportvehicle rental operations, selected openings of new off airport locations, the disciplined performance management and evaluation of existingall locations and the pursuit of same-store sales growth.
Our total revenues primarily are derived from rental and related charges and consist of:
Vehicle rental revenues - revenues from all company-operated vehicle rental operations, including charges to customers for the reimbursement of costs incurred relating to airport concession fees and vehicle license fees, the fueling of vehicles and revenues associated with ancillary products associated with vehicle rentals, including
THE HERTZ CORPORATION AND SUBSIDIARIES
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ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
the sale of loss or collision damage waivers, liability insurance coverage, parking and other products and fees, ancillary products associated with the retail vehicle sales channel and certain royalty fees from our franchisees (such fees, including initial franchise fees, are less than 2% of total revenues each period);
All other operations revenues - revenues from vehicle leasing and fleet management services and other business activities.
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
| |
| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
Our expenses primarily consist of:
Direct vehicle and operating expenses (primarily wages and related benefits; commissions and concession fees paid to airport authorities, travel agents and others; facility, self-insurance and reservation costs; and other costs relating to the operation and rental of revenue earning vehicles, such as damage, maintenance and fuel costs);
Depreciation expense and lease charges, net relating to revenue earning vehicles (including net gains or losses on the disposal of such vehicles);
Selling, general and administrative expenses; and
Interest expense, net.
Our Business Segments
We have identified three reportable segments, which are organized based on the products and services provided by our operating segments and the geographic areas in which our operating segments conduct business, as follows:
U.S. Rental Car ("U.S. RAC") - Rental of vehicles, (cars, crossovers and light trucks), as well as sales of ancillary products and services, in the U.S.;
International Rental Car ("International RAC") - Rental and leasing of vehicles, (cars, vans, crossovers and light trucks), as well as sales of ancillary products and services, internationally; and
All Other Operations - Comprised of our Donlen business, which provides vehicle leasing and fleet management services, and other business activities.
In addition to the above reportable segments, we have corporate operations ("Corporate") which includes general corporate assets and expenses and certain interest expense (including net interest on non-vehicle debt).Corporate operations. We assess performance and allocate resources based upon the financial information for our operating segments.
Fleet
We periodically review the efficiencies of an optimal mix between program and non-program vehicles in our fleet. Program vehicles generally provide us with flexibility to increase or reduce the size of our fleet by returning vehicles to the manufacturer sooner than originally expected without risk of loss in the event of anbased on economic downturn or to respond to changes in rental demand. When we increase the percentage of program vehicles, the average age of our fleet decreases since the average holding period for program vehicles is shorter than for non-program vehicles. We dispose of our non-program vehicles via auction, dealer-direct and our retail locations. Non-program vehicles disposed of through our retail outlets allow us the opportunity for ancillary revenue, such as warranty and financing during disposition.and title fees. We adjust the ratio of program and non-program vehicles in our fleet as needed based on contract negotiations and the economic environment pertaining to our industry.
Seasonality
Our vehicle rental operations are a seasonal business, with decreased levels of business in the winter months and heightened activity during the spring and summer. We havesummer peak ("our peak season") for the ability to dynamically manage fleet capacity, the most significant portionmajority of countries where we generate our cost structure, to meet market demand. For instance, torevenues. To accommodate increased demand,
THE HERTZ CORPORATION AND SUBSIDIARIES
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ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
we increase our available fleet and staff during the second and third quarters of the year. As business demand declines, fleetvehicles and staff are decreased accordingly. A number of our other major operating costs, including airport concession fees, commissions and vehicle liability expenses, are directly related to revenues or transaction volumes. In addition, our management expects to utilize enhanced process improvements, including utilization initiatives and the use of our information technology systems, to help manage our variable costs. More than halfGenerally, between 70% and 75% of our typical annual operating costs represent variable costs, while the remaining costs are fixed or semi-fixed. We also maintain a flexible workforce, with a significant number of part-time and seasonal workers. However, certainCertain operating expenses, including real estate taxes, rent, insurance, utilities, maintenance and other facility-related expenses, the costs of operating our information technology systems and minimum staffing costs, remain fixed and cannot be adjusted for seasonal demand. Revenues related to our vehicle leasing and fleet management services are generally not seasonal.
2016 Operating Overview
The following provides an overview of our business and financial performance and key factors influencing our results:
Old Hertz Holdings successfully completed the previously announced separation of its vehicle rental business and equipment rental business on June 30, 2016, receiving approximately $2.0 billion pursuant to the Separation Agreement, which was used to repay outstanding non-vehicle debt;
Total revenues for U.S. RAC for the second quarter of 2016 decreased by 2% as compared to 2015 driven by an 8% decline in Total RPD, partially offset by a 6% increase in transaction days. Total revenues for U.S. RAC for the first half of 2016 decreased by 5% as compared to 2015 driven by a 9% decline in Total RPD, partially offset by a 4% increase in transaction days;
Depreciation of revenue earning vehicles and lease charges, net for U.S. RAC increased 10% to $417 million from $380 million for the second quarter of 2016 versus 2015 and increased 4% to $836 million from $801 million for the first half of 2016 versus 2015. Net depreciation per unit per month in U.S. RAC increased 12% to $278 from $248 for the second quarter of 2016 versus 2015 and increased 9% to $290 from $267 for the first half of 2016 versus 2015. The increases are the result of declining residual values on non-program vehicles and higher program vehicle acquisition costs;
51
Total revenues for International RAC decreased 3% and 2% for the second quarter and first half of 2016 versus 2015, respectively. Excluding the impact of foreign currency, total revenues for International RAC decreased $10 million, or 2% for the second quarter 2016 versus 2015, driven by a 2% decrease in Total RPD, on a constant currency basis, on flat transaction days. Excluding the impact of foreign currency, total revenues for International RAC increased $13 million, or 1% for the first half of 2016 versus 2015, driven by flat Total RPD, on a constant currency basis, and a 1% increase in transaction days;
Depreciation of revenue earning vehicles and lease charges, net for International RAC decreased 3% to $98 million from $101 million for the second quarter of 2016 versus 2015 and decreased 6%to $184 million from $196 million for the first half of 2016 versus 2015. On a constant currency basis, net depreciation per unit per month for International RAC decreased 4% to $179 from $186 for the second quarter of 2016 versus 2015 and decreased 6% to $186 from $197 for the first half of 2016 versus 2015. The decreases are the result of improved vehicle procurement, vehicle mix changes and optimized remarketing channels;
The Company realized cost savings of approximately $100 million in the second quarter 2016 and $170 million for the first half of 2016, reflecting continued progress as part of the Company's three-to-five year margin improvement plan. In addition to vehicle related initiatives, consolidated unit costs for the Company, defined as consolidated direct vehicle and operating and selling, general and administrative expenses per transaction day, decreased $2.23, or 7%, as compared to the second quarter of 2015 and decreased $2.01, or 6%, as compared to the first half of 2015.
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
| |
| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
Wrote-off $20 million
2017 Operating Overview
The following provides an overview of deferred financing costs inour business and financial performance and key factors influencing our results:
Total revenues for U.S. RAC for the second quarter of 2017 decreased by 4% compared to 2016 driven by a 2% decline in Total RPD and a 3% decrease in transaction days. Total revenues for U.S. RAC for the first half of 2017 decreased by 4% as compared to the first half of 2016 driven by a result of paying off our Senior Term Facility2% decline in Total RPD and various vehicle debt refinancings;a 2% decrease in transaction days;
Recorded $3Depreciation of revenue earning vehicles and lease charges, net for U.S. RAC increased 26% to $524 million from $417 million for the second quarter of net impairments2017 versus 2016 and asset write-downs duringincreased 22% to $1.0 billion from $836 million for the first half of 2017 versus 2016. Net depreciation per unit per month in U.S. RAC increased 27% to $353 from $278 for the second quarter of 2017 versus 2016 and zero in 2015. Recorded $3 million net impairments and asset write-downs duringincreased 21% to $351 from $290 for the first half of 2017 versus 2016. The increases in per vehicle depreciation rates are the result of shortened hold periods on certain non-program vehicles as we rebalanced the fleet, our onboarding of a richer mix of premium model year 2017 vehicles, and declining residual values;
Total revenues for International RAC increased 1% for the second quarter of 2017 versus 2016. Excluding the impact of foreign currency exchange rates, total revenues for International RAC increased $21 million, or 4% for the second quarter 2017 versus 2016, compared to $20 million duringdriven by a 6%increase in transaction days, partially offset by a 1% decrease in Total RPD. Total revenues for International RAC decreased 2% for the first half of 2015;2017 versus 2016. Excluding the impact of foreign currency exchange rates, total revenues for International RAC increased $6 million, or 1% for the first half of 2017 versus 2016, driven by a 4% increase in transaction days, partially offset by a 3% decrease in Total RPD;
Recorded $19Depreciation of revenue earning vehicles and lease charges, net for International RAC increased 2% to $100 million and $26from $98 million in finance and information technology transformation costs duringfor the second quarter of 2017 versus 2016 and increased 1% to $185 million from $184 million for the first half of 2016, respectively, with no comparable costs in the second2017 versus 2016. Net depreciation per unit per month for International RAC increased 2% to $172 from $168 for the second quarter of 2017 versus 2016 and was comparable for the first half of 2015;2017 versus 2016;
International RAC's public liability and property damage (“PLPD”) expense increased $20decreased $17 million in the second quarter of 2017 versus 2016 as comparedand decreased $14 million during the first half of 2017 versus 2016. The decreases are primarily related to 2015, due to$20 million in unanticipated charges recorded in the second quarter of 2016 resulting from adverse experience and case development of historical claims, primarily in the United Kingdom. WhileKingdom, and a $5 million favorable impact in the company cannot be assured that additional exposure may not materializesecond quarter of 2017 as a result of actions taken by management to improve claims handling in future quarters, the company has proactively addressed the root cause of the impactEurope and changed itschanges in business practices, accordingly. The increase inincluding the closure of certain locations with unfavorable PLPD expense in International RAC wasexperience, partially offset by a $5 million decrease inaccrual for PLPD expenserelated to a terrorist event in the US RAC segment.second quarter of 2017;
Recorded $18$86 million of impairment charges in restructuringthe second quarter 2017 resulting from the impairment of the Dollar Thrifty tradename versus $3 million of net impairments and restructuring related expensesasset write-downs in the second quarter 2016. Recorded $116 million of impairment charges during the first halfsecond quarter of 20162017 resulting from the $86 million impairment of the Dollar Thrifty tradename and a $30 million impairment of an equity method investment during the first halfof 2017 compared to $41$3 million during the second quarter of 2015. Recorded $29 million in restructuringnet impairments and restructuring related expensesasset write-downs during the first half of 20162016;
Recorded $20 million and $39 million during the second quarter and first half of 2017, respectively, in expenses associated with our finance and information technology transformation programs, both of which are multi-year initiatives to upgrade and modernize the Company's systems and processes, compared to $59 million in 2015. Included in these amounts were $3$19 million and $7$26 million in consulting, audit and legal costs associated with the restatement and investigation activities during the second quarter and first half of 2016, respectively, as compared to $13 million and $23 million duringrespectively;
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
| |
| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
During the second quarter and first half of 2015, respectively;
The Company2017, we sold 204approximately 9 million shares of common stock of CAR Inc., a publicly traded company on the Hong Kong Stock Exchange, infor net proceeds of approximately $9 million, recognizing a pre-tax gain of $3 million. During the first quarterhalf of 2016, we sold 204 million shares of common stock of CAR Inc. for net proceeds of approximately $233 million, recognizing a pre-tax gain of $75 million;million. There were no sales of common stock of CAR Inc. in the second quarter of 2017 or 2016;
The Company executed new financingsWe issued $1.25 billion in aggregate principal amount of 7.625% Senior Second Priority Secured Notes due 2022, utilizing a portion of the proceeds to decrease near term debt maturities by approximately $250 million following redemption of the April 2018 Notes and amended and extendedto terminate commitments under the maturities of several existing financing facilities such that there are no significant maturities of non-vehicle debt until 2019;Senior RCF by $150 million; and
In an effort to focus its resources on continuing to grow the Hertz, DollarRecorded $8 million of charges for early redemption premiums and Thrifty brands, the Company substantially transitioned its Firefly operations to its Thrifty brandwrite off of deferred financing costs in the U.S. market.second quarter and first half of 2017 as a result of redeeming the April 2018 Notes and terminating commitments under the Senior RCF, compared to $20 million in the second quarter and first half of 2016 as a result of paying off the Senior Term Facility and various vehicle debt refinancings.
For more information on the above highlights, see the discussion of our results on a consolidated basis and by segment that follows herein.
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
| |
| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
CONSOLIDATED RESULTS OF OPERATIONS - HERTZ
| | | | Three Months Ended June 30, | | Percent Increase/(Decrease) | | Six Months Ended
June 30, | | Percent Increase/(Decrease) | Three Months Ended June 30, | | Percent Increase/(Decrease) | | Six Months Ended
June 30, | | Percent Increase/(Decrease) |
| ($ in millions) | 2016 | | 2015 | | 2016 | | 2015 | | 2017 | | 2016 | | 2017 | | 2016 | |
| Total revenues | $ | 2,270 |
| | $ | 2,317 |
| | (2 | )% | | $ | 4,253 |
| | $ | 4,415 |
| | (4 | )% | $ | 2,224 |
| | $ | 2,270 |
| | (2 | )% | | $ | 4,140 |
| | $ | 4,253 |
| | (3 | )% |
| Direct vehicle and operating expenses | 1,267 |
| | 1,290 |
| | (2 | ) | | 2,425 |
| | 2,492 |
| | (3 | ) | 1,255 |
| | 1,267 |
| | (1 | ) | | 2,387 |
| | 2,425 |
| | (2 | ) |
| Depreciation of revenue earning vehicles and lease charges, net | 629 |
| | 597 |
| | 5 |
| | 1,245 |
| | 1,228 |
| | 1 |
| 743 |
| | 629 |
| | 18 |
| | 1,444 |
| | 1,245 |
| | 16 |
|
| Selling, general and administrative expenses | 234 |
| | 251 |
| | (7 | ) | | 459 |
| | 471 |
| | (3 | ) | 223 |
| | 234 |
| | (5 | ) | | 442 |
| | 459 |
| | (4 | ) |
| Interest expense, net: | | | | | | | | | | | | |
| Vehicle | | 82 |
| | 72 |
| | 14 |
| | 153 |
| | 140 |
| | 9 |
|
| Non-vehicle | | 75 |
| | 102 |
| | (26 | ) | | 134 |
| | 185 |
| | (28 | ) |
| Interest expense, net | 174 |
| | 149 |
| | 17 |
| | 325 |
| | 296 |
| | 10 |
| 157 |
| | 174 |
| | (10 | ) | | 287 |
| | 325 |
| | (12 | ) |
| Intangible asset impairments | | 86 |
| | — |
| | — |
| | 86 |
| | — |
| | — |
|
| Other (income) expense, net | 1 |
| | (8 | ) | | NM |
| | (89 | ) | | (1 | ) | | NM |
| 4 |
| | 1 |
| | 300 |
| | 31 |
| | (89 | ) | | NM |
|
| Income (loss) from continuing operations, before income taxes | (35 | ) | | 38 |
| | NM |
| | (112 | ) | | (71 | ) | | 58 |
| (244 | ) | | (35 | ) | | 597 |
| | (537 | ) | | (112 | ) | | 379 |
|
| (Provision) benefit for taxes on income (loss) of continuing operations | 7 |
| | (25 | ) | | NM |
| | 32 |
| | 6 |
| | 433 |
| |
| Income tax (provision) benefit | | 86 |
| | 7 |
| | NM |
| | 157 |
| | 32 |
| | 391 |
|
| Net income (loss) from continuing operations | (28 | ) | | 13 |
| | NM |
| | (80 | ) | | (65 | ) | | 23 |
| (158 | ) | | (28 | ) | | 464 |
| | (380 | ) | | (80 | ) | | 375 |
|
| Net income (loss) from discontinued operations | (15 | ) | | 23 |
| | NM |
| | (11 | ) | | 32 |
| | NM |
| — |
| | (15 | ) | | NM |
| | — |
| | (11 | ) | | NM |
|
| Net income (loss) | $ | (43 | ) | | $ | 36 |
| | NM |
| | $ | (91 | ) | | $ | (33 | ) | | 176 |
| $ | (158 | ) | | $ | (43 | ) | | 267 |
| | $ | (380 | ) | | $ | (91 | ) | | 318 |
|
Adjusted pre-tax income (loss)(a) | $ | 55 |
| | $ | 118 |
| | (53 | ) | | $ | (53 | ) | | $ | 77 |
| | NM |
| $ | (81 | ) | | $ | 55 |
| | NM |
| | $ | (293 | ) | | $ | (53 | ) | | 453 |
|
Footnotes to the table above are shown in the "Footnotes to the Results of Operations and Selected Operating Data by Segment Tables" section of this MD&A.
NM - Not meaningful
Three Months Ended June 30, 20162017 Compared with Three Months Ended June 30, 20152016
Total revenues decreased $47$46 million, or 2%, due primarily to a decreasedecreases in our U.S. RAC revenues of $31$65 million, partially offset by a $16 million increase in our All Other Operations segment revenues and a decrease$3 million increase in our International RAC revenues of $16 million. Lower U.S. RAC revenues were predominantly the result of lower rental rates. Volumerevenues. Total RPD in our U.S. RAC segment increaseddeclined 2% due to a decline in ancillary revenues and a change in customer mix. Volume for U.S. RAC decreased 3% incomprised of a decrease of 2% for our airport business and increased 14%4% for our off airport business which reflects the challenging year over year comparison in replacement rentals due to a large number of customer vehicle recalls in the second quarter of 2016. Revenues in our off-airportAll Other Operations business versus 2015.increased primarily due to an increase in Donlen's leasing and services volume. Excluding thean $18 million impact of foreign currency revenues forexchange rates, International RAC decreased $10revenues increased $21 million, period over period.or 4%, driven by a 6% increase in transaction days partially offset by a 1% decrease in Total RPD for the segment.
The decrease in direct vehicle and operating expenses ("DOE") of $23$12 million, or 2%1%, was primarily comprised of a decrease in our U.S. RAC segment of $26 million, due to a $9 million decrease in other direct vehicle and operating expenses, a $9 million decrease in transaction variable expenses, a $4 million decrease in vehicle related expenses and a $4 million decrease in personnel related expenses, as compared to the second quarter of 2015. Direct vehicle and operating expenses increased $9 million, or 3%, in our International RAC segment due to a $20of $19 million, increase in PLPD expense due to adverse experience and case development, primarily in the United Kingdom, partially offset by a $9an increase in our All Other Operations segment of $8 million decrease in commissions expense due towhile the termination of a contract inU.S. RAC segment remained flat. Excluding the second quarter 2015. Excluding a $6$11 million impact of foreign currency exchange rates, DOE for International RAC's direct vehicle and operating expenses increased approximately $15RAC decreased $8 million, or 5%.2%, due to a $17 milliondecrease in PLPD expense, partially offset by an increase of $10 million in transaction variable costs due to higher rental volume in the second quarter of 2017 versus 2016. The increase in our All Other Operations segment is due to charges related to new leases entered into during the second quarter of 2017.
Depreciation of revenue earning vehicles and lease charges, net in the second quarter 2016 increased $32$114 million, compared to the second quarter of 2015or 18%, primarily due to a $37$107 million increase in theour U.S. RAC segment drivenresulting from higher per vehicle depreciation rates, slightly offset by declining residual values and a reduction in the planned hold period of certain vehicles.smaller fleet.
Selling, general and administrative expenses (“SG&A”) decreased $17$11 million, or 7%5%, in the second quarter of 2017 compared to the second quarter of 2016, versus 2015 primarily due to a $12decrease of approximately $32 million decrease in our International RAC segment resulting from $9 million of accruals, expenses, charges, and write-downs recorded in the second quarter of 2015 in connection with the termination of a contract. Our Corporate SG&A expenses decreased $8 million due to a $10 million decrease in general consultingrestructuring
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
| |
| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
costsrelated, incentive compensation and a $10 million decrease in consulting, audit and legal costs associated with the restatement and investigation activities,other expenses, partially offset by $14a $21 million of financeincrease in advertising expense, charges for labor-related matters and information technology transformation costs which are("IT") expenses recorded during the quarter. The above changes primarily related to initiativesour U.S. RAC segment and Corporate.
Vehicle interest expense, net increased $10 million, or 14%, in the second quarter of 2017 compared to the second quarter of 2016 primarily due to higher market interest rates, higher rates associated with increasing the mix of medium term funding and interest related to the European Vehicle Notes that beganwere issued in the third quarter of 2016, partially offset by a loss on extinguishment of debt for terminated vehicle debt in the second quarter of 2016 with no comparable loss in the second quarter of 2017.
Non-vehicle interest expense, net decreased $27 million, or 26%, in the second quarter of 2017 compared to the second quarter of 2016, primarily due to the termination of the $2.1 billion of Senior Credit Facilities in June 2016, the 2016 refinancings of certain Senior Notes with the lower rate Senior Term Loan and 5.50% Senior Notes due 2024 and lower losses on the extinguishment of debt in the second quarter of 2017 versus 2016.
Interest expense, net increased $25We had intangible asset impairments of $86 million or 17%, primarily duerelated to a $20 million write-offthe Dollar Thrifty tradename for the second quarter of deferred financing costs as a result of paying off our Senior Term Facility and various vehicle debt refinancings, and higher interest rates on some of our vehicle debt reflecting an increase in the mix of term debt, partially offset by the impact of lower balances of non-vehicle debt.2017.
We had other income of $1 million in the second quarter 2016 as compared to other expense of $8$4 million infor the second quarter of 2015, which was2017, primarily comprised of a $4 million fair value adjustment of our shareBrazil operations in connection with its classification as held for sale. In the second quarter of earnings from our equity method and joint venture investments. Our investment in CAR Inc. ceased to be accounted for under the equity method in March 2016.2016, we had other expense of $1 million.
The effective tax rate for the second quarter of 2016 was 20% as compared to 66% in the second quarter of 2015. The effective tax rate for2017 was 35% compared to 20% in the full fiscal year 2016 is expected to be approximately 47%.second quarter of 2016. The Company recorded a tax benefit of $86 million in the second quarter of 2017 and $7 million in the second quarter 2016 as compared to a provision of $252016. The $79 million increase in the second quarter 2015. The change wasincome tax benefit is the result of the impactcomposition of tax law changes, principally in Louisiana, for approximately $2 millionearnings and charges related to the Spin-Off of approximately $2 million recordedlower worldwide pre-tax income, offset by discrete items in the second quarter, attributable to an out of 2016.period adjustment and due in part to tax charges from stock compensation.
Net income (loss) fromThe results for discontinued operations representsare associated with the resultsactivities of the Old Hertz Holdings equipment rental business as further described in Note 1, "Background" and Note 3, "Discontinued Operations". Therewhich was a netspun-off on June 30, 2016.
Adjusted pre-tax loss from discontinued operations of $15was $81 million in the second quarter of 2016 as2017 compared to net income from discontinued operations of $23 million in the second quarter of 2015. The change was primarily due to lower revenues, which were negatively impacted by continuing weakness in upstream oil and gas markets. The results were also impacted by the sale of the France and Spain equipment rental businesses which were sold in October 2015 and costs associated with the Spin-Off, which were $45 million in the second quarter of 2016 and $8 million in the second quarter of 2015.
We had an adjusted pre-tax income of $55 million in the second quarter 2016 compared with adjusted pre-tax income of $118 million in the second quarter 2015.2016. See footnote (a) in the "Footnotes to the Results of Operations and Selected Operating Data by Segment Tables" for a summary and description of reconciling adjustments on a consolidated basis.
Six Months EndedJune 30, 20162017 Compared with Six Months EndingEnded June 30, 20152016
Total revenues decreased $162$113 million, or 4%3%, due primarily to decreases in our U.S. RAC and International RAC revenues of $145$118 million and $19$18 million, respectively.respectively, partially offset by a $23 million increase in our All Other Operations segment revenues. Total RPD in our U.S. RAC segment declined 9%decreased 2% due to a decline in ancillary revenues and customer mix, primarily driven predominantly by a change from higher yielding corporate contracted and retail rentals to lower rentalyielding domestic tour, opaque and ride-hailing vehicle rentals. Volume for U.S. RAC decreased 2% driven by declines of 2% in each of our airport and off airport businesses. The decline in our off airport volume reflects the challenging year over year comparison in replacement rentals due to a large number of customer vehicle recalls in the first half of 2016. Excluding a $24 million impact of foreign currency exchange rates, partially offsetInternational RAC revenues increased $6 million, or 1%, driven by a 4% increase in transaction days. Volumedays partially offset by a 3% decrease in our U.S. RAC segment increased 2% in our airport business and increased 9% in our off-airport business versus 2015. Excluding a $32 million impact of foreign currency,Total RPD for the segment. Total revenues in our International RACAll Other Operations segment increased $13 million, or 1% during the first half of 2016.primarily due to an increase in Donlen's leasing and services volume.
The decrease in direct vehicle and operating expensesDOE of $67$38 million, or 3%2%, was primarily due to a decrease in our International RAC segment and our corporate operations of $31 million and $9 million, respectively, while the U.S. RAC segment remained flat in the first half of $82 million comprised of a $20 million decrease in other direct vehicle and operating expenses, a $15 million decrease in transaction variable expenses, a $25 million decrease in vehicle related expenses and a $22 million decrease in personnel related expenses as2017 compared to the first half of 2015. Partially offsetting the decrease is an increase in International RAC primarily due to a $20 million charge to PLPD expense recorded in the second quarter 2016 due to adverse experience and case development, primarily in the United Kingdom, an $8 million increase in vehicle damage expense and due to the favorable impact of $16 million in 2015 resulting from non-recurring items. These were partially offset by a $10 million decrease in commissions expense due to the termination of a contract in the second quarter 2015, a $3 million decrease in bad debt expense and a $3 million decrease in fuel related expense.2016. Excluding the $23$17 million impact of foreign currency direct vehicle and operating expensesexchange rates, DOE for International RAC increased approximately $44decreased $14 million, or 8%.
Depreciation of revenue earning vehicles and lease charges, net increased $17 million, or 1%2%, due to a $35$14 million increasedecrease in our U.S. RAC segment due to lower residual values on certain vehicles,PLPD expense and a $5 million decrease in vehicle damage expense, partially offset by a decreasean increase of $9 million in transaction variable
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
| |
| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
$12costs due to higher rental volume. The decrease in DOE for our corporate operations is due mainly to charges related to the Spin-Off in the first half of 2016 with no comparable charges in the first half of 2017.
Depreciation of revenue earning vehicles and lease charges, net increased $199 million, or 16%, primarily due to a $187 million increase in our InternationalU.S. RAC segment driven by improvedresulting from higher per vehicle procurement, vehicle mix changes and optimized remarketing channels.depreciation rates combined with a slightly larger fleet.
Selling, general and administrative expenses (“SG&A”)&A decreased $12$17 million, or 3%4%, in the first half of 20162017 compared with 2015. The decrease was due to a $13 million decrease in SG&A expense in our International RAC segment primarily due to $9 millionthe first half of accruals, expenses, charges, and write-downs recorded in the second quarter of 2015 in connection with the termination of a contract. Our Corporate SG&A expenses decreased $11 million due to a $15 million decrease in general consulting costs and a $16 million decrease in consulting, audit and legal costs associated with the restatement and investigation activities, partially offset by $17 million of finance and information technology transformation costs which are related to initiatives that began in 2016. The decreases in International RAC and Corporate were partially offset by an $11 million increase in SG&A in our U.S. RAC segment primarily driven by finance and information technology transformation costs for the segment of $9 million.
Interest expense, net increased $29 million, or 10%,2016, primarily due to a $20decrease of approximately $50 million write-offin restructuring related, incentive compensation and other expenses, partially offset by a $21 million increase in advertising expense, charges for labor-related matters and litigation settlements related to various cases and a $13 million increase in information technology transformation program costs recorded during the first half of deferred financing2017. The above changes primarily related to our U.S. RAC segment. As discussed above, we incurred higher information technology transformation program costs as a resultin the first half of paying off our Senior Term Facility2017 versus the first half 2016, and various vehicle debt refinancings,we expect to see continued increases in SG&A expenses for information technology investments for the remainder of 2017 and in 2018.
Vehicle interest expense, net increased $13 million, or 9%, in the first half of 2017 compared to the first half of 2016 primarily due to higher market interest rates and higher outstanding balances on our vehicle debt driven by increased levelsrates associated with increasing the mix of revenue earning vehicles,medium term funding and interest related to the European Vehicle Notes that were issued in the third quarter of 2016, partially offset by a loss on extinguishment of debt for terminated vehicle debt in the impactfirst half of lower balances2016 with no comparable loss recorded in the first half of non-vehicle debt.2017.
Non-vehicle interest expense, net decreased $51 million, or 28%, in the first half of 2017 compared to the first half of 2016, primarily due to the termination of the $2.1 billion of Senior Credit Facilities in June 2016, the 2016 refinancings of certain Senior Notes with the lower rate Senior Term Loan and 5.50% Senior Notes due 2024 and lower losses on the extinguishment of debt in the first half of 2017 versus 2016.
We had intangible asset impairments of $86 million related to the Dollar Thrifty tradename for the first half of 2017.
We had other expense of $31 million for the first half of 2017, primarily comprised of a $30 million impairment of an equity method investment. Other income of $89 million infor the first half of 2016 was primarily comprised of a $75 million gain on the sale of common stock of CAR Inc. and a $9 million settlement gain related tofrom an eminent domain case at one of our U.S. airport locations.
The effective tax rate for the first half of 2016 was 29% as compared to 8% in the first half of 2015.2017 was 29% compared to 29% in the first half of 2016. The effective tax rate for the full fiscal year 2016 is expected to be approximately 47%. There wasCompany recorded a tax benefit of $157 million in the first half of 2017 and $32 million in the first half of 2016 as compared2016. The $125 million increase in the income tax benefit is the result of composition of earnings and lower worldwide pre-tax income, offset by discrete items in the first half of 2017, attributable to a benefitan out of $6period adjustment and due in part to tax charges from stock compensation.
The results for discontinued operations are associated with the activities of the Old Hertz Holdings equipment rental business which was spun-off on June 30, 2016.
Adjusted pre-tax loss was $293 million in the first half of 2015. The change was the result of a higher loss from continuing operations before income taxes, the impact of tax law changes, principally in Louisiana, for approximately $2 million and charges related2017 compared to the Spin-Off of approximately $2 million recorded in the second quarter of 2016.
There was a net loss from discontinued operations of $11$53 million in the first half of 2016 as compared to net income from discontinued operations of $32 million in the first half of 2015. The change was primarily due to lower revenues which were negatively impacted by continuing weakness in upstream oil and gas markets. The results were also impacted by the sale of the France and Spain equipment rental businesses which were sold in October 2015 and costs associated with the Spin-Off, which were $58 million in the first half of 2016 and $17 million in the first half of 2015.
We had adjusted pre-tax loss of $53 million in the first half 2016 compared with adjusted pre-tax income of $77 million in the first half 2015.2016. See footnote (a) in the "Footnotes to the Results of Operations and Selected Operating Data by Segment Tables" for a summary and description of reconciling adjustments on a consolidated basis.
CONSOLIDATED RESULTS OF OPERATIONS - HERTZ GLOBAL
The above discussion for Hertz also applies to Hertz Global.
Hertz Global has net losses from discontinued operations of $2 million for the first half of 2016 that are incremental to the amounts shown for Hertz. These amounts represent the net losses of the parent legal entities of Old Hertz Holdings
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
| |
| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
which are deemed discontinued operations of Hertz Global but not Hertz. There are no incremental net losses for Hertz Global in the second quarter 2016.
In the second quarter and first half of 2017, Hertz Global has interest expense, net of $1 million and $2 million, respectively that is incremental to the amounts shown for Hertz. These amounts represent interest associated with amounts outstanding under the master loan agreement between the companies. Hertz includes this amount as interest income in its statement of operations but this amount is eliminated in consolidation for purposes of Hertz Global.
RESULTS OF OPERATIONS AND SELECTED OPERATING DATA BY SEGMENT
U.S. Rental Car
| | | | Three Months Ended
June 30, | | Percent Increase/(Decrease) | | | Six Months Ended
June 30, | | Percent Increase/(Decrease) | | Three Months Ended
June 30, | | Percent Increase/(Decrease) | | Six Months Ended
June 30, | | Percent Increase/(Decrease) | |
| ($ in millions, except as noted) | 2016 | | 2015 | | | | 2016 | | 2015 | | 2017 | | 2016 | | 2017 | | 2016 | |
| Total revenues | $ | 1,584 |
| | $ | 1,615 |
| | (2 | )% | | | $ | 2,990 |
| | $ | 3,135 |
| | (5 | )% | | $ | 1,519 |
| | $ | 1,584 |
| | (4 | )% | | $ | 2,872 |
| | $ | 2,990 |
| | (4 | )% | |
| Direct vehicle and operating expenses | $ | 916 |
| | $ | 942 |
| | (3 | ) | | $ | 1,786 |
| | $ | 1,868 |
| | (4 | ) | | $ | 919 |
| | $ | 916 |
| | — |
| | $ | 1,780 |
| | $ | 1,786 |
| | — |
| |
| Depreciation of revenue earning vehicles and lease charges, net | $ | 417 |
| | $ | 380 |
| | 10 |
| | $ | 836 |
| | $ | 801 |
| | 4 |
| | $ | 524 |
| | $ | 417 |
| | 26 |
| | $ | 1,023 |
| | $ | 836 |
| | 22 |
| |
| Income (loss) before income taxes | $ | 104 |
| | $ | 153 |
| | (32 | ) | | $ | 82 |
| | $ | 188 |
| | (56 | ) | | $ | (146 | ) | | $ | 104 |
| | NM |
| | $ | (278 | ) | | $ | 82 |
| | NM |
| |
Adjusted pre-tax income (loss)(a) | $ | 143 |
| | $ | 195 |
| | (27 | ) | | $ | 138 |
| | $ | 265 |
| | (48 | ) | | $ | (37 | ) | | $ | 143 |
| | NM |
| | $ | (152 | ) | | $ | 138 |
| | NM |
| |
| Transaction days (in thousands)(b) | 37,190 |
| | 34,977 |
| | 6 |
| | 69,932 |
| | 67,014 |
| | 4 |
| | |
Total RPD (in whole dollars)(c) | $ | 42.11 |
| | $ | 45.80 |
| | (8 | ) | | $ | 42.23 |
| | $ | 46.41 |
| | (9 | ) | | |
Average vehicles(d) | 500,000 |
| | 511,700 |
| | (2 | ) | | 480,100 |
| | 500,500 |
| | (4 | ) | | |
Vehicle utilization(d) | 82 | % | | 75 | % | | 700 |
| bps | | 80 | % | | 74 | % | | 600 |
| bps | |
| Revenue per available car day (in whole dollars)(e) | $ | 34.42 |
| | $ | 34.40 |
| | — |
| | $ | 33.80 |
| | $ | 34.33 |
| | (2 | ) | | |
Transaction days (in thousands)(b) | | 36,233 |
| | 37,190 |
| | (3 | ) | | 68,545 |
| | 69,932 |
| | (2 | ) | |
Average vehicles(c) | | 495,000 |
| | 500,000 |
| | (1 | ) | | 486,500 |
| | 480,100 |
| | 1 |
| |
Vehicle utilization(c) | | 80 | % | | 82 | % | | (130 | ) | bps | | 78 | % | | 80 | % | | (220 | ) | bps |
Total RPD (in whole dollars)(d) | | $ | 41.26 |
| | $ | 42.11 |
| | (2 | ) | | $ | 41.23 |
| | $ | 42.23 |
| | (2 | ) | |
Total RPU (in whole dollars)(e) | | $ | 1,007 |
| | $ | 1,044 |
| | (4 | ) | | $ | 968 |
| | $ | 1,025 |
| | (6 | ) | |
Net depreciation per unit per month (in whole dollars)(f) | $ | 278 |
| | $ | 248 |
| | 12 |
| | $ | 290 |
| | $ | 267 |
| | 9 |
| | $ | 353 |
| | $ | 278 |
| | 27 |
| | $ | 351 |
| | $ | 290 |
| | 21 |
| |
| Program vehicles as a percentage of average vehicles at period end | 12 | % | | 29 | % | | N/A |
| | 12 | % | | 29 | % | | N/A |
| | |
| Percentage of program vehicles at period end | | 11 | % | | 12 | % | | (100 | ) | bps | | 11 | % | | 12 | % | | (100 | ) | bps |
Footnotes to the table above are shown in the "Footnotes to the Results of Operations and Selected Operating Data by Segment Tables" section of this MD&A.
N/ANM - Not Applicablemeaningful
Three Months Ended June 30, 20162017 Compared with Three Months Ended June 30, 20152016
Total U.S. RAC revenues were $1.6$1.5 billion in the second quarter of 2016,2017, a decrease of 2%$65 million, or 4%, from the second quarter of 2015. An 8% decrease in2016. Total RPD drivendecreased 2% due to a decline in ancillary revenues and customer mix, primarily by lower rental rates resulting from competitive pricing pressure in the industry and an increase in weekly versus daily rentals, was partially offsetdriven by a 6% increase in transactionchange from higher yielding corporate contracted and retail rentals to lower yielding domestic tour and ride-hailing vehicle rentals. Transaction days during the quarter. Volumedecreased 3% comprised of a decrease of 2% for U.S. RAC increased 3% in our airport business and increased 14%4% for our off airport business which reflects the challenging year over year comparison in our off-airport business versus 2015 due primarily to increases in the number of insurance replacement rentals due to a large number of customer vehicle damage as a result of severe weather conditionsrecalls in the Southwest and due to manufacturers' recalls during the quarter.second quarter of 2016. Off airport revenues comprised 27%28% of total rental revenues for the segment in the second quarter of 2016 as compared to 24% in the second quarter of 2015. The decrease also reflects the impact of the Easter holiday occurring in the first quarter in 2016 versus the second quarter in 2015.2017 and 2016.
Direct vehicle and operating expensesDOE for U.S. RAC decreased $26 million, or 3%,was comparable year over year primarily comprised ofdue to the following:
Vehicle related expenses decreased $4were comparable with the second quarter of 2016.
Personnel related expenses increased $12 million year over yearcompared to the second quarter of 2016, primarily due to:to an increase of $9 million in field wages due in part to new customer-oriented initiatives and an increase of $8 million in benefits expense, mainly resulting from an increase in the workers compensation reserve, partially offset by a $5 million decrease in variable incentive compensation.
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◦ | Decreased collision and short term maintenance expense of $5 million, driven primarily by process improvements leading to increased customer collections on damage claims and a decrease in the costs to prepare vehicles for turn-back due to a reduction in the number of program vehicles returned to the manufacturer in the second quarter of 2016 versus 2015; |
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
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| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
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◦ | Decreased maintenance costs of $6 million due primarily to a reduction in the average age of revenue earning vehicles, thus requiring less maintenance as compared to 2015 and improved pricing through parts and supplier sourcing; |
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◦ | Increases in other vehicle operating costs of $5 million due to fewer pre-delivery inspection credits (credits received from vehicle manufacturers for procedures we perform on new vehicle deliveries) as compared to 2015 when we were completing our fleet refresh. Additionally, there was an increase in vehicle trucking and transportation expenses of $2 million, primarily driven by repositioning of the fleet to respond to the severe weather conditions in the Southwest during the quarter. |
Personnel related expenses decreased $4 million from the second quarter of 2015, primarily due to decreased benefits expenses driven by a favorable adjustment to the worker's compensation reserve based on experience.
Transaction variable expenses decreased $9$18 million from the second quarter of 2015 primarily due to decreased fuel costs of $11 million driven by lower market fuel pricing, a $7 million decrease in concessions expense as a result of reduced airport revenues, and a decrease in PLPD expense of $5 million, partially offset by an increasedecreases in optional insurance liability expense of $13 million.$21 million due to favorable adjustments based on historical experience and a decrease in transaction days discussed above, partially offset by higher fuel expense of $4 million due to higher market fuel prices compared to the second quarter of 2016.
Other direct vehicle and operating expenses decreasedincreased $9 million from the second quarter of 2015,year over year primarily due to information technology cost savings resulting fromincreased facility costs of $6 million, mainly related to accelerated depreciation at certain of our airport locations as a result of the previously announced initiatives.Ultimate Choice program, and a $4 million increase in IT charges.
Depreciation rates are reviewed on a quarterly basis based on management's routine review of present and estimated future market conditions and their effect on residual values at the time of disposal. During the three and six months ended June 30, 2016 and 2015, depreciationDepreciation rates being used to compute the provision for depreciation of revenue earning vehicles wereare adjusted on certain vehicles in our vehicle rental operations to reflect changes in the estimated residual values to be realized when revenue earning vehicles are sold. TheseBased on the reviews completed during the second quarter of 2017 and 2016, depreciation rate changes in our U.S. RAC operations resulted in a net increase in depreciation expense of $24 million and $12 million, and $13 million based on the reviews completed during the second quarter of 2016 and 2015.respectively. The rate changes reflect shortened hold periods on certain non-program vehicles as we rebalanced the fleet, our onboarding of a richer mix of premium model year 2017 vehicles, and declining residual values and a reduction in the planned hold period of certain vehicles.values.
Depreciation of revenue earning vehicles and lease charges, net for U.S. RAC increased $37by $107 million, or 10% when compared with26%, in the second quarter of 2015. The increases year over year are primarily2017 compared to the resultsecond quarter of declining residual values on non-program vehicles and higher program vehicle acquisition costs.2016. Net depreciation per unit per month increased to $353 in the second quarter of 2017 compared to $278 in the second quarter of 2016 compared to $2482016. The increase year over year is primarily the result of higher per vehicle depreciation rates, slightly offset by a smaller fleet.
There was a loss before income taxes for U.S. RAC of $146 million in the second quarter of 2015, partially offset by a 700 basis point improvement in vehicle utilization driven primarily by disciplined capacity and vehicle management that enabled a 2% year over year decline in US RAC average vehicles for the period.
U.S. RAC had2017 compared to income before income taxes of $104 million in the second quarter of 2016, compared2016. The $250 million decrease year over year is primarily due to income before income taxesthe impact of $153increased depreciation expense on our revenue earning vehicles, the $86 million impairment of the Dollar Thrifty tradename and lower revenues. The above were partially offset by a decrease of $10 million in interest expense, net. SG&A for the segment decreased $2 million year over year, primarily resulting from $16 million of decreases in restructuring related, information technology transformation program costs, incentive compensation and other expenses, partially offset by a $14 million increase due to charges for labor-related matters and advertising expense recorded during the second quarter of 2017.
Adjusted pre-tax loss for U.S. RAC was $37 million in the prior year period. The decrease was driven by the impactsecond quarter of lower revenues and increased depreciation expense as discussed above, partially offset by the impact of lower direct vehicle and operating expenses.
U.S. RAC had2017 compared to adjusted pre-tax income of $143 million in the second quarter of 2016, compared to adjusted pre-tax income of $195 million in the second quarter of 2015.2016. See footnote (a) in the "Footnotes to the Results of Operations and Selected Operating Data by Segment Tables" for a summary and description of reconciling adjustments on a consolidated basis.
Six Months Ended June 30, 20162017 Compared with Six Months Ended June 30, 20152016
Total U.S. RAC revenues were $3.0$2.9 billion in the first half of 2016,2017, a decrease of 5%$118 million, or 4%, from the first half of 2015.2016. Total RPD declined 9%decreased 2% due to a decline in ancillary revenues and customer mix, primarily driven predominantly by a change from higher yielding corporate contracted and retail rentals to lower rental rates asyielding domestic tour, opaque and ride-hailing vehicle rentals. Transaction days decreased 2% driven by declines of 2% in each of our airport and off airport businesses. The decline in our off airport volume reflects the challenging year over year comparison in replacement rentals due to a resultlarge number of competitive pressurecustomer vehicle recalls in the industry and an increasefirst half of 2016. Off airport revenues comprised 28% of total revenues for the segment in weekly versus daily rentals, partially offset by a 4% increase in transaction days. Volumethe first half of 2017 as compared to 27% for the first half of 2016.
DOE for U.S. RAC increased 2%was comparable year over year primarily due to the following:
Vehicle related expenses decreased $5 million year over year primarily due to:
Decreased collision and short term maintenance expense of $10 million resulting from improved customer collections on damage claims resulting from process improvements and a decrease in our airport business and increased 9% in our off-airport business versus 2015 due primarily to increasesthe
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
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| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
costs to prepare program vehicles for turn-back due to a reduction in the number of insurance replacement rentals dueprogram vehicles returned to vehicle damage as a resultthe manufacturer year over year.
Increased maintenance expense of severe weather conditions in the Southwest and due to manufacturers' recalls during the second quarter 2016, partially offset by the impact of airport rental volume declines and off-airport store closures in the second quarter 2015. Off airport revenues comprised 27% of total revenues$4 million for the segment in the first halfreconditioning of 2016 and 25% for 2015.certain vehicles.
Direct vehicle and operating expenses for U.S. RAC decreased $82 million, or 4%, primarily comprised of the following:
Vehicle related expenses decreased $25 million year over year primarily due to:
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◦ | Decreased collision and short term maintenance expense of $13 million driven primarily by process improvements leading to increased customer collections on damage claims and a decrease in the costs to prepare vehicles for turn-back due to a reduction in the number of program vehicles returned to the manufacturer year over year; |
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◦ | Decreased maintenance costs of $12 million due primarily to a reduction in the average age of our revenue earning vehicles, thus requiring less maintenance as compared to 2015 and improved pricing through parts and supplier sourcing. |
Personnel related expenses decreased $22increased $8 million as compared to the first half of 20152016, primarily due to centralization of workforce management, ana $11 million improvementincrease in field wages due in part to new customer-oriented initiatives and a $9 million increase in benefits expenses,expense, primarily resulting from an increase in the workers compensation reserve, partially offset by a decrease in worker's compensation reserves based on experience, and a $6$12 million decrease in variable incentive expenses.compensation.
Transaction variable expenses decreased $15$18 million from the first half of 2015 primarily due to decreased fuel costs of $19 million driven by lower market fuel pricing and a $13 million decreasedecreases in concessions expense as a result of reduced airport revenues, partially offset by increased optional insurance liability expense of $17 million.$21 million due to favorable adjustments based on historical experience and a decrease in transaction days discussed above, and decreased concessions and credit card expense of $4 million, partially offset by higher fuel expense of $8 million due to higher market fuel prices compared to the first half of 2016.
Other direct vehicle and operating expenses decreased $20increased $9 million from the first half of 2015year over year primarily due to a net $15$5 million of information technology cost savings resulting from the previously announced initiatives.charges related to our navigational service offerings.
Depreciation rates are reviewed on a quarterly basis based on management's routine review of present and estimated future market conditions and their effect on residual values at the time of disposal. During the first half of 2016 and 2015, depreciationDepreciation rates being used to compute the provision for depreciation of revenue earning vehicles wereare adjusted on certain vehicles in our vehicle rental operations to reflect changes in the estimated residual values to be realized when revenue earning vehicles are sold. Based on the quarterly reviews completed during the first half of 20162017 and 2015,2016, depreciation rate changes in our U.S. RAC operations resulted in a net increase in depreciation expense of $45$62 million and $57$45 million, respectively. The rate changes reflect shortened hold periods on certain non-program vehicles as we rebalanced the fleet, our onboarding of a richer mix of premium model year 2017 vehicles, and declining residual values and a reduction in the planned hold period of certain vehicles.values.
Depreciation of revenue earning vehicles and lease charges, net for U.S. RAC increased by $35$187 million, or 4% when compared with22%, in the first half of 2015. The increases year over year are primarily2017 compared to the resultfirst half of declining residual values on non-program vehicles and higher program vehicle acquisition costs.2016. Net depreciation per unit per month increased to $351 in the first half of 2017 compared to $290 in the first half of 2016 as compared to $267 in the first half of 2015, partially offset by a 600 basis point improvement in vehicle utilization driven primarily by disciplined capacity and vehicle management that enabled a 4%2016. The increase year over year decline in US RAC average vehicles foris primarily the period.result of higher per vehicle depreciation rates combined with a slightly larger fleet.
IncomeThere was a loss before income taxes for U.S. RAC decreased $106of $278 million or 56%, fromin the first half of 20152017 compared to income before income taxes of $82 million in the first half of 2016. The $360 million decrease year over year is due primarily to the impact of lower revenues and increased depreciation expense on our revenue earning vehicles, lower revenues and the $86 million impairment of the Dollar Thrifty tradename. The above were partially offset by decreased direct vehiclea decrease of $25 million in interest expense, net and operatinga $11 million decrease in SG&A for the segment, primarily resulting from $21 million of decreases in restructuring related, incentive compensation and other expenses as discussed above.and a $9 million decrease in information technology transformation program costs, partially offset by a $19 million increase due to charges for labor-related matters and advertising expense recorded during the first half of 2017. Additionally, in the first half of 2016 we had other income of $11 million primarily related to an eminent domain case at one of our airport locations with no comparable charges in 2017.
Adjusted pre-tax loss for U.S. RAC hadwas $152 million in the first half of 2017 compared to adjusted pre-tax income of $138 million in the first half of 2016, compared to $265 million in the first half of 2015. See footnote (a) in the "Footnotes to the Results of Operations and Selected Operating Data by Segment Tables" for a summary and description of these adjustments on a consolidated basis.
THE HERTZ CORPORATION AND SUBSIDIARIES
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ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
International Rental Car
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Percent Increase/(Decrease) | | | Six Months Ended
June 30, | | Percent Increase/(Decrease) | |
| ($ in millions, except as noted) | 2016 | | 2015 | | | | 2016 | | 2015 | | |
| Total revenues | $ | 540 |
| | $ | 556 |
| | (3 | )% | | | $ | 973 |
| | $ | 992 |
| | (2 | )% | |
| Direct vehicle and operating expenses | $ | 341 |
| | $ | 332 |
| | 3 |
| | | $ | 620 |
| | $ | 599 |
| | 4 |
| |
| Depreciation of revenue earning vehicles and lease charges, net | $ | 98 |
| | $ | 101 |
| | (3 | ) | | | $ | 184 |
| | $ | 196 |
| | (6 | ) | |
| Income (loss) before income taxes | $ | 29 |
| | $ | 36 |
| | (19 | ) | | | $ | 27 |
| | $ | 38 |
| | (29 | ) | |
Adjusted pre-tax income (loss)(a) | $ | 34 |
| | $ | 45 |
| | (24 | ) | | | $ | 36 |
| | $ | 52 |
| | (31 | ) | |
Transaction days (in thousands)(b) | 12,511 |
| | 12,523 |
| | — |
| | | 22,613 |
| | 22,298 |
| | 1 |
| |
Total RPD (in whole dollars)(c) | $ | 42.04 |
| | $ | 42.72 |
| | (2 | ) | | | $ | 42.45 |
| | $ | 42.56 |
| | — |
| |
Average vehicles(d) | 178,600 |
| | 173,700 |
| | 3 |
| | | 163,300 |
| | 158,800 |
| | 3 |
| |
Vehicle utilization(d) | 77 | % | | 79 | % | | (200 | ) | bps | | 76 | % | | 78 | % | | (200 | ) | bps |
Revenue per available car day (in whole dollars)(e) | $ | 32.36 |
| | $ | 33.85 |
| | (4 | ) | | | $ | 32.30 |
| | $ | 33.02 |
| | (2 | ) | |
Net depreciation per unit per month (in whole dollars)(f) | $ | 179 |
| | $ | 186 |
| | (4 | ) | | | $ | 186 |
| | $ | 197 |
| | (6 | ) | |
| Program vehicles as a percentage of average vehicles at period end | 45 | % | | 46 | % | | N/A |
| | | 45 | % | | 46 | % | | N/A |
| |
Footnotes to the table above are shown in the "Footnotes to the Results of Operations and Selected Operating Data by Segment Tables" section of this MD&A.
N/A - Not Applicable
Three Months Ended June 30, 2016 Compared with Three Months Ended June 30, 2015
Total revenues for International RAC decreased $16 million, or 3%, when compared with the prior-year period. Excluding a $6 million impact of foreign currency, total revenues decreased $10 million, or 2%, driven by a 2% decrease in Total RPD, on a constant currency basis, and flat transaction days. The decrease also reflects the impact of the Easter holiday occurring in the first quarter in 2016 versus the second quarter in 2015.
Direct vehicle and operating expenses for International RAC increased $9 million, or 3%, from the prior year, primarily due to a $20 million increase in PLPD expense due to adverse experience and case development, primarily in the United Kingdom, partially offset by a $9 million decrease in commissions expense due to the termination of a contract in the second quarter 2015. Excluding a $6 million impact of foreign currency, direct vehicle and operating expenses increased approximately $15 million, or 5%.
Depreciation of revenue earning vehicles and lease charges, net for International RAC decreased $3 million, or 3%, from the second quarter of 2015. Excluding the $1 million impact of foreign currency, depreciation of revenue earning vehicles and lease charges, net decreased $2 million, or 2%. Net depreciation per unit per month decreased 4% to $179 from $186 year over year, excluding currency effects on a constant currency basis, due to improved vehicle procurement, vehicle mix changes and optimized remarketing channels, partially offset by a 3% increase in average vehicles.
THE HERTZ CORPORATION AND SUBSIDIARIES
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ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
International RAC had income before income taxes of $29 million in the second quarter 2016 as compared to income of $36 million in 2015 due to the factors discussed above as well as a $12 million decrease in SG&A expense primarily due to $9 million of accruals, expenses, charges, and write-downs recorded in the second quarter of 2015 in connection with the termination of a contract.
Adjusted pre-tax income was $34 million for International RAC in the second quarter of 2016 as compared to $45 million in the second quarter of 2015.2016. See footnote (a) in the "Footnotes to the Results of Operations and Selected Operating Data by Segment Tables" for a summary and description of reconciling adjustments on a consolidated basis.
Six
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
| |
| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
International Rental Car
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Percent Increase/(Decrease) | | | Six Months Ended
June 30, | | Percent Increase/(Decrease) | |
| ($ in millions, except as noted) | 2017 | | 2016 | | | | 2017 | | 2016 | | |
| Total revenues | $ | 543 |
| | $ | 540 |
| | 1 | % | | | $ | 955 |
| | $ | 973 |
| | (2 | )% | |
| Direct vehicle and operating expenses | $ | 322 |
| | $ | 341 |
| | (6 | ) | | | $ | 589 |
| | $ | 620 |
| | (5 | ) | |
| Depreciation of revenue earning vehicles and lease charges, net | $ | 100 |
| | $ | 98 |
| | 2 |
| | | $ | 185 |
| | $ | 184 |
| | 1 |
| |
| Income (loss) before income taxes | $ | 43 |
| | $ | 29 |
| | 48 |
| | | $ | 37 |
| | $ | 27 |
| | 37 |
| |
Adjusted pre-tax income (loss)(a) | $ | 56 |
| | $ | 34 |
| | 65 |
| | | $ | 52 |
| | $ | 36 |
| | 44 |
| |
Transaction days (in thousands)(b) | 13,235 |
| | 12,511 |
| | 6 |
| | | 23,419 |
| | 22,613 |
| | 4 |
| |
Average vehicles(c) | 186,100 |
| | 178,600 |
| | 4 |
| | | 168,300 |
| | 163,300 |
| | 3 |
| |
Vehicle utilization(c) | 78 | % | | 77 | % | | 120 |
| bps | | 77 | % | | 76 | % | | 80 |
| bps |
Total RPD (in whole dollars)(d) | $ | 39.29 |
| | $ | 39.88 |
| | (1 | ) | | | $ | 39.28 |
| | $ | 40.38 |
| | (3 | ) | |
Total RPU (in whole dollars)(e) | $ | 931 |
| | $ | 931 |
| | — |
| | | $ | 911 |
| | $ | 932 |
| | (2 | ) | |
Net depreciation per unit per month (in whole dollars)(f) | $ | 172 |
| | $ | 168 |
| | 2 |
| | | $ | 177 |
| | $ | 176 |
| | 1 |
| |
| Percentage of program vehicles at period end | 46 | % | | 45 | % | | 100 |
| bps | | 46 | % | | 45 | % | | 100 |
| bps |
Footnotes to the table above are shown in the "Footnotes to the Results of Operations and Selected Operating Data by Segment Tables" section of this MD&A.
Three Months Ended June 30, 20162017 Compared with SixThree Months Ended June 30, 20152016
Total revenues for International RAC decreased $19increased $3 million, or 2%1%, asin the second quarter of 2017 compared withto the prior-year period.second quarter of 2016. Excluding a $32an $18 million impact of foreign currency exchange rates, revenues increased $13 million, or 1% during the first half of 2016, driven by a 1% increase in transaction days while Total RPD for the segment, on a constant currency basis, was flat.
Direct vehicle and operating expenses for International RAC increased $21 million or 4%, fromdriven by a 6% increase in transaction days primarily due to the impact in Europe of the Easter holiday falling in the second quarter of 2017 compared to the first quarter of 2016 and growth in our value brands, partially offset by a 1% decrease in Total RPD.
DOE for International RAC decreased $19 million in the second quarter of 2017 compared to the second quarter of 2016. Excluding the $11 million impact of foreign currency exchange rates, direct vehicle and operating expenses decreased $8 million, or 2%, versus the prior year period, primarily due to an increasea $17 milliondecrease in PLPD expense, partially offset by an increase of $24$10 million in transaction variable costs, such as field compensation, concessions and facilities due primarily to ahigher rental volume in the second quarter 2016of 2017. The decrease in PLPD expense primarily represents a $20 million charge in the second quarter of $20 million2016 resulting from adverse experience and case development, primarily in the United Kingdom, an $8combined with a $5 million increasereduction in vehicle damagePLPD expense in the second quarter 2017 as a result of actions taken by management to improve claims handling in Europe and due tochanges in business practices, including the favorable impactclosure of $16 million in 2015 resulting from non-recurring items. These werecertain locations with unfavorable PLPD experience, partially offset by a $10$5 million decrease in commissions expense dueaccrual for PLPD related to the termination of a contractterrorist event in the second quarter 2015, a $3 million decrease in bad debt expense and a $3 million decrease in fuel related expense. Excluding the $23 million impact of foreign currency, direct vehicle and operating expenses increased approximately $44 million, or 8%.2017.
Depreciation of revenue earning vehicles and lease charges, net for International RAC decreased $12increased $2 million, or 6% from2%, in the first halfsecond quarter of 2015.2017 compared to the second quarter of 2016. Excluding the $6$4 million impact of foreign currency exchange rates, depreciation of revenue earning vehicles and lease charges, net decreasedincreased $6 million or 3%.6% primarily due to a 4% increase in average vehicles in the second quarter of 2017 compared to the second quarter of 2016. Net depreciation per unit per month decreased 6%increased to $186 from $197 year over year, excluding currency effects on a constant currency basis, due$172 in the second quarter of 2017 compared to improved vehicle procurement, vehicle mix changes and optimized remarketing channels, partially offset by a 3% increase$168 in average vehicles.the second quarter of 2016.
Income
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
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| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
There was income before income taxes for International RAC was $27of $43 million in the first half of 2016 as compared to $38 million in 2015 due to the factors discussed above as well as a $13 million decrease in SG&A expense in 2016, primarily due to $9 million of accruals, expenses, charges, and write-downs recorded in the second quarter of 20152017 compared to $29 million in connection with the terminationsecond quarter of 2016. The $14 million increase year over year is primarily due to decreased DOE and higher revenues as discussed above, partially offset by an increase of $4 million in interest expense, net primarily related to the European Vehicle Notes which were issued in the third quarter of 2016, and an increase of $4 million in other income (expense), net comprised of a contract.$4 million fair value adjustment of our Brazil assets and liabilities held for sale.
Adjusted pre-tax income for International RAC was $36$56 million in the first halfsecond quarter of 2016 as2017 compared to $52$34 million in the first halfsecond quarter of 2015.2016. See footnote (a) in the "Footnotes to the Results of Operations and Selected Operating Data by Segment Tables" for a summary and description of reconciling adjustments on a consolidated basis.
The recent terror attacksSix Months Ended June 30, 2017 Compared with Six Months Ended June 30, 2016
Total revenues for International RAC decreased $18 million, or 2%, in Europethe first half of 2017 compared to the first half of 2016. Excluding a $24 million impact of foreign currency exchange rates, revenues increased $6 million or 1%, driven by a 4% increase in 2016 are having a negative impact ontransaction days for the travel sector and particularly international inbound travel into Europe. Specifically, we had negativesegment, due to volume growth in our Europe operationsvalue brands, partially offset by a 3% decrease in Total RPD.
DOE for International RAC decreased $31 million in the first half of 5%2017 compared to the first half of 2016. Excluding the $17 million impact of foreign currency exchange rates, direct vehicle and operating expenses decreased $14 million, or 2%, versus the prior year due to a $14 milliondecrease in our inbound leisure businessPLPD expense and a decrease of $5 million in vehicle damage expense, partially offset by an increase of $9 million in transaction variable costs, such as field compensation and concessions due to higher rental volume in the first half of 2017 versus 2016. The decrease in PLPD expense primarily represents a $20 million charge in the second quarter of 2016 asresulting from adverse experience and case development, primarily in the United Kingdom, partially offset by a $5 million accrual for PLPD related to a terrorist event in the first half of 2017.
Depreciation of revenue earning vehicles and lease charges, net for International RAC increased $1 million, or 1%, in the first half of 2017 compared to the second quarterfirst half of 2015, while we grew at 10%2016. Excluding the $6 million impact of foreign currency exchange rates, depreciation of revenue earning vehicles and lease charges, net increased $7 million or 4% primarily due to a 3% increase in average vehicles in the first half of 2017 compared to the first half of 2016. Net depreciation per unit per month was comparable year over year.
There was income before income taxes for International RAC of $37 million in the first quarterhalf of 2016 and 13%2017 compared to $27 million in the fullfirst half of 2016. The $10 million increase year 2015. We expectover year is primarily due to decreased direct vehicle and operating expenses discussed above and a decrease of $4 million in SG&A driven by the impact of exchange rates, incentive compensation and other general expenses, partially offset by lower revenues and a $5 million increase in interest expense, net primarily related to continuethe European Vehicle Notes which were issued in the third quarter 2016, our strongest quarter of 2016.
Adjusted pre-tax income for International RAC was $52 million in the year,first half of 2017 compared to $36 million in the first half of 2016. See footnote (a) in the "Footnotes to the Results of Operations and negatively impact our full year 2016 operating resultsSelected Operating Data by Segment Tables" for Europe by approximately $10 million to $15 million,a summary and description of reconciling adjustments on a constant currencyconsolidated basis. Additionally, while it is too early to determine what, if any, impact, the United Kingdom’s vote in June 2016 to leave the European Union will have on our business, we have seen no material impact to date and will continue to monitor the situation.
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
| |
| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
All Other Operations
| | | | Three Months Ended June 30, | | Percent Increase/(Decrease) | | Six Months Ended
June 30, | | Percent Increase/(Decrease) | Three Months Ended
June 30, | | Percent Increase/(Decrease) | | Six Months Ended
June 30, | | Percent Increase/(Decrease) |
| ($ in millions) | 2016 | | 2015 | | 2016 | | 2015 | | 2017 | | 2016 | | 2017 | | 2016 | |
| Total revenues | $ | 146 |
| | $ | 146 |
| | — | % | | $ | 290 |
| | $ | 288 |
| | 1 | % | $ | 162 |
| | $ | 146 |
| | 11 | % | | $ | 313 |
| | $ | 290 |
| | 8 | % |
| Direct vehicle and operating expenses | $ | 6 |
| | $ | 6 |
| | — |
| | $ | 11 |
| | $ | 11 |
| | — |
| $ | 14 |
| | $ | 6 |
| | 133 |
| | $ | 19 |
| | $ | 11 |
| | 73 |
|
| Depreciation of revenue earning vehicles and lease charges, net | $ | 114 |
| | $ | 116 |
| | (2 | ) | | $ | 225 |
| | $ | 231 |
| | (3 | ) | $ | 119 |
| | $ | 114 |
| | 4 |
| | $ | 236 |
| | $ | 225 |
| | 5 |
|
| Income (loss) before income taxes | $ | 14 |
| | $ | 14 |
| | — |
| | $ | 30 |
| | $ | 25 |
| | 20 |
| $ | 16 |
| | $ | 14 |
| | 14 |
| | $ | 34 |
| | $ | 30 |
| | 13 |
|
Adjusted pre-tax income (loss)(a) | $ | 17 |
| | $ | 17 |
| | — |
| | $ | 35 |
| | $ | 31 |
| | 13 |
| $ | 19 |
| | $ | 17 |
| | 12 |
| | $ | 39 |
| | $ | 35 |
| | 11 |
|
| Average vehicles - Donlen | 166,900 |
| | 165,600 |
| | 1 |
| | 166,900 |
| | 167,100 |
| | — |
| 206,200 |
| | 166,900 |
| | 24 |
| | 206,900 |
| | 166,900 |
| | 24 |
|
Footnotes to the table above are shown in the "Footnotes to the Results of Operations and Selected Operating Data by Segment Tables" section of this MD&A.
Our Donlen operations had comparable resultsAll Other Operations has favorable results in the second quarter of 20162017 as compared withto the second quarter of 20152016 and favorable results forin the first half of 20162017 as compared to 2015the first half of 2016. Revenues were higher primarily due primarily to increased revenuesan increase in Donlen's leasing and decreasedservices volume due to new business origination and existing customer growth, and were partially offset by increases in DOE due to charges related to new leases entered into during the second quarter of 2017 and increases in vehicle depreciation expense, due in part to lower average vehicles.the growth of leased fleet.
Footnotes to the Results of Operations and Selected Operating Data by Segment Tables
| |
| (a) | Adjusted pre-tax income (loss) is a Non-GAAP measure that is calculated as income (loss) from continuing operations before income taxes plus certain non-cash purchaseacquisition accounting charges, debt-related charges relating to the amortization and write-off of debt financing costs and debt discounts, goodwill, intangible and tangible asset impairments and write-downs and certain one-time charges and nonoperationalnon-operational items. Adjusted pre-tax income (loss) is important to management because it allows management to assess operational performance of our business, exclusive of the items mentioned above. It also allows management to assess the performance of the entire business on the same basis as the segment measure of profitability. Management believes that it is important to investors for the same reasons it is important to management and because it allows them to assess our operational performance on the same basis that management uses internally. When evaluating our operating performance, investors should not consider adjusted pre-tax income (loss) in isolation of, or as a substitute for, measures of our financial performance, such as net income (loss) from continuing operations or income (loss) from continuing operations before income tax.taxes. The contribution of our reportable segments to adjusted pre-tax income (loss) and reconciliation to the most comparable consolidated GAAP measure are presented below: |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| (In millions) | 2016 | | 2015 | | 2016 | | 2015 |
| Adjusted pre-tax income (loss): | | | | | | | |
| U.S. Rental Car | $ | 143 |
| | $ | 195 |
| | $ | 138 |
| | $ | 265 |
|
| International Rental Car | 34 |
| | 45 |
| | 36 |
| | 52 |
|
| All Other Operations | 17 |
| | 17 |
| | 35 |
| | 31 |
|
| Total reportable segments | 194 |
| | 257 |
| | 209 |
| | 348 |
|
Corporate(1) | (139 | ) | | (139 | ) | | (262 | ) | | (271 | ) |
| Consolidated adjusted pre-tax income (loss) | 55 |
| | 118 |
| | (53 | ) | | 77 |
|
| Adjustments: | | | | | | | |
Acquisition accounting(2) | (18 | ) | | (23 | ) | | (34 | ) | | (45 | ) |
Debt-related charges(3) | (12 | ) | | (15 | ) | | (25 | ) | | (29 | ) |
Loss on extinguishment of debt(4) | (20 | ) | | — |
| | (20 | ) | | — |
|
Restructuring and restructuring related charges(5) | (18 | ) | | (41 | ) | | (29 | ) | | (59 | ) |
Sale of CAR Inc. common stock(6) | — |
| | — |
| | 75 |
| | — |
|
Impairment charges and asset write-downs(7) | (3 | ) | | — |
| | (3 | ) | | (9 | ) |
Finance and information technology transformation costs(8) | (19 | ) | | — |
| | (26 | ) | | — |
|
Other(9) | — |
| | (1 | ) | | 3 |
| | (6 | ) |
| Income (loss) from continuing operations before income taxes | $ | (35 | ) | | $ | 38 |
| | $ | (112 | ) | | $ | (71 | ) |
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
| |
| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
Hertz
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| (In millions) | 2017 | | 2016 | | 2017 | | 2016 |
| Adjusted pre-tax income (loss): | | | | | | | |
| U.S. Rental Car | $ | (37 | ) | | $ | 143 |
| | $ | (152 | ) | | $ | 138 |
|
| International Rental Car | 56 |
| | 34 |
| | 52 |
| | 36 |
|
| All Other Operations | 19 |
| | 17 |
| | 39 |
| | 35 |
|
| Total reportable segments | 38 |
| | 194 |
| | (61 | ) | | 209 |
|
Corporate(1) | (119 | ) | | (139 | ) | | (232 | ) | | (262 | ) |
| Adjusted pre-tax income (loss) | (81 | ) | | 55 |
| | (293 | ) | | (53 | ) |
| Adjustments: | | | | | | | |
Acquisition accounting(2) | (16 | ) | | (18 | ) | | (31 | ) | | (34 | ) |
Debt-related charges(3) | (10 | ) | | (12 | ) | | (21 | ) | | (25 | ) |
Loss on extinguishment of debt(4) | (8 | ) | | (20 | ) | | (8 | ) | | (20 | ) |
Restructuring and restructuring related charges(5) | (5 | ) | | (18 | ) | | (13 | ) | | (29 | ) |
Sale of CAR Inc. common stock(6) | — |
| | — |
| | 3 |
| | 75 |
|
Impairment charges and asset write-downs(7) | (86 | ) | | (3 | ) | | (116 | ) | | (3 | ) |
Finance and information technology transformation costs(8) | (20 | ) | | (19 | ) | | (39 | ) | | (26 | ) |
Other(9) | (18 | ) | | — |
| | (19 | ) | | 3 |
|
| Income (loss) before income taxes | $ | (244 | ) | | $ | (35 | ) | | $ | (537 | ) | | $ | (112 | ) |
Hertz Global
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| (In millions) | 2017 | | 2016 | | 2017 | | 2016 |
| Adjusted pre-tax income (loss): | | | | | | | |
| U.S. Rental Car | $ | (37 | ) | | $ | 143 |
| | $ | (152 | ) | | $ | 138 |
|
| International Rental Car | 56 |
| | 34 |
| | 52 |
| | 36 |
|
| All Other Operations | 19 |
| | 17 |
| | 39 |
| | 35 |
|
| Total reportable segments | 38 |
| | 194 |
| | (61 | ) | | 209 |
|
Corporate(1) | (120 | ) | | (139 | ) | | (234 | ) | | (262 | ) |
| Adjusted pre-tax income (loss) | (82 | ) | | 55 |
| | (295 | ) | | (53 | ) |
| Adjustments: | | | | | | | |
Acquisition accounting(2) | (16 | ) | | (18 | ) | | (31 | ) | | (34 | ) |
Debt-related charges(3) | (10 | ) | | (12 | ) | | (21 | ) | | (25 | ) |
Loss on extinguishment of debt(4) | (8 | ) | | (20 | ) | | (8 | ) | | (20 | ) |
Restructuring and restructuring related charges(5) | (5 | ) | | (18 | ) | | (13 | ) | | (29 | ) |
Sale of CAR Inc. common stock(6) | — |
| | — |
| | 3 |
| | 75 |
|
Impairment charges and asset write-downs(7) | (86 | ) | | (3 | ) | | (116 | ) | | (3 | ) |
Finance and information technology transformation costs(8) | (20 | ) | | (19 | ) | | (39 | ) | | (26 | ) |
Other(9) | (18 | ) | | — |
| | (19 | ) | | 3 |
|
| Income (loss) before income taxes | $ | (245 | ) | | $ | (35 | ) | | $ | (539 | ) | | $ | (112 | ) |
| |
| (1) | Represents general corporate expenses, non-vehicle interest expense, as well as other business activities. |
| |
| (2) | Represents incremental expense associated with amortization of other intangible assets and depreciation of property and other equipment and accretion of revalued liabilities relating to acquisition accounting. |
| |
| (3) | Represents debt-related charges relating to the amortization of deferred debt financing costs and debt discounts and premiums. |
| |
| (4) | RepresentsIn 2017, represents $6 million of early redemption premium and write off of deferred financing costs associated with the redemption of the outstanding 4.25% Senior Notes due April 2018 and a $2 million in deferred financing costs associated with the termination of commitments under the Senior RCF. In 2016, represents the write-off of deferred debt financing costs in the second quarter of 2016 as a result of paying off the Senior Term Facility and various vehicle debt refinancings. |
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
| |
| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
| |
| (5) | Represents expenses incurred under restructuring actions as defined in U.S. GAAP.GAAP, excluding impairments and asset write-downs, when applicable. For further information on restructuring costs, see Part I, Item 1, Note 9, "Restructuring.10, "Restructuring," to the Notes to our condensed consolidated financial statements included in this Report. Also represents certain other charges such as incremental costs incurred directly supporting business transformation initiatives. Such costs include transition costs incurred in connection with business process outsourcing arrangements and incremental costs incurred to facilitate business process re-engineering initiatives that involve significant organization redesign and extensive operational process changes. Also includes consulting costs and legal fees related to the previously disclosed accounting review and investigation. |
| |
| (6) | Represents the pre-tax gain on the sale of CAR Inc. common stock. |
| |
| (7) | In the first half of 2015,2017, primarily represents a $6second quarter $86 million impairment onof the former Dollar Thrifty headquarters in Tulsa, Oklahoma.tradename and a first quarter impairment of $30 million related to an equity method investment. |
| |
| (8) | Represents external costs associated with the Company’sour finance and information technology transformation programs, both of which are multi-year initiatives that commenced in 2016 to upgrade and modernize the Company’sour systems and processes. In the three months ended June 30, 2016, $5 million was incurred by U.S. RAC and $14 million was incurred by Corporate and in the six months ended June 30, 2016, $9 million was incurred by U.S. RAC and $17 million was incurred by Corporate. |
| |
| (9) | IncludesRepresents miscellaneous, and non-recurring items including but not limited to acquisition charges, integration charges, and other non-cash items. In 2017, includes first and second quarter adjustments, as applicable, to the carrying value of the Company's Brazil operations in connection with its classification as held for sale and second quarter charges of $6 million for labor-related matters and $5 million relating to PLPD as a result of a terrorist event. For the six months ended June 30, 2016, also includes a $9 million settlement gain from an eminent domain case related to one of our airport locations. In the 2015 periods, includes charges incurred in connection with relocating the Company's corporate headquarters to Estero, Florida. |
| |
| (b) | Transaction days represent the total number of 24-hour periods, with any partial period counted as one transaction day, that vehicles were on rent (the period between when a rental contract is opened and closed) in a given period. Thus, it is possible for a vehicle to attain more than one transaction day in a 24-hour period. Late in the third quarter of 2015 the Company fully integrated the Dollar Thrifty and Hertz counter systems and as a result aligned the transaction day calculation in the Hertz system. As a result of this alignment, Hertz determined that there was an impact to the calculation. Hertz expects that transaction days for the U.S. RAC segment will increase by approximately 1% prospectively relative to the historic calculations through the third quarter of 2016. |
| |
| (c) | Total RPD is a Non-GAAP measure that is calculated as total revenue less ancillary retail vehicle sales revenue, divided by the total number of transaction days, with all periods adjusted to eliminate the effect of fluctuations in foreign currency. Our management believes eliminating the effect of fluctuations in foreign currency is useful in analyzing underlying trends. This statistic is important to our management and investors as it represents a measurement of the changes in underlying pricing in the vehicle rental business and encompasses the elements in vehicle rental pricing that management has the ability to control. |
The following tables reconcile our rental car segment revenues to our total rental revenue and total revenue per transaction day (based on December 31, 2015 foreign exchange rates) for the three and six months ended June 30, 2016 and 2015 ($ in millions, except for Total RPD):
|
| | | | | | | | | | | | | | | |
| | U.S. Rental Car | | International Rental Car |
| | Three Months Ended June 30, |
| ($ in millions, except as noted) | 2016 | | 2015 | | 2016 | | 2015 |
| Revenues | $ | 1,584 |
| | $ | 1,615 |
| | $ | 540 |
| | $ | 556 |
|
| Ancillary retail vehicle sales revenue | (18 | ) | | (13 | ) | | — |
| | — |
|
| Foreign currency adjustment | — |
| | — |
| | (14 | ) | | (21 | ) |
| Total rental revenue | $ | 1,566 |
| | $ | 1,602 |
| | $ | 526 |
| | $ | 535 |
|
| Transaction days (in thousands) | 37,190 |
| | 34,977 |
| | 12,511 |
| | 12,523 |
|
| Total RPD (in whole dollars) | $ | 42.11 |
| | $ | 45.80 |
| | $ | 42.04 |
| | $ | 42.72 |
|
THE HERTZ CORPORATION AND SUBSIDIARIES
| |
ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
|
| | | | | | | | | | | | | | | |
| | U.S. Rental Car | | International Rental Car |
| | Six Months Ended June 30, |
| ($ in millions, except as noted) | 2016 | | 2015 | | 2016 | | 2015 |
| Revenues | $ | 2,990 |
| | $ | 3,135 |
| | $ | 973 |
| | $ | 992 |
|
| Ancillary retail vehicle sales revenue | (37 | ) | | (25 | ) | | — |
| | — |
|
| Foreign currency adjustment | — |
| | — |
| | (13 | ) | | (43 | ) |
| Total rental revenue | $ | 2,953 |
| | $ | 3,110 |
| | $ | 960 |
| | $ | 949 |
|
| Transaction days (in thousands) | 69,932 |
| | 67,014 |
| | 22,613 |
| | 22,298 |
|
| Total RPD (in whole dollars) | $ | 42.23 |
| | $ | 46.41 |
| | $ | 42.45 |
| | $ | 42.56 |
|
| |
(d) | Average vehicles is determined using a simple average of the number of vehicles at the beginning and end of a given period. Among other things, average vehicles is used to calculate our vehicle utilization which represents the portion of our vehicles that are being utilized to generate revenue. Vehicle utilization is calculated by dividing total transaction days by available car days. The calculation of vehicle utilization is shown in the table below. |
| | | | U.S. Rental Car | | International Rental Car | U.S. Rental Car | | International Rental Car |
| | Three Months Ended June 30, | Three Months Ended June 30, |
| | 2016 | | 2015 | | 2016 | | 2015 | 2017 | | 2016 | | 2017 | | 2016 |
| Transaction days (in thousands) | 37,190 |
| | 34,977 |
| | 12,511 |
| | 12,523 |
| 36,233 |
| | 37,190 |
| | 13,235 |
| | 12,511 |
|
| Average vehicles | 500,000 |
| | 511,700 |
| | 178,600 |
| | 173,700 |
| 495,000 |
| | 500,000 |
| | 186,100 |
| | 178,600 |
|
| Number of days in period | 91 |
| | 91 |
| | 91 |
| | 91 |
| 91 |
| | 91 |
| | 91 |
| | 91 |
|
| Available car days (in thousands) | 45,500 |
| | 46,565 |
| | 16,253 |
| | 15,807 |
| 45,045 |
| | 45,500 |
| | 16,935 |
| | 16,253 |
|
| Vehicle utilization | 82 | % | | 75 | % | | 77 | % | | 79 | % | 80 | % | | 82 | % | | 78 | % | | 77 | % |
| | | | U.S. Rental Car | | International Rental Car | U.S. Rental Car | | International Rental Car |
| | Six Months Ended June 30, | Six Months Ended June 30, |
| | 2016 | | 2015 | | 2016 | | 2015 | 2017 | | 2016 | | 2017 | | 2016 |
| Transaction days (in thousands) | 69,932 |
| | 67,014 |
| | 22,613 |
| | 22,298 |
| 68,545 |
| | 69,932 |
| | 23,419 |
| | 22,613 |
|
| Average vehicles | 480,100 |
| | 500,500 |
| | 163,300 |
| | 158,800 |
| 486,500 |
| | 480,100 |
| | 168,300 |
| | 163,300 |
|
| Number of days in period | 182 |
| | 181 |
| | 182 |
| | 181 |
| 181 |
| | 182 |
| | 181 |
| | 182 |
|
| Available car days (in thousands) | 87,378 |
| | 90,591 |
| | 29,721 |
| | 28,743 |
| 88,057 |
| | 87,378 |
| | 30,462 |
| | 29,721 |
|
| Vehicle utilization | 80 | % | | 74 | % | | 76 | % | | 78 | % | 78 | % | | 80 | % | | 77 | % | | 76 | % |
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
| |
(e)ITEM 2. | Revenue per available car dayMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
| |
| (d) | Total RPD is a key metric that is calculated as total revenuesrevenue less ancillary retail vehicle sales revenue, divided by available carthe total number of transaction days, with all periods adjusted to eliminate the effect of fluctuations in foreign currency.currency exchange rates. Our management believes eliminating the effect of fluctuations in foreign currency exchange rates is appropriate so as not to affect the comparability ofuseful in analyzing underlying trends. This metricstatistic is important to our management and investors as it represents a measurement of the changes in underlying pricing in the vehicle rental business and provides a measure ofencompasses the elements in vehicle rental pricing that management has the ability to control. The following tables reconcile our rental car segment revenues to our total rental revenue production relative to overall capacity.and total revenue per transaction day (based on December 31, 2016 foreign currency exchange rates) for the periods shown: |
The following tables reconcile our rental car segments' total rental revenues to our revenue per available car day (based on December 31, 2015 foreign exchange rates) for the three and six months ended June 30, 2016 and 2015: |
| | | | | | | | | | | | | | | |
| | U.S. Rental Car | | International Rental Car |
| | Three Months Ended June 30, |
| ($ in millions, except as noted) | 2017 | | 2016 | | 2017 | | 2016 |
| Revenues | $ | 1,519 |
| | $ | 1,584 |
| | $ | 543 |
| | $ | 540 |
|
| Ancillary retail vehicle sales revenue | (24 | ) | | (18 | ) | | — |
| | — |
|
| Foreign currency adjustment | — |
| | — |
| | (23 | ) | | (41 | ) |
| Total rental revenue | $ | 1,495 |
| | $ | 1,566 |
| | $ | 520 |
| | $ | 499 |
|
| Transaction days (in thousands) | 36,233 |
| | 37,190 |
| | 13,235 |
| | 12,511 |
|
| Total RPD (in whole dollars) | $ | 41.26 |
| | $ | 42.11 |
| | $ | 39.29 |
| | $ | 39.88 |
|
| | | | U.S. Rental Car | | International Rental Car | U.S. Rental Car | | International Rental Car |
| | Three Months Ended March 31, | Six Months Ended June 30, |
| ($ in millions, except as noted) | 2016 | | 2015 | | 2016 | | 2015 | 2017 | | 2016 | | 2017 | | 2016 |
| Revenues | | $ | 2,872 |
| | $ | 2,990 |
| | $ | 955 |
| | $ | 973 |
|
| Ancillary retail vehicle sales revenue | | (46 | ) | | (37 | ) | | — |
| | — |
|
| Foreign currency adjustment | | — |
| | — |
| | (35 | ) | | (60 | ) |
| Total rental revenue | $ | 1,566 |
| | $ | 1,602 |
| | $ | 526 |
| | $ | 535 |
| $ | 2,826 |
| | $ | 2,953 |
| | $ | 920 |
| | $ | 913 |
|
| Available car days (in thousands) | 45,500 |
| | 46,565 |
| | 16,253 |
| | 15,807 |
| |
| Revenue per available car day (in whole dollars) | $ | 34.42 |
| | $ | 34.40 |
| | $ | 32.36 |
| | $ | 33.85 |
| |
| Transaction days (in thousands) | | 68,545 |
| | 69,932 |
| | 23,419 |
| | 22,613 |
|
| Total RPD (in whole dollars) | | $ | 41.23 |
| | $ | 42.23 |
| | $ | 39.28 |
| | $ | 40.38 |
|
| |
| (e) | Total RPU is a key metric that is calculated as total revenues less ancillary retail vehicle sales revenue divided by the average vehicles in each period and then divided by the number of months in the period reported, with all periods adjusted to eliminate the effect of fluctuations in foreign currency exchange rates. Our management believes eliminating the effect of fluctuations in foreign currency exchange rates is appropriate so as not to affect the comparability of underlying trends. This metric is important to our management as it represents a measurement of revenue productivity relative to fleet capacity. The following tables reconcile our rental car segments' total rental revenues to our total revenue per unit per month (based on December 31, 2016 foreign currency exchange rates) for the periods shown: |
|
| | | | | | | | | | | | | | | |
| | U.S. Rental Car | International Rental Car |
| | Three Months Ended June 30, |
| ($ in millions, except as noted) | 2017 | | 2016 | | 2017 | | 2016 |
| Total rental revenue | $ | 1,495 |
| | $ | 1,566 |
| | $ | 520 |
| | $ | 499 |
|
| Average vehicles | 495,000 |
| | 500,000 |
| | 186,100 |
| | 178,600 |
|
| Total revenue per unit (in whole dollars) | $ | 3,020 |
| | $ | 3,132 |
| | $ | 2,794 |
| | $ | 2,794 |
|
| Number of months in period | 3 |
| | 3 |
| | 3 |
| | 3 |
|
| Total RPU (in whole dollars) | $ | 1,007 |
| | $ | 1,044 |
| | $ | 931 |
| | $ | 931 |
|
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
| |
| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
| | | | U.S. Rental Car | | International Rental Car | U.S. Rental Car | International Rental Car |
| | Six Months Ended June 30, | Six Months Ended June 30, |
| ($ in millions, except as noted) | 2016 | | 2015 | | 2016 | | 2015 | 2017 | | 2016 | | 2017 | | 2016 |
| Total rental revenue | $ | 2,953 |
| | $ | 3,110 |
| | $ | 960 |
| | $ | 949 |
| $ | 2,826 |
| | $ | 2,953 |
| | $ | 920 |
| | $ | 913 |
|
| Available car days (in thousands) | 87,378 |
| | 90,591 |
| | 29,721 |
| | 28,743 |
| |
| Revenue per available car day (in whole dollars) | $ | 33.80 |
| | $ | 34.33 |
| | $ | 32.30 |
| | $ | 33.02 |
| |
| Average vehicles | | 486,500 |
| | 480,100 |
| | 168,300 |
| | 163,300 |
|
| Total revenue per unit (in whole dollars) | | $ | 5,809 |
| | $ | 6,151 |
| | $ | 5,466 |
| | $ | 5,591 |
|
| Number of months in period | | 6 |
| | 6 |
| | 6 |
| | 6 |
|
| Total RPU (in whole dollars) | | $ | 968 |
| | $ | 1,025 |
| | $ | 911 |
| | $ | 932 |
|
| |
| (f) | Net depreciation per unit per month is a non-GAAP measurekey metric that is calculated by dividing depreciation of revenue earning vehicles and lease charges, net by the average vehicles in each period and then dividing by the number of months in the period reported, with all periods adjusted to eliminate the effect of fluctuations in foreign currency.currency exchange rates. Our management believes eliminating the effect of fluctuations in foreign currency exchange rates is useful in analyzing underlying trends. Net depreciation per unit per month represents the amount of average depreciation expense and lease charges, net per vehicle per month. The following tables below reconcile this non-GAAP measure to its most comparable GAAP measure, which isour rental car segment depreciation of revenue earning vehicles and lease charges, net to our net depreciation per unit per month (based on December 31, 20152016 foreign currency exchange rates) for the periods shown: |
| | | | U.S. Rental Car | | International Rental Car | U.S. Rental Car | | International Rental Car |
| | Three Months Ended June 30, | Three Months Ended June 30, |
| ($ in millions, except as noted) | 2016 | | 2015 | | 2016 | | 2015 | 2017 | | 2016 | | 2017 | | 2016 |
| Depreciation of revenue earning vehicles and lease charges | $ | 417 |
| | $ | 380 |
| | $ | 98 |
| | $ | 101 |
| |
| Depreciation of revenue earning vehicles and lease charges, net | | $ | 524 |
| | $ | 417 |
| | $ | 100 |
| | $ | 98 |
|
| Foreign currency adjustment | — |
| | — |
| | (2 | ) | | (4 | ) | — |
| | — |
| | (4 | ) | | (8 | ) |
| Adjusted depreciation of revenue earning vehicles and lease charges, net | $ | 417 |
| | $ | 380 |
| | $ | 96 |
| | $ | 97 |
| $ | 524 |
| | $ | 417 |
| | $ | 96 |
| | $ | 90 |
|
| Average vehicles | 500,000 |
| | 511,700 |
| | 178,600 |
| | 173,700 |
| 495,000 |
| | 500,000 |
| | 186,100 |
| | 178,600 |
|
| Adjusted depreciation of revenue earning vehicles and lease charges, net divided by average vehicles (in whole dollars) | $ | 834 |
| | $ | 743 |
| | $ | 538 |
| | $ | 558 |
| $ | 1,059 |
| | $ | 834 |
| | $ | 516 |
| | $ | 504 |
|
| Number of months in period | 3 | | 3 | | 3 | | 3 | 3 | | 3 | | 3 | | 3 |
| Net depreciation per unit per month (in whole dollars) | $ | 278 |
| | $ | 248 |
| | $ | 179 |
| | $ | 186 |
| $ | 353 |
| | $ | 278 |
| | $ | 172 |
| | $ | 168 |
|
| | | | U.S. Rental Car | | International Rental Car | U.S. Rental Car | | International Rental Car |
| | Six Months Ended June 30, | Six Months Ended June 30, |
| ($ in millions, except as noted) | 2016 | | 2015 | | 2016 | | 2015 | 2017 | | 2016 | | 2017 | | 2016 |
| Depreciation of revenue earning vehicles and lease charges | $ | 836 |
| | $ | 801 |
| | $ | 184 |
| | $ | 196 |
| |
| Depreciation of revenue earning vehicles and lease charges, net | | $ | 1,023 |
| | $ | 836 |
| | $ | 185 |
| | $ | 184 |
|
| Foreign currency adjustment | — |
| | — |
| | (2 | ) | | (8 | ) | — |
| | — |
| | (6 | ) | | (12 | ) |
| Adjusted depreciation of revenue earning vehicles and lease charges, net | $ | 836 |
| | $ | 801 |
| | $ | 182 |
| | $ | 188 |
| $ | 1,023 |
| | $ | 836 |
| | $ | 179 |
| | $ | 172 |
|
| Average vehicles | 480,100 |
| | 500,500 |
| | 163,300 |
| | 158,800 |
| 486,500 |
| | 480,100 |
| | 168,300 |
| | 163,300 |
|
| Adjusted depreciation of revenue earning vehicles and lease charges, net divided by average vehicles (in whole dollars) | $ | 1,741 |
| | $ | 1,600 |
| | $ | 1,115 |
| | $ | 1,184 |
| $ | 2,103 |
| | $ | 1,741 |
| | $ | 1,064 |
| | $ | 1,053 |
|
| Number of months in period | 6 | | 6 | | 6 | | 6 | 6 | | 6 | | 6 | | 6 |
| Net depreciation per unit per month (in whole dollars) | $ | 290 |
| | $ | 267 |
| | $ | 186 |
| | $ | 197 |
| $ | 351 |
| | $ | 290 |
| | $ | 177 |
| | $ | 176 |
|
LIQUIDITY AND CAPITAL RESOURCES
Our U.S. and international operations are funded by cash provided by operating activities and by extensive financing arrangements maintained by us in the U.S. and internationally.
As of June 30, 2016,2017, we had $1.3$1.1 billion of cash and cash equivalents of which a portion was used in July 2016 to repay $700 million in principal amount of the 7.50% Senior Notes due 2018. As of June 30, 2016, we had $318 millionand $1.1 billion of restricted cash. Of these amounts as of June 30, 2016, $3072017, $119 million of cash and cash equivalents and $40$49 million of restricted cash was held by our subsidiaries outside of the United States, Canada and Puerto Rico. Repatriation of some of these funds under current regulatory and tax law for use in domestic operations would expose us to additional
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
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| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
by our subsidiaries outside of the U.S., Canada and Puerto Rico. Repatriation of some of these funds under current regulatory and tax law for use in domestic operations would expose us to additional taxes. Except for repatriationcash and cash equivalents in Brazil, due to the pending sale of some income previously taxedour operations in that foreign jurisdiction, we consider cash held by our subsidiaries outside of the U.S., we consider this cashCanada and Puerto Rico to be permanently reinvested. In the second quarter of 2016, we changed our assertion with respect to previously taxed income and made a distribution of previously taxed income which resulted in minimal tax impact from foreign exchange.
We believe that cash and cash equivalents generated by our U.S. operations, cash received on the disposal of vehicles, together with amounts available under various liquidity facilities and refinancing options available to us in the U.S. capital markets, will be sufficient to fund operating requirements in the U.S. for the foreseeable future.next twelve months.
Cash Flows - Hertz
As of June 30, 2016, we2017, Hertz had cash and cash equivalents of $1.3$1.1 billion, an increase of $811$325 million from $474$816 million as of December 31, 2015.2016. The following table summarizes the net change in cash and cash equivalents for the periods shown:
| | | | Six Months Ended
June 30, | | | Six Months Ended
June 30, | | |
| (In millions) | 2016 | | 2015 | | $ Change | 2017 | | 2016 | | $ Change |
| Cash provided by (used in): | | | | | | | | | | |
| Operating activities | $ | 1,014 |
| | $ | 1,161 |
| | $ | (147 | ) | $ | 984 |
| | $ | 1,014 |
| | $ | (30 | ) |
| Investing activities | (1,929 | ) | | (2,868 | ) | | 939 |
| (2,904 | ) | | (1,929 | ) | | (975 | ) |
| Financing activities | 1,718 |
| | 1,777 |
| | (59 | ) | 2,233 |
| | 1,718 |
| | 515 |
|
| Effect of exchange rate changes | 8 |
| | (16 | ) | | 24 |
| 12 |
| | 8 |
| | 4 |
|
| Net change in cash and cash equivalents | $ | 811 |
| | $ | 54 |
| | $ | 757 |
| $ | 325 |
| | $ | 811 |
| | $ | (486 | ) |
During the six months ended June 30, 2016, we generated $1472017, there was a reduction of cash inflows of $62 million less cash from operating activities compared with the same period in 2015. The decrease was primarily related tonet income excluding non-cash items, partially offset by a $114$32 million reduction in net incomecash outflows from continuing operations excluding non-cash items, and a $33 million change in working capital accounts period over period. The change from working capital accounts is due primarily to a $91 million increase in cash related to non-vehicle accounts payable from customer prepayments for peak season vehicle rentals and an increase in payables related to our IT transformation programs. The above is partially offset by a $61 million decrease in cash related to accrued liabilities and prepaid expenses and other assets resulting from insurance and restructuring payments, other accrued liabilities and prepayments for advertising and IT services.
Our primary use of cash in investing activities is forrelate to the acquisition and disposals of revenue earning vehicles. Cash from the sale of revenue earning vehicles see "Capital Expenditures" below. was down $952 million due to fewer program vehicles returned to the manufacturer year over year and overall lower sales prices, and was partially offset by a $178 million decrease in cash outflows for the purchase of revenue earning vehicles as the Company focused on managing its fleet size. Cash from equity method investments was down $179 million due to $9 million of proceeds received from the sale of CAR Inc. common stock during the six months ended June 30, 2017 compared to $233 million received in the prior year period, offset by a $45 million cash outflow in the prior period for the purchase of an equity method investment.
During the six months ended June 30, 2016, we used $939 million less cash for investing activities compared with the same period in 2015 primarily due to2017, there was a decrease in revenue earning vehicle expenditures of $371 million and an$3.5 billion increase in proceedsnet borrowings, partially offset by the $2.1 billion transfer from disposals of revenue earning vehicles of $352 million which resulted in 4% lower average vehicles in the U.S business. Additionally, we received proceeds of $233 milliondiscontinued operations resulting from the sale of common stock of CAR Inc.Spin-Off which occurred during the first halfsix months ended June 30, 2016. See Note 4, "AcquisitionsUnder the terms of the credit agreement governing the Senior Facilities, the use of proceeds from the issuance of the Senior Second Priority Secured Notes in June 2017 is limited to refinancing existing indebtedness and Divestitures."
Duringfunding related expenses. As such, the first halfremaining proceeds as of June 30, 2017 of approximately $834 million are classified as restricted cash and comprise the net change in restricted cash and cash equivalents, non-vehicle during the six months ended June 30, 2016,2017.
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
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| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
Cash Flows - Hertz Global
As of June 30, 2017, Hertz Global had cash provided byand cash equivalents of $1.1 billion, an increase of $325 million from $816 million as of December 31, 2016. The following table summarizes the net change in cash and cash equivalents for the periods shown:
|
| | | | | | | | | | | |
| | Six Months Ended
June 30, | | |
| (In millions) | 2017 | | 2016 | | $ Change |
| Cash provided by (used in): | | | | | |
| Operating activities | $ | 982 |
| | $ | 1,014 |
| | $ | (32 | ) |
| Investing activities | (2,904 | ) | | (1,929 | ) | | (975 | ) |
| Financing activities | 2,235 |
| | 1,718 |
| | 517 |
|
| Effect of exchange rate changes | 12 |
| | 8 |
| | 4 |
|
| Net change in cash and cash equivalents | $ | 325 |
| | $ | 811 |
| | $ | (486 | ) |
Fluctuations in operating, investing and financing activities decreased by $59 million comparedcash flows from period to period are due to the same factors as those disclosed for Hertz above, with the same period in 2015. The decrease was primarily dueexception of any cash inflows or outflows related to a $2,151 million decrease in net borrowings offsetthe master loan agreement between Hertz and Hertz Global and cash outflows by transfers from discontinued entitiesHertz Global for the purchase of $2,122 million.
The effecttreasury shares, of exchange rates on our cashwhich there were none during the first halfsix months ended June 30, 2016 was an increase in cash of $8 million as compared to a reduction in cash of $16 million during the first half ended June 30, 2015.2017 or 2016.
Financing
Our primary liquidity needs include servicing of vehicle and non-vehicle debt, the payment of operating expenses and capital projects and purchases of revenue earning vehicles to be used in our operations. Our primary sources of funding are operating cash flows, cash received on the disposal of revenue earning vehicles, borrowings under our revolving credit facilities and access to the credit markets. Substantially all of our revenue earning vehicles and certain related assets are owned by special purpose entities, or are encumbered in favor of our lenders under our various credit facilities, other secured financings and asset-backed securities programs. None of such assets are available to satisfy the claims of our general creditors.
As of June 30, 2016, we had $15,392 million of total indebtedness outstanding. Cash paid for interest during the first half ended June 30, 2016, was $115 million for interest on vehicle debt and $167 million for interest on non-vehicle debt. Accordingly, weWe are highly leveraged, and a substantial portion of our liquidity needs arise from debt service on our indebtedness and from the funding of our costs of operations, capital expenditures and acquisitions. Substantially allThe Company’s practice is to maintain sufficient total liquidity through cash from operations, credit facilities and other financing arrangements, to mitigate any adverse effect on its operations resulting from adverse financial market conditions.
In June 2017, Hertz terminated $150 million of commitments under the Senior RCF, such that after giving effect to such termination the Senior RCF consists of a $1.55 billion senior secured revolving credit facility. Other financing transactions that occurred during the six months ended June 30, 2017 did not significantly change our revenue earning vehiclesoverall liquidity. See Part I, Item 1, Note 7, "Debt," to the Notes to our condensed consolidated financial statements included in this Report ("Note 7") for information. Corporate liquidity (defined as unrestricted cash plus availability under the primary non-vehicle liquidity line of $1.1 billion and certain related assets are owned by special purpose entities,$9 million, respectively, at June 30, 2017 and $816 million and $1.1 billion, respectively, at December 31, 2016) declined to $1.2 billion at June 30, 2017 from $1.9 billion at December 31, 2016. The decline is primarily due to funding our operations and the acquisition of non-vehicle capital assets.
Cash paid for interest during the six months ended June 30, 2017 was $130 million for interest on vehicle debt and $128 million for interest on non-vehicle debt.
Approximately $1.6 billion of vehicle debt and $7 million of non-vehicle debt will mature during the twelve months following the issuance of this Report and the Company will need to refinance a portion of the debt. The Company has reviewed the maturing debt obligations and determined that it is probable that the Company will be able, and has the intent, to repay or are encumberedrefinance such obligations before the expiration of such facilities.
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
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| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
in favor of our lenders under our various credit facilities, other secured financings and asset-backed securities programs. None of such assets are available to satisfy the claims of our general creditors. For further information on our indebtedness, see Note 6, "Debt," to the Notes to our condensed consolidated financial statements included in this Report on Form 10‑Q for more information.
Our liquidity as of June 30, 2016 consisted of cash and cash equivalents, unused commitments under our Senior RCF and unused commitments under our vehicle debt, see "Borrowing Capacity and Availability" below. The Company’s practice is to maintain sufficient liquidity through cash from operations, credit facilities and other financing arrangements, to mitigate any adverse effect on its operations resulting from adverse financial market conditions.
We believe that cash generated from operations, cash received on the disposal of vehicles, together with amounts available under various liquidity facilities and refinancing options available to us, will be adequate to permit us to meet our debt maturities over the next twelve months.
Transactions with Related Parties
In November 2015, the Company signed a master loan agreement with Old Hertz Holdings for a facility size of $650 million with an expiration in November 2016 (the "Old Master Loan"). Prior to the Spin-Off on June 30, 2016, the board of directors of the Company approved, and Hertz paid, a non-cash dividend to Hertz Investors, Inc. consisting of the full rights to the receivable due from Old Hertz Holdings under the Old Master Loan in the amount of $334 million plus accrued interest. Hertz Investors, Inc. declared and paid the same dividend to Old Hertz Holdings; thereby settling the amount receivable from Old Hertz Holdings.
On June 30, 2016, the Company signed a master loan agreement with Hertz Global for a facility size of $425 million with an expiration in June 2017 (the "Master Loan"). The interest rate is based on the U.S. Dollar LIBOR rate plus a margin. There were no amounts outstanding under the Master Loan as of June 30, 2016.
2016 Financing Activities
During the first half of 2016 we had the following financing activities which are more fully disclosed in Note 6, "Debt," to the Notes to our condensed consolidated financial statements included in this Report:
Non-Vehicle Debt
Senior Credit Facilities
In June 2016, in connection with the Spin-Off, the Senior Term Facility and the Senior ABL Facility were terminated.
Senior Facilities
In June 2016, in connection with the Spin-Off, Hertz entered into the Senior Term Loan, with a $700 million initial principal balance, and the Senior RCF, a $1.7 billion revolving credit facility.
The proceeds from the Senior Term Loan, together with available cash, were used to redeem Hertz’s 7.50% Senior Notes in July 2016 as further described in Note 19, "Subsequent Events," to the Notes to our condensed consolidated financial statements included in this Report. The proceeds from the Senior RCF will be used to finance the Company’s operations. As of June 30, 2016, no amounts were outstanding under the Senior RCF.
THE HERTZ CORPORATION AND SUBSIDIARIES
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ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
Vehicle Debt
HVF II U.S. Vehicle Variable Funding Notes
In June 2016, HVF II terminated $1.8 billion of commitments under the HVF II Series 2014-A Notes, terminated $20 million of commitments under the HVF II Series 2013-B Notes and transitioned approximately $500 million of commitments available under the HVF II Series 2013-B Notes to the HVF II Series 2013-A Notes.
The net proceeds from the sale of the HVF II Series 2016-3 Notes and HVF II Series 2016-4 Notes as further described below, together with available cash, were used to repay approximately $820 million of the outstanding principal amount of the HVF II Series 2014-A Notes.
The net proceeds from the issuance of the HVF II Series 2016-1 Notes and HVF II Series 2016-2 Notes as further described below, together with available cash, were used to repay approximately $741 million of the outstanding principal amount of the HVF II Series 2014-A Notes and approximately $264 million of the outstanding principal amount of the HVF II Series 2013-A Notes.
HVF II U.S. Vehicle Medium Term Notes
In June 2016, HVF II issued the HVF II Series 2016-3 Notes and the HVF II Series 2016-4 Notes in an aggregate principal amount of approximately $848 million. An affiliate of HVF II purchased the Class D Notes of each such series, and as a result approximately $48 million of the aggregate principal amount is eliminated in consolidation.
In February 2016, HVF II issued HVF II Series 2016-1 Notes and HVF II Series 2016-2 Notes in an aggregate principal amount of approximately $1.1 billion. An affiliate of HVF II purchased the Class D Notes of each such series, and as a result approximately $61 million of the aggregate principal amount is eliminated in consolidation.
HFLF Medium Term Notes
In April 2016, HFLF issued the HFLF Series 2016-1 Notes in an aggregate principal amount of $400 million. An affiliate of HFLF purchased the Class E Notes of such series, and as a result approximately $15 million of the aggregate principal amount is eliminated in consolidation.
The net proceeds from the issuance of the HFLF Series 2016-1 Notes, together with available cash, were used to repay $400 million of amounts then-outstanding under the HFLF Series 2013-2 Notes.
U.S. Vehicle RCF
In June 2016, in connection with the Spin-Off, Hertz executed the $200 million U.S. Vehicle RCF. The proceeds will be used to finance certain of Hertz’s operations and replenish the funds used to pay-off Hertz’s U.S. Vehicle Financing Facility.
U.S. Vehicle Financing Facility
In June 2016, in anticipation of the Spin-Off, the U.S. Vehicle Financing Facility was terminated. Vehicles that, prior to the Spin-Off, would have been financed under the U.S. Vehicle Financing Facility will be financed under the U.S. Vehicle RCF or the HVF II U.S. ABS Program going forward, as applicable.
European Revolving Credit Facility
In June 2016, HHN BV amended the European Revolving Credit Facility to provide for aggregate maximum borrowings of up to €340 million during the peak season, for a seasonal commitment period through December 2016. Following
THE HERTZ CORPORATION AND SUBSIDIARIES
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ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
the expiration of the seasonal commitment period, aggregate maximum borrowings available under the European Revolving Credit Facility will revert to up to €250 million.
European Securitization
In June 2016, the Company amended certain terms of the European Securitization to provide for, among other things, aggregate maximum borrowings (subject to borrowing base availability) of up to €460 million and an extension of the maturity from October 2017 to October 2018.
Brazilian Vehicle Financing Facility
In April 2016, we entered into an agreement pursuant to which the maturity of the Brazilian Vehicle Financing Facility was extended from April 2016 to October 2016.
Capitalized Leases-U.K. Leveraged Financing
In June 2016, the U.K. Leveraged Financing was amended to provide for aggregate maximum leasing capacity of up to £300 million during the peak season, for a seasonal commitment period through October 2016. Following the expiration of the seasonal commitment period, aggregate maximum borrowings available under the U.K Leveraged Financing will revert up to £250 million.
Due to the changes to our aggregate indebtedness at June 30, 2016, primarily resulting from the Spin-Off, we have provided later in this MD&A an update to the contractual obligations from those reported in Part II Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2015 Form 10‑K.
In July 2016, Moody’s Investors Service (“Moody’s”) published a request for comment regarding proposed changes to its methodology for rating rental fleet securitizations. If Moody’s implements the changes as proposed, one or more senior tranches of our outstanding series of HVF II U.S. Vehicle Medium Term Notes and/or HVF U.S. Vehicle Medium Term Notes could be downgraded by Moody’s as a result of Moody’s application of its new methodology to such outstanding series of notes. To the extent Moody’s, in its sole discretion, downgrades any such tranches of notes, the Company does not have any contractual obligation under the documentation governing such notes to take any actions. Notwithstanding the foregoing, after evaluating the impact of the application of Moody’s final published changes to its methodology, the Company may, based upon the best information available to it at the time, decide to take actions to restore the ratings to their prior levels, including causing an increase in the credit enhancement, cash collateral, and/or other liquid reserves relating to such notes. The aforementioned potential rating actions relate solely to certain of our securitization debt and not our corporate ratings or ratings on any of our non-vehicle debt.
Borrowing Capacity and Availability
Our borrowing capacity and availability comes from our "revolving credit facilities," which are a combination of variable funding asset-backed securitization facilities, cash-flow-based revolving credit facilities and asset-based revolving credit facilities. Creditors under each such asset-backed securitization facility and asset-based revolving credit facility have a claim on a specific pool of assets as collateral. Our ability to borrow under each such asset-backed securitization facility and asset-based revolving credit facility is a function of, among other things, the value of the assets in the relevant collateral pool. With respect to each such asset-backed securitization facility and asset-based revolving credit facility, we refer to the amount of debt we can borrow given a certain pool of assets as the borrowing base.
We refer to "Remaining Capacity" as the maximum principal amount of debt permitted to be outstanding under the respective facility (i.e., with respect to a variable funding asset-backed securitization facility or asset-based revolving credit facility, the amount of debt we could borrow assuming we possessed sufficient assets as collateral) less the principal amount of debt then-outstanding under such facility. With respect to a variable funding asset-backed securitization facility or asset-based revolving credit facility, we refer to "Availability Under Borrowing Base Limitation" as the lower of Remaining Capacity or the borrowing base less the principal amount of debt then-outstanding under such facility (i.e., the amount of debt that can be borrowed given the collateral possessed at such time). With respect
THE HERTZ CORPORATION AND SUBSIDIARIES
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ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
to the Senior RCF, "Availability Under Borrowing Base Limitation" is the same as "Remaining Capacity" since borrowings under the Senior RCF are not subject to a borrowing base.
As of June 30, 2016, the following facilities were available to us:
|
| | | | | | | |
| (In millions) | Remaining Capacity | | Availability Under Borrowing Base Limitation |
| Non-Vehicle Debt | | | |
| Senior RCF | $ | 1,094 |
| | $ | 1,094 |
|
| Total Non-Vehicle Debt | 1,094 |
| | 1,094 |
|
| Vehicle Debt | | | |
| U.S. Vehicle RCF | — |
| | — |
|
| HVF II U.S. Vehicle Variable Funding Notes | 613 |
| | — |
|
| HFLF Variable Funding Notes | 325 |
| | — |
|
| European Revolving Credit Facility | — |
| | — |
|
| European Securitization | 94 |
| | — |
|
| Canadian Securitization | 16 |
| | — |
|
| Australian Securitization | 96 |
| | 2 |
|
| Capitalized Leases | 16 |
| | 8 |
|
| Total Vehicle Debt | 1,160 |
| | 10 |
|
| Total | $ | 2,254 |
| | $ | 1,104 |
|
Letters of Credit
As of June 30, 2016, there were outstanding standby letters of credit totaling $618 million. Such letters of credit have been issued primarily to support the Company's vehicle rental concessions and leaseholds and its insurance programs as well as to provide credit enhancement for its asset-backed securitization facilities. Of this amount $606 million was issued under the Senior RCF, which has a $1 billion letter of credit sublimit, resulting in $394 million of availability under such sublimit. As of June 30, 2016, none of the letters of credit have been drawn upon.
Covenants
We refer to Hertz and its subsidiaries as the Hertz credit group. The indentures for the Senior Notes and Senior Second Priority Secured Notes contain covenants that, among other things, limit or restrict the ability of the Hertz credit group to incur additional indebtedness, incur guarantee obligations, prepay certain indebtedness, make certain restricted payments (including paying dividends, redeeming stock or making other distributions to parent entities of Hertz and other persons outside of the Hertz credit group), make investments, create liens, transfer or sell assets, merge or consolidate, and enter into certain transactions with Hertz's affiliates that are not members of the Hertz credit group.
Certain of ourthe Company's other debt instruments and credit facilities (including the Senior Facilities) contain a number of covenants that, among other things, limit or restrict the ability of the borrowers and the guarantors to dispose of assets, incur additional indebtedness, incur guarantee obligations, prepay certain indebtedness, make certain restricted payments (including paying dividends, share repurchases or making other distributions), create liens, make investments, make acquisitions, engage in mergers, fundamentally change the nature of their business, make capital expenditures, or engage in certain transactions with certain affiliates.
The Senior RCF contains a financial maintenance covenant whichthat is a maximumonly applicable to the Senior RCF. Such covenant provides that Hertz’s consolidated totalfirst lien net corporate leverage ratio, as defined in the Senior RCF Credit Agreement, as of the last day of any fiscal quarter (the "Covenant Leverage Ratio"), may not exceed the ratios indicated below:
|
| | | | |
| Fiscal Quarter(s) Ending | | Maximum Ratio |
| June 30, 2017 | | 3.25 | to | 1.00 |
| September 30, 2017 | | 3.25 | to | 1.00 |
| December 31, 2017 and each March 31, June 30, September 30 and December 31 ending thereafter | | 3.00 | to | 1.00 |
At June 30, 2017, Hertz was in compliance with the Covenant Leverage Ratio with a ratio of 2.56 to 1.00, as calculated in accordance with the Senior RCF Credit Agreement. Consolidated EBITDA, as defined in the Senior RCF Credit Agreement, is a component of the calculation of the Covenant Leverage Ratio and is only applicablea non-GAAP financial measure that is not a measure of operating results, but instead is a measure used to determine compliance with the Covenant Leverage Ratio under the Senior RCF Credit Agreement. Consolidated EBITDA is generally defined in the Senior RCF Credit Agreement as consolidated net income plus the sum of income taxes, non-vehicle interest expense, non-vehicle depreciation and amortization expense, and non-cash charges or losses, as further adjusted for certain other items permitted in calculating covenant compliance under the Senior RCF, including add backs for non-recurring, unusual or extraordinary charges, business optimization expenses or other restructuring charges or reserves.
Based on available liquidity from our expected operating results, the Senior RCF and other financing arrangements, Hertz expects to continue to be in compliance with the Covenant Leverage Ratio for at least the next twelve months.
Rental Fleet Securitization Rating Methodology
In July 2016, Moody’s Investors Service (“Moody’s”) published a request for comment regarding proposed changes to its methodology for rating rental fleet securitizations, and in December 2016, Moody's published updated methodology for rating rental fleet securitizations. In connection therewith, Moody's placed several senior tranches of our outstanding series of HVF II U.S. Vehicle Medium Term Notes and/or HVF U.S. Vehicle Medium Term Notes on review for downgrade as a result of Moody’s application of its new methodology to such outstanding series of notes. In February 2017, the Company took actions to maintain the ratings at their current levels and as a result of such actions Moody’s removed these tranches from review for downgrade and confirmed the ratings of such tranches at their current levels. The actions taken include the Company making changes to the Senior RCF. Hertz’s consolidated total netunderlying documentation governing such series of notes
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
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| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
as well as providing incremental enhancement with respect to one such series. The aforementioned rating actions relate solely to certain of our securitization debt and not our corporate leverage ratio asratings or ratings on any of the last day of any fiscal quarter, commencing with September 30, 2016, may not exceed the ratios indicated below:
|
| | |
Fiscal Quarter(s) Ending | | Maximum Ratio |
September 30, 2016 | | 5.25 to 1.00 |
December 31, 2016 through March 31, 2017 | | 4.75 to 1.00 |
June 30, 2017 through September 30, 2017 | | 5.25 to 1.00 |
December 31, 2017 | | 4.75 to 1.00 |
March 31, 2018 | | 4.50 to 1.00 |
June 30, 2018 through September 30, 2018 | | 5.00 to 1.00 |
December 31, 2018 through March 31, 2019 | | 4.50 to 1.00 |
June 30, 2019 through September 30, 2019 | | 5.00 to 1.00 |
December 31, 2019 through March 31, 2020 | | 4.50 to 1.00 |
June 30, 2020 through September 30, 2020 | | 5.00 to 1.00 |
December 31, 2020 through March 31, 2021 | | 4.50 to 1.00 |
We are in compliance with our covenants as of June 30, 2016. For a discussion of the risks associated with our significant indebtedness, see Item 1A, "Risk Factors" in this Report.non-vehicle debt.
Capital Expenditures
Revenue Earning Vehicle Expenditures
The table below sets forth theour revenue earning vehicles and capital assetvehicle expenditures and related disposal proceeds for the periods shown:
| | | | | Revenue Earning Vehicles | | Capital Assets, Non-Vehicle | |
| Cash inflow (cash outflow)(In millions) | | Capital Expenditures | | Disposal Proceeds | | Net Capital Expenditures | | Capital Expenditures | | Disposal Proceeds | | Net Capital Expenditures | |
| Cash inflow (cash outflow) | | Revenue Earning Vehicles |
| (In millions) | | Capital Expenditures | | Disposal Proceeds | | Net Capital Expenditures |
| 2017 | | | | | | |
| First Quarter | | $ | (2,862 | ) | | $ | 1,960 |
| | $ | (902 | ) |
| Second Quarter | | (3,847 | ) | | 1,875 |
| | (1,972 | ) |
| Total | | $ | (6,709 | ) | | $ | 3,835 |
| | $ | (2,874 | ) |
| 2016 | | | | | | | | | | | | | | | | | |
| First Quarter | | $ | (3,590 | ) | | $ | 2,967 |
| | $ | (623 | ) | | $ | (46 | ) | | $ | 19 |
| | $ | (27 | ) | $ | (3,378 | ) | | $ | 2,755 |
| | $ | (623 | ) |
| Second Quarter | | (3,678 | ) | | 2,201 |
| | (1,477 | ) | | (26 | ) | | 20 |
| | (6 | ) | (3,509 | ) | | 2,032 |
| | (1,477 | ) |
| Total | | $ | (7,268 | ) | | $ | 5,168 |
| | $ | (2,100 | ) | | $ | (72 | ) | | $ | 39 |
| | $ | (33 | ) | $ | (6,887 | ) | | $ | 4,787 |
| | $ | (2,100 | ) |
| 2015 | | | | | | | | | | | | | |
| First Quarter | | $ | (3,317 | ) | | $ | 2,227 |
| | $ | (1,090 | ) | | $ | (66 | ) | | $ | 18 |
| | $ | (48 | ) | |
| Second Quarter | | (4,322 | ) | | 2,589 |
| | (1,733 | ) | | (55 | ) | | 26 |
| | (29 | ) | |
| Total | | $ | (7,639 | ) | | $ | 4,816 |
| | $ | (2,823 | ) | | $ | (121 | ) | | $ | 44 |
| | $ | (77 | ) | |
The table below sets forth net capital expenditures for revenue earning vehicles by segment for the periods shown:
| | | | Six Months Ended
June 30, | | | | | |
| (In millions) | 2016 | | 2015 | | $ Change | | % Change | |
| Revenue earning vehicle expenditures, net | | | | | | | | |
| Cash inflow (cash outflow) | | Six Months Ended
June 30, | | | | |
| ($ in millions) | | 2017 | | 2016 | | $ Change | | % Change |
| U.S. Rental Car | $ | (1,309 | ) | | $ | (1,911 | ) | | $ | 602 |
| | (32 | )% | $ | (1,862 | ) | | $ | (1,309 | ) | | $ | (553 | ) | | 42 | % |
| International Rental Car | (543 | ) | | (621 | ) | | 78 |
| | (13 | ) | (787 | ) | | (543 | ) | | (244 | ) | | 45 |
|
| All Other Operations | (248 | ) | | (291 | ) | | 43 |
| | (15 | ) | (225 | ) | | (248 | ) | | 23 |
| | (9 | ) |
| Total | $ | (2,100 | ) | | $ | (2,823 | ) | | $ | 723 |
| | (26 | ) | $ | (2,874 | ) | | $ | (2,100 | ) | | $ | (774 | ) | | 37 |
|
As further described in Note 2, "Basis of Presentation and Recently Issued Accounting Pronouncements," to the Notes to our condensed consolidated financial statements included in this Report, we revised our condensed consolidated statements of cash flows to decrease revenue earning vehicles expenditures and decrease proceeds from disposals of revenue earning vehicles by $22 million, of which $7 million is attributable to the first quarter of 2016, in the International segment and $359 million in the All Other Operations segment for the six months ended June 30, 2016. These revisions had no impact on net capital expenditures for revenue earning vehicles for the segments.
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
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| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
Capital Assets, non-vehicle
The table below sets forth our capital asset expenditures, non-vehicle, and related disposal proceeds for the periods shown:
|
| | | | | | | | | | | |
| Cash inflow (cash outflow) | Capital Assets, Non-Vehicle |
| (In millions) | Capital Expenditures | | Disposal Proceeds | | Net Capital Expenditures |
| 2017 | | | | | |
| First Quarter | $ | (54 | ) | | $ | 7 |
| | $ | (47 | ) |
| Second Quarter | (49 | ) | | 4 |
| | (45 | ) |
| Total | $ | (103 | ) | | $ | 11 |
| | $ | (92 | ) |
| 2016 | | | | | |
| First Quarter | $ | (46 | ) | | $ | 19 |
| | $ | (27 | ) |
| Second Quarter | (26 | ) | | 20 |
| | (6 | ) |
| Total | $ | (72 | ) | | $ | 39 |
| | $ | (33 | ) |
The table below sets forth capital asset expenditures, non-fleet, net of disposal proceeds, by segment for the periods shown:
| | | | Six Months Ended
June 30, | | | | | |
| (In millions) | 2016 | | 2015 | | $ Change | | % Change | |
| Capital asset expenditures, non-vehicle, net | | | | | | | | |
| Cash inflow (cash outflow) | | Six Months Ended
June 30, | | | | |
| ($ in millions) | | 2017 | | 2016 | | $ Change | | % Change |
| U.S. Rental Car | $ | (17 | ) | | $ | (16 | ) | | $ | (1 | ) | | 6 | % | $ | (45 | ) | | $ | (17 | ) | | $ | (28 | ) | | 165 | % |
| International Rental Car | (7 | ) | | (19 | ) | | 12 |
| | (63 | ) | (9 | ) | | (7 | ) | | (2 | ) | | 29 |
|
| All Other Operations | (2 | ) | | (2 | ) | | — |
| | — |
| (3 | ) | | (2 | ) | | (1 | ) | | 50 |
|
| Corporate | (7 | ) | | (40 | ) | | 33 |
| | (83 | ) | (35 | ) | | (7 | ) | | (28 | ) | | 400 |
|
| Total | $ | (33 | ) | | $ | (77 | ) | | $ | 44 |
| | (57 | ) | $ | (92 | ) | | $ | (33 | ) | | $ | (59 | ) | | 179 |
|
CONTRACTUAL OBLIGATIONS
Material changes to our aggregate indebtedness, primarily resulting from the Spin-Off, are described in Part I, Item I, Note 6, "Debt," to the Notes to our condensed consolidated financial statements included in this Report. These changes result in contractual obligations at June 30, 2016 for debt and related interest as follows:
|
| | | | | | | | | | | | | | | | | | | |
| | | | Payments Due by Period |
| (in millions) | Total | | 2016 | | 2017 to 2018 | | 2019 to 2020 | | After 2020 |
| Vehicle: | | | | | | | | | |
Debt obligation(a) | $ | 10,846 |
| | $ | 906 |
| | $ | 6,140 |
| (d) | $ | 2,254 |
| | $ | 1,546 |
|
Interest on debt(b) | 652 |
| | 139 |
| | 358 |
| | 151 |
| | 4 |
|
| Non-Vehicle: | | | | | | | | | |
Debt obligation(a) | 4,629 |
| | 703 |
| (c) | 265 |
| | 1,965 |
| | 1,696 |
|
Interest on debt(b) | 1,014 |
| | 130 |
| | 454 |
| | 291 |
| | 139 |
|
| Total | $ | 17,141 |
| | $ | 1,878 |
| | $ | 7,217 |
| | $ | 4,661 |
| | $ | 3,385 |
|
| |
(a) | Amounts represent nominal value of debt obligations. See Note 6, "Debt," to the Notes to our condensed consolidated financial statements included in this Report. |
| |
(b) | Amounts represent the estimated commitment fees and interest payments based on the principal amounts, minimum non-cancelable maturity dates and applicable interest rates on the debt at June 30, 2016. |
| |
(c) | Amount includes $700 million principal related to the 7.50% Senior Notes due October 2018 that were repaid in July 2016 as further described in Note 19, "Subsequent Events," to the Notes to our condensed consolidated financial statements included in this Report. |
| |
(d) | Amount includes $89 million outstanding borrowings at June 30, 2016 related to the Australian Securitization which was extended to July 2018 as further described in Note 19, "Subsequent Events," to the Notes to our condensed consolidated financial statements included in this Report. |
As of June 30, 2016,2017, there have been no other material changes outside of the ordinary course of business to our other known contractual obligations as set forth in the Contractual Obligations table included in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our 20152016 Form 10‑K. Changes to our aggregate indebtedness, including related interest and terms for new issuances, are described in Part I, Item 1, Note 7, "Debt," to the Notes to our condensed consolidated financial statements included in this Report.
OFF-BALANCE SHEET COMMITMENTS AND ARRANGEMENTS
Indemnification Obligations
As described in Note 3, "Discontinued Operations", the Separation and Distribution Agreement with Herc Holdings contains mutual indemnification clauses and a customary indemnification provision with respect to liability arising out of or resulting from assumed legal matters.
THE HERTZ CORPORATION AND SUBSIDIARIES
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ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
Other than as described above, thereThere have been no significant changes to our indemnification obligations as compared to those disclosed in Note 16,17, "Contingencies and Off-Balance Sheet Commitments" of the Notes to our consolidated financial statements included in our 20152016 Form 10‑K under the caption Item 8, "Financial Statements and Supplementary Data."
The Company regularly evaluates the probability of having to incur costs associated with indemnification obligations and will accrue for expected losses when they are probable and estimable.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
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| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
United States of America. The preparation of the condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts in our condensed consolidated financial statements and accompanying notes. If different assumptions or conditions were to prevail, the results could be materially different from our reported results.
We discuss our critical accounting policies and estimates in Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2016 Form 10-K. On January 1, 2017, we prospectively adopted guidance that eliminates the second step of the two-step goodwill impairment test, which requires the determination of the implied fair value of goodwill to measure an impairment. Rather, a goodwill impairment charge will be calculated as the amount by which a reporting unit's carrying amount exceeds its fair value. Under the guidance, we still have the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.
On January 1, 2017 we also adopted guidance that simplifies several areas of employee share-based payment accounting, including income taxes, forfeitures, minimum statutory withholding requirements, and classifications within the statement of cash flows. Most significantly, the new guidance eliminates the need to track tax “windfalls” in a separate pool within additional paid-in capital; instead, excess tax benefits and tax deficiencies will be recorded within income tax expense. For details regarding the method of adoption, refer to Part I, Item 1, Note 2 "Basis of Presentation and Recently Issued Accounting Pronouncements," to the Notes to our condensed consolidated financial statements included in this Report.
Effective January 1, 2017, the Company’s board of directors adopted the 2017 EICP which provides for PSUs where the service inception date precedes the grant date. The fair value is based on the anticipated number of shares awarded and the quoted price of the Company’s shares at each reporting date up to the grant date. Compensation charges accumulate as a liability until the grant date, at which time the liability will be reclassified to equity. Additionally, under the 2016 Omnibus Plan, we issued PSAs with graded vesting where the compensation expense is recognized ratably over the requisite service period for each separately vesting tranche of the award. For details regarding the 2017 EICP and PSAs described above, refer to Part I, Item 1, Note 9 "Stock-Based Compensation," to the Notes to our condensed consolidated financial statements included in this Report.
There have been no other material changes to our critical accounting policies and estimates as disclosed in Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2016 Form 10-K.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
For a discussion of recent accounting pronouncements, see Note 2, "Basis of Presentation and Recently Issued Accounting Pronouncements," to the Notes to our condensed consolidated financial statements included in this Report on Form 10‑Q10-Q under the caption Item 1, "Condensed Consolidated Financial Statements (Unaudited)" ("Note 2")."
As disclosed in Note 2, the Company will adopt Topic 606 on January 1, 2018. The Company believes that the most significant impact relates to its accounting for reward points earned by customers under its loyalty programs. Upon adoption of Topic 606, each transaction which generates loyalty reward points will result in the deferral of revenue equivalent to the retail value of the redemption of the loyalty reward points. The associated revenue will be recognized at the time when the customer redeems the loyalty reward points. Under the current guidance, there is no revenue deferral and the Company records an expense associated with the incremental cost of providing the future rental at the time when the loyalty reward points are earned. The Company is in the process of quantifying the impact of deferring revenue associated with reward points upon adoption of Topic 606.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained or incorporated by reference in this Report and in reports we subsequently file with the United States Securities and Exchange Commission ("SEC") on Forms 10‑K and 10-Q10‑Q and file or furnish on Form 8‑K, and in related comments by our management, include "forward-looking statements." Forward-looking statements
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
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| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
include information concerning our liquidity and our possible or assumed future results of operations, including descriptions of our business strategies. These statements often include words such as "believe," "expect," "project," "potential," "anticipate," "intend," "plan," "estimate," "seek," "will," "may," "would," "should," "could," "forecasts" or similar expressions. These statements are based on certain assumptions that we have made in light of our experience in the industry as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate in these circumstances. We believe these judgments are reasonable, but you should understand that these statements are not guarantees of performance or results, and our actual results could differ materially from those expressed in the forward-looking statements due to a variety of important factors, both positive and negative, that may be revised or supplemented in subsequent reports on Forms 10‑K, 10‑Q and 8‑K.
Important factors that could affect our actual results and cause them to differ materially from those expressed in forward-looking statements include, among others, those that may be disclosed from time to time in subsequent reports filed with the SEC, and those described under "Item 1A—Risk Factors" included in this Report onour 2016 Form 10‑Q. Some10-K and the following, which were derived in part from the risks set forth in "Item 1A—Risk Factors" of the factors that we believe could affect our results include without limitation:2016 Form 10-K:
any claims, investigations or proceedings arising as a result of the restatement in 2015 of our previously issued financial results;
our ability to remediate the material weaknesses in our internal controls over financial reporting;
levels of travel demand, particularly with respect to airline passenger traffic in the United States and in global markets;
the effect of our separation of our vehicle and equipment rental businesses, any failure by Herc Holdings Inc. to comply with the agreements entered into in connection with the separation and our ability to obtain the expected benefits of the separation;
significant changes in the competitive environment, including as a result of industry consolidation, and the effect of competition in our markets on rental volume and pricing, including on our pricing policies or use of incentives;
increased vehicle costs due to declines in the value of our non-program vehicles;
occurrences that disrupt rental activity during our peak periods;
our ability to purchase adequate supplies of competitively priced vehicles and risks relating to increases in the cost of the vehicles we purchase;
THE HERTZ CORPORATION AND SUBSIDIARIES
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ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
our ability to accurately estimate future levels of rental activity and adjust the number and mix of vehicles used in our rental operations accordingly;
our ability to maintain sufficient liquidity and the availability to us of additional or continued sources of financing for our revenue earning vehicles and to refinance our existing indebtedness;
our ability to adequately respond to changes in technology and customer demands;
our ability to maintain access to third-party distribution channels including current or favorableand related prices, commission structures and transaction volumes;
an increase in our vehicle costs or disruption to our rental activity, particularly during our peak periods, due to safety recalls by the manufacturers of our vehicles;
a major disruption in our communication or centralized information networks;
financial instability of the manufacturers of our vehicles;
any impact on us from the actions of our franchisees, dealers and independent contractors;
our ability to maintain profitabilitysustain operations during adverse economic cycles and unfavorable external events (including war, terrorist acts, natural disasters and epidemic disease);
shortages of fuel and increases or volatility in fuel costs;
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
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| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
our ability to successfully integrate acquisitions and complete dispositions;
our ability to maintain favorable brand recognition;
costs and risks associated with litigation and investigations;
risks related to our indebtedness, including our substantial amount of debt, our ability to incur substantially more debt, the fact that substantially all of our consolidated assets secure certain of our outstanding indebtedness and increases in interest rates or in our borrowing margins;
our ability to meet the financial and other covenants contained in our Senior Facilities, our outstanding unsecured Senior Notes, our Senior Second Priority Secured Notes and certain asset-backed and asset-based arrangements;
changes in accounting principles, or their application or interpretation, and our ability to make accurate estimates and the assumptions underlying the estimates, which could have an effect on earnings;operating results;
risks associated with operating in many different countries, including the risk of a violation or alleged violation of applicable anticorruption or antibribery laws;laws and our ability to repatriate cash from non-U.S. affiliates without adverse tax consequences;
our ability to successfully outsource a significant portion of our information technology services or other activities;
our ability to successfully implement our finance and information technology transformation programs;
changes in the existing, or the adoption of new laws, regulations, policies or other activities of governments, agencies and similar organizations where such actions may affect our operations, the cost thereof or applicable tax rates;
changes to our senior management team and the dependence of our business operations on our senior management team;
the effect of tangible and intangible asset impairment charges;
our exposure to uninsured claims in excess of historical levels;
fluctuations in interest rates and commodity prices;
our exposure to fluctuations in foreign currency exchange rates; and
other risks described from time to time in periodic and current reports that we file with the SEC.
You should not place undue reliance on forward-looking statements. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing cautionary statements. All such
THE HERTZ CORPORATION AND SUBSIDIARIES
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ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
statements speak only as of the date made, and we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
WeHertz Global and Hertz are exposed to a variety of market risks, including the effects of changes in interest rates (including credit spreads), foreign currency exchange rates and fluctuations in fuel prices. WeHertz Global and Hertz manage ourtheir exposure to these market risks through ourtheir regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. Derivative financial instruments are viewed as risk management tools and have not been used for speculative or trading purposes. In addition, derivative financial instruments are entered into with a diversified group of major financial institutions in order to manage ourHertz Global and Hertz's exposure to counterparty nonperformance on such instruments.
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
Hertz Global
In the second quarter of 2017, Hertz Global identified a new 5 percent shareholder of its common stock that resulted in a change in control as that term is defined in Section 382 of the Internal Revenue Code. Due to the net unrealized built-in gains from its like-kind exchange programs, Hertz Global does not anticipate that this will have an impact on its taxes or that it will lose any of its net operating losses. Other than as described above, there have been no material changes to the information reported under Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," included in Hertz Global's 2016 Form 10‑K.
Hertz
There is no material change in the information reported under Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," included our 2015in Hertz's 2016 Form 10‑K.
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
ITEM 4. CONTROLS AND PROCEDURES
HERTZ GLOBAL
Evaluation of Disclosure Controls and Procedures
Our senior management has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined under Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10‑-Q.10-Q. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of June 30, 2016,2017, due to the identification of material weaknesses in our internal control over financial reporting, as further described in Item 9A of our 20152016 Form 10‑K/A,10-K, our disclosure controls and procedures were not effective to provide reasonable assurance that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, with the participation of its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
Our remediation efforts were ongoing duringDuring the periodthree months ended June 30, 2016. In December 2015,2017, we signed an agreementhave taken, and continue to outsource certain information technology application and infrastructure functionstake, the actions described below to a third party service provider.remediate our existing material weaknesses, which have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
The Company began transitioning workControl Activities
Non-Fleet Procurement
To address the material weaknesses over the non-fleet procurement process untimely creation of purchase orders and improper receipting of goods management performed the following during the three months ended June 30, 2017: (1) established comprehensive and clear policies and procedures to govern requisitioning of goods and expenditure approval requirements, (ii) delivered supplemental trainings to all requisitioners with the objective of developing a thorough understanding of the Company’s requisitioner policies and review protocols and (iii) implemented monitoring controls of purchase orders created after invoice date and invoices on hold activity to ensure compliance with policies and procedures.
To address the material weakness over improper recording and submission of purchase card “Pcard” transactions by field operations, management performed the following during the three months ended June 30, 2017: (1) updated existing technology and expense reporting tools to assist in the review and approval of Pcard transactions, (2) delivered trainings on the new process for submitting Pcard transactions with receipts for approval and desktop procedures and (3) enhanced our Pcard approval review controls.
To address the material weakness over lack of approval of material vendor payments, management performed the following during the three months ended June 30, 2017: (1) updated existing technology to assist in the review and approval of material vendor payments, (2) established comprehensive and clear policies and procedures to govern expenditure approval requirements, training and (iii) enhanced our material vendor payment approval manual review controls.
Risk Assessment
Information Technology Systems
To address the material weakness associated with controls over IT, management performed the following during the three months ended June 30, 2017: (1) enhanced and implemented controls to monitor developers’ access to production and adequately capture, document and approve data changes and other IT related activities, (2) enhanced design and operation of control activities and procedures associated with user and administrator access to the service provideraffected IT system, including both preventative and detective control activities, (3) educated and re-trained control owners regarding risks,
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
ITEM 4. CONTROLS AND PROCEDURES (CONTINUED)
controls and maintaining adequate evidence of review, (4) clarified and communicated appropriate roles and responsibilities for controls and systems for both IT and business users and (5) dedicated additional resources to administer IT general controls monitoring and promote compliance with policies, procedures and processes.
System-Generated Reports and Spreadsheets Related to Revenue Earning Vehicles Estimates
To address the material weakness associated with completeness and accuracy of system-generated reports and spreadsheets used in the accounting for estimates related to revenue earning vehicles, during the first quarterthree months ended June 30, 2017, management identified the key assumptions and inputs of 2016certain significant estimates, the data sources and substantially completeddesigned procedures to validate the transition ascompleteness and accuracy of May 2016. Functional areas impacted by the outsourcing include business application support, service desk, end user computing support, voicedata extraction and transfer of data network support,used in these estimates. Management is in process of completing the design and data center operations support.implementation of the controls.
In May 2016, we signed an agreement to outsource certain functions related to our global accounts payable process to a third party service provider. The Company began the training and transition process during the second quarter of 2016 and is projected to complete the transition by September 2016.
In order toTo remediate our existing material weaknesses, we require additional time to complete the implementation of our remediation plans and demonstrate the effectiveness of our remediation efforts. The material weaknesses cannot be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. During 2016, the Company has taken actions
As we continue to remediate the material weakness associated with the risk assessment process. Specifically, management implementedevaluate and enhancedwork to improve our internal controls over certain business processes including our period end financial reporting, processour senior management may determine to take additional measures to address control deficiencies or determine to modify the remediation efforts described in this section. Until the remediation efforts discussed in this section, including any additional remediation efforts that our senior management identifies as necessary, are completed, the material weaknesses described in Item 9A of our Brazilian subsidiary.2016 Form 10-K will continue to exist.
Other than those items noted above, there were no otherHERTZ
Evaluation of Disclosure Controls and Procedures
Our senior management has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined under Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of June 30, 2017, due to the identification of material changesweaknesses in our internal control over financial reporting, as further described in Item 9A of our 2016 Form 10-K, our disclosure controls and procedures were not effective to provide reasonable assurance that occurredthe information required to be disclosed by us in the reports that we file or submit under the Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, with the participation of its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
During the three months ended June 30, 2017, we have taken, and continue to take, the actions described below to remediate our existing material weaknesses, which have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Control Activities
Non-Fleet Procurement
To address the material weaknesses over the non-fleet procurement process untimely creation of purchase orders and improper receipting of goods management performed the following during the three months ended June 30, 2016 that materially affected, or that are reasonably likely2017: (1) established comprehensive and clear policies and procedures to materially affect our internal control over financial reporting.govern requisitioning of goods and expenditure approval requirements, (ii) delivered supplemental trainings to all requisitioners with the objective of developing a thorough understanding of the Company’s requisitioner policies and review protocols and (iii) implemented monitoring
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
ITEM 4. CONTROLS AND PROCEDURES (CONTINUED)
controls of purchase orders created after invoice date and invoices on hold activity to ensure compliance with policies and procedures.
To address the material weakness over improper recording and submission of purchase card “Pcard” transactions by field operations, management performed the following during the three months ended June 30, 2017: (1) updated existing technology and expense reporting tools to assist in the review and approval of Pcard transactions, (2) delivered trainings on the new process for submitting Pcard transactions with receipts for approval and desktop procedures and (3) enhanced our Pcard approval review controls.
To address the material weakness over lack of approval of material vendor payments, management performed the following during the three months ended June 30, 2017: (1) updated existing technology to assist in the review and approval of material vendor payments, (2) established comprehensive and clear policies and procedures to govern expenditure approval requirements, training and (iii) enhanced our material vendor payment approval manual review controls.
Risk Assessment
Information Technology Systems
To address the material weakness associated with controls over IT, management performed the following during the three months ended June 30, 2017: (1) enhanced and implemented controls to monitor developers’ access to production and adequately capture, document and approve data changes and other IT related activities, (2) enhanced design and operation of control activities and procedures associated with user and administrator access to the affected IT system, including both preventative and detective control activities, (3) educated and re-trained control owners regarding risks, controls and maintaining adequate evidence of review, (4) clarified and communicated appropriate roles and responsibilities for controls and systems for both IT and business users and (5) dedicated additional resources to administer IT general controls monitoring and promote compliance with policies, procedures and processes.
System-Generated Reports and Spreadsheets Related to Revenue Earning Vehicles Estimates
To address the material weakness associated with completeness and accuracy of system-generated reports and spreadsheets used in the accounting for estimates related to revenue earning vehicles, during the three months ended June 30, 2017, management identified the key assumptions and inputs of certain significant estimates, the data sources and designed procedures to validate the completeness and accuracy of the data extraction and transfer of data used in these estimates. Management is in process of completing the design and implementation of the controls.
To remediate our existing material weaknesses, we require additional time to complete the implementation of our remediation plans and demonstrate the effectiveness of our remediation efforts. The material weaknesses cannot be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
As we continue to evaluate and work to improve our internal controls over financial reporting, our senior management may determine to take additional measures to address control deficiencies or determine to modify the remediation efforts described in this section. Until the remediation efforts discussed in this section, including any additional remediation efforts that our senior management identifies as necessary, are completed, the material weaknesses described in Item 9A of our 2016 Form 10-K will continue to exist.
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
PART II—OTHER INFORMATION
THE HERTZ CORPORATION AND SUBSIDIARIES
ITEM 1. LEGAL PROCEEDINGS
For a description of certain pending legal proceedings see Part I, Item I,1, Note 15,13, "Contingencies and Off-Balance Sheet Commitments.Commitments,"
to the Notes to our condensed consolidated financial statements included in this Report.
ITEM 1A. RISK FACTORS
RISKS RELATED TO OUR BUSINESS
Our vehicle rental business is particularly sensitiveThere are no material amendments or additions to reductions in the levels of airline passenger travel, and reductions in air travel could materially adversely impact our financial condition, results of operations, liquidity and cash flows.
Our results of operations are affected by many economic factors, including the level of economic activity in the markets in which we operate. At times in the past, the United States ("U.S.") and international markets have experienced declines in economic activity that have affected the vehicle rental market, including a tightening of the credit markets, reduced business and leisure travel, reduced government and consumer spending and volatile fuel prices. The vehicle rental industry is particularly affected by reductions in business and leisure travel, especially with respect to levels of airline passenger traffic. Reductions in levels of air travel, whether caused by general economic conditions, airfare increases (such as due to capacity reductions or increases in fuel costs borne by commercial airlines) or other events (such as work stoppages, military conflicts, terrorist incidents, natural disasters, epidemic diseases, or the response of governments to any of these events) could materially adversely affect us. In particular, we derive a substantial proportion of our revenues from key leisure destinations, including Florida, Hawaii, California, New York and Texas in the U.S. and Europe internationally and the level of travel to these destinations is dependent upon the ability and willingness of consumers to travel on vacation and the effect of economic cycles on consumers’ discretionary travel. To the extent travel to these destinations is adversely affected, our results of operations could be materially adversely affected.
We face intense competition that may lead to downward pricing or an inability to increase prices.
The markets in which we operate are highly competitive. We believe that price is one of the primary competitive factors in the vehicle rental market and that the internet has enabled cost‑conscious customers, including business travelers, to more easily compare rates available from rental companies. If we try to increase our pricing, our competitors, some of whom may have greater resources and better access to capital than us, may seek to compete aggressively on the basis of pricing. In addition, our competitors may reduce prices in order to attempt to gain a competitive advantage, capture market share, or to compensate for declines in rental activity. To the extent we do not match or remain within a reasonable competitive margin of our competitors’ pricing, our revenues and results of operations could be materially adversely affected. If competitive pressures lead us to match any of our competitors’ downward pricing and we are not able to reduce our operating costs, then our margins, results of operations and cash flows could be materially adversely impacted. Seeinformation reported under Part I, Item 1, “Business - U.S. and International Car Rental Operations - Competition”1A “Risk Factors” contained in our Annual Report on2016 Form 10‑K for the year ended December 31, 2015.
Our business is highly seasonal and any occurrence that disrupts rental activity during our peak periods could materially adversely affect our liquidity, cash flows and results of operations.
Certain significant components of our expenses are fixed in the short‑term, including minimum concession fees, real estate taxes, rent, insurance, utilities, maintenance and other facility‑related expenses, the costs of operating our information technology systems and minimum staffing costs. Seasonal changes in our revenues do not alter those fixed expenses, typically resulting in higher profitability in periods when our revenues are higher. The second and third quarters of the year have historically been the strongest quarters for our vehicle rental business due to increased levels
THE HERTZ CORPORATION AND SUBSIDIARIES
ITEM 1A. RISK FACTORS (CONTINUED)
of leisure travel. Any occurrence that disrupts rental activity during these periods could have a disproportionately material adverse effect on our liquidity, cash flows and results of operations.
If our management is unable to accurately estimate future levels of rental activity and adjust the number and mix of vehicles used in our rental operations accordingly, our results of operations could suffer.
Because vehicle costs typically represent our single largest expense and vehicle purchases are typically made weeks or months in advance of the expected use of the vehicle, our business is dependent upon the ability of our management to accurately estimate future levels of rental activity and consumer preferences with respect to the mix of vehicles used in our rental operations. To the extent we do not purchase sufficient numbers of vehicles, or the right types of vehicles, to meet consumer demand, we may lose revenue to our competitors. If we purchase too many vehicles, our vehicle utilization could be adversely affected and we may not be able to dispose of excess vehicles in a timely and cost effective manner. While purchasing program vehicles is useful in managing our seasonal peak demand for vehicles, program vehicles typically cost more than non-program vehicles. As a result, if our management is unable to accurately estimate future levels of rental activity and determine the appropriate mix of vehicles used in our rental operations, including because of changes in the competitive environment or economic factors outside of our control, our results of operations could suffer.
Increased vehicle cost due to declines in the value of the non-program vehicles in our operations could materially adversely impact our financial condition, results of operations, liquidity and cash flows.
For the six months ended June 30, 2016 and the year ended December 31, 2015, 19% and 35%, respectively, of the vehicles purchased for our U.S. rental operations were program vehicles and 63% and 59%, respectively, of the vehicles purchased for our international rental operations were program vehicles. Manufacturers agree to repurchase program vehicles at a specified price or guarantee the depreciation rate on the vehicles during a specified time period. To the extent the vehicles in our rental operations are non-program vehicles, we have an increased risk that the market value of a vehicle at the time of its disposition will be less than its estimated residual value at such time. Any decrease in residual values with respect to our non-program vehicles could also materially adversely affect our financial condition, results of operations, liquidity and cash flows.
The use of program vehicles enables us to determine our depreciation expense in advance and this is useful to us because depreciation is a significant cost factor in our operations. Using program vehicles is also useful in managing our seasonal peak demand for vehicles, because in certain cases we can sell certain program vehicles shortly after having acquired them at a higher value than what we could for a similar non-program vehicle at that time. If there were fewer program vehicles in our rental operations, these benefits would diminish and we would bear increased risk related to residual value. In addition, the related depreciation on our vehicles and our flexibility to reduce the number of vehicles used in our rental operations by returning vehicles sooner than originally expected without the risk of loss in the event of an economic downturn or to respond to changes in rental demand would be reduced.
We may fail to respond adequately to changes in technology and customer demands.
In recent years our industry has been characterized by rapid changes in technology and customer demands. For example, in recent years, industry participants have taken advantage of new technologies to improve vehicle utilization, decrease customer wait times and improve customer satisfaction. Our industry has also seen the entry of new competitors whose businesses are based on emerging mobile platforms and efforts continue to introduce various types of self-driving vehicles. Our ability to continually improve our current processes and products in response to changes in technology is essential in maintaining our competitive position and maintaining current levels of customer satisfaction. We may experience technical or other difficulties that could delay or prevent the development, introduction or marketing of new products or enhanced product offerings.
THE HERTZ CORPORATION AND SUBSIDIARIES
ITEM 1A. RISK FACTORS (CONTINUED)
If we are unable to purchase adequate supplies of competitively priced vehicles and the cost of the vehicles we purchase increases, our financial condition, results of operations, liquidity and cash flows may be materially adversely affected.
The price and other terms at which we can acquire vehicles vary based on market and other conditions. For example, certain vehicle manufacturers have in the past, and may in the future, utilize strategies to de-emphasize sales to the vehicle rental industry, which can negatively impact our ability to obtain vehicles on competitive terms and conditions. Consequently, there is no guarantee that we can purchase a sufficient number of vehicles at competitive prices and on competitive terms and conditions. If we are unable to obtain an adequate supply of vehicles, or if we obtain less favorable pricing and other terms when we acquire vehicles and are unable to pass on any increased costs to our customers, then our financial condition, results of operations, liquidity and cash flows may be materially adversely affected.
A material downsizing in the number of revenue earning vehicles we own or a change in U.S. tax laws could require us to make additional cash payments for tax liabilities, which could be material.
We have maintained like-kind exchange programs for our U.S. Rental Car business and Donlen for a number of years. Our like-kind exchange programs allow tax gains on the disposition of our revenue earning vehicles to be deferred and have resulted in deferrals of federal and state income taxes for prior years. If a qualified replacement vehicle is not purchased within a specific time period after vehicle disposal, then taxable gain is recognized. A material reduction in the combined net book value of our revenue earning vehicles, a material and extended reduction in vehicle purchases and/or a material downsizing in the number of revenue earnings vehicles, for any reason, could result in reduced tax deferrals in the future, which in turn could require us to make material cash payments for U.S. federal and state income tax liabilities.
In addition, in his fiscal year 2017 budget, President Obama has proposed to modify the like-kind exchange rules for all real and personal property in a manner that would and limit capital gains eligible for §1031 exchanges to $1,000,000 per taxpayer per year and exclude certain personal property from eligibility for §1031 exchanges. We do not expect these proposed changes to have an impact on our ability to defer tax gains on the disposition of our revenue earning vehicles. However, if IRS rules are implemented that limit our ability to defer tax gains on the disposition of our revenue earning vehicles, we could be required to make material cash payments for U.S. federal and state income tax liabilities.
The failure of a manufacturer of our program vehicles to fulfill its obligations under a repurchase or guaranteed depreciation program could expose us to loss on those program vehicles and materially adversely affect certain of our financing arrangements, which could in turn materially adversely affect our liquidity, cash flows, financial condition and results of operations.
If any manufacturer of our program vehicles does not fulfill its obligations under its repurchase or guaranteed depreciation agreement with us, whether due to default, reorganization, bankruptcy or otherwise, then we would have to dispose of those program vehicles without receiving the benefits of the associated programs and we would also be exposed to residual risk with respect to these vehicles. In addition, we could be left with a substantial unpaid claim against the manufacturer with respect to program vehicles that were sold and returned to the manufacturer but not paid for, or that were sold for less than their agreed repurchase price or guaranteed value.
The failure by a manufacturer to pay such amounts could cause a credit enhancement deficiency with respect to our asset‑backed and asset‑based financing arrangements, requiring us to either reduce the outstanding principal amount of debt or provide more collateral (in the form of cash, vehicles and/or certain other contractual rights) to the creditors under any such affected arrangement.
If one or more manufacturers were to adversely modify or eliminate repurchase or guaranteed depreciation programs in the future, our access to and the terms of asset‑backed and asset‑based debt financing could be adversely affected, which could in turn have a material adverse effect on our liquidity, cash flows, financial condition and results of operations.
THE HERTZ CORPORATION AND SUBSIDIARIES
ITEM 1A. RISK FACTORS (CONTINUED)
We rely on third‑party distribution channels for a significant amount of our revenues.
Third-party distribution channels accounted for a significant amount of our vehicle rental reservations for the six months ended June 30, 2016 and the year ended December 31, 2015. These third-party distribution channels include traditional and online travel agencies, third-party internet sites, airlines and hotel companies, marketing partners such as credit card companies and membership organizations and global distribution systems that allow travel agents, travel service providers and customers to connect directly to our reservations systems. Loss of access to any of these channels, changes in pricing or commission structures or a reduction in transaction volume could have an adverse impact on our financial condition or results of operations, particularly if our customers are unable to access our reservation systems through alternate channels.
We may not be successful in implementing our strategy of further reducing operating costs and our cost reduction initiatives may have adverse consequences.
We are continuing to implement initiatives to reduce our operating expenses. These initiatives may include headcount reductions, business process outsourcing, business process re‑engineering, internal reorganization and other expense controls. We cannot assure you that our cost reduction initiatives will achieve any further success. Whether or not successful, our cost reduction initiatives involve significant expenses and we expect to incur further expenses associated with these initiatives, some of which may be material in the period in which they are incurred.
Even if we achieve further success with our cost reduction initiatives, we face risks associated with our initiatives, including declines in employee morale or the level of customer service we provide, the efficiency of our operations or the effectiveness of our internal controls. Any of these risks could have a material adverse impact on our results of operations, financial condition, liquidity and cash flows.
If our new initiatives to reduce costs, increase efficiencies and increase customer loyalty are not successful, our margins may suffer.
We have moved aggressively to pursue opportunities to deliver cost savings, increase our efficiency and regain customer loyalty. If we are unsuccessful in taking advantage of these opportunities, we may be unable to align our cost structure to lower levels of demand, which could depress our margins and negatively impact our ability to effectively compete. In addition, some internet travel intermediaries use generic indicators of the type of vehicle (such as “standard” or “compact”) at the expense of brand identification and some intermediaries have launched their own loyalty programs to develop loyalties to their reservation system rather than to our brands. If the volume of sales made through internet travel intermediaries increases significantly and consumers develop stronger loyalties to these intermediaries rather than to our brands, our business and revenues could be harmed. If our market share suffers due to lower levels of customer loyalty, our financial results could suffer.
An impairment of our goodwill or our indefinite-lived intangible assets could have a material noncash adverse impact on our results of operations.
We review our goodwill and indefinite lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable and at least annually. If economic deterioration occurs, then we may be required to record charges for goodwill or indefinite lived intangible asset impairments in the future, which could have a material adverse non‑cash impact on our results of operations.
Our foreign operations expose us to risks that may materially adversely affect our results of operations, liquidity and cash flows.
A significant portion of our annual revenues are generated outside the U.S., and we intend to pursue additional international growth opportunities. Operating in many different countries exposes us to varying risks, which include: (i) multiple, and sometimes conflicting, foreign regulatory requirements and laws that are subject to change and are often much different than the domestic laws in the U.S., including laws relating to taxes, automobile‑related liability, insurance rates, insurance products, consumer privacy, data security, employment matters, cost and fee recovery, and the protection of our trademarks and other intellectual property; (ii) the effect of foreign currency translation risk, as
THE HERTZ CORPORATION AND SUBSIDIARIES
ITEM 1A. RISK FACTORS (CONTINUED)
well as limitations on our ability to repatriate income; (iii) varying tax regimes, including consequences from changes in applicable tax laws; (iv) local ownership or investment requirements, as well as difficulties in obtaining financing in foreign countries for local operations; and (v) political and economic instability, natural calamities, war, and terrorism. The effects of these risks may, individually or in the aggregate, materially adversely affect our results of operations, liquidity, cash flows and ability to diversify internationally.
Our international operations are based in Uxbridge, England and we have significant vehicle rental operations in the United Kingdom and the Eurozone. The United Kingdom held a referendum on June 23, 2016 in which a majority voted for the United Kingdom’s withdrawal from the European Union (the “Brexit”). In order to effect the Brexit, a process of negotiation will determine the future terms of the United Kingdom’s relationship with the European Union. Depending on the terms of Brexit, if any, the United Kingdom could lose access to the single European Union market and to the global trade deals negotiated by the European Union on behalf of its members. The effects of the Brexit vote and the perceptions as to the impact of the withdrawal of the United Kingdom from the European Union may adversely affect business activity and economic and market conditions in the United Kingdom, the Eurozone and globally, could make it more difficult for us to manage our international operations out of the United Kingdom and could contribute to instability in global financial and foreign exchange markets. In addition, Brexit could lead to additional political, legal and economic instability in the European Union.
Additionally, operating in many different countries also increases the risk of a violation, or alleged violation, of the United States Foreign Corrupt Practices Act, the U.K. Bribery Act, other applicable anti-corruption laws and regulations, the economic sanction programs administered by the U.S. Treasury Department’s Office of Foreign Assets Control and the anti-boycott regulations administered by the U.S. Department of Commerce's Office of Anti-boycott Compliance. Any failure to comply with these laws, even if inadvertent, could result in significant penalties or otherwise harm the Company’s reputation and business. There can be no assurance that all of our employees, contractors and agents will comply with the Company’s policies that mandate compliance with these laws. Violations of these laws could be costly and disrupt the Company’s business, which could have a material adverse effect on its business, financial condition and results of operations.
Manufacturer safety recalls could create risks to our business.
Our vehicles may be subject to safety recalls by their manufacturers. The Raechel and Jacqueline Houck Safe Rental Car Act of 2015 prohibits us from renting vehicles with open federal safety recalls and to repair or address these recalls prior to renting or selling the car. Any federal safety recall with respect to our vehicles would require us to decline to rent recalled vehicles until we can arrange for the steps described in the recall to be taken. If a large number of vehicles are the subject of a recall or if needed replacement parts are not in adequate supply, we may not be able to rent recalled vehicles for a significant period of time. Those types of disruptions could jeopardize our ability to fulfill existing contractual commitments or satisfy demand for our vehicles, and could also result in the loss of business to our competitors. Depending on the severity of any recall, it could materially adversely affect our revenues, create customer service problems, reduce the residual value of the recalled vehicles and harm our general reputation.
Our business is heavily reliant upon communications networks and centralized information technology systems and the concentration of our systems creates risks for us.
We rely heavily on communication networks and information technology systems to accept reservations, process rental and sales transactions, manage our pricing, manage our revenue earning vehicles, manage our financing arrangements, account for our activities and otherwise conduct our business. Our reliance on these networks and systems exposes us to various risks that could cause a loss of reservations, interfere with our ability to manage our vehicles, slow rental and sales processes, adversely affect our ability to comply with our financing arrangements and otherwise materially adversely affect our ability to manage our business effectively. Our major information technology systems, reservations and accounting functions are centralized in a few locations worldwide. Any disruption, termination or substandard provision of these services, whether as the result of localized conditions (such as a fire, explosion or hacking), failure of our systems to function as designed, or as the result of events or circumstances of broader geographic impact (such as an earthquake, storm, flood, epidemic, strike, act of war, civil unrest or terrorist act), could materially adversely affect our business by disrupting normal reservations, customer service, accounting and information
THE HERTZ CORPORATION AND SUBSIDIARIES
ITEM 1A. RISK FACTORS (CONTINUED)
technology functions or by eliminating access to financing arrangements. Any disruption or poor performance of our systems could lead to lower revenues, increased costs or other material adverse effects on our results of operations.
Failure to maintain, upgrade and consolidate our information technology networks could adversely affect us.
We are continuously upgrading and consolidating our systems, including making changes to legacy systems, replacing legacy systems with successor systems with new functionality and acquiring new systems with new functionality. In particular, we currently have material weaknesses in our internal controls and in certain instances enhancements to our accounting systems may assist in the remediation of these material weaknesses. In addition, we have decided to outsource a significant portion of our information technology services. These types of activities subject us to additional costs and inherent risks associated with outsourcing, replacing and changing these systems, including impairment of our ability to manage our business, potential disruption of our internal control structure, substantial capital expenditures, additional administration and operating expenses, retention of sufficiently skilled personnel to implement and operate the new systems, demands on management time, and other risks and costs of delays or difficulties in transitioning to outsourcing alternatives, new systems or of integrating new systems into our current systems. Our outsourcing initiatives and system implementations may not result in productivity improvements at a level that outweighs the costs of implementation, or at all. In addition, the implementation of our outsourcing initiatives and new technology systems may cause disruptions in our business operations and have an adverse effect on our business and operations, if not anticipated and appropriately mitigated and our competitive position may be adversely affected if we are unable to maintain systems that allow us to manage our business in a competitive manner.
The misuse or theft of information we possess, including as a result of cyber security breaches, could harm our brand, reputation or competitive position and give rise to material liabilities.
We regularly possess, store and handle non‑public information about millions of individuals and businesses, including both credit and debit card information and other sensitive and confidential personal information. In addition, our customers regularly transmit confidential information to us via the internet and through other electronic means. Despite the security measures we currently have in place, our facilities and systems and those of our third‑party service providers may contain defects in design or manufacture or other problems that could unexpectedly compromise information security. Unauthorized parties may also attempt to gain access to our systems or facilities, or those of third parties with whom we do business, through fraud, trickery, or other forms of deception of our employees or contractors. Many of the techniques used to obtain unauthorized access, including viruses, worms and other malicious software programs, are difficult to anticipate until launched against a target and we may be unable to implement adequate preventative measures. Our failure to maintain the security of that data, whether as the result of our own error or the malfeasance or errors of others, could harm our reputation, interrupt our operations, result in governmental investigations and give rise to a host of civil or criminal liabilities. Any such failure could lead to lower revenues, increased remediation, prevention and other costs and other material adverse effects on our results of operations.
Our leases and vehicle rental concessions expose us to risks.
We maintain a substantial network of vehicle rental locations at a number of airports in the U.S. and internationally. Many of these locations are leased and, in the case of airport vehicle rental locations, the subject of vehicle rental concessions where vehicle rental companies are frequently required to bid periodically for the available locations. If we are unable to continue operating these facilities at their current locations due to the termination of leases or vehicle rental concessions, particularly at airports, which comprise a majority of our revenues, our operating results could be adversely affected.
Maintaining favorable brand recognition is essential to our success, and failure to do so could materially adversely affect our results of operations.
Our business is heavily dependent upon the favorable brand recognition that our “Hertz”, “Dollar” and “Thrifty” brand names have in the markets in which they participate. Factors affecting brand recognition are often outside our control, and our efforts to maintain or enhance favorable brand recognition, such as marketing and advertising campaigns, may not have their desired effects. In addition, although our licensing partners are subject to contractual requirements
THE HERTZ CORPORATION AND SUBSIDIARIES
ITEM 1A. RISK FACTORS (CONTINUED)
to protect our brands, it may be difficult to monitor or enforce such requirements, particularly in foreign jurisdictions. Any decline in perceived favorable recognition of our brands could materially adversely affect our results of operations.
Our business operations are dependent upon our new senior management team and the ability of our other new employees to learn their new roles.
Within the past three years, we have substantially changed our senior management team and have replaced many of the other employees performing key functions at our corporate headquarters. We have a new Chief Executive Officer who started on November 20, 2014, a new Chief Financial Officer who started on December 9, 2013 and many other new members of our senior management team. In addition, in connection with the transition of our corporate headquarters from Park Ridge, New Jersey to Estero, Florida, we have replaced many other employees in other key functions. As new employees gain experience in their roles, we could experience inefficiencies or a lack of business continuity due to loss of historical knowledge and a lack of familiarity of new employees with business processes, operating requirements, policies and procedures, some of which are new, and key information technologies and related infrastructure used in our day‑to‑day operations and financial reporting and we may experience additional costs as new employees learn their roles and gain necessary experience. It is important to our success that these key employees quickly adapt to and excel in their new roles. If they are unable to do so, our business and financial results could be materially adversely affected. In addition, if we were to lose the services of any one or more key employees, whether due to death, disability or termination of employment, our ability to successfully implement our business strategy, financial plans, marketing and other objectives, could be significantly impaired.
We may face issues with our union employees.
Labor contracts covering the terms of employment of approximately 5,900 employees in the U.S. (including those in the U.S. territories) are presently in effect under approximately 110 active contracts with local unions, affiliated primarily with the International Brotherhood of Teamsters and the International Association of Machinists. These contracts are renegotiated periodically. Failure to negotiate a new labor agreement when required could result in a work stoppage. Although we believe that our labor relations have generally been good, it is possible that we could become subject to additional work rules imposed by agreements with labor unions, or that work stoppages or other labor disturbances could occur in the future. In addition, our non-union workforce has been subject to unionization efforts in the past, and we could be subject to future unionization, which could lead to increases in our operating costs and/or constraints on our operating flexibility.
The restatement of our previously issued financial statements has been time consuming and expensive and could expose us to additional risks that could materially adversely affect our financial position, results of operations and cash flows.
We have incurred significant expenses, including audit, legal, consulting and other professional fees and lender and noteholder consent fees, in connection with the restatement of our previously issued financial statements and the ongoing remediation of weaknesses in our internal control over financial reporting. We have taken a number of steps, including adding significant internal resources and implemented a number of additional procedures, in order to strengthen our accounting function and attempt to reduce the risk of additional misstatements in our financial statements. To the extent these steps are not successful, we could be forced to incur additional time and expense. Our management’s attention has also been diverted from the operation of our business in connection with the restatements and ongoing remediation of material weaknesses in our internal controls.
We are also subject to a number of claims, investigations and proceedings arising out of the misstatements in our financial statements, including an investigation by the New York Regional Office of the SEC. In addition, in December 2014 a state securities regulator requested information and starting in June 2016 the Company has had communications with the United States Attorney's Office for the District of New Jersey regarding the same or similar events. See below under “The restatement of our previously issued financial results has resulted in government investigations and could result in government enforcement actions and private litigation that could have a material adverse impact on our results of operations, financial condition, liquidity and cash flows.”
THE HERTZ CORPORATION AND SUBSIDIARIES
ITEM 1A. RISK FACTORS (CONTINUED)
We have identified material weaknesses in our internal control over financial reporting which could, if not remediated, adversely affect our ability to report our financial condition and results of operations in a timely and accurate manner, which may adversely affect investor confidence in our company and, as a result, the value of our common stock.
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rule 13a‑15(f) under the Exchange Act. As further described in Item 9A in our Annual Report on Form 10‑K for the year ended December 31, 2015, as amended, management has identified material weaknesses in our internal control over financial reporting.
As a result of the material weaknesses, our management concluded that our internal control over financial reporting was not effective as of December 31, 2015. The assessment was based on criteria established in Internal Control‑Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. We are actively engaged in remediation activities designed to address the material weaknesses, but our remediation efforts are not complete and are ongoing. If our remedial measures are insufficient to address the material weaknesses, or if additional material weaknesses or significant deficiencies in our internal control are discovered or occur in the future, it may materially adversely affect our ability to report our financial condition and results of operations in a timely and accurate manner. If we are unable to report our results in a timely and accurate manner, we may not be able to comply with the applicable covenants in our financing arrangements, and may be required to seek additional waivers or repay amounts under these financing arrangements earlier than anticipated, which could adversely impact our liquidity and financial condition. Although we continually review and evaluate internal control systems to allow management to report on the sufficiency of our internal controls, we cannot assure you that we will not discover additional weaknesses in our internal control over financial reporting. The next time we evaluate our internal control over financial reporting, if we identify one or more new material weaknesses or are unable to timely remediate our existing weaknesses, we may be unable to assert that our internal controls are effective. If we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which would have a material adverse effect on the price of our common stock and possibly impact our ability to obtain future financing on acceptable terms. We may also lose assets if we do not maintain adequate internal controls.
The restatement of our previously issued financial results has resulted in government investigations and could result in government enforcement actions and private litigation that could have a material adverse impact on our results of operations, financial condition, liquidity and cash flows.
We are subject to securities class action litigation relating to our previous public disclosures. In addition, the New York Regional Office of the SEC is currently investigating the events disclosed in certain of our filings with the SEC. A state securities regulator has also requested information and starting in June 2016 we have had communications with the United States Attorney’s Office for the District of New Jersey regarding the same or similar events. For additional discussion of these matters, see Note 16, “Contingencies and Off-Balance Sheet Commitments,” to our audited annual consolidated financial statements included in our Annual Report on Form 10‑K for the year ended December 31, 2015 and Note 15, "Contingencies and Off-Balance Sheet Commitments" to the interim unaudited condensed consolidated financial statements included in this report. We could also become subject to private litigation or investigations, or one or more government enforcement actions, arising out of the misstatements in our previously issued financial statements. Our management may be required to devote significant time and attention to these matters, and these and any additional matters that arise could have a material adverse impact on our results of operations, financial condition, liquidity and cash flows. While we cannot estimate our potential exposure in these matters at this time, we have already expended significant amounts investigating the claims underlying and defending this litigation and expect to continue to need to expend significant amounts to defend this litigation.
We may pursue strategic transactions which could be difficult to implement, disrupt our business or change our business profile significantly.
Any future strategic acquisition or disposition of assets or a business could involve numerous risks, including: (i) potential disruption of our ongoing business and distraction of management; (ii) difficulty integrating the acquired business or
THE HERTZ CORPORATION AND SUBSIDIARIES
ITEM 1A. RISK FACTORS (CONTINUED)
segregating assets and operations to be disposed of; (iii) exposure to unknown, contingent or other liabilities, including litigation arising in connection with the acquisition or disposition or against any business we may acquire; (iv) changing our business profile in ways that could have unintended negative consequences; and (v) the failure to achieve anticipated synergies.
If we enter into significant strategic transactions, the related accounting charges may affect our financial condition and results of operations, particularly in the case of an acquisition. The financing of any significant acquisition may result in changes in our capital structure, including the incurrence of additional indebtedness. A material disposition could require the amendment or refinancing of our outstanding indebtedness or a portion thereof.
The agreements we entered into in connection with the Spin-Off may distract our management and expose us to claims and liabilities.
Hertz Global and Herc Holdings entered into a separation and distribution agreement and various other agreements to govern the separation of Hertz Global from Herc Holdings and the relationship between the two companies going forward. Certain of these agreements provide for the performance of services by Hertz Global and its subsidiaries, including Hertz, for the benefit of Herc Holdings and its subsidiaries for up to three years following the date of the Spin-Off, including with respect to the preparation of financial reports filed with the Securities and Exchange Commission. Certain of these agreements also impose certain obligations, including indemnification obligations, on Herc Holdings for the benefit of Hertz Global. If Herc Holdings is unable to satisfy its obligations under these agreements, Hertz Global could incur losses. These arrangements could also distract management of Hertz Global and lead to disputes between Hertz Global and Herc Holdings over the allocation of assets and liabilities between Hertz Global and Herc Holdings.
If, following the completion of the Spin-Off, there is a determination that any of the Spin-Off or the internal spin-off transactions completed in connection with the Spin-Off (collectively with the Spin-Off, the “Spin-Offs”) is taxable for U.S. federal income tax purposes because the facts, assumptions, representations or undertakings underlying the IRS private letter ruling or tax opinions are incorrect or for any other reason, then Herc Holdings and its stockholders could incur significant U.S. federal income tax liabilities and Hertz Global could incur significant liabilities.
Herc Holdings received a private letter ruling from the IRS to the effect that, subject to the accuracy of and compliance with certain representations, assumptions and covenants, (i) the Spin-Off will qualify as a tax-free transaction under Sections 355 and 368(a)(1)(D) of the Code, and (ii) the internal spin-off transactions will qualify as tax free under Section 355 of the Code. A private letter ruling from the IRS generally is binding on the IRS. However, the IRS ruling did not rule that the Spin-Offs satisfied every requirement for a tax-free spin-off, and Herc Holdings relied solely on opinions of KPMG LLP and Debevoise & Plimpton LLP to determine that such additional requirements were satisfied. The ruling and the opinions relied on certain facts, assumptions, representations and undertakings from Herc Holdings and Hertz Holdings regarding the past and future conduct of the companies’ respective businesses and other matters. If any of these facts, assumptions, representations or undertakings were incorrect or not otherwise satisfied, Herc Holdings, its affiliates and its stockholders may not be able to rely on the ruling or the opinions of tax advisors and could be subject to significant tax liabilities. Notwithstanding the private letter ruling and opinions of tax advisors, the IRS could determine on audit that the Spin-Offs and related transactions are taxable if it determines that any of these facts, assumptions, representations or undertakings are not correct or have been violated or if it disagrees with the conclusions in the opinions that are not covered by the private letter ruling, or for any other reason, including as a result of certain significant changes in the stock ownership of Herc Holdings or Hertz Global after the Spin-Off. If the Spin-Offs or related transactions are determined to be taxable for U.S. federal income tax purposes, Herc Holdings and, in certain cases, its stockholders could incur significant U.S. federal income tax liabilities, including taxation on the value of the Hertz Global stock distributed in the Spin-Off and the value of other companies distributed in the internal Spin-Off transactions, and Hertz Global could incur significant liabilities, either directly to the tax authorities or under a Tax Matters Agreement entered into with Herc Holdings.
THE HERTZ CORPORATION AND SUBSIDIARIES
ITEM 1A. RISK FACTORS (CONTINUED)
Some or all of our deferred tax assets could expire if we experience an “ownership change” as defined in Section 382 of the Code.
An “ownership change” could limit our ability to utilize tax attributes, including net operating losses, capital loss carryovers, excess foreign tax carry forwards, and credit carryforwards, to offset future taxable income. As of December 31, 2015, we had U.S. federal net operating loss carryforwards of approximately $3.9 billion (which begin to expire in 2029). Our ability to use such tax attributes to offset future taxable income and tax liabilities may be significantly limited if we experience an “ownership change” as defined in Section 382(g) of the Code. In general, an ownership change will occur when the percentage of Hertz Global's ownership (by value) of one or more “5-percent shareholders” (as defined in the Code) has increased by more than 50 percentage points over the lowest percentage of stock owned by such shareholders at any time during the prior three years (calculated on a rolling basis). An entity that experiences an ownership change generally should be subject to an annual limitation on its pre-ownership change tax loss carryforward equal to the equity value of the corporation immediately before the ownership change, multiplied by the long-term, tax-exempt rate posted monthly by the IRS (subject to certain adjustments). The annual limitation accumulates each year to the extent that there is any unused limitation from a prior year. The limitation on our ability to utilize tax losses and credit carryforwards arising from an ownership change under Section 382 depends on the value of our equity at the time of any ownership change. If we were to experience an “ownership change”, it is possible that a significant portion of our tax loss carryforwards could expire before we would be able to use them to offset future taxable income. Many states adopt the federal section 382 rules and therefore have similar limitations with respect to state tax attributes.
We face risks related to liabilities and insurance.
Our businesses expose us to claims for personal injury, death and property damage resulting from the use of the vehicles rented or sold by us, and for employment‑related injury claims by our employees. The Company is currently a defendant in numerous actions and has received numerous claims on which actions have not yet been commenced for public liability and property damage arising from the operation of motor vehicles rented from the Company. Currently, we generally self‑insure up to $10 million per occurrence in the U.S. and up to $5 million in Europe for vehicle and general liability exposures, $5 million for employment‑related injury claims, and we also maintain insurance with unaffiliated carriers in excess of such levels up to $200 million per occurrence for the current policy year, or in the case of international operations outside of Europe, in such lower amounts as we deem adequate given the risks. We cannot assure you that we will not be exposed to uninsured liability at levels in excess of our historical levels resulting from multiple payouts or otherwise, that liabilities in respect of existing or future claims will not exceed the level of our insurance, that we will have sufficient capital available to pay any uninsured claims or that insurance with unaffiliated carriers will continue to be available to us on economically reasonable terms or at all. See Item 1, “Business - Insurance and Risk Management” and Note 16, “Contingencies and Off-Balance Sheet Commitments,” to our audited annual consolidated financial statements, in each case included in our Annual Report on Form 10‑K for the year ended December 31, 2015.
We could face a significant withdrawal liability if we withdraw from participation in multiemployer pension plans or in the event other employers in such plans become insolvent and certain multiemployer plans in which we participate are reported to have underfunded liabilities, any of which could have a material adverse effect on our financial position, results of operations or cash flows.
We could face a significant withdrawal liability if we withdraw from participation in one or more multiemployer pension plans in which we participate or in the event other employers in such plans become insolvent, any of which could have a material adverse effect on our financial position, results of operations or cash flows.
We participate in various “multiemployer” pension plans. In the event that we withdraw from participation in one of these plans, then applicable law could require us to make an additional lump‑sum contribution to the plan, and we would have to reflect that as an expense in our consolidated statement of operations and as a liability on our consolidated balance sheet. Our withdrawal liability for any multiemployer plan would depend on the extent of the plan’s funding of vested benefits. Our multiemployer plans could have significant underfunded liabilities. Such underfunding may increase in the event other employers become insolvent or withdraw from the applicable plan or upon the inability or failure of withdrawing employers to pay their withdrawal liability. In addition, such underfunding may increase as a result of lower
THE HERTZ CORPORATION AND SUBSIDIARIES
ITEM 1A. RISK FACTORS (CONTINUED)
than expected returns on pension fund assets or other funding deficiencies. The occurrence of any of these events could have a material adverse effect on our consolidated financial position, results of operations or cash flows. See Note 7 to our audited annual consolidated financial statements included in our Annual Report on Form 10‑K for the year ended December 31, 2015.
Environmental laws and regulations and the costs of complying with them, or any liability or obligation imposed under them, could materially adversely affect our financial position, results of operations or cash flows.
We are subject to federal, state, local and foreign environmental laws and regulations in connection with our operations, including with respect to the ownership and operation of tanks for the storage of petroleum products, such as gasoline, diesel fuel and motor and waste oils. We cannot assure you that our tanks will at all times remain free from leaks or that the use of these tanks will not result in significant spills or leakage. If leakage or a spill occurs, it is possible that the resulting costs of cleanup, investigation and remediation, as well as any resulting fines, could be significant. We cannot assure you that compliance with existing or future environmental laws and regulations will not require material expenditures by us or otherwise have a material adverse effect on our consolidated financial position, results of operations or cash flows. See Item 1, “Business - Governmental Regulation and Environmental Matters” included in our Annual Report on Form 10‑K for the year ended December 31, 2015.
The U.S. Congress and other legislative and regulatory authorities in the U.S. and internationally have considered, and will likely continue to consider, numerous measures related to climate change and greenhouse gas emissions. Should rules establishing limitations on greenhouse gas emissions or rules imposing fees on entities deemed to be responsible for greenhouse gas emissions become effective, demand for our services could be affected, our vehicle, and/or other, costs could increase, and our business could be adversely affected.
Changes in the U.S. legal and regulatory environment that affect our operations, including laws and regulations relating to taxes, automobile‑related liability, insurance rates, insurance products, consumer privacy, data security, employment matters, licensing and franchising, automotive retail sales, cost and fee recovery and the banking and financing industry could disrupt our business, increase our expenses or otherwise have a material adverse effect on our results of operations.
We are subject to a wide variety of U.S. laws and regulations and changes in the level of government regulation of our business have the potential to materially alter our business practices and materially adversely affect our financial position and results of operations, including our profitability. Those changes may come about through new laws and regulations or changes in the interpretation of existing laws and regulations.
Any new, or change in existing, U.S. law and regulation with respect to optional insurance products or policies could increase our costs of compliance or make it uneconomical to offer such products, which would lead to a reduction in revenue and profitability. For further discussion regarding how changes in the regulation of insurance intermediaries may affect us, see Item 1, “Business - Risk Management” included in our Annual Report on Form 10‑K for the year ended December 31, 2015. If customers decline to purchase supplemental liability insurance products from us as a result of any changes in these laws or otherwise, our results of operations could be materially adversely affected.
Changes in the U.S. and E.U. legal and regulatory environments in the areas of customer and employee privacy, data security, and cross‑border data flows could have a material adverse effect on our business, primarily through the impairment of our marketing and transaction processing activities, and the resulting costs of complying with such legal and regulatory requirements. It is also possible that we could face significant liability for failing to comply with any such requirements.
We derive revenue through rental activities of the Hertz, Dollar and Thrifty brands under franchise and license arrangements. These arrangements are subject to a number of federal and state laws and regulations that impose limitations on our interactions with counter‑parties. In addition, the automotive retail industry, including our network of company‑operated vehicle sales locations, is subject to a wide range of federal, state and local laws and regulations, such as those relating to motor vehicle sales, retail installment sales and related finance and insurance matters, advertising, licensing, consumer protection and consumer privacy. Changes in these laws and regulations that impact our franchising and licensing arrangements or our automotive retail sales could adversely impact our results.
THE HERTZ CORPORATION AND SUBSIDIARIES
ITEM 1A. RISK FACTORS (CONTINUED)
In most places where we operate, we pass through various expenses, including the recovery of vehicle licensing costs and airport concession fees, to our rental customers as separate charges. We believe that our expense pass throughs, where imposed, are properly disclosed and are lawful. However, in the event of incorrect calculations or disclosures with respect to expense pass throughs, or a successful challenge to the methodology we have used for determining our expense pass through treatment, we could be subject to fines or other liabilities. In addition, we may in the future be subject to potential legislative, regulatory or administrative changes or actions which could limit, restrict or prohibit our ability to separately state, charge and recover vehicle licensing costs and airport concession fees, which could result in a material adverse effect on our results of operations.
Certain new or proposed laws and regulations with respect to the banking and finance industries, including the Dodd‑Frank Wall Street Reform and Consumer Protection Act and amendments to Regulation AB, could restrict our access to certain financing arrangements and increase our financing costs, which could have a material adverse effect on our financial position, results of operations, liquidity and cash flows.
RISKS RELATED TO OUR SUBSTANTIAL INDEBTEDNESS
Our substantial level of indebtedness could materially adversely affect our results of operations, cash flows, liquidity and ability to compete in our industry.
As of June 30, 2016, we had debt outstanding of $15.5 billion, exclusive of unamortized debt issuance costs, discounts and premiums. Our substantial indebtedness could materially adversely affect us. For example, it could: (i) make it more difficult for us to satisfy our obligations to the holders of our outstanding debt securities and to the lenders under our various credit facilities, resulting in possible defaults on, and acceleration or early amortization of, such indebtedness; (ii) be difficult to refinance or borrow additional funds in the future; (iii) require us to dedicate a substantial portion of our cash flows from operations and investing activities to make payments on our debt, which would reduce our ability to fund working capital, capital expenditures or other general corporate purposes; (iv) increase our vulnerability to general adverse economic and industry conditions (such as credit‑related disruptions), including interest rate fluctuations, because a portion of our borrowings are at floating rates of interest and are not hedged against rising interest rates, and the risk that one or more of the financial institutions providing commitments under our revolving credit facilities fails to fund an extension of credit under any such facility, due to insolvency or otherwise, leaving us with less liquidity than expected; (v) place us at a competitive disadvantage to our competitors that have proportionately less debt or comparable debt at more favorable interest rates or on better terms; and (vi) limit our ability to react to competitive pressures, or make it difficult for us to carry out capital spending that is necessary or important to our growth strategy and our efforts to improve operating margins. While the terms of the agreements and instruments governing our outstanding indebtedness contain certain restrictions upon our ability to incur additional indebtedness, they do not fully prohibit us from incurring substantial additional indebtedness and do not prevent us from incurring obligations that do not constitute indebtedness. If new debt or other obligations are added to our current liability levels without a corresponding refinancing or redemption of our existing indebtedness and obligations, these risks would increase. For a description of the amounts we have available under certain of our debt facilities, see Part 1 Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Borrowing Capacity and Availability” in this Report on Form 10‑Q.
Our ability to manage these risks depends on financial market conditions as well as our financial and operating performance, which, in turn, is subject to a wide range of risks, including those described under “Risks Related to Our Business.”
If our capital resources (including borrowings under our revolving credit facilities and access to other refinancing indebtedness) and operating cash flows are not sufficient to pay our obligations as they mature or to fund our liquidity needs, we may be forced to do, among other things, one or more of the following: (i) sell certain of our assets; (ii) reduce the number of our revenue earning vehicles; (iii) reduce or delay capital expenditures; (iv) obtain additional equity capital; (v) forgo business opportunities, including acquisitions and joint ventures; or (vi) restructure or refinance all or a portion of our debt on or before maturity.
THE HERTZ CORPORATION AND SUBSIDIARIES
ITEM 1A. RISK FACTORS (CONTINUED)
We cannot assure you that we would be able to accomplish any of these alternatives on a timely basis or on satisfactory terms, if at all. Furthermore, we cannot assure you that we will maintain financing activities and cash flows sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness. If we cannot refinance or otherwise pay our obligations as they mature and fund our liquidity needs, our business, financial condition, results of operations, cash flows, liquidity, ability to obtain financing and ability to compete in our industry could be materially adversely affected.
Our reliance on asset‑backed and asset‑based financing arrangements to purchase vehicles subjects us to a number of risks, many of which are beyond our control.
We rely significantly on asset‑backed and asset‑based financing to purchase vehicles. If we are unable to refinance or replace our existing asset‑backed and asset‑based financing or continue to finance new vehicle acquisitions through asset‑backed or asset‑based financing on favorable terms, on a timely basis, or at all, then our costs of financing could increase significantly and have a material adverse effect on our liquidity, interest costs, financial condition, cash flows and results of operations.
Our asset‑backed and asset‑based financing capacity could be decreased, our financing costs and interest rates could be increased, or our future access to the financial markets could be limited, as a result of risks and contingencies, many of which are beyond our control, including: (i) the acceptance by credit markets of the structures and structural risks associated with our asset‑backed and asset‑based financing arrangements; (ii) the credit ratings provided by credit rating agencies for our asset‑backed indebtedness; (iii) third parties requiring changes in the terms and structure of our asset‑backed or asset‑based financing arrangements, including increased credit enhancement or required cash collateral and/or other liquid reserves; (iv) the insolvency or deterioration of the financial condition of one or more of our principal vehicle manufacturers; or (v) changes in laws or regulations, including judicial review of issues of first impression, that negatively impact any of our asset‑backed or asset‑based financing arrangements.
Any reduction in the value of certain revenue earning vehicles could effectively increase our vehicle costs, adversely impact our profitability and potentially lead to decreased borrowing base availability in our asset‑backed and certain asset‑based vehicle financing facilities due to the credit enhancement requirements for such facilities, which could increase if market values for vehicles decrease below net book values for those vehicles. In addition, if disposal of vehicles in the used vehicle marketplace were to become severely limited at a time when required collateral levels were rising and as a result we failed to meet the minimum required collateral levels, the principal under our asset‑backed and certain asset‑based financing arrangements may be required to be repaid sooner than anticipated with vehicle disposition proceeds and lease payments we make to our special purpose financing subsidiaries. If that were to occur, the holders of our asset‑backed and certain asset‑based debt may have the ability to exercise their right to direct the trustee or other secured party to foreclose on and sell vehicles to generate proceeds sufficient to repay such debt.
The occurrence of certain events, including those described in the paragraph above, could result in the occurrence of an amortization event pursuant to which the proceeds of sales of vehicles that collateralize the affected asset‑backed financing arrangement would be required to be applied to the payment of principal and interest on the affected facility or series, rather than being reinvested in our revenue earning vehicles. In the case of our asset‑backed financing arrangements, certain other events, including defaults by us and our affiliates in the performance of covenants set forth in the agreements governing certain vehicle debt, could result in the occurrence of a liquidation event with the passing of time or immediately pursuant to which the trustee or holders of the affected asset‑backed financing arrangement would be permitted to require the sale of the assets collateralizing that series. Any of these consequences could affect our liquidity and our ability to maintain sufficient levels of revenue earning vehicles to meet customer demands and could trigger cross‑defaults under certain of our other financing arrangements.
Substantially all of our consolidated assets secure certain of our outstanding indebtedness, which could materially adversely affect our debt and equity holders and our business.
Substantially all of our consolidated assets, including our revenue earning vehicles and Donlen’s lease portfolio, are subject to security interests or are otherwise encumbered for the lenders under our senior credit facilities, asset‑backed and asset‑based financing arrangements. As a result, the lenders under those facilities would have a prior claim on such assets in the event of our bankruptcy, insolvency, liquidation or reorganization, and we may not have sufficient
THE HERTZ CORPORATION AND SUBSIDIARIES
ITEM 1A. RISK FACTORS (CONTINUED)
funds to pay in full, or at all, all of our creditors or make any amount available to holders of our equity. The same is true with respect to structurally senior obligations: in general, all liabilities and other obligations of a subsidiary must be satisfied before the assets of such subsidiary can be made available to the creditors (or equity holders) of the parent entity.
Because substantially all of our assets are encumbered under financing arrangements, our ability to incur additional secured indebtedness or to sell or dispose of assets to raise capital may be impaired, which could have a material adverse effect on our financial flexibility and force us to attempt to incur additional unsecured indebtedness, which may not be available to us.
Restrictive covenants in certain of the agreements and instruments governing our indebtedness may materially adversely affect our financial flexibility or may have other material adverse effects on our business, financial condition, cash flows and results of operations.
Certain of our credit facilities and other asset‑based and asset‑backed financing arrangements contain covenants that, among other things, restrict Hertz and its subsidiaries’ ability to: (i) dispose of assets; (ii) incur additional indebtedness; (iii) incur guarantee obligations; (iv) prepay other indebtedness or amend other financing arrangements; (v) pay dividends; (vi) create liens on assets; (vii) sell assets; (viii) make investments, loans, advances or capital expenditures; (ix) make acquisitions; (x) engage in mergers or consolidations; (xi) change the business conducted by us; and (xii) engage in certain transactions with affiliates.
Commencing with the fiscal quarter ending September 30, 2016, our new Senior RCF (as defined in “Description of Certain Indebtedness” below) subjects us to a financial maintenance covenant. Our ability to comply with this covenant will depend on our ongoing financial and operating performance, which in turn are subject to, among other things, the risks identified in “Risks Related to Our Business.”
The agreements governing our financing arrangements contain numerous covenants. The breach of any of these covenants or restrictions could result in a default under the relevant agreement, which could, in turn, cause cross‑defaults under our other financing arrangements. In such event, we may be unable to borrow under the Senior RCF (as defined in “Description of Certain Indebtedness” below) and certain of our other financing arrangements and may not be able to repay the amounts due under such arrangements, which could have a material adverse effect on our business, financial condition, cash flows and results of operations.
An increase in interest rates or in our borrowing margin would increase the cost of servicing our debt and could reduce our profitability.
A significant portion of our outstanding debt bears interest at floating rates. As a result, to the extent we have not hedged against rising interest rates, an increase in the applicable benchmark interest rates would increase our cost of servicing our debt and could materially adversely affect our liquidity and results of operations.
In addition, we regularly refinance our indebtedness. If interest rates or our borrowing margins increase between the time an existing financing arrangement was consummated and the time such financing arrangement is refinanced, the cost of servicing our debt would increase and our liquidity and results of operations could be materially adversely affected.
10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
The attached list of exhibits in the "Exhibit Index" immediately following the signature page to this Report is filed as part of this Form 10‑Q10-Q and is incorporated herein by reference in response to this item.
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant hasregistrants have duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| Date: | August 12, 20168, 2017 | HERTZ GLOBAL HOLDINGS, INC. THE HERTZ CORPORATION (Registrant)(Registrants)
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| | | By: | /s/ THOMAS C. KENNEDY |
| | | | Thomas C. Kennedy Senior Executive Vice President and Chief Financial Officer |
80
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
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Exhibit
Number
| | Description |
2.14.16.1 | Separation and Distribution Agreement, dated June 30, 2016, by and between Hertz Global Holdings Inc. and Herc Holdings Inc. (Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K of Hertz Global Holdings, Inc. (File No. 001-37665), as filed on July 7, 2016). |
4.5.15 | Fourth Amended and Restated Master Exchange Agreement,Indenture, dated as of June 30, 2016,6, 2017, among The Hertz Corporation, Hertz Vehicle Financing LLC, Hertz General Interest LLC, Hertz Car Sales LLC, Hertz Car Exchange Inc.,as Issuer, the Subsidiary Guarantors from time to time parties thereto, and DB Services Americas, Inc. (Incorporated by reference to Exhibit 4.1 toWells Fargo Bank, National Association, as Trustee and Note Collateral Agent, providing for the Current Report on Form 8-Kissuance of Hertz Global Holdings, Inc. (File No. 001-37665), as filed on July 7, 2016).senior second priority secured notes in series.* |
4.5.164.16.2 | Fourth Amended and Restated Escrow Agreement,Hertz Holdings Hertz | First Supplemental Indenture, dated as of June 30, 2016,6, 2017, among The Hertz Corporation, Hertz Vehicle Financing LLC, Hertz General Interest LLC, Hertz Car Sales LLC, Hertz Car Exchange Inc., and Deutsche Bank Trust Company Americas. (Incorporated by reference to Exhibit 4.2 toas Issuer, the Current Report on Form 8-K of Hertz Global Holdings, Inc. (File No. 001-37665), as filed on July 7, 2016). |
10.1.1 | Credit Agreement, dated as of June 30, 2016, among The Hertz Corporation, the subsidiary borrowersSubsidiary Guarantors from time to time party thereto, the several banks and other financial institutions from time to time partyparties thereto, and BarclaysWells Fargo Bank, PLC,National Association, as administrative agent and collateral agent (Incorporated by reference to Exhibit 10.7Trustee, relating to the Current Report on Form 8-K of Hertz Global Holdings, Inc. (File No. 001-37665), as filed on July 7, 2016).7.625% Senior Second Priority Secured Notes due 2022.* |
10.1.24.16.3 | Guarantee and Hertz Holdings Hertz | Collateral Agreement, dated as of June 30, 2016,6, 2017, made by Rental Car Intermediate Holdings, LLC, The Hertz Corporation and certain of its subsidiaries from time to time party thereto, in favor of BarclaysWells Fargo Bank, PLC,National Association, as note collateral agent and administrative agent (Incorporated by reference to Exhibit 10.8 to the Current Report on Form 8-K of Hertz Global Holdings, Inc. (File No. 001-37665), as filed on July 7, 2016).agent.* |
10.2.131.1 | Hertz Global Holdings Inc. 2016 Omnibus Incentive Plan (Incorporated by reference to Exhibit 99.1 to Hertz Global Holdings, Inc.’s Registration Statement on Form S-8 (File No. 333-212249), as filed on June 24, 2016). |
10.6 | Hertz Global Holdings, Inc. Senior Executive Bonus Plan, effective May 18, 2016 (Incorporated by reference to Exhibit 10.10 to the Current Report on Form 8-K of Hertz Global Holdings, Inc. (File No. 001-37665), as filed on July 7, 2016). |
10.22 | Tax Matters Agreement, dated June 30, 2016, by among Herc Holdings Inc., The Hertz Corporation, Herc Rentals Inc. and Hertz Global Holdings, Inc. (Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K of Hertz Global Holdings, Inc. (File No. 001-37665), as filed on July 7, 2016). |
10.23 | Transition Services Agreement, dated June 30, 2016, by and between Hertz Global Holdings, Inc. and Herc Holdings Inc. (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Hertz Global Holdings, Inc. (File No. 001-37665), as filed on July 7, 2016). |
10.24 | Employee Matters Agreement, dated June 30, 2016, by and between Hertz Global Holdings, Inc. and Herc Holdings Inc. (Incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K of Hertz Global Holdings, Inc. (File No. 001-37665), as filed on July 7, 2016). |
10.25 | Intellectual Property Agreement, dated June 30, 2016, by among The Hertz Corporation, Hertz System, Inc. and Herc Rentals Inc. (Incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K of Hertz Global Holdings, Inc. (File No. 001-37665), as filed on July 7, 2016). |
10.26 | Confidentiality Agreement, dated June 30, 2016, by and between Hertz Global Holdings, Inc. and the entities listed in the agreement (Incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K of Hertz Global Holdings, Inc. (File No. 001-37665), as filed on July 7, 2016). |
10.27 | Registration Rights Agreement, dated June 30, 2016, by and between Hertz Global Holdings, Inc. and the entities listed in the agreement (Incorporated by reference to Exhibit 10.6 to the Current Report on Form 8-K of Hertz Global Holdings, Inc. (File No. 001-37665), as filed on July 7, 2016). |
10.28 | Hertz Global Holdings, Inc. Employee Stock Purchase Plan (Incorporated by reference to Exhibit 99.1 to Hertz Global Holdings, Inc.’s Registration Statement on Form S-8 (File No. 333-212248), as filed on June 24, 2016). |
31.1–31.2 | Rule 13a-14(a)/15d-14(a) Certifications |
| 31.2 | Hertz Holdings | |
32.1–32.231.3 | 18 U.S.C. Section 1350 CertificationsHertz | |
| 31.4 | Hertz | |
| 32.1 | Hertz Holdings | |
| 32.2 | Hertz Holdings | |
| 32.3 | Hertz | |
| 32.4 | Hertz | |
| 101.INS | Hertz Holdings Hertz | XBRL Instance Document* |
| 101.SCH | Hertz Holdings Hertz | XBRL Taxonomy Extension Schema Document* |
| 101.CAL | Hertz Holdings Hertz | XBRL Taxonomy Extension Calculation Linkbase Document* |
| 101.DEF | Hertz Holdings Hertz | XBRL Taxonomy Extension Definition Linkbase Document* |
| 101.LAB | Hertz Holdings Hertz | XBRL Taxonomy Extension Label Linkbase Document* |
| 101.PRE | Hertz Holdings Hertz | XBRL Taxonomy Extension Presentation Linkbase Document* |
*Furnished herewith
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Note: | Certain instruments with respect to various additional obligations, which could be considered as long-term debt, have not been filed as exhibits to this Report because the total amount of securities authorized under any such instrument does not exceed 10% of our total assets on a consolidated basis. We agree to furnish to the SEC upon request a copy of any such instrument defining the rights of the holders of such long-term debt. |
Note: Certain instruments with respect to various additional obligations, which could be considered as long-term debt, have not been filed as exhibits to this Report because the total amount of securities authorized under any such instrument does not exceed 10% of our total assets on a consolidated basis. We agree to furnish to the SEC upon request a copy of any such instrument defining the rights of the holders of such long-term debt.