| | | | | (1)(100% owned by Rental Car Intermediate Holdings, LLC) | | | | | | | | | | Class | | Shares Outstanding at | July 30, 2019 | Hertz Global Holdings, Inc. | | Common Stock, | par value $0.01 per share | | 142,067,813 | 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 (DEBTORS-IN-POSSESSION)
TABLE OF CONTENTS
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION)
PART I. FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Index
| | | | | | | | | | | Page | | | Page | | Hertz Global Holdings, Inc. and Subsidiaries (Debtor-in-Possession) | | | | | | | | | | | | | | | | | | | The Hertz Corporation and Subsidiaries (Debtor-in-Possession) | | | | | | | | | | | | | | | | | | | Notes to the Condensed Consolidated Financial Statements | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited
(In millions, except par value) | | | | | | | | | | | June 30,
2019 | | December 31,
2018 | | ASSETS | | | | | Cash and cash equivalents | $ | 415 |
| | $ | 1,127 |
| | Restricted cash and cash equivalents: | | | | | Vehicle | 207 |
| | 257 |
| | Non-vehicle | 32 |
| | 26 |
| | Total restricted cash and cash equivalents | 239 |
| | 283 |
| | Total cash, cash equivalents, restricted cash and restricted cash equivalents | 654 |
| | 1,410 |
| | Receivables: | | | | | Vehicle | 434 |
| | 625 |
| | Non-vehicle, net of allowance of $29 and $27, respectively | 1,264 |
| | 962 |
| | Total receivables, net | 1,698 |
| | 1,587 |
| | Prepaid expenses and other assets | 926 |
| | 902 |
| | Revenue earning vehicles: | | | | | Vehicles | 19,687 |
| | 15,703 |
| | Less: accumulated depreciation | (3,242 | ) | | (3,284 | ) | | Total revenue earning vehicles, net | 16,445 |
| | 12,419 |
| | Property and equipment, net | 772 |
| | 778 |
| | Operating lease right-of-use assets | 1,547 |
| | — |
| | Intangible assets, net | 3,229 |
| | 3,203 |
| | Goodwill | 1,083 |
| | 1,083 |
| Total assets(a) | $ | 26,354 |
| | $ | 21,382 |
| | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | Accounts payable: | | | | | Vehicle | $ | 705 |
| | $ | 284 |
| | Non-vehicle | 664 |
| | 704 |
| | Total accounts payable | 1,369 |
| | 988 |
| | Accrued liabilities | 1,358 |
| | 1,304 |
| | Accrued taxes, net | 164 |
| | 136 |
| | Debt: | | | | | Vehicle | 14,919 |
| | 11,902 |
| | Non-vehicle | 4,428 |
| | 4,422 |
| | Total debt | 19,347 |
| | 16,324 |
| | Operating lease liabilities | 1,538 |
| | — |
| | Public liability and property damage | 426 |
| | 418 |
| | Deferred income taxes, net | 1,082 |
| | 1,092 |
| Total liabilities(a) | 25,284 |
| | 20,262 |
| | Commitments and contingencies |
|
| |
|
| | Stockholders' equity: | | | | | Preferred stock, $0.01 par value, no shares issued and outstanding | — |
| | — |
| | Common stock, $0.01 par value, 86 and 86 shares issued, respectively and 84 and 84 shares outstanding, respectively | 1 |
| | 1 |
| | Additional paid-in capital | 2,267 |
| | 2,261 |
| | Accumulated deficit | (1,017 | ) | | (909 | ) | | Accumulated other comprehensive income (loss) | (187 | ) | | (192 | ) | | Treasury stock, at cost, 2 shares and 2 shares, respectively | (100 | ) | | (100 | ) | | Stockholders' equity attributable to Hertz Global | 964 |
| | 1,061 |
| | Noncontrolling interests | 106 |
| | 59 |
| | Total stockholders' equity | 1,070 |
| | 1,120 |
| | Total liabilities and stockholders' equity | $ | 26,354 |
| | $ | 21,382 |
|
| | (a) | Hertz Global Holdings, Inc.'s consolidated total assets as of June 30, 2019 and December 31, 2018 include total assets of variable interest entities (“VIEs”) of $1.5 billion and $1.0 billion, respectively, which can only be used to settle obligations of the VIEs. Hertz Global Holdings, Inc.'s consolidated total liabilities as of June 30, 2019 and December 31, 2018 include total liabilities of VIEs of $1.4 billion and $947 million, respectively, for which the creditors of the VIEs have no recourse to Hertz Global Holdings, Inc. See "Special Purpose Entities" in Note 3, "Debt," and "767 Auto Leasing LLC" in Note 9, "Related Party Transactions," for further information. |
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, | | | 2019 | | 2018 | | 2019 | | 2018 | | Revenues: | | | | | | | | | Worldwide vehicle rental | $ | 2,344 |
| | $ | 2,217 |
| | $ | 4,297 |
| | $ | 4,111 |
| | All other operations | 167 |
| | 172 |
| | 321 |
| | 341 |
| | Total revenues | 2,511 |
| | 2,389 |
| | 4,618 |
| | 4,452 |
| | Expenses: | | | | | | | | | Direct vehicle and operating | 1,388 |
| | 1,349 |
| | 2,655 |
| | 2,585 |
| | Depreciation of revenue earning vehicles and lease charges | 634 |
| | 687 |
| | 1,226 |
| | 1,348 |
| | Selling, general and administrative | 258 |
| | 265 |
| | 490 |
| | 498 |
| | Interest expense, net: | | | | | | | | | Vehicle | 127 |
| | 127 |
| | 238 |
| | 221 |
| | Non-vehicle | 72 |
| | 73 |
| | 144 |
| | 146 |
| | Total interest expense, net | 199 |
| | 200 |
| | 382 |
| | 367 |
| | Other (income) expense, net | (12 | ) | | (26 | ) | | (31 | ) | | (29 | ) | | Total expenses | 2,467 |
| | 2,475 |
| | 4,722 |
| | 4,769 |
| | Income (loss) before income taxes | 44 |
| | (86 | ) | | (104 | ) | | (317 | ) | | Income tax (provision) benefit | (4 | ) | | 23 |
| | (3 | ) | | 52 |
| | Net income (loss) | 40 |
| | (63 | ) | | (107 | ) | | (265 | ) | | Net (income) loss attributable to noncontrolling interests | (2 | ) | | — |
| | (1 | ) | | — |
| | Net income (loss) attributable to Hertz Global | $ | 38 |
| | $ | (63 | ) | | $ | (108 | ) | | $ | (265 | ) | | Weighted average shares outstanding: | | | | | | | | | Basic | 96 |
| | 96 |
| | 96 |
| | 95 |
| | Diluted | 97 |
| | 96 |
| | 96 |
| | 95 |
| | Earnings (loss) per share: | | | | | | | | | Basic earnings (loss) per share | $ | 0.40 |
| | $ | (0.66 | ) | | $ | (1.13 | ) | | $ | (2.78 | ) | | Diluted earnings (loss) per share | $ | 0.40 |
| | $ | (0.66 | ) | | $ | (1.13 | ) | | $ | (2.78 | ) |
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, | | | 2019 | | 2018 | | 2019 | | 2018 | | Net income (loss) | $ | 40 |
| | $ | (63 | ) | | $ | (107 | ) | | $ | (265 | ) | | Other comprehensive income (loss): | | | | | | | | | Foreign currency translation adjustments | (5 | ) | | (19 | ) | | 3 |
| | (19 | ) | | Net gain (loss) on defined benefit pension plans | 1 |
|
| 5 |
|
| — |
|
| 2 |
| | Reclassification from other comprehensive income (loss) to other (income) expense for amortization of actuarial (gains) losses on defined benefit pension plans | 2 |
| | — |
| | 3 |
| | — |
| | Total other comprehensive income (loss) before income taxes | (2 | ) | | (14 | ) | | 6 |
| | (17 | ) | | Income tax (provision) benefit related to reclassified amounts of net periodic costs on defined benefit pension plans | — |
| | — |
| | (1 | ) | | — |
| | Total other comprehensive income (loss) | (2 | ) | | (14 | ) | | 5 |
| | (17 | ) | | Total comprehensive income (loss) | 38 |
| | (77 | ) | | (102 | ) | | (282 | ) | | Comprehensive (income) loss attributable to noncontrolling interests | (2 | ) | | — |
| | (1 | ) | | — |
| | Comprehensive income (loss) attributable to Hertz Global | $ | 36 |
| | $ | (77 | ) | | $ | (103 | ) | | $ | (282 | ) |
The accompanying notes are an integral part of these financial statements.
4
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Unaudited
(In millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Preferred Stock
Shares | | Common Stock Shares | | Common Stock Amount | | Additional
Paid-In Capital | | Accumulated
Deficit | | Accumulated
Other
Comprehensive
Income (Loss) | | Treasury Stock Shares | | Treasury Stock Amount | | Stockholders'
Equity
Attributable to
Hertz Global | | Non-
controlling Interests | | Total Stockholders' Equity | | Balance as of: | | | | | | | December 31, 2017 | — |
| | 84 |
| | $ | 1 |
| | $ | 2,243 |
| | $ | (506 | ) | | $ | (118 | ) | | 2 |
| | $ | (100 | ) | | $ | 1,520 |
| | $ | — |
| | $ | 1,520 |
| | Change in accounting principle | — |
| | — |
| | — |
| | — |
| | (189 | ) | | — |
| | — |
| | — |
| | (189 | ) | | — |
| | (189 | ) | | January 1, 2018 (as adjusted) | — |
| | 84 |
| | 1 |
| | 2,243 |
| | (695 | ) | | (118 | ) | | 2 |
| | (100 | ) | | 1,331 |
| | — |
| | 1,331 |
| | Net income (loss) | — |
| | — |
| | — |
| | — |
| | (202 | ) | | — |
| | — |
| | — |
| | (202 | ) | | — |
| | (202 | ) | | Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | (3 | ) | | — |
| | — |
| | (3 | ) | | — |
| | (3 | ) | | Net settlement on vesting of restricted stock | — |
| | — |
| | — |
| | (3 | ) | | — |
| | — |
| | — |
| | — |
| | (3 | ) | | — |
| | (3 | ) | | Stock-based compensation charges | — |
| | — |
| | — |
| | 10 |
| | — |
| | — |
| | — |
| | — |
| | 10 |
| | — |
| | 10 |
| | Contributions from noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5 |
| | 5 |
| | March 31, 2018 | — |
| | 84 |
| | 1 |
| | 2,250 |
| | (897 | ) | | (121 | ) | | 2 |
| | (100 | ) | | 1,133 |
| | 5 |
| | 1,138 |
| | Net income (loss) | — |
| | — |
| | — |
| | — |
| | (63 | ) | | — |
| | — |
| | — |
| | (63 | ) | | — |
| | (63 | ) | | Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | (14 | ) | | — |
| | — |
| | (14 | ) | | — |
| | (14 | ) | | Stock-based compensation charges | — |
| | — |
| | — |
| | 3 |
| | — |
| | — |
| | — |
| | — |
| | 3 |
| | — |
| | 3 |
| | Contributions from noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5 |
| | 5 |
| | June 30, 2018 | — |
| | 84 |
| | $ | 1 |
| | $ | 2,253 |
| | $ | (960 | ) | | $ | (135 | ) | | 2 |
| | $ | (100 | ) | | $ | 1,059 |
| | $ | 10 |
| | $ | 1,069 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Preferred Stock
Shares | | Common Stock Shares | | Common Stock Amount | | Additional
Paid-In Capital | | Accumulated
Deficit(a) | | Accumulated
Other
Comprehensive
Income (Loss) | | Treasury Stock Shares | | Treasury Stock Amount | | Stockholders'
Equity
Attributable to
Hertz Global | | Non-
controlling Interests | | Total Stockholders' Equity | | Balance as of: | | | | | | | December 31, 2018 | — |
| | 84 |
| | $ | 1 |
| | $ | 2,261 |
| | $ | (909 | ) | | $ | (192 | ) | | 2 |
| | $ | (100 | ) | | $ | 1,061 |
| | $ | 59 |
| | $ | 1,120 |
| | Net income (loss) | — |
| | — |
| | — |
| | — |
| | (147 | ) | | — |
| | — |
| | — |
| | (147 | ) | | (1 | ) | | (148 | ) | | Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | 7 |
| | — |
| | — |
| | 7 |
| | — |
| | 7 |
| | Net settlement on vesting of restricted stock | — |
| | — |
| | — |
| | (2 | ) | | — |
| | — |
| | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) | | Stock-based compensation charges | — |
| | — |
| | — |
| | 3 |
| | — |
| | — |
| | — |
| | — |
| | 3 |
| | — |
| | 3 |
| | Contributions from noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 25 |
| | 25 |
| | March 31, 2019 | — |
| | 84 |
| | 1 |
| | 2,262 |
| | (1,056 | ) | | (185 | ) | | 2 |
| | (100 | ) | | 922 |
| | 83 |
| | 1,005 |
| | Net income (loss) | — |
| | — |
| | — |
| | — |
| | 39 |
| | — |
| | — |
| | — |
| | 39 |
| | 2 |
| | 41 |
| | Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | (2 | ) | | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) | | Stock-based compensation charges | — |
| | — |
| | — |
| | 5 |
| | — |
| | — |
| | — |
| | — |
| | 5 |
| | — |
| | 5 |
| | Contributions from noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 21 |
| | 21 |
| | June 30, 2019 | — |
| | 84 |
| | $ | 1 |
| | $ | 2,267 |
| | $ | (1,017 | ) | | $ | (187 | ) | | 2 |
| | $ | (100 | ) | | $ | 964 |
| | $ | 106 |
| | $ | 1,070 |
|
| | (a) | Net income (loss) is computed independently each quarter. As a result, the quarter amounts presented herein may be rounded to agree to accumulated deficit in the unaudited condensed consolidated balance sheet. |
The accompanying notes are an integral part of these financial statements.
5
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In millions)
| | | | | | | | | | | Six Months Ended
June 30, | | | 2019 | | 2018 | | Cash flows from operating activities: | | | | | Net income (loss) | $ | (107 | ) | | $ | (265 | ) | | Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | Depreciation and reserves for revenue earning vehicles | 1,329 |
| | 1,306 |
| | Depreciation and amortization, non-vehicle | 99 |
| | 113 |
| | Amortization of deferred financing costs and debt discount (premium) | 26 |
| | 26 |
| | Loss on extinguishment of debt | — |
| | 22 |
| | Stock-based compensation charges | 8 |
| | 7 |
| | Provision for receivables allowance | 23 |
| | 19 |
| | Deferred income taxes, net | (13 | ) | | (74 | ) | | (Gain) loss on marketable securities | (20 | ) | | (17 | ) | | Other | (22 | ) | | 3 |
| | Changes in assets and liabilities: | | | | | Non-vehicle receivables | (316 | ) | | (275 | ) | | Prepaid expenses and other assets | (90 | ) | | (84 | ) | | Operating lease right-of-use assets | 200 |
| | — |
| | Non-vehicle accounts payable | 65 |
| | 154 |
| | Accrued liabilities | 56 |
| | 5 |
| | Accrued taxes, net | 29 |
| | 2 |
| | Operating lease liabilities | (211 | ) | | — |
| | Public liability and property damage | (2 | ) | | — |
| | Net cash provided by (used in) operating activities | 1,054 |
| | 942 |
| | Cash flows from investing activities: | | | | | Revenue earning vehicles expenditures | (8,947 | ) | | (7,610 | ) | | Proceeds from disposal of revenue earning vehicles | 4,212 |
| | 3,654 |
| | Capital asset expenditures, non-vehicle | (118 | ) | | (80 | ) | | Proceeds from property and other equipment disposed of or to be disposed of | 21 |
| | 8 |
| | Purchases of marketable securities | — |
| | (61 | ) | | Sales of marketable securities | — |
| | 36 |
| | Other | — |
| | (2 | ) | | Net cash provided by (used in) investing activities | (4,832 | ) | | (4,055 | ) |
The accompanying notes are an integral part of these financial statements.
6
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In millions)
| | | | | | | | | | | Six Months Ended
June 30, | | | 2019 | | 2018 | | Cash flows from financing activities: | | | | | Proceeds from issuance of vehicle debt | 8,267 |
| | 9,414 |
| | Repayments of vehicle debt | (5,254 | ) | | (6,829 | ) | | Proceeds from issuance of non-vehicle debt | 815 |
| | 187 |
| | Repayments of non-vehicle debt | (823 | ) | | (194 | ) | | Payment of financing costs | (23 | ) | | (27 | ) | | Early redemption premium payment | — |
| | (19 | ) | | Contributions from noncontrolling interests | 45 |
| | 10 |
| | Other | (4 | ) | | (2 | ) | | Net cash provided by (used in) financing activities | 3,023 |
| | 2,540 |
| | Effect of foreign currency exchange rate changes on cash, cash equivalents, restricted cash and restricted cash equivalents | (1 | ) | | (10 | ) | | Net increase (decrease) in cash, cash equivalents, restricted cash and restricted cash equivalents during the period | (756 | ) | | (583 | ) | | Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period | 1,410 |
| | 1,504 |
| | Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period | $ | 654 |
| | $ | 921 |
| | |
|
| |
|
| | Supplemental disclosures of cash flow information: | | | | | Cash paid during the period for: | | | | | Interest, net of amounts capitalized: | | | | | Vehicle | $ | 213 |
| | $ | 175 |
| | Non-vehicle | 140 |
| | 142 |
| | Income taxes, net of refunds | 15 |
| | 10 |
| | Operating lease liabilities | 282 |
| | — |
| | Supplemental disclosures of non-cash information: | | | | | Purchases of revenue earning vehicles included in accounts payable, net of incentives | $ | 567 |
| | $ | 548 |
| | Sales of revenue earning vehicles included in receivables | 296 |
| | 204 |
| | Purchases of non-vehicle capital assets included in accounts payable | 46 |
| | 42 |
| | Operating lease right-of-use assets obtained in exchange for lease liabilities | 162 |
| | — |
|
The accompanying notes are an integral part of these financial statements.
7
THE HERTZ CORPORATION AND SUBSIDIARIESDEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEETS Unaudited (In millions, except par value and share data) | | | | | | | | | | | | | June 30,
2020 | | December 31,
2019 | | ASSETS | | | | | Cash and cash equivalents | $ | 1,366 | | | $ | 865 | | | Restricted cash and cash equivalents: | | | | | Vehicle | 649 | | | 466 | | | Non-vehicle | 296 | | | 29 | | | Total restricted cash and cash equivalents | 945 | | | 495 | | | Total cash, cash equivalents, restricted cash and restricted cash equivalents | 2,311 | | | 1,360 | | | Receivables: | | | | | Vehicle | 819 | | | 791 | | | Non-vehicle, net of allowance of $44 and $35, respectively | 747 | | | 1,049 | | | Total receivables, net | 1,566 | | | 1,840 | | | Prepaid expenses and other assets | 563 | | | 689 | | | Revenue earning vehicles: | | | | | Vehicles | 15,340 | | | 17,085 | | | Less: accumulated depreciation | (3,275) | | | (3,296) | | | Total revenue earning vehicles, net | 12,065 | | | 13,789 | | | Property and equipment, net | 724 | | | 757 | | | Operating lease right-of-use assets | 1,719 | | | 1,871 | | | Intangible assets, net | 3,088 | | | 3,238 | | | Goodwill | 1,080 | | | 1,083 | | Total assets(a) | $ | 23,116 | | | $ | 24,627 | | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | Accounts payable: | | | | | Vehicle | $ | 103 | | | $ | 289 | | | Non-vehicle | 413 | | | 654 | | | Total accounts payable | 516 | | | 943 | | | Accrued liabilities | 836 | | | 1,032 | | | Accrued taxes, net | 97 | | | 150 | | | Debt: | | | | | Vehicle | 12,924 | | | 13,368 | | | Non-vehicle | 58 | | | 3,721 | | | Total debt | 12,982 | | | 17,089 | | | Operating lease liabilities | 1,690 | | | 1,848 | | | Self-insured liabilities | 495 | | | 553 | | | Deferred income taxes, net | 915 | | | 1,124 | | | Total liabilities not subject to compromise | 17,531 | | | 22,739 | | | Liabilities subject to compromise | 4,912 | | | — | | Total liabilities(a) | 22,443 | | | 22,739 | | | Commitments and contingencies | | | | | Stockholders' equity: | | | | | Preferred stock, $0.01 par value, 0 shares issued and outstanding | — | | | — | | | Common stock, $0.01 par value, 158,235,410 and 144,153,444 shares issued, respectively and 156,206,478 and 142,124,512 shares outstanding, respectively | 2 | | | 1 | | | Additional paid-in capital | 3,048 | | | 3,024 | | | Accumulated deficit | (2,170) | | | (967) | | | Accumulated other comprehensive income (loss) | (221) | | | (189) | | | Treasury stock, at cost, 2,028,932 and 2,028,932 shares, respectively | (100) | | | (100) | | | Stockholders' equity attributable to Hertz Global | 559 | | | 1,769 | | | Noncontrolling interests | 114 | | | 119 | | | Total stockholders' equity | 673 | | | 1,888 | | | Total liabilities and stockholders' equity | $ | 23,116 | | | $ | 24,627 | |
| | | | | | | | | | | June 30,
2019 | | December 31,
2018 | | ASSETS | | | | | Cash and cash equivalents | $ | 415 |
| | $ | 1,127 |
| | Restricted cash and cash equivalents: | | | | | Vehicle | 207 |
| | 257 |
| | Non-vehicle | 32 |
| | 26 |
| | Total restricted cash and cash equivalents | 239 |
| | 283 |
| | Total cash, cash equivalents, restricted cash and restricted cash equivalents | 654 |
| | 1,410 |
| | Receivables: | | | | | Vehicle | 434 |
| | 625 |
| | Non-vehicle, net of allowance of $29 and $27, respectively | 1,264 |
| | 962 |
| | Total receivables, net | 1,698 |
| | 1,587 |
| | Prepaid expenses and other assets | 925 |
| | 902 |
| | Revenue earning vehicles: | | | | | Vehicles | 19,687 |
| | 15,703 |
| | Less: accumulated depreciation | (3,242 | ) | | (3,284 | ) | | Total revenue earning vehicles, net | 16,445 |
| | 12,419 |
| | Property and equipment, net | 772 |
| | 778 |
| | Operating lease right-of-use assets | 1,547 |
| | — |
| | Intangible assets, net | 3,229 |
| | 3,203 |
| | Goodwill | 1,083 |
| | 1,083 |
| Total assets(a) | $ | 26,353 |
| | $ | 21,382 |
| | LIABILITIES AND STOCKHOLDER'S EQUITY | | | | | Accounts payable: | | | | | Vehicle | $ | 705 |
| | $ | 284 |
| | Non-vehicle | 664 |
| | 704 |
| | Total accounts payable | 1,369 |
| | 988 |
| | Accrued liabilities | 1,358 |
| | 1,304 |
| | Accrued taxes, net | 164 |
| | 136 |
| | Debt: | | | | | Vehicle | 14,919 |
| | 11,902 |
| | Non-vehicle | 4,428 |
| | 4,422 |
| | Total debt | 19,347 |
| | 16,324 |
| | Operating lease liabilities | 1,538 |
| | — |
| | Public liability and property damage | 426 |
| | 418 |
| | Deferred income taxes, net | 1,085 |
| | 1,094 |
| Total liabilities(a) | 25,287 |
| | 20,264 |
| | Commitments and contingencies |
|
| |
|
| | Stockholder's equity: | | | | | Common stock, $0.01 par value, 100 and 100 shares issued and outstanding, respectively | — |
| | — |
| | Additional paid-in capital | 3,195 |
| | 3,187 |
| | Due from affiliate | (58 | ) | | (52 | ) | | Accumulated deficit | (1,990 | ) | | (1,884 | ) | | Accumulated other comprehensive income (loss) | (187 | ) | | (192 | ) | | Stockholder's equity attributable to Hertz | 960 |
| | 1,059 |
| | Noncontrolling interests | 106 |
| | 59 |
| | Total stockholder's equity | 1,066 |
| | 1,118 |
| | Total liabilities and stockholder's equity | $ | 26,353 |
| | $ | 21,382 |
|
| | (a) | The Hertz Corporation's consolidated total assets as of June 30, 2019 and December 31, 2018 include total assets of variable interest entities (“VIEs”) of $1.5 billion and $1.0 billion, respectively, which can only be used to settle obligations of the VIEs. The Hertz Corporation's consolidated total liabilities as of June 30, 2019 and December 31, 2018 include total liabilities of VIEs of $1.4 billion and $947 million, respectively, for which the creditors of the VIEs have no recourse to The Hertz Corporation. See "Special Purpose Entities" in Note 3, "Debt," and "767 Auto Leasing LLC" in Note 9, "Related Party Transactions," for further information. |
The accompanying notes are an integral part of these financial statements.
8
THE HERTZ CORPORATIONGLOBAL HOLDINGS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION) CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Unaudited (In millions)millions, except per share data) | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended
June 30, | | | | Six Months Ended
June 30, | | | | | 2020 | | 2019 | | 2020 | | 2019 | | Revenues: | | | | | | | | | Worldwide vehicle rental | $ | 668 | | | $ | 2,344 | | | $ | 2,417 | | | $ | 4,297 | | | All other operations | 164 | | | 167 | | | 338 | | | 321 | | | Total revenues | 832 | | | 2,511 | | | 2,755 | | | 4,618 | | | Expenses: | | | | | | | | | Direct vehicle and operating | 704 | | | 1,388 | | | 1,945 | | | 2,655 | | | Depreciation of revenue earning vehicles and lease charges | 610 | | | 634 | | | 1,286 | | | 1,226 | | | Selling, general and administrative | 168 | | | 258 | | | 377 | | | 490 | | | Interest expense, net: | | | | | | | | | Vehicle | 132 | | | 127 | | | 250 | | | 238 | | | Non-vehicle (excludes $22 million contractual interest) | 44 | | | 72 | | | 101 | | | 144 | | | Total interest expense, net | 176 | | | 199 | | | 351 | | | 382 | | | Technology-related intangible and other asset impairments | 193 | | | — | | | 193 | | | — | | | Other (income) expense, net | 2 | | | (12) | | | (15) | | | (31) | | | Reorganization items, net | 23 | | | — | | | 23 | | | — | | | Total expenses | 1,876 | | | 2,467 | | | 4,160 | | | 4,722 | | | Income (loss) before income taxes | (1,044) | | | 44 | | | (1,405) | | | (104) | | | Income tax (provision) benefit | 192 | | | (4) | | | 196 | | | (3) | | | Net income (loss) | (852) | | | 40 | | | (1,209) | | | (107) | | | Net (income) loss attributable to noncontrolling interests | 5 | | | (2) | | | 6 | | | (1) | | | Net income (loss) attributable to Hertz Global | $ | (847) | | | $ | 38 | | | $ | (1,203) | | | $ | (108) | | | Weighted-average shares outstanding: | | | | | | | | | Basic | 144 | | | 96 | | | 143 | | | 96 | | | Diluted | 144 | | | 97 | | | 143 | | | 96 | | | Earnings (loss) per share: | | | | | | | | | Basic earnings (loss) per share | $ | (5.86) | | | $ | 0.40 | | | $ | (8.39) | | | $ | (1.13) | | | Diluted earnings (loss) per share | $ | (5.86) | | | $ | 0.40 | | | $ | (8.39) | | | $ | (1.13) | |
| | | | | | | | | | | | | | | | | | | Three Months Ended
June 30, | | Six Months Ended
June 30, | | | 2019 | | 2018 | | 2019 | | 2018 | | Revenues: | | | | | | | | | Worldwide vehicle rental | $ | 2,344 |
| | $ | 2,217 |
| | $ | 4,297 |
| | $ | 4,111 |
| | All other operations | 167 |
| | 172 |
| | 321 |
| | 341 |
| | Total revenues | 2,511 |
| | 2,389 |
| | 4,618 |
| | 4,452 |
| | Expenses: | |
| | |
| | |
| | |
| | Direct vehicle and operating | 1,388 |
| | 1,349 |
| | 2,655 |
| | 2,585 |
| | Depreciation of revenue earning vehicles and lease charges | 634 |
| | 687 |
| | 1,226 |
| | 1,348 |
| | Selling, general and administrative | 258 |
| | 265 |
| | 490 |
| | 498 |
| | Interest expense, net: | | | | | | | | | Vehicle | 127 |
| | 127 |
| | 238 |
| | 221 |
| | Non-vehicle | 70 |
| | 71 |
| | 141 |
| | 143 |
| | Total interest expense, net | 197 |
| | 198 |
| | 379 |
| | 364 |
| | Other (income) expense, net | (12 | ) | | (26 | ) | | (31 | ) | | (29 | ) | | Total expenses | 2,465 |
| | 2,473 |
| | 4,719 |
| | 4,766 |
| | Income (loss) before income taxes | 46 |
| | (84 | ) | | (101 | ) | | (314 | ) | | Income tax (provision) benefit | (5 | ) | | 23 |
| | (4 | ) | | 51 |
| | Net income (loss) | 41 |
| | (61 | ) | | (105 | ) | | (263 | ) | | Net (income) loss attributable to noncontrolling interests | (2 | ) | | — |
| | (1 | ) | | — |
| | Net income (loss) attributable to Hertz | $ | 39 |
| | $ | (61 | ) | | $ | (106 | ) | | $ | (263 | ) |
The accompanying notes are an integral part of these financial statements.
9
THE HERTZ CORPORATIONGLOBAL HOLDINGS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION) CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) Unaudited (In millions) | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended
June 30, | | | | Six Months Ended
June 30, | | | | 2020 | | 2019 | | 2020 | | 2019 | | Net income (loss) | $ | (852) | | | $ | 40 | | | $ | (1,209) | | | $ | (107) | | | Other comprehensive income (loss): | | | | | | | | | Foreign currency translation adjustments | 15 | | | (5) | | | (26) | | | 3 | | | Net gain (loss) on defined benefit pension plans | (15) | | | 1 | | | (14) | | | — | | | Reclassification to other (income) expense for amortization of actuarial (gains) losses on defined benefit pension plans | 4 | | | 2 | | | 5 | | | 3 | | | | | | | | | | | Total other comprehensive income (loss) before income taxes | 4 | | | (2) | | | (35) | | | 6 | | | Income tax (provision) benefit related to net gains and losses on defined benefit pension plans | 4 | | | — | | | 4 | | | — | | | Income tax (provision) benefit related to reclassified amounts of net periodic costs on defined benefit pension plans | (1) | | | — | | | (1) | | | (1) | | | Total other comprehensive income (loss) | 7 | | | (2) | | | (32) | | | 5 | | | Total comprehensive income (loss) | (845) | | | 38 | | | (1,241) | | | (102) | | | Comprehensive (income) loss attributable to noncontrolling interests | 5 | | | (2) | | | 6 | | | (1) | | | Comprehensive income (loss) attributable to Hertz Global | $ | (840) | | | $ | 36 | | | $ | (1,235) | | | $ | (103) | |
| | | | | | | | | | | | | | | | | | | Three Months Ended
June 30, | | Six Months Ended
June 30, | | | 2019 | | 2018 | | 2019 | | 2018 | | Net income (loss) | $ | 41 |
| | $ | (61 | ) | | $ | (105 | ) | | $ | (263 | ) | | Other comprehensive income (loss): | | | | | | | | | Foreign currency translation adjustments | (5 | ) | | (19 | ) | | 3 |
| | (19 | ) | | Net gain (loss) on defined benefit pension plans | 1 |
| | 5 |
| | — |
| | 2 |
| | Reclassification from other comprehensive income (loss) to other (income) expense for amortization of actuarial (gains) losses on defined benefit pension plans | 2 |
| | — |
| | 3 |
| | — |
| | Total other comprehensive income (loss) before income taxes | (2 | ) | | (14 | ) | | 6 |
| | (17 | ) | | Income tax (provision) benefit related to reclassified amounts of net periodic costs on defined benefit pension plans | — |
| | — |
| | (1 | ) | | — |
| | Total other comprehensive income (loss) | (2 | ) | | (14 | ) | | 5 |
| | (17 | ) | | Total comprehensive income (loss) | 39 |
| | (75 | ) | | (100 | ) | | (280 | ) | | Comprehensive (income) loss attributable to noncontrolling interests | (2 | ) | | — |
| | (1 | ) | | — |
| | Comprehensive income (loss) attributable to Hertz | $ | 37 |
| | $ | (75 | ) | | $ | (101 | ) | | $ | (280 | ) |
The accompanying notes are an integral part of these financial statements.
10
(DEBTOR-IN-POSSESSION) CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Unaudited (In millions) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Preferred Stock
Shares | | Common Stock Shares | | Common Stock Amount | | Additional
Paid-In Capital | | Accumulated Deficit(1) | | Accumulated
Other
Comprehensive
Income (Loss) | | Treasury Stock Shares | | Treasury Stock Amount | | Stockholders'
Equity
Attributable to
Hertz Global | | Non-
controlling Interests | | Total Stockholders' Equity | | Balance as of: | | | | | | | | | | | | | | | | | | | | | | | December 31, 2018 | — | | | 84 | | | $ | 1 | | | $ | 2,261 | | | $ | (909) | | | $ | (192) | | | 2 | | | $ | (100) | | | $ | 1,061 | | | $ | 59 | | | $ | 1,120 | | | Net income (loss) | — | | | — | | | — | | | — | | | (147) | | | — | | | — | | | — | | | (147) | | | (1) | | | (148) | | | Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | 7 | | | — | | | — | | | 7 | | | — | | | 7 | | | Net settlement on vesting of restricted stock | — | | | — | | | — | | | (2) | | | — | | | — | | | — | | | — | | | (2) | | | — | | | (2) | | | Stock-based compensation charges | — | | | — | | | — | | | 3 | | | — | | | — | | | — | | | — | | | 3 | | | — | | | 3 | | | Contributions from noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 25 | | | 25 | | | March 31, 2019 | — | | | 84 | | | 1 | | | 2,262 | | | (1,056) | | | (185) | | | 2 | | | (100) | | | 922 | | | 83 | | | 1,005 | | | Net income (loss) | — | | | — | | | — | | | — | | | 39 | | | — | | | — | | | — | | | 39 | | | 2 | | | 41 | | | Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | (2) | | | — | | | — | | | (2) | | | — | | | (2) | | | Stock-based compensation charges | — | | | — | | | — | | | 5 | | | — | | | — | | | — | | | — | | | 5 | | | — | | | 5 | | | Contributions from noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 21 | | | 21 | | | June 30, 2019 | — | | | 84 | | | $ | 1 | | | $ | 2,267 | | | $ | (1,017) | | | $ | (187) | | | 2 | | | $ | (100) | | | $ | 964 | | | $ | 106 | | | $ | 1,070 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Preferred Stock
Shares | | Common Stock Shares | | Common Stock Amount | | Additional
Paid-In Capital | | Accumulated
Deficit | | Accumulated
Other
Comprehensive
Income (Loss) | | Treasury Stock Shares | | Treasury Stock Amount | | Stockholders'
Equity
Attributable to
Hertz Global | | Non-
controlling Interests | | Total Stockholders' Equity | | Balance as of: | | | | | | | | | | | | | | | | | | | | | | | December 31, 2019 | — | | | 142 | | | $ | 1 | | | $ | 3,024 | | | $ | (967) | | | $ | (189) | | | 2 | | | $ | (100) | | | $ | 1,769 | | | $ | 119 | | | $ | 1,888 | | | Net income (loss) | — | | | — | | | — | | | — | | | (356) | | | — | | | — | | | — | | | (356) | | | (1) | | | (357) | | | Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | (39) | | | — | | | — | | | (39) | | | — | | | (39) | | | Net settlement on vesting of restricted stock | — | | | — | | | — | | | (2) | | | — | | | — | | | — | | | — | | | (2) | | | — | | | (2) | | | | | | | | | | | | | | | | | | | | | | | | | Contributions from noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 1 | | | 1 | | | March 31, 2020 | — | | | 142 | | | 1 | | | 3,022 | | | (1,323) | | | (228) | | | 2 | | | (100) | | | 1,372 | | | 119 | | | 1,491 | | | Net income (loss) | — | | | — | | | — | | | — | | | (847) | | | — | | | — | | | — | | | (847) | | | (5) | | | (852) | | | Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | 7 | | | — | | | — | | | 7 | | | — | | | 7 | | | | | | | | | | | | | | | | | | | | | | | | | Stock-based compensation charges | — | | | — | | | — | | | (2) | | | — | | | — | | | — | | | — | | | (2) | | | — | | | (2) | | | Stock issuance, net | — | | | 14 | | | 1 | | | 28 | | | — | | | — | | | — | | | — | | | 29 | | | — | | | 29 | | | | | | | | | | | | | | | | | | | | | | | | | June 30, 2020 | — | | | 156 | | | $ | 2 | | | $ | 3,048 | | | $ | (2,170) | | | $ | (221) | | | 2 | | | $ | (100) | | | $ | 559 | | | $ | 114 | | | $ | 673 | |
(1) Net income (loss) is computed independently each quarter. As a result, the quarter amounts presented herein may be rounded to agree to accumulated deficit in the accompanying unaudited condensed consolidated balance sheet. The accompanying notes are an integral part of these financial statements. 5
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Unaudited (In millions)
| | | | | | | | | | | | | | Six Months Ended
June 30, | | | | | 2020 | | 2019 | | Cash flows from operating activities: | | | | | Net income (loss) | $ | (1,209) | | | $ | (107) | | | Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | Depreciation and reserves for revenue earning vehicles | 1,393 | | | 1,329 | | | Depreciation and amortization, non-vehicle | 110 | | | 99 | | | Amortization of deferred financing costs and debt discount (premium) | 26 | | | 26 | | | | | | | Stock-based compensation charges | (2) | | | 8 | | | Provision for receivables allowance | 32 | | | 23 | | | Deferred income taxes, net | (205) | | | (13) | | | Technology-related intangible and other asset impairments | 193 | | | — | | | (Gain) loss on marketable securities | — | | | (20) | | | (Gain) loss on sale of non-vehicle capital assets | (24) | | | (12) | | | (Gain) loss on derivatives | (4) | | | (10) | | | | | | | | | | | Other | 7 | | | — | | | Changes in assets and liabilities: | | | | | Non-vehicle receivables | 287 | | | (316) | | | Prepaid expenses and other assets | (4) | | | (90) | | | Operating lease right-of-use assets | 189 | | | 200 | | | Non-vehicle accounts payable | 168 | | | 65 | | | Accrued liabilities | (61) | | | 57 | | | Accrued taxes, net | (20) | | | 29 | | | Operating lease liabilities | (195) | | | (211) | | | Self-insured liabilities | (55) | | | (3) | | | Net cash provided by (used in) operating activities | 626 | | | 1,054 | | | Cash flows from investing activities: | | | | | Revenue earning vehicles expenditures | (4,956) | | | (8,947) | | | Proceeds from disposal of revenue earning vehicles | 5,005 | | | 4,212 | | | Non-vehicle capital asset expenditures | (72) | | | (118) | | | Proceeds from non-vehicle capital assets disposed of or to be disposed of | 50 | | | 21 | | | Sales of marketable securities | 74 | | | — | | | Other | (1) | | | — | | | Net cash provided by (used in) investing activities | 100 | | | (4,832) | | | Cash flows from financing activities: | | | | | Proceeds from issuance of vehicle debt | 4,174 | | | 8,267 | | | Repayments of vehicle debt | (4,613) | | | (5,254) | | | Proceeds from issuance of non-vehicle debt | 1,498 | | | 815 | | | Repayments of non-vehicle debt | (853) | | | (823) | | | Payment of financing costs | (11) | | | (23) | |
The accompanying notes are an integral part of these financial statements. 6
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Unaudited (In millions)
| | | | | | | | | | | | | | Six Months Ended
June 30, | | | | | 2020 | | 2019 | | Proceeds from the issuance of stock, net | 29 | | | — | | | Contributions from noncontrolling interests | — | | | 45 | | | Other | (2) | | | (4) | | | Net cash provided by (used in) financing activities | 222 | | | 3,023 | | | Effect of foreign currency exchange rate changes on cash, cash equivalents, restricted cash and restricted cash equivalents | 3 | | | (1) | | | Net increase (decrease) in cash, cash equivalents, restricted cash and restricted cash equivalents during the period | 951 | | | (756) | | | Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period | 1,360 | | | 1,410 | | | Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period | $ | 2,311 | | | $ | 654 | | | | | | | Supplemental disclosures of cash flow information: | | | | | Cash paid during the period for: | | | | | Interest, net of amounts capitalized: | | | | | Vehicle | $ | 193 | | | $ | 213 | | | Non-vehicle | 67 | | | 140 | | | Income taxes, net of refunds | 3 | | | 15 | | | | | | | Supplemental disclosures of non-cash information: | | | | | Purchases of revenue earning vehicles included in accounts payable, net of incentives | $ | 43 | | | $ | 567 | | | Sales of revenue earning vehicles included in vehicle receivables | 759 | | | 296 | | | Purchases of non-vehicle capital assets included in accounts payable | 4 | | | 46 | | | Purchases of non-vehicle capital assets included in liabilities subject to compromise | 31 | | | — | | | | | |
The accompanying notes are an integral part of these financial statements. 7
THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) CONDENSED CONSOLIDATED BALANCE SHEETS Unaudited (In millions, except par value and share data) | | | | | | | | | | | | | June 30,
2020 | | December 31,
2019 | | ASSETS | | | | | Cash and cash equivalents | $ | 1,366 | | | $ | 865 | | | Restricted cash and cash equivalents: | | | | | Vehicle | 649 | | | 466 | | | Non-vehicle | 267 | | | 29 | | | Total restricted cash and cash equivalents | 916 | | | 495 | | | Total cash, cash equivalents, restricted cash and restricted cash equivalents | 2,282 | | | 1,360 | | | Receivables: | | | | | Vehicle | 819 | | | 791 | | | Non-vehicle, net of allowance of $44 and $35, respectively | 747 | | | 1,049 | | | Total receivables, net | 1,566 | | | 1,840 | | | Prepaid expenses and other assets | 563 | | | 689 | | | Revenue earning vehicles: | | | | | Vehicles | 15,340 | | | 17,085 | | | Less: accumulated depreciation | (3,275) | | | (3,296) | | | Total revenue earning vehicles, net | 12,065 | | | 13,789 | | | Property and equipment, net | 724 | | | 757 | | | Operating lease right-of-use assets | 1,719 | | | 1,871 | | | Intangible assets, net | 3,088 | | | 3,238 | | | Goodwill | 1,080 | | | 1,083 | | Total assets(a) | $ | 23,087 | | | $ | 24,627 | | | LIABILITIES AND STOCKHOLDER'S EQUITY | | | | | Accounts payable: | | | | | Vehicle | $ | 103 | | | $ | 289 | | | Non-vehicle | 413 | | | 654 | | | Total accounts payable | 516 | | | 943 | | | Accrued liabilities | 836 | | | 1,032 | | | Accrued taxes, net | 97 | | | 150 | | | Debt: | | | | | Vehicle | 12,924 | | | 13,368 | | | Non-vehicle | 58 | | | 3,721 | | | Total debt | 12,982 | | | 17,089 | | | Operating lease liabilities | 1,690 | | | 1,848 | | | Self-insured liabilities | 495 | | | 553 | | | Deferred income taxes, net | 891 | | | 1,128 | | | Total liabilities not subject to compromise | 17,507 | | | 22,743 | | | Liabilities subject to compromise | 4,977 | | | — | | Total liabilities(a) | 22,484 | | | 22,743 | | | Commitments and contingencies | | | | | Stockholder's equity: | | | | | Common stock, $0.01 par value, 100 and 100 shares issued and outstanding, respectively | — | | | — | | | Additional paid-in capital | 3,953 | | | 3,955 | | | Due from affiliate | — | | | (64) | | | Accumulated deficit | (3,243) | | | (1,937) | | | Accumulated other comprehensive income (loss) | (221) | | | (189) | | | Stockholder's equity attributable to Hertz | 489 | | | 1,765 | | | Noncontrolling interests | 114 | | | 119 | | | Total stockholder's equity | 603 | | | 1,884 | | | Total liabilities and stockholder's equity | $ | 23,087 | | | $ | 24,627 | |
(a)The Hertz Corporation's consolidated total assets as of June 30, 2020 and December 31, 2019 include total assets of variable interest entities (“VIEs”) of $986 million and $1.3 billion, respectively, which can only be used to settle obligations of the VIEs. The Hertz Corporation's consolidated total liabilities as of June 30, 2020 and December 31, 2019 include total liabilities of VIEs of $873 million and $1.1 billion, respectively, for which the creditors of the VIEs have no recourse to The Hertz Corporation. See "Special Purpose Entities" in Note 5, "Debt," and "767 Auto Leasing LLC" in Note 13, "Related Party Transactions," for further information. The accompanying notes are an integral part of these financial statements. 8
THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Unaudited (In millions) | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended
June 30, | | | | Six Months Ended
June 30, | | | | | 2020 | | 2019 | | 2020 | | 2019 | | Revenues: | | | | | | | | | Worldwide vehicle rental | $ | 668 | | | $ | 2,344 | | | $ | 2,417 | | | $ | 4,297 | | | All other operations | 164 | | | 167 | | | 338 | | | 321 | | | Total revenues | 832 | | | 2,511 | | | 2,755 | | | 4,618 | | | Expenses: | | | | | | | | | Direct vehicle and operating | 704 | | | 1,388 | | | 1,945 | | | 2,655 | | | Depreciation of revenue earning vehicles and lease charges | 610 | | | 634 | | | 1,286 | | | 1,226 | | | Selling, general and administrative | 168 | | | 258 | | | 377 | | | 490 | | | Interest expense, net: | | | | | | | | | Vehicle | 132 | | | 127 | | | 250 | | | 238 | | | Non-vehicle (excludes $22 million contractual interest) | 43 | | | 70 | | | 99 | | | 141 | | | Total interest expense, net | 175 | | | 197 | | | 349 | | | 379 | | | Technology-related intangible and other asset impairments | 193 | | | — | | | 193 | | | — | | | Write-off of intercompany loan | 133 | | | — | | | 133 | | | — | | | Other (income) expense, net | 2 | | | (12) | | | (15) | | | (31) | | | Reorganization items, net | 23 | | | — | | | 23 | | | — | | | Total expenses | 2,008 | | | 2,465 | | | 4,291 | | | 4,719 | | | Income (loss) before income taxes | (1,176) | | | 46 | | | (1,536) | | | (101) | | | Income tax (provision) benefit | 219 | | | (5) | | | 224 | | | (4) | | | Net income (loss) | (957) | | | 41 | | | (1,312) | | | (105) | | | Net (income) loss attributable to noncontrolling interests | 5 | | | (2) | | | 6 | | | (1) | | | Net income (loss) attributable to Hertz | $ | (952) | | | $ | 39 | | | $ | (1,306) | | | $ | (106) | |
The accompanying notes are an integral part of these financial statements. 9
THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) Unaudited (In millions) | | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended
June 30, | | | | Six Months Ended
June 30, | | | | 2020 | | 2019 | | 2020 | | 2019 | | Net income (loss) | $ | (957) | | | $ | 41 | | | $ | (1,312) | | | $ | (105) | | | Other comprehensive income (loss): | | | | | | | | | Foreign currency translation adjustments | 15 | | | (5) | | | (26) | | | 3 | | | Net gain (loss) on defined benefit pension plans | (15) | | | 1 | | | (14) | | | — | | | Reclassification to other (income) expense for amortization of actuarial (gains) losses on defined benefit pension plans | 4 | | | 2 | | | 5 | | | 3 | | | | | | | | | | | Total other comprehensive income (loss) before income taxes | 4 | | | (2) | | | (35) | | | 6 | | | Income tax (provision) benefit related to net gains and losses on defined benefit pension plans | 4 | | | — | | | 4 | | | — | | | Income tax (provision) benefit related to reclassified amounts of net periodic costs on defined benefit pension plans | (1) | | | — | | | (1) | | | (1) | | | Total other comprehensive income (loss) | 7 | | | (2) | | | (32) | | | 5 | | | Total comprehensive income (loss) | (950) | | | 39 | | | (1,344) | | | (100) | | | Comprehensive (income) loss attributable to noncontrolling interests | 5 | | | (2) | | | 6 | | | (1) | | | Comprehensive income (loss) attributable to Hertz | $ | (945) | | | $ | 37 | | | $ | (1,338) | | | $ | (101) | |
The accompanying notes are an integral part of these financial statements. 10
THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY Unaudited (In millions, except share data) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Common Stock Shares | | Common Stock Amount | | Additional
Paid-In Capital | | Due From Affiliate | | Accumulated
Deficit | | Accumulated
Other
Comprehensive
Income (Loss) | | Stockholder's Equity Attributable to Hertz | | Noncontrolling Interests | | Total Stockholder's Equity | | Balance as of: | | | | | | | | | | | | | | | | | | | December 31, 2018 | 100 | | | $ | — | | | $ | 3,187 | | | $ | (52) | | | $ | (1,884) | | | $ | (192) | | | $ | 1,059 | | | $ | 59 | | | $ | 1,118 | | | Net income (loss) | — | | | — | | | — | | | — | | | (145) | | | — | | | (145) | | | (1) | | | (146) | | | Due from Hertz Holdings | — | | | — | | | — | | | (4) | | | — | | | — | | | (4) | | | — | | | (4) | | | Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | 7 | | | 7 | | | — | | | 7 | | | Stock-based compensation charges | — | | | — | | | 3 | | | — | | | — | | | — | | | 3 | | | — | | | 3 | | | Contributions from noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 25 | | | 25 | | | March 31, 2019 | 100 | | | — | | | 3,190 | | | (56) | | | (2,029) | | | (185) | | | 920 | | | 83 | | | 1,003 | | | Net income (loss) | — | | | — | | | — | | | — | | | 39 | | | — | | | 39 | | | 2 | | | 41 | | | Due from Hertz Holdings | — | | | — | | | — | | | (2) | | | — | | | — | | | (2) | | | — | | | (2) | | | Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | (2) | | | (2) | | | — | | | (2) | | | Stock-based compensation charges | — | | | — | | | 5 | | | — | | | — | | | — | | | 5 | | | — | | | 5 | | | Contributions from noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 21 | | | 21 | | | June 30, 2019 | 100 | | | $ | — | | | $ | 3,195 | | | $ | (58) | | | $ | (1,990) | | | $ | (187) | | | $ | 960 | | | $ | 106 | | | $ | 1,066 | |
| | | | Common Stock Shares | | Common Stock Amount | | Additional
Paid-In Capital | | Due From Affiliate | | Accumulated
Deficit(a) | | Accumulated
Other
Comprehensive
Income (Loss) | | Stockholder's Equity Attributable to Hertz | | Noncontrolling Interests | | Total Stockholder's Equity | | Common Stock Shares | | Common Stock Amount | | Additional
Paid-In Capital | | Due From Affiliate | | Accumulated Deficit(1) | | Accumulated
Other
Comprehensive
Income (Loss) | | Stockholder's Equity Attributable to Hertz | | Noncontrolling Interests | | Total Stockholder's Equity | | Balance as of: | | Balance as of: | | | | | | | | | | | | | | | | | December 31, 2017 | 100 |
| | $ | — |
| | $ | 3,166 |
| | $ | (42 | ) | | $ | (1,486 | ) | | $ | (118 | ) | | $ | 1,520 |
| | $ | — |
| | $ | 1,520 |
| | | Change in accounting principle | — |
| | — |
| | — |
| | — |
| | (189 | ) | | — |
| | (189 | ) | | — |
| | (189 | ) | | | January 1, 2018 (as adjusted) | 100 |
| | — |
| | 3,166 |
| | (42 | ) | | (1,675 | ) | | (118 | ) | | 1,331 |
| | — |
| | 1,331 |
| | | December 31, 2019 | | December 31, 2019 | 100 | | | $ | — | | | $ | 3,955 | | | $ | (64) | | | $ | (1,937) | | | $ | (189) | | | $ | 1,765 | | | $ | 119 | | | $ | 1,884 | | | Net income (loss) | — |
| | — |
| | — |
| | — |
| | (201 | ) | | — |
| | (201 | ) | | — |
| | (201 | ) | Net income (loss) | — | | | — | | | — | | | — | | | (355) | | | — | | | (355) | | | (1) | | | (356) | | | Due from Hertz Holdings | — |
| | — |
| | — |
| | (4 | ) | | — |
| | — |
| | (4 | ) | | — |
| | (4 | ) | Due from Hertz Holdings | — | | | — | | | — | | | (3) | | | — | | | — | | | (3) | | | — | | | (3) | | | Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | (3 | ) | | (3 | ) | | — |
| | (3 | ) | Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | (39) | | | (39) | | | — | | | (39) | | | Stock-based compensation charges | — |
| | — |
| | 10 |
| | — |
| | — |
| | — |
| | 10 |
| | — |
| | 10 |
| | | | Contributions from noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5 |
| | 5 |
| Contributions from noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 1 | | | 1 | | | March 31, 2018 | 100 |
| | — |
| | 3,176 |
| | (46 | ) | | (1,876 | ) | | (121 | ) | | 1,133 |
| | 5 |
| | 1,138 |
| | | March 31, 2020 | | March 31, 2020 | 100 | | | — | | | 3,955 | | | (67) | | | (2,292) | | | (228) | | | 1,368 | | | 119 | | | 1,487 | | | Net income (loss) | — |
| | — |
| | — |
| | — |
| | (62 | ) | | — |
| | (62 | ) | | — |
| | (62 | ) | Net income (loss) | — | | | — | | | — | | | — | | | (951) | | | — | | | (951) | | | (5) | | | (956) | | | Due from Hertz Holdings | — |
| | — |
| | — |
| | (2 | ) | | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) | Due from Hertz Holdings | — | | | — | | | — | | | (1) | | | — | | | — | | | (1) | | | — | | | (1) | | Liabilities subject to compromise(2) | | Liabilities subject to compromise(2) | — | | | — | | | — | | | (65) | | | — | | | — | | | (65) | | | — | | | (65) | | Write-off of intercompany loan(3) | | Write-off of intercompany loan(3) | — | | | — | | | — | | | 133 | | | — | | | — | | | 133 | | | — | | | 133 | | | Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | (14 | ) | | (14 | ) | | — |
| | (14 | ) | Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | 7 | | | 7 | | | — | | | 7 | | | Stock-based compensation charges | — |
| | — |
| | 3 |
| | — |
| | — |
| | — |
| | 3 |
| | — |
| | 3 |
| Stock-based compensation charges | — | | | — | | | (2) | | | — | | | — | | | — | | | (2) | | | — | | | (2) | | | Contributions from noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5 |
| | 5 |
| | | June 30, 2018 | 100 |
| | $ | — |
| | $ | 3,179 |
| | $ | (48 | ) | | $ | (1,938 | ) | | $ | (135 | ) | | $ | 1,058 |
| | $ | 10 |
| | $ | 1,068 |
| | | | June 30, 2020 | | June 30, 2020 | 100 | | | $ | — | | | $ | 3,953 | | | $ | — | | | $ | (3,243) | | | $ | (221) | | | $ | 489 | | | $ | 114 | | | $ | 603 | |
(1) Net income (loss) is computed independently each quarter. As a result, the quarter amounts presented herein may be rounded to agree to accumulated deficit in the accompanying unaudited condensed consolidated balance sheet. (2) As a result of filing the Chapter 11 Cases, a pre-petition loan due to an affiliate was classified as liabilities subject to compromise in the accompanying unaudited condensed consolidated balance sheet as of June 30, 2020. See Note 15, "Liabilities Subject to Compromise." (3) As a result of filing the Chapter 11 Cases, the full amount outstanding under a loan due from affiliate was deemed uncollectible and written off. See Note 13, "Related Party Transactions."
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Common Stock Shares | | Common Stock Amount | | Additional
Paid-In Capital | | Due From Affiliate | | Accumulated
Deficit | | Accumulated
Other
Comprehensive
Income (Loss) | | Stockholder's Equity Attributable to Hertz | | Noncontrolling Interests | | Total Stockholder's Equity | | Balance as of: | | | | | | | | | December 31, 2018 | 100 |
| | $ | — |
| | $ | 3,187 |
| | $ | (52 | ) | | $ | (1,884 | ) | | $ | (192 | ) | | $ | 1,059 |
| | $ | 59 |
| | $ | 1,118 |
| | Net income (loss) | — |
| | — |
| | — |
| | — |
| | (145 | ) | | — |
| | (145 | ) | | (1 | ) | | (146 | ) | | Due from Hertz Holdings | — |
| | — |
| | — |
| | (4 | ) | | — |
| | — |
| | (4 | ) | | — |
| | (4 | ) | | Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | 7 |
| | 7 |
| | — |
| | 7 |
| | Stock-based compensation charges | — |
| | — |
| | 3 |
| | — |
| | — |
| | — |
| | 3 |
| | — |
| | 3 |
| | Contributions from noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 25 |
| | 25 |
| | March 31, 2019 | 100 |
| | — |
| | 3,190 |
| | (56 | ) | | (2,029 | ) | | (185 | ) | | 920 |
| | 83 |
| | 1,003 |
| | Net income (loss) | — |
| | — |
| | — |
| | — |
| | 39 |
| | — |
| | 39 |
| | 2 |
| | 41 |
| | Due from Hertz Holdings | — |
| | — |
| | — |
| | (2 | ) | | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) | | Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | (2 | ) | | (2 | ) | | — |
| | (2 | ) | | Stock-based compensation charges | — |
| | — |
| | 5 |
| | — |
| | — |
| | — |
| | 5 |
| | — |
| | 5 |
| | Contributions from noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 21 |
| | 21 |
| | June 30, 2019 | 100 |
| | $ | — |
| | $ | 3,195 |
| | $ | (58 | ) | | $ | (1,990 | ) | | $ | (187 | ) | | $ | 960 |
| | $ | 106 |
| | $ | 1,066 |
|
| | (a) | Net income (loss) is computed independently each quarter. As a result, the quarter amounts presented herein may be rounded to agree to accumulated deficit in the unaudited condensed consolidated balance sheet. |
The accompanying notes are an integral part of these financial statements.
11
THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Unaudited (In millions)
| | | | | | | | | | | | | | Six Months Ended
June 30, | | | | | 2020 | | 2019 | | Cash flows from operating activities: | | | | | Net income (loss) | $ | (1,312) | | | $ | (105) | | | Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | Depreciation and reserves for revenue earning vehicles | 1,393 | | | 1,329 | | | Depreciation and amortization, non-vehicle | 110 | | | 99 | | | Amortization of deferred financing costs and debt discount (premium) | 26 | | | 26 | | | | | | | Stock-based compensation charges | (2) | | | 8 | | | Provision for receivables allowance | 32 | | | 23 | | | Deferred income taxes, net | (232) | | | (12) | | | Technology-related intangible and other asset impairments | 193 | | | — | | | Write-off of intercompany loan | 133 | | | — | | | (Gain) loss on marketable securities | — | | | (20) | | | (Gain) loss on sale of non-vehicle capital assets | (24) | | | (12) | | | (Gain) loss on derivatives | (4) | | | (10) | | | | | | | | | | | Other | 7 | | | — | | | Changes in assets and liabilities: | | | | | Non-vehicle receivables | 287 | | | (316) | | | Prepaid expenses and other assets | (4) | | | (90) | | | Operating lease right-of-use assets | 189 | | | 200 | | | Non-vehicle accounts payable | 168 | | | 65 | | | Accrued liabilities | (61) | | | 57 | | | Accrued taxes, net | (20) | | | 29 | | | Operating lease liabilities | (195) | | | (211) | | | Self-insured liabilities | (55) | | | (3) | | | Net cash provided by (used in) operating activities | 629 | | | 1,057 | | | Cash flows from investing activities: | | | | | Revenue earning vehicles expenditures | (4,956) | | | (8,947) | | | Proceeds from disposal of revenue earning vehicles | 5,005 | | | 4,212 | | | Non-vehicle capital asset expenditures | (72) | | | (118) | | | Proceeds from non-vehicle capital assets disposed of or to be disposed of | 50 | | | 21 | | | Sales of marketable securities | 74 | | | — | | | Other | (1) | | | — | | | Net cash provided by (used in) investing activities | 100 | | | (4,832) | | | Cash flows from financing activities: | | | | | Proceeds from issuance of vehicle debt | 4,174 | | | 8,267 | | | Repayments of vehicle debt | (4,613) | | | (5,254) | | | Proceeds from issuance of non-vehicle debt | 1,498 | | | 815 | | | Repayments of non-vehicle debt | (853) | | | (823) | |
| | | | | | | | | | | Six Months Ended
June 30, | | | 2019 | | 2018 | | Cash flows from operating activities: | | | | | Net income (loss) | $ | (105 | ) | | $ | (263 | ) | | Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | Depreciation and reserves for revenue earning vehicles | 1,329 |
| | 1,306 |
| | Depreciation and amortization, non-vehicle | 99 |
| | 113 |
| | Amortization of deferred financing costs and debt discount (premium) | 26 |
| | 26 |
| | Loss on extinguishment of debt | — |
| | 22 |
| | Stock-based compensation charges | 8 |
| | 7 |
| | Provision for receivables allowance | 23 |
| | 19 |
| | Deferred income taxes, net | (12 | ) | | (73 | ) | | (Gain) loss on marketable securities | (20 | ) | | (17 | ) | | Other | (22 | ) | | 3 |
| | Changes in assets and liabilities: | |
| | |
| | Non-vehicle receivables | (316 | ) | | (275 | ) | | Prepaid expenses and other assets | (90 | ) | | (84 | ) | | Operating lease right-of-use assets | 200 |
| | — |
| | Non-vehicle accounts payable | 65 |
| | 154 |
| | Accrued liabilities | 56 |
| | 5 |
| | Accrued taxes, net | 29 |
| | 2 |
| | Operating lease liabilities | (211 | ) | | — |
| | Public liability and property damage | (2 | ) | | — |
| | Net cash provided by (used in) operating activities | 1,057 |
| | 945 |
| | Cash flows from investing activities: | |
| | |
| | Revenue earning vehicles expenditures | (8,947 | ) | | (7,610 | ) | | Proceeds from disposal of revenue earning vehicles | 4,212 |
| | 3,654 |
| | Capital asset expenditures, non-vehicle | (118 | ) | | (80 | ) | | Proceeds from property and other equipment disposed of or to be disposed of | 21 |
| | 8 |
| | Purchases of marketable securities | — |
| | (61 | ) | | Sales of marketable securities | — |
| | 36 |
| | Other | — |
| | (2 | ) | | Net cash provided by (used in) investing activities | (4,832 | ) | | (4,055 | ) |
The accompanying notes are an integral part of these financial statements.
12
THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Unaudited (In millions) | | | | | | | | | | | | | | Six Months Ended
June 30, | | | | | 2020 | | 2019 | | Payment of financing costs | (11) | | | (23) | | | Advances to Hertz Holdings | (4) | | | (6) | | | Contributions from noncontrolling interests | — | | | 45 | | | Other | (1) | | | (1) | | | Net cash provided by (used in) financing activities | 190 | | | 3,020 | | | Effect of foreign currency exchange rate changes on cash, cash equivalents, restricted cash and restricted cash equivalents | 3 | | | (1) | | | Net increase (decrease) in cash, cash equivalents, restricted cash and restricted cash equivalents during the period | 922 | | | (756) | | | Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period | 1,360 | | | 1,410 | | | Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period | $ | 2,282 | | | $ | 654 | | | | | | | Supplemental disclosures of cash flow information: | | | | | Cash paid during the period for: | | | | | Interest, net of amounts capitalized: | | | | | Vehicle | $ | 193 | | | $ | 213 | | | Non-vehicle | 67 | | | 140 | | | Income taxes, net of refunds | 3 | | | 15 | | | | | | | Supplemental disclosures of non-cash information: | | | | | Purchases of revenue earning vehicles included in accounts payable, net of incentives | $ | 43 | | | $ | 567 | | | Sales of revenue earning vehicles included in vehicle receivables | 759 | | | 296 | | | Purchases of non-vehicle capital assets included in accounts payable | 4 | | | 46 | | | Purchases of non-vehicle capital assets included in liabilities subject to compromise | 31 | | | — | | | | | |
| | | | | | | | | | | Six Months Ended
June 30, | | | 2019 | | 2018 | | Cash flows from financing activities: | | | | | Proceeds from issuance of vehicle debt | 8,267 |
| | 9,414 |
| | Repayments of vehicle debt | (5,254 | ) | | (6,829 | ) | | Proceeds from issuance of non-vehicle debt | 815 |
| | 187 |
| | Repayments of non-vehicle debt | (823 | ) | | (194 | ) | | Payment of financing costs | (23 | ) | | (27 | ) | | Early redemption premium payment | — |
| | (19 | ) | | Advances to Hertz Holdings | (6 | ) | | (6 | ) | | Contributions from noncontrolling interests | 45 |
| | 10 |
| | Other | (1 | ) | | 1 |
| | Net cash provided by (used in) financing activities | 3,020 |
| | 2,537 |
| | Effect of foreign currency exchange rate changes on cash, cash equivalents, restricted cash and restricted cash equivalents | (1 | ) | | (10 | ) | | Net increase (decrease) in cash, cash equivalents, restricted cash and restricted cash equivalents during the period | (756 | ) | | (583 | ) | | Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period | 1,410 |
| | 1,504 |
| | Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period | $ | 654 |
| | $ | 921 |
| | | | | | | Supplemental disclosures of cash flow information: | | | | | Cash paid during the period for: | | | | | Interest, net of amounts capitalized: | | | | | Vehicle | $ | 213 |
| | $ | 175 |
| | Non-vehicle | 140 |
| | 142 |
| | Income taxes, net of refunds | 15 |
| | 10 |
| | Operating lease liabilities | 282 |
| | — |
| | Supplemental disclosures of non-cash information: | |
| | |
| | Purchases of revenue earning vehicles included in accounts payable, net of incentives | $ | 567 |
| | $ | 548 |
| | Sales of revenue earning vehicles included in receivables | 296 |
| | 204 |
| | Purchases of non-vehicle capital assets included in accounts payable | 46 |
| | 42 |
| | Operating lease right-of-use assets obtained in exchange for lease liabilities | 162 |
| | — |
|
The accompanying notes are an integral part of these financial statements.
13
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Unaudited
Note 1—Background
Hertz Global Holdings, Inc. ("Hertz Global" when including its subsidiaries and VIEs and "Hertz Holdings" when excluding its subsidiaries and VIEs) 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 ("Hertz" and interchangeably with Hertz Global, the "Company"), 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 United States ("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.
In March 2020, the World Health Organization declared a pandemic resulting from the COVID-19 viral disease ("COVID-19"). In response to COVID-19, local and national governments around the world instituted shelter-in-place and similar orders and travel restrictions, and airline travel decreased suddenly and dramatically. Despite a strong start to the year, as a result of the impact on travel demand, late in the first quarter, the Company began experiencing a high level of rental cancellations and a significant decline in forward bookings. In response, during a time in which the Company would normally be increasing its fleet for the peak summer season, the Company sought to adjust its fleet level to reflect the reduced level of demand by leveraging its multiple used-vehicle channels and negotiating with suppliers to reduce fleet commitments.
The Company began aggressively managing costs, including implementing employee furlough programs affecting approximately 20,000 employees worldwide to align staffing levels with the slowdown in demand. The Company (i) initiated a restructuring program affecting approximately 11,000 employees in its U.S. RAC segment and U.S. corporate operations, the majority of which were previously furloughed, (ii) actively negotiated to abate or defer its airport rent and concession payments, (iii) substantially reduced capital expenditures; (iv) eliminated discretionary marketing spend; and (v) reduced commitments to purchase vehicles by approximately $4.0 billion from original commitments in its U.S. RAC segment, the majority of which were due to be delivered during the second quarter of 2020. See Note 7, "Restructuring" for further information regarding the restructuring program disclosed above.
Although the Company had taken aggressive action to eliminate costs, it faced significant ongoing expenses, including monthly payments under its Amended and Restated Master Motor Vehicle Operating Lease and Servicing Agreement (Series 2013-G1) (the "Operating Lease") with Hertz Vehicle Financing LLC ("HVF"), pursuant to which Hertz leases from HVF vehicles used in the Company's U.S. rental car operations. Hertz Vehicle Financing II LP ("HVF II"), a special purpose financing subsidiary, issues asset-backed notes and lends the proceeds thereof to HVF to finance the acquisition of vehicles, which are then leased to Hertz pursuant to the Operating Lease. Monthly payments under the Operating Lease are variable and significant and are subject to volatility depending upon the changes in current market value estimates of the underlying leased vehicles. During April 2020, the Company engaged in discussions with various creditors to obtain relief from its obligations to make full rent payments under its Operating Lease. While such discussions were ongoing, to preserve liquidity, on April 27, 2020, Hertz did not make certain payments, including the full rent payments, in accordance with the Operating Lease.
As a result of the failure to make the full rent payments on April 27, 2020, an amortization event was in effect as of May 5, 2020 for all series of notes issued by HVF II and a liquidation event was in effect with respect to the variable funding notes (“Series 2013-A Notes”) issued by HVF II. As a result of the amortization event, and notwithstanding the forbearance agreement described below, proceeds from the sales of vehicles that collateralize the notes issued by HVF II must be primarily applied to the payment of principal and interest under those notes and will not be available to finance new vehicle acquisitions for Hertz. A liquidation event means that, unless the affected noteholders otherwise agree, the affected noteholders can direct the liquidation of vehicles serving as collateral for their notes.
On May 4, 2020, prior to the occurrence of the liquidation event with respect to the Series 2013-A Notes, Hertz, HVF, HVF II and DTG Operations, Inc. entered into a forbearance agreement (the “Forbearance Agreement”) with
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Unaudited holders (the “VFN Noteholders”) of the Series 2013-A Notes representing approximately 77% in aggregate principal amount of the Series 2013-A Notes. Pursuant to the Forbearance Agreement that became effective against all VFN Noteholders, the VFN Noteholders agreed to forbear from exercising their liquidation remedies. The Forbearance Agreement with the VFN Noteholders expired on May 22, 2020.
Concurrently with entering into the Forbearance Agreement, on May 4, 2020, Hertz entered into limited waiver agreements (collectively, the “Waiver Agreements”) with certain of the lenders (the “Lenders”) under its (i) Senior RCF/senior term loan facility, (ii) letter of credit facility, (iii) alternative letter of credit facility and (iv) U.S. Vehicle RCF (collectively, the “Facilities”). Pursuant to the Waiver Agreements, the Lenders agreed to (a) waive any default or event of default that could have resulted from the above referenced missed payment under the Operating Lease, (b) waive any default or event of default that had arisen as a result of Hertz’s failure to deliver its 2020 operating budget on a timely basis in accordance with the Facilities and (c) extend the grace period to cure a default with respect to Hertz’s obligation to reimburse drawings that occurred under certain letters of credit during the waiver period. The Waiver Agreements which were effective across the Facilities expired on May 22, 2020.
In accordance with the Forbearance Agreement and the Waiver Agreements, the Company made a payment of approximately $30 million reflecting certain variable payment elements of monthly rent under the Operating Lease, including an interest component on May 5, 2020.
Voluntary Petitions for Bankruptcy
In connection with the expiration of the Forbearance Agreement and the Waiver Agreements described above and the continuing economic impact from COVID-19, on May 22, 2020 (the "Petition Date"), Hertz Global, Hertz and certain of their direct and indirect subsidiaries in the U.S. and Canada (collectively the "Debtors" and the "Debtors- in-Possession") filed voluntary petitions for relief (collectively, the "Petitions") under chapter 11 of title 11 ("Chapter 11") of the U.S. Bankruptcy Code (the "Bankruptcy Code") in the U.S. Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). The Chapter 11 cases (the "Chapter 11 Cases") are being jointly administered under the caption In re: the Hertz Corporation, et al., Case No. 20-11218 (MFW). Additional information about the Chapter 11 Cases, including access to documents filed with the Bankruptcy Court, is available online at https://restructuring.primeclerk.com/hertz, a website administered by Prime Clerk, LLC ("Prime Clerk"), a third-party bankruptcy claims and noticing agent. The information on this web site is not incorporated by reference and does not constitute part of this Form 10-Q.
The Bankruptcy Court has approved motions filed by the Debtors that were designed primarily to mitigate the impact of the Chapter 11 Cases on the Company’s operations, customers and employees. The Debtors are authorized to conduct their business activities in the ordinary course, and pursuant to orders entered by the Bankruptcy Court, the Debtors are authorized to, among other things and subject to the terms and conditions of such orders: (i) pay employees’ wages and related obligations; (ii) pay certain taxes; (iii) pay critical vendors and certain fees to airport authorities; (iv) continue to maintain certain customer programs; (v) maintain their insurance program; (vi) use cash collateral on an interim basis; and (vii) continue their cash management system.
On July 24, 2020, the Bankruptcy Court entered an order related to the Operating Lease (the "Interim Lease Order") which, among other things, directed the Debtors to: (i) make $650 million of base rent payments under the Operating Lease to the HVF trustee in the amount of six equal monthly payments of approximately $108 million commencing in July 2020 through December 2020; (ii) dispose of at least 182,521 lease vehicles between June 1, 2020 and December 31, 2020, inclusive, where the proceeds of the dispositions, subject to certain exclusions set forth in the Interim Lease Order, will be used to make payments under the Master Lease; and (iii) fund interest payments on the Master Lease from draws on certain existing letters of credit, which are reimbursable by the Debtors. For the period from June 1, 2020 through July 31, 2020, the Company disposed of approximately 100,000 vehicles which are associated with the Interim Order.
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Unaudited
Debtors-In-Possession
The Debtors are currently operating as debtors-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. In general, as debtors-in-possession under the Bankruptcy Code, the Debtors are authorized to continue to operate as an ongoing business but may not engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court.
Automatic Stay
Subject to certain specific exceptions under the Bankruptcy Code, the Petitions automatically stayed most judicial or administrative actions against the Debtors and efforts by creditors to collect on or otherwise exercise rights or remedies with respect to obligations of the Debtors incurred prior to the Petition Date ("Pre-petition"). Absent an order from the Bankruptcy Court, substantially all of the Debtors’ Pre-petition liabilities are subject to settlement under the Bankruptcy Code.
Borrowing Capacity and Availability
The filing of the Chapter 11 Cases constituted defaults, termination events and/or amortization events with respect to certain of the Company's existing debt obligations. As a result of the filing of the Chapter 11 Cases, the remaining capacity under almost all of the Company's revolving credit facilities was terminated, as disclosed in Note 5, "Debt." Consequently, the proceeds of sales of vehicles which serve as collateral for such vehicle finance facilities must be applied to the payment of the related indebtedness of the Non-Debtor Financing Subsidiaries (as defined in Note 5, "Debt") and are not otherwise available to fund the Company’s operations. Additionally, the Company is precluded from accessing any of its subordinated investment in the vehicle collateral until the related defaults are waived or the third party funding under those facilities has been retired, either through the monetization of the underlying collateral or the refinancing of the related indebtedness. Additionally, proceeds from vehicle receivables, excluding manufacturer rebates, as of June 30, 2020 and ongoing vehicle sales must be applied to vehicle debt in amortization.
The Company currently has waivers related to the filing of the Chapter 11 Cases under its European Vehicle Notes, European ABS and U.K. Fleet Financing facility that expire on September 30, 2020, as disclosed in Note 5, "Debt."
The Company's inability to access its Senior RCF facility or retain any proceeds from the sale of vehicles under its U.S. ABS programs means that its source of liquidity is almost entirely its cash and cash equivalents on hand and cash generated from its operations. As of June 30, 2020, the Company had $1.4 billion of unrestricted cash and cash equivalents which the Company believes will be sufficient to fund its operations through approximately December 31, 2020, assuming it does not experience any unforeseen liquidity needs before then, which could result in the utilization of the liquidity in advance of December 31, 2020. The Company believes, however, that if, among other things, (i) it cannot successfully extend the international vehicle debt waivers that expire on September 30, 2020, as disclosed in Note 5, "Debt," (ii) it cannot successfully implement a plan of reorganization, and (iii) there is not a significant recovery in the economic conditions in its major markets, its available cash and cash equivalents and cash generated by its operations will not be sufficient to fund operating requirements for the next twelve months. Consequently, the Debtors are seeking debtor-in-possession financing and pursuing vehicle financing for certain of their operations, either through waivers on existing facilities or entering into new arrangements to fund vehicles and vehicle leases, to supplement their sources of funding.
Going Concern
The accompanying unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern and contemplate the realization of assets and the satisfaction of liabilities in the normal course of business. The Company’s ability to continue as a going concern is contingent upon its ability to successfully implement a plan of reorganization, among other factors, and the realization of assets and the
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Unaudited satisfaction of liabilities are subject to uncertainty. Further, any plan of reorganization could materially change the amounts of assets and liabilities reported in the accompanying condensed consolidated financial statements. The accompanying condensed consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern or as a consequence of the Chapter 11 Cases. As a result of the Company's financial condition, defaults under certain debt agreements as disclosed in Note 5, "Debt," and the risks and uncertainties surrounding the Chapter 11 Cases, substantial doubt exists that the Company will be able to continue as a going concern within one year from the issuance date of this Quarterly Report on Form 10-Q.
Note 2—Basis of Presentation and Recently Issued Accounting Pronouncements
Basis of Presentation
This Quarterly Report on Form 10-Q combines the quarterly reports on Form 10-Q for the quarterly period ended June 30, 20192020 of Hertz Global and Hertz. Hertz Global consolidates Hertz for financial statement purposes, therefore, disclosures that relate to activities of Hertz also apply to Hertz Global. In the sections that combine disclosure of Hertz Global and Hertz, this report refers to actions as being actions of the Company, or Hertz Global, which is appropriate because the business is one enterprise and Hertz Global operates the business through Hertz. When appropriate, Hertz Global and Hertz are named specifically for their individual disclosures and any significant differences between the operations and results of Hertz Global and Hertz are separately disclosed and explained.
The Company'saccompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“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.
Effective on the Petition date, the Company applied accounting standards applicable to reorganizations, Accounting Standards Codification 852 - Reorganizations, in preparing the accompanying condensed consolidated financial statements as of and for the three and six months ended June 30, 2020 which requires the financial statements, for periods subsequent to the commencement of the Chapter 11 Cases, to distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, Pre-petition obligations of the Debtors that may be impacted by the Chapter 11 Cases have been classified as liabilities subject to compromise in the accompanying unaudited condensed consolidated balance sheet as of June 30, 2020. These liabilities are reported at the amounts the Company anticipates will be allowed by the Bankruptcy Court, even if they may be settled for lesser amounts. See Note 15, "Liabilities Subject to Compromise," for additional information. In addition, certain charges related to the Chapter 11 Cases are recorded as reorganization items, net in the accompanying unaudited condensed consolidated statements of operations for the three and six months ended June 30, 2020. See Note 16, "Reorganization Items, Net," for additional information.
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 December 31, 20182019 unaudited condensed consolidated balance sheet data is derived from the audited financial statements at that date but does not include all disclosures required by U.S. GAAP. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with information included in the Company's Form 10‑K10-K for the year ended December 31, 20182019 (the "2018"2019 Form 10‑K"10-K"), as filed with the Securities and Exchange Commission ("SEC") on February 25, 2019.2020.
Certain prior period amounts have been reclassified to conform to current period presentation.
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Unaudited 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 and its VIEs, as applicable. The unaudited condensed consolidated financial statements of Hertz include the accounts of Hertz, its wholly owned and majority owned U.S. and international subsidiaries and its VIEs, as applicable. The Company consolidates a VIE when it is deemed the primary beneficiary.beneficiary of the VIE. The Company accounts for its investment in joint ventures using the equity method when it has significant influence but not control and is not the primary beneficiary.beneficiary of the joint venture. All significant intercompany transactions have been eliminated in consolidation.
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
Recently Issued Accounting Pronouncements
Adopted
Measurement of Credit Losses on Financial Instruments Leases
In FebruaryJune 2016, the Financial Accounting Standards Board (the "FASB") issued guidance that replacedsets forth a current expected credit loss impairment model for financial assets, which replaces the existing lease guidance in U.S. GAAPcurrent incurred loss model, and in 2018 and 2019 issued amendments and updates to the new lease standard (collectively "Topic 842"). Topic 842 established a right-of-use (“ROU”)in 2018 and 2019. This model that requires a lesseefinancial asset (or group of financial assets), including trade receivables, measured at amortized cost to record onbe presented at the balance sheetnet 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 ROU asset and corresponding lease liability based on the present value of future lease payments. Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. Topic 842 also expanded 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.
asset. The Company adopted this guidance when effective, on January 1, 20192020, using a simplifiedmodified retrospective transition approach for both lessees and lessors. Prior periods have not been retrospectively adjusted and are in conformance with the then existingmethod. The adoption of this guidance under U.S. GAAP ("Topic 840"). The Company utilized the package of practical expedients for existing or expired contracts and did not reassess whether such contracts contain leases, the lease classification or the initial direct costs. Additionally, the Company utilized the historical lease term and did not utilize the practical expedient allowing the use of hindsight in determining the lease term and in assessing impairment of its ROU assets. To determine the present value of its lease payments as of January 1, 2019, the Company utilized the interest rate implicit in the lease agreement. If the implicit interest rate was not provided in the lease agreement, the Company utilizedhave a material impact on the Company's collateralized incremental borrowing rate as of January 1, 2019. Also, with respect to the Company's real estate leases, vehicle leases and fleet leases, the Company availed itself of the practical expedient for lessees and lessors and elected an accounting policy by class of underlying asset to combine lease and non-lease components.
As of January 1, 2019, the Company accounts for revenue earned from vehicle rentals and rental related activities wherein an identified asset is transferred to the customer and the customer has the ability to control that asset under Topic 842. Prior to the adoption of Topic 842, the Company accounted for such revenue under Revenue from Contracts with Customers ("Topic 606").
The cumulative effect of applying the new guidance to all leases as of January 1, 2019 that were not completed and with lease terms in excess of twelve months has been recorded as of the adoption date as follows:
Hertz Global
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (In millions) | Operating Lease Right-of-Use Assets | | Prepaid and Other Assets | | Total Assets | | Operating Lease Liabilities | | Accrued Liabilities | | Total Liabilities | | Total Liabilities and Stockholders' Equity | | As of December 31, 2018 | $ | — |
| | $ | 902 |
| | $ | 21,382 |
| | $ | — |
| | $ | 1,304 |
| | $ | 20,262 |
| | $ | 21,382 |
| | Effect of Adopting Topic 842 | 1,585 |
| | (45 | ) | | 1,540 |
| | 1,588 |
| | (48 | ) | | 1,540 |
| | 1,540 |
| | As of January 1, 2019 | $ | 1,585 |
| | $ | 857 |
| | $ | 22,922 |
| | $ | 1,588 |
| | $ | 1,256 |
| | $ | 21,802 |
| | $ | 22,922 |
|
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
Hertz
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (In millions) | Operating Lease Right-of-Use Assets | | Prepaid and Other Assets | | Total Assets | | Operating Lease Liabilities | | Accrued Liabilities | | Total Liabilities | | Total Liabilities and Stockholder's Equity | | As of December 31, 2018 | $ | — |
| | $ | 902 |
| | $ | 21,382 |
| | $ | — |
| | $ | 1,304 |
| | $ | 20,264 |
| | $ | 21,382 |
| | Effect of Adopting Topic 842 | 1,585 |
| | (45 | ) | | 1,540 |
| | 1,588 |
| | (48 | ) | | 1,540 |
| | 1,540 |
| | As of January 1, 2019 | $ | 1,585 |
| | $ | 857 |
| | $ | 22,922 |
| | $ | 1,588 |
| | $ | 1,256 |
| | $ | 21,804 |
| | $ | 22,922 |
|
Adoption of Topic 842 did not impact the Company'sfinancial position, results of operations or cash flows. See
Note 4, "Leases,"
Customer's Accounting for information regardingImplementation Costs Incurred in a Cloud Computing Arrangement
In August 2018, the Company’sFASB issued guidance on a customer's accounting policies for leases,implementation fees paid in a cloud computing service contract arrangement that addresses which implementation costs to capitalize as wellan asset and which costs to expense. Capitalized implementation fees are to be expensed over the term of the cloud computing arrangement, and the expense is required to be recognized in the same line item in the income statement as otherthe associated hosting service expenses. The entity is also required disclosures under Topic 842.to present the capitalized implementation fees on the balance sheet in the same line item as the prepayment for hosting service fees associated with the cloud computing arrangement. The Company adopted this guidance when effective, on January 1, 2020, using a prospective transition method. The adoption of this guidance did not have a material impact on the Company's financial position, results of operations or cash flows.
The Company has hosting arrangements in connection with its Enterprise Resource Planning systems. Prior to the adoption of this guidance, the Company capitalized certain implementation costs for its hosting arrangements in intangible assets, net, in the accompanying unaudited condensed consolidated balance sheet as of December 31, 2019. Subsequent to the adoption of this guidance on January 1, 2020, the Company records implementation fees incurred in connection with its hosting arrangements in prepaid expenses and other assets in the accompanying unaudited condensed consolidated balance sheet as of June 30, 2020.
Not Yet Adopted
Changes to Disclosure RequirementsSimplifying the Accounting for Defined Benefit PlansIncome Taxes
In August 2018,December 2019, the FASB issued guidance that modifies disclosure requirementssimplifies the accounting for employers that sponsor defined benefit pension or other postretirement plans to remove disclosures no longer considered cost beneficial, add disclosures identified as relevantincome taxes by removing certain exceptions in existing guidance and clarify certain disclosure requirements. Theimproves consistency in application by clarifying and amending existing guidance. This guidance is effective for annual periods beginning after December 15, 2020, using a retrospective transition method. Early adoption is permitted. The Company is in the process of determining the timing of adoption and assessing the overall impact of adopting this guidance on its disclosures.
Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement
In August 2018, the FASB issued guidance on a customer's accounting for implementation fees paid in a cloud computing service contract arrangement that addresses which implementation costs to capitalize as an asset and which costs to expense. Capitalized implementation fees are to be expensed over the term of the cloud computing arrangement, and the expense is required to be recognized in the same line item in the income statement as the associated hosting service expenses. The entity is also required to present the capitalized implementation fees on the balance sheet in the same line item as the prepayment for hosting service fees associated with the cloud computing arrangement.
The guidance is effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods, using a retrospective or prospectivewhere the transition method.method varies depending upon the specific amendment. Early adoption is permitted, including adoption in any interim period. An entity that elects to early adopt the amendments
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Unaudited in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period, and all amendments must be adopted in the same period. The Company intends to adopt this guidance when effective, on January 1, 2020, using a prospective transition method and is in the process of assessing the overall impact of adopting this guidance on its financial position, results of operations and cash flows.
Facilitation of the Effects of Reference Rate Reform
In March 2020, the FASB issued guidance that provides optional expedients and exceptions for contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform initiatives. This guidance is effective beginning March 12, 2020 through December 31, 2022 where the transition method varies depending upon the specific expedient or exception. The Company is in the process of assessing the available expedients and exceptions and, if applicable, the method and timing of adoption.
Note 3—Divestitures
Sale of Non-vehicle Capital Assets
During the first quarter of 2020, the Company received additional cash from the sale of certain non-vehicle capital assets in its U.S. Rental Car segment, which was completed in the fourth quarter of 2019, and recognized an additional $20 million pre-tax gain on the sale, which is included in other (income) expense, net in the accompanying unaudited condensed consolidated statement of operations for the six months ended June 30, 2020.
Sale of Marketable Securities
During the first quarter of 2020, the Company sold marketable securities for $74 million and recognized an immaterial gain on the sale in its corporate operations, which is included in other (income) expense, net in the accompanying unaudited condensed consolidated statement of operations for the six months ended June 30, 2020.
Note 4—Goodwill and Intangible Assets, Net
Technology-related Intangible and Other Assets
Due to uncertainty surrounding the Company's financial ability to complete certain information technology projects as a result of COVID-19 and the filing of the Chapter 11 Cases as disclosed in Note 1, "Background," the Company concluded that there was an impairment of such technology-related intangible assets and capitalized cloud computing implementation costs. The Company recorded an impairment charge of $193 million in its corporate operations, representing a full impairment of the carrying value of such assets as of June 30, 2020 of $124 million and $69 million of technology-related intangible assets and other assets, respectively.
Recoverability of Goodwill and Indefinite-lived Intangible Assets
As of June 30, 2020, the Company tested the recoverability of its goodwill and indefinite-lived intangible assets due to the impact related to COVID-19, the Company's reduction in cash flow projections and declines in the stock price of Hertz Global. The quantitative fair value test utilized the Company's most recent cash flow projections, including a range of potential outcomes, along with a long-term growth rate of 1% and a range of discount rates between 12.5% and 13.0%. Based on the quantitative tests, no impairments were recorded in the second quarter of 2020. However, the fair values of tradenames, which are indefinite-lived intangible assets, in the Company's U.S. RAC and International RAC segments were in excess by 3% and 18% of the carrying values of $934 million and $560 million, respectively.
Subsequent to June 30, 2020, the adverse impact from COVID-19 to the overall travel industry and the Company's business has continued. If there is further deterioration in cash flow projections, the Company's ability to obtain future financing to maintain its fleet or the weighted average cost of capital assumptions used in the impairment
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Unaudited analyses or if the Company is unable to execute its strategies, the Company may incur impairment charges related to its goodwill and indefinite-lived intangible assets which could be material.
Note 5—Debt
The Company's debt, including its available credit facilities, consists of the following ($ in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Facility | | Weighted-Average Interest Rate
as of
June 30, 2020 | | Fixed or
Floating
Interest
Rate | | Maturity | | June 30,
2020 | | December 31,
2019 | | Non-Vehicle Debt | | | | | | | | | | | Senior Term Loan(1) | | | | Floating | | 6/2023 | | $ | — | | | $ | 660 | | Senior RCF(1) | | | | Floating | | 6/2021 | | — | | | — | | Senior Notes(1)(2) | | | | Fixed | | 10/2022-1/2028 | | — | | | 2,700 | | Senior Second Priority Secured Notes(1) | | | | Fixed | | 6/2022 | | — | | | 350 | | Promissory Notes(1) | | | | Fixed | | 1/2028 | | — | | | 27 | | | Alternative Letter of Credit Facility | | 3.25% | | Floating | | 11/2023 | | 36 | | | — | | | Senior RCF Letter of Credit Facility | | 3.25% | | Floating | | 6/2021 | | 2 | | | — | | | Other Non-Vehicle Debt | | 6.75% | | Fixed | | Various | | 20 | | | 18 | | | Unamortized Debt Issuance Costs and Net (Discount) Premium | | | | | | | | — | | | (34) | | | Total Non-Vehicle Debt Not Subject to Compromise | | | | | | | | 58 | | | 3,721 | | | Non-Vehicle Debt Subject to Compromise | | | | | | | | | | | | Senior Term Loan | | 3.51% | | Floating | | 6/2023 | | 656 | | | — | | | Senior RCF | | 4.08% | | Floating | | 6/2021 | | 615 | | | — | | Senior Notes(2) | | 6.11% | | Fixed | | 10/2022-1/2028 | | 2,700 | | | — | | | Senior Second Priority Secured Notes | | 7.63% | | Fixed | | 6/2022 | | 350 | | | — | | | Promissory Notes | | 7.00% | | Fixed | | 1/2028 | | 27 | | | — | | | Unamortized Debt Issuance Costs and Net (Discount) Premium | | | | | | | | (36) | | | — | | | Total Non-Vehicle Debt Subject to Compromise | | | | | | | | 4,312 | | | — | | | Vehicle Debt | | | | | | | | | | | | HVF II U.S. ABS Program | | | | | | | | | | | | HVF II U.S. Vehicle Variable Funding Notes | | | | | | | | | | | HVF II Series 2013-A(3)(6) | | 3.46% | | Floating | | 3/2022 | | 4,148 | | | 2,644 | | | | | | | | | | 4,148 | | | 2,644 | | | HVF II U.S. Vehicle Medium Term Notes | | | | | | | | | | | HVF II Series 2015-1(3) | | N/A | | Fixed | | 3/2020 | | — | | | 780 | | HVF II Series 2015-3(3) | | 3.17% | | Fixed | | 9/2020 | | 319 | | | 371 | | HVF II Series 2016-2(3) | | 3.48% | | Fixed | | 3/2021 | | 512 | | | 595 | | HVF II Series 2016-4(3) | | 3.16% | | Fixed | | 7/2021 | | 365 | | | 424 | | HVF II Series 2017-1(3) | | 3.45% | | Fixed | | 10/2020 | | 387 | | | 450 | | HVF II Series 2017-2(3) | | 3.82% | | Fixed | | 10/2022 | | 318 | | | 350 | |
| | | | | | | | | | | | | | | | | Facility | | Weighted Average Interest Rate
as of
June 30, 2019 | | Fixed or
Floating
Interest
Rate | | Maturity | | June 30,
2019 | | December 31,
2018 | | Non-Vehicle Debt | | | | | | | | | | | | Senior Term Loan | | 5.16% | | Floating | | 6/2023 | | $ | 667 |
| | $ | 674 |
| | Senior RCF | | N/A | | Floating | | 6/2021 | | — |
| | — |
|
20
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Unaudited
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Facility | | Weighted-Average Interest Rate
as of
June 30, 2020 | | Fixed or
Floating
Interest
Rate | | Maturity | | June 30,
2020 | | December 31,
2019 | HVF II Series 2018-1(3) | | 3.58% | | Fixed | | 2/2023 | | 910 | | | 1,000 | | HVF II Series 2018-2(3) | | 3.99% | | Fixed | | 6/2021 | | 183 | | | 200 | | HVF II Series 2018-3(3) | | 4.33% | | Fixed | | 7/2023 | | 183 | | | 200 | | HVF II Series 2019-1(3) | | 4.05% | | Fixed | | 3/2022 | | 641 | | | 700 | | HVF II Series 2019-2(3) | | 3.71% | | Fixed | | 5/2024 | | 687 | | | 750 | | HVF II Series 2019-3(3) | | 2.95% | | Fixed | | 12/2024 | | 687 | | | 800 | | | | | | | | | | 5,192 | | | 6,620 | | | Donlen U.S. ABS Program | | | | | | | | | | | | HFLF Variable Funding Notes | | | | | | | | | | | HFLF Series 2013-2(4)(6) | | 6.10% | | Floating | | 7/2020-10/2022 | | 475 | | | 286 | | | | | | | | | | 475 | | | 286 | | | HFLF Medium Term Notes | | | | | | | | | | | HFLF Series 2016-1(4) | | N/A | | Both | | 1/2020-2/2020 | | — | | | 34 | | HFLF Series 2017-1(4) | | 2.51% | | Both | | 7/2020-11/2022 | | 139 | | | 229 | | HFLF Series 2018-1(4) | | 2.59% | | Both | | 7/2020-11/2022 | | 353 | | | 462 | | HFLF Series 2019-1(4) | | 2.23% | | Both | | 7/2020-11/2022 | | 552 | | | 650 | | | | | | | | | | 1,044 | | | 1,375 | | | Vehicle Debt - Other | | | | | | | | | | | | U.S. Vehicle RCF | | 5.73% | | Floating | | 6/2021 | | 93 | | | 146 | | European Vehicle Notes(5) | | 5.07% | | Fixed | | 10/2021-3/2023 | | 813 | | | 810 | | European ABS(3) | | 1.60% | | Floating | | 11/2021 | | 624 | | | 766 | | Hertz Canadian Securitization(3)(6) | | 3.73% | | Floating | | 3/2021 | | 170 | | | 241 | | Donlen Canadian Securitization(3) | | 2.31% | | Floating | | 12/2022 | | 25 | | | 24 | | Australian Securitization(3) | | 1.74% | | Floating | | 6/2021 | | 137 | | | 177 | | | New Zealand RCF | | 2.93% | | Floating | | 6/2021 | | 45 | | | 50 | | | U.K. Financing Facility | | 3.05% | | Floating | | 7/2020-2/2023 | | 210 | | | 247 | | | Other Vehicle Debt | | 3.61% | | Floating | | 7/2020-11/2024 | | 23 | | | 29 | | | | | | | | | | 2,140 | | | 2,490 | | | Unamortized Debt Issuance Costs and Net (Discount) Premium | | | | | | | | (75) | | | (47) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total Vehicle Debt Not Subject to Compromise | | | | | | | | 12,924 | | | 13,368 | | | Total Debt Not Subject to Compromise | | | | | | | | $ | 12,982 | | | $ | 17,089 | |
N/A - Not applicable | | | | | | | | | | | | | | | | | Facility | | Weighted Average Interest Rate
as of
June 30, 2019 | | Fixed or
Floating
Interest
Rate | | Maturity | | June 30,
2019 | | December 31,
2018 | Senior Notes(1) | | 6.13% | | Fixed | | 10/2020-10/2024 | | 2,500 |
| | 2,500 |
| | Senior Second Priority Secured Notes | | 7.63% | | Fixed | | 6/2022 | | 1,250 |
| | 1,250 |
| | Promissory Notes | | 7.00% | | Fixed | | 1/2028 | | 27 |
| | 27 |
| | Other Non-Vehicle Debt | | 6.92% | | Fixed | | Various | | 13 |
| | 4 |
| | Unamortized Debt Issuance Costs and Net (Discount) Premium | | | | | | | | (29 | ) | | (33 | ) | | Total Non-Vehicle Debt | | | | | | | | 4,428 |
| | 4,422 |
| | Vehicle Debt | | | | | | | | | | | | HVF II U.S. ABS Program | | | | | | | | | | | | HVF II U.S. Vehicle Variable Funding Notes | | | | | | | | | HVF II Series 2013-A(2) | | 3.71% | | Floating | | 3/2021 | | 4,104 |
| | 2,940 |
| HVF II Series 2019-A(2) | | N/A | | Floating | | 10/2019 | | — |
| | — |
| | | | | | | | | | 4,104 |
| | 2,940 |
| | HVF II U.S. Vehicle Medium Term Notes | | | | | | | | | HVF II Series 2015-1(2) | | 2.93% | | Fixed | | 3/2020 | | 780 |
| | 780 |
| HVF II Series 2015-3(2) | | 3.10% | | Fixed | | 9/2020 | | 371 |
| | 371 |
| HVF II Series 2016-1(2) | | N/A | | N/A | | N/A | | — |
| | 466 |
| HVF II Series 2016-2(2) | | 3.41% | | Fixed | | 3/2021 | | 595 |
| | 595 |
| HVF II Series 2016-3(2) | | 2.72% | | Fixed | | 7/2019 | | 424 |
| | 424 |
| HVF II Series 2016-4(2) | | 3.09% | | Fixed | | 7/2021 | | 424 |
| | 424 |
| HVF II Series 2017-1(2) | | 3.38% | | Fixed | | 10/2020 | | 450 |
| | 450 |
| HVF II Series 2017-2(2) | | 3.57% | | Fixed | | 10/2022 | | 350 |
| | 350 |
| HVF II Series 2018-1(2) | | 3.41% | | Fixed | | 2/2023 | | 1,000 |
| | 1,000 |
| HVF II Series 2018-2(2) | | 3.80% | | Fixed | | 6/2021 | | 200 |
| | 200 |
| HVF II Series 2018-3(2) | | 4.15% | | Fixed | | 7/2023 | | 200 |
| | 200 |
| HVF II Series 2019-1(2) | | 3.85% | | Fixed | | 3/2022 | | 700 |
| | — |
| HVF II Series 2019-2(2) | | 3.51% | | Fixed | | 5/2024 | | 750 |
| | — |
| | | | | | | | | | 6,244 |
| | 5,260 |
| | Donlen ABS Program | | | | | | | | | | | | HFLF Variable Funding Notes | | | | | | | | | | | HFLF Series 2013-2(2) | | 3.20% | | Floating | | 3/2021 | | 64 |
| | 320 |
| | | | | | | | | | 64 |
| | 320 |
| | HFLF Medium Term Notes | | | | | | | | | | | HFLF Series 2015-1(3) | | N/A | | N/A | | N/A | | — |
| | 33 |
| HFLF Series 2016-1(3) | | 4.04% | | Both | | 7/2019-1/2020 | | 99 |
| | 171 |
| HFLF Series 2017-1(3) | | 2.86% | | Both | | 7/2019-3/2021 | | 308 |
| | 397 |
| HFLF Series 2018-1(3) | | 3.25% | | Both | | 7/2019-6/2021 | | 550 |
| | 550 |
| HFLF Series 2019-1(3) | | 2.85% | | Both | | 2/2020-11/2022 | | 650 |
| | — |
| | | | | | | | | | 1,607 |
| | 1,151 |
|
21
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Unaudited
(2)References to the "Senior Notes" include the series of Hertz's unsecured senior notes set forth in the table below which are included in liabilities subject to compromise in the accompanying unaudited condensed consolidated balance sheet as of June 30, 2020. Outstanding principal amounts for each such series of the Senior Notes is also specified below: | | | | | | | | | | | | | | | | | Facility | | Weighted Average Interest Rate
as of
June 30, 2019 | | Fixed or
Floating
Interest
Rate | | Maturity | | June 30,
2019 | | December 31,
2018 | | Vehicle Debt - Other | | | | | | | | | | | | U.S. Vehicle RCF | | 4.90% | | Floating | | 6/2021 | | 146 |
| | 146 |
| European Vehicle Notes(4) | | 5.07% | | Fixed | | 10/2021-3/2023 | | 825 |
| | 829 |
| European ABS(2) | | 1.75% | | Floating | | 10/2020 | | 1,026 |
| | 600 |
| Canadian Securitization(2) | | 3.25% | | Floating | | 10/2019-3/2021 | | 335 |
| | 220 |
| Australian Securitization(2) | | 3.09% | | Floating | | 3/2020 | | 151 |
| | 155 |
| | New Zealand RCF | | 4.40% | | Floating | | 3/2020 | | 37 |
| | 40 |
| | U.K. Financing Facility | | 3.07% | | Floating | | 7/2019-5/2022 | | 393 |
| | 242 |
| | Other Vehicle Debt | | 3.96% | | Floating | | 7/2019-4/2023 | | 37 |
| | 42 |
| | | | | | | | | | 2,950 |
| | 2,274 |
| | Unamortized Debt Issuance Costs and Net (Discount) Premium | | | | | | | | (50 | ) | | (43 | ) | | Total Vehicle Debt | | | | | | | | 14,919 |
| | 11,902 |
| | Total Debt | | | | | | | | $ | 19,347 |
| | $ | 16,324 |
|
| | | | | | | | | | | | | (In millions) | Outstanding Principal | | | | Senior Notes | June 30, 2020 | | December 31, 2019 | | 6.250% Senior Notes due October 2022 | 500 | | | 500 | | | 5.500% Senior Notes due October 2024 | 800 | | | 800 | | | 7.125% Senior Notes due August 2026 | 500 | | | 500 | | | 6.000% Senior Notes due January 2028 | 900 | | | 900 | | | $ | 2,700 | | | $ | 2,700 | |
N/A - Not applicable(3)Maturity reference is to the earlier "expected final maturity date" as opposed to the subsequent "legal final maturity date." The expected final maturity date is the date by which Hertz and investors in the relevant indebtedness originally expected the outstanding principal of the relevant indebtedness to be repaid in full. The legal final maturity date is the date on which the outstanding principal of the relevant indebtedness is legally due and payable in full. The expected maturity of debt under amortization, as described below, is based upon the sale of the underlying vehicles or the refinancing of the current debt.
| | (1) | References to the "Senior Notes" include the series of Hertz's unsecured senior notes set forth in the table below. Outstanding principal amounts for each such series of the Senior Notes is also specified below: |
| | | | | | | | | | (In millions) | Outstanding Principal | | Senior Notes | June 30, 2019 | | December 31, 2018 | | 5.875% Senior Notes due October 2020 | $ | 700 |
| | $ | 700 |
| | 7.375% Senior Notes due January 2021 | 500 |
| | 500 |
| | 6.250% Senior Notes due October 2022 | 500 |
| | 500 |
| | 5.500% Senior Notes due October 2024 | 800 |
| | 800 |
| | | $ | 2,500 |
| | $ | 2,500 |
|
| | (2) | Maturity reference is to the earlier "expected final maturity date" as opposed to the subsequent "legal final maturity date." The expected final maturity date is the date by which Hertz and investors in the relevant indebtedness expect the outstanding principal of the relevant indebtedness to be repaid in full. The legal final maturity date is the date on which the outstanding principal of the relevant indebtedness is legally due and payable in full. |
| | (3) | 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(4)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. As a result of the Chapter 11 Cases and the resulting amortization events, as described below, the revolving period for all series were terminated, and are amortizing monthly by an amount equal to the lease collections payable to that series and the maturity date referenced for each series of HFLF Medium Term Notes represents the date by which Hertz expects such series of notes to be repaid in full, which is based upon 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.
(5)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, unsecured senior notes (converted from Euros to U.S. dollars at a rate of 1.12 to 1 as of June 30, 2020 and December 31, 2019, respectively), set forth in the table below. Outstanding principal amounts for each such series of the European Vehicle Notes is also specified below: | | | | | | | | | | | | | (In millions) | Outstanding Principal | | | | European Vehicle Notes | June 30, 2020 | | December 31, 2019 | | 4.125% Senior Notes due October 2021 | $ | 252 | | | $ | 251 | | | 5.500% Senior Notes due March 2023 | 561 | | | 559 | | | $ | 813 | | | $ | 810 | |
(5) Includes default interest which is comprised of an increase in the contractual spread and may also include a change in the benchmark rate from the U.S. Dollar LIBOR rate to the prime rate.
Chapter 11
As a result of filing the Chapter 11 Cases, as disclosed in Note 1, "Background," the Company reclassified certain of its non-vehicle debt instruments, net of deferred financing costs, discounts and premiums, as applicable, to liabilities subject to compromise in the accompanying condensed consolidated balance sheet as of June 30, 2020. The Company has suspended accruing and paying interest and amortizing deferred financing costs, discounts and premiums, as applicable, on the Senior Notes and Promissory Notes, as of the Petition Date. The Company is continuing to pay in cash an amount equal to the monthly interest at the non-default rate during the months of July and August for the Senior Term Loan, Senior RCF and the U.S. Vehicle RCF and has suspended amortizing the associated deferred financing costs, discounts and premiums for the Senior Term Loan and Senior RCF, as applicable, as of the Petition Date. Additionally, the Company is continuing to pay in kind 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 2019. 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. |
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) 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 as of June 30, 2019 and December 31, 2018) set forth in the table below. Outstanding principal amounts for each such series of the European Vehicle Notes is also specified below: |
monthly interest at the non-default rate for the Senior Second Priority Secured Notes during the months of July and August. | | | | | | | | | | (In millions) | Outstanding Principal | | European Vehicle Notes | June 30, 2019 | | December 31, 2018 | | 4.125% Senior Notes due October 2021 | $ | 256 |
| | $ | 257 |
| | 5.500% Senior Notes due March 2023 | 569 |
| | 572 |
| | | $ | 825 |
| | $ | 829 |
|
The Company is highly leveragedfiling of the Chapter 11 Cases constituted an event of default that accelerated the Debtors’ obligations under the Senior Term Loan, the Senior RCF, the U.S. Vehicle RCF, the Letter of Credit Facility and a substantial portionthe Alternative Letter of its liquidity needs arise from debt service on its indebtedness and fromCredit Facility. Additionally, the fundingfiling triggered defaults, termination events and/or amortization events under certain obligations of its costs of operations 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.
In July 2019,(i) Hertz provided conditional notices to the registered holders of its outstanding 5.875% Senior Notes due 2020 (the “2020 Notes”International Limited, Hertz Holdings Netherlands BV ("Hertz Netherlands") and 7.375% Senior Notes due 2021 (the "2021 Notes") of its election to redeem in full allthe direct and indirect subsidiary companies located outside of the outstanding 2020 NotesUnited States and 2021 Notes pursuantCanada (collectively the "International Subsidiaries") (some of which were waived or amended, subject to certain time limitations, as disclosed further below), and (ii) HVF, HVF II, HFLF and certain other vehicle financing subsidiaries (collectively the requirements of the indentures governing the 2020 Notes and 2021 Notes on the redemption date, as further described in Note 12, "Subsequent Events"Non-Debtor Financing Subsidiaries")." Excluding the completion of the aforementioned activity, as of June 30, 2019, approximately $2.7 billion of vehicle debt and $20 million of non-vehicle debt is due to mature between July 1, 2019 and June 30, 2020. The Company has reviewed its debt facilities and determined that it is probable that the Company will be able, and has the intent, to refinance these facilities at such times as the Company determines appropriate prior to their respective maturities.
Non-Vehicle Debt
Senior Notes
See Note 12, "Subsequent Events" regarding transactions occurring subsequent to June 30, 2019.
Vehicle Debt
HVF II U.S. ABS Program
HVF II U.S. Vehicle Variable Funding Notes
HVF II Series 2013-A Notes: In February 2019,2020, HVF II extended the maturity of the Series 2013-A Notes from March 2021 to March 2022 and increased the commitments underthereunder by $750 million. After giving effect to the HVF II Series 2013-A Notes by $400 million.
In May 2019, HVF II increasedtransactions, the commitments under the HVF II Series 2013-A Notes by $40 million.
HVF II Series 2019-A Notes: In February 2019, HVF II issued the Series 2019-A Variable Funding Rental Car Asset Backed Notes in an aggregate maximum principal amount of $500 million.the Series 2013-A Notes was $4.9 billion, where $0.2 billion of commitments have a maturity of March 2021.
As a result of the failure to make the full rent payments on April 27, 2020, an amortization event was in effect as of May 5, 2020 for all series of notes issued by HVF II and a liquidation event was in effect with respect to the Series 2013-A Notes issued by HVF II. As a result of the amortization event, proceeds from the sales of vehicles that collateralize the notes issued by HVF II must be primarily applied to the payment of principal and are allocated on what approximates a pro rata basis to the reduction of principal on the basis of seniority by class. As disclosed in Note 1, "Background," per the terms of the Interim Lease Order entered on July 24, 2020, the Debtors were directed, among other things, to make $650 million of base rent payments under the Operating Lease to the HVF trustee in the amount of six equal monthly payments of approximately $108 million commencing in July 2020 through December 2020. The parties have agreed to defer litigation related to the Master Lease until January 15, 2021. Interest is being paid on the HVF II Variable Funding Notes and the U.S. Vehicle Medium Term Notes from funds drawn on existing letter of credit facilities, as described below.
23 HVF II Series 2019-1 Notes:In February 2019, HVF II issued the Series 2019-1 Rental Car Asset Backed Notes, Class A, Class B, Class C and Class D in an aggregate principal amount of $745 million. An affiliate of HVF II purchased the Class D Notes of such series at the time of issuance, and as a result, approximately $45 million of the aggregate principal amount is eliminated in consolidation. There is subordination within the HVF II Series 2019-1 Notes based on class.
HVF II Series 2019-2 Notes:In May 2019, HVF II issued the Series 2019-2 Rental Car Asset Backed Notes, Class A, Class B, Class C and Class D in an aggregate principal amount of $799 million. An affiliate of HVF II purchased the Class D Notes of such series at the time of issuance, and as a result, approximately $49 million of the aggregate
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Unaudited
principal amount is eliminated in consolidation. There is subordination within the HVF II Series 2019-2 Notes based on class.
HFLFU.S. Vehicle Medium Term Notes
In March 2020, HVF II sold the below notes, which it had acquired at the time of the respective initial offerings and which were previously eliminated in consolidation, to third parties. | | | | | | | | | | (In millions) | | Aggregate Principal Amount | | HVF II Series 2017-2 Class D Notes | | $ | 20 | | | HVF II Series 2018-1 Class D Notes | | 58 | | | HVF II Series 2018-2 Class D Notes | | 13 | | | HVF II Series 2018-3 Class D Notes | | 13 | | | HVF II Series 2019-1 Class D Notes | | 45 | | | HVF II Series 2019-2 Class D Notes | | 49 | | | Total | | $ | 198 | |
Donlen U.S. ABS Program
HFLF Variable Funding Notes
HFLF Series 2019-12013-2 Notes: In May 2019,February 2020, HFLF issuedamended the Series 2019-1 Asset Backed Notes, Class A, Class B, Class C, Class D and Class E in an aggregate principal amount of $650 million. The HFLF Series 2019-12013-2 Notes are fixed rate, except for the Class A-1 Notes, which are floating rate and carry an interest rate based upon a spread to one-month LIBOR.
Canadian Securitization
In April 2019, TCL Funding Limited Partnership ("Funding LP"), a bankruptcy remote, indirect, wholly owned, special purpose subsidiary of Hertz, amended its supplemental indenture for its Series 2015-A Variable Funding Rental Car Asset Backed Notes (the "Funding LP Series 2015-A2013-2 Notes") to provide for incremental seasonal capacity (subject to borrowing base availability) of up to CAD$90 million from June 2019 to October 2019. Following the expiration of the seasonal commitment period, aggregate maximum borrowings available under the Funding LP Series 2015-A Notes will revert to CAD$350 million (subject to borrowing base availability). Additionally, the Canadian Securitization was amended to extend the maturityend of the revolving period from March 2021 to March 2022 and increased the commitments thereunder by $100 million, such that the aggregate maximum borrowings of the 2013-2 Notes increased to $600 million.
The filing of the Chapter 11 Cases triggered an amortization event under the HFLF Variable Funding Notes and the HFLF Medium Term Notes. As a result, the remaining commitments under the HFLF Series 2013-2 Notes were terminated and, while the amortization events continue, proceeds from lease payments and from the sales of vehicles that collateralize the notes issued by HFLF must be applied to the reduction of principal and payment of interest on the notes. The principal will be allocated on approximately a pro rata basis and distributed to the note holders on the basis of seniority by class.
Vehicle Debt-Other
The filing of the Chapter 11 Cases constituted defaults, termination events and/or amortization events with respect to certain of the Company's existing debt obligations, as described below.
European Vehicle Notes
Hertz Netherlands and certain other international subsidiaries entered into a limited waiver agreement in respect of the European Vehicle Notes pursuant to which the majority noteholders agreed to waive any default or event of default that could have resulted from the Chapter 11 Cases. This waiver agreement expires on September 30, 2020.
European ABS
An amortization event that would have arisen under the European ABS as a result of filing the Chapter 11 Cases was waived in May 2020 as International Fleet Financing No.2 B.V (“IFF No. 2”) entered into a waiver agreement which expires on September 30, 2020 such that the aggregate maximum borrowings were reduced from €1.1 billion to €600 million.
Hertz Canadian Securitization
The filing of the Chapter 11 Cases triggered an amortization event under the Hertz Canadian Securitization. As a result, the remaining committed available borrowings were terminated and proceeds from the sales of vehicles and
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Unaudited receipt of vehicle receivables that collateralize the Hertz Canadian Securitization must be applied to the payment of principal.
Donlen Canadian Securitization
The filing of the Chapter 11 Cases triggered an event of default under the Donlen Canadian Securitization. In June 2020, Donlen entered into a waiver agreement under the Donlen Canadian Securitization with an expiration date of August 28, 2020 such that the aggregate maximum borrowings were reduced from CAD$35050 million to March 2021.CAD$37 million.
Australian Securitization
An amortization event that would have arisen under the Australian Securitization as a result of filing the Chapter 11 Cases was waived in May 2020 as HA Fleet Pty Limited, an indirect, wholly-owned subsidiary of Hertz, entered into a permanent waiver agreement under the Australian Securitization such that the aggregate maximum borrowing capacity was reduced from AUD$270 million to AUD$210 million.
U.K. Financing Facility
In May 2019, Hertz U.K. Limited amended its credit agreement ("U.K. Financing Facility") to provide forApril 2020, the aggregate maximum borrowing capacity (subject to asset availability) of up to £325 million during the peak rental season, for a seasonal commitment period through October 2019. Following the expiration of the seasonal commitment period, aggregate maximum borrowings available under the U.K. Financing Facility will revert towas reduced from £250 million (subject to asset availability). Additionally,£200 million as result of a downgrade in the credit rating of Hertz. Events of default that would have arisen under the U.K. Financing Facility was amended to extendas a result of filing the maturityChapter 11 Cases were waived in May 2020 as Hertz U.K. Limited entered into a waiver agreement under the U.K. Financing Facility with an expiration date of the aggregate maximum borrowings of £250 million to March 2021.September 30, 2020.
Borrowing Capacity and Availability
Borrowing capacity and availability comes from the Company's "revolving credit facilities,facilities." whichAs a result of the filing of the Chapter 11 Cases, almost all of the Company's "revolving credit facilities" were terminated, as disclosed in the following table. The remaining "revolving credit facilities" are a combination of variable funding asset-backed securitization facilities, cash-flow-based revolving credit facilities and asset-based revolving credit facilities and a standalone $400 million letter of credit facility (the "Letter of Credit Facility").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 the Company could borrow assuming it 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 and the Letter of Credit Facility, "Availability Under Borrowing Base Limitation" is the same as "Remaining Capacity" since borrowings under the Senior RCF and availability for issuances of letters of credit under the Letter of Credit Facility are not subject to a borrowing base.
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Unaudited
The following facilities were available to the Company as of June 30, 20192020 and are presented net of any outstanding letters of credit: | | | | | | | | | | | | | (In millions) | Remaining
Capacity | | Availability Under
Borrowing Base
Limitation | | Non-Vehicle Debt | | | | Senior RCF(1) | $ | — | | | $ | — | | Letter of Credit Facility(1) | — | | | — | | Alternative Letter of Credit Facility(1) | — | | | — | | | Total Non-Vehicle Debt | — | | | — | | | Vehicle Debt | | | | U.S. Vehicle RCF(1) | — | | | — | | HVF II U.S. Vehicle Variable Funding Notes(1) | — | | | — | | HFLF Variable Funding Notes(1) | — | | | — | | | European ABS | 49 | | | — | | Hertz Canadian Securitization(1) | — | | | — | | | Donlen Canadian Securitization | 2 | | | — | | | Australian Securitization | 7 | | | — | | | U.K. Financing Facility | 37 | | | — | | | New Zealand RCF | 3 | | | 2 | | | Total Vehicle Debt | 98 | | | 2 | | | Total | $ | 98 | | | $ | 2 | |
| | | | | | | | | | (In millions) | Remaining
Capacity | | Availability Under
Borrowing Base
Limitation | | Non-Vehicle Debt | | | | | Senior RCF | $ | 397 |
| | $ | 397 |
| | Letter of Credit Facility | 4 |
| | 4 |
| | Total Non-Vehicle Debt | 401 |
| | 401 |
| | Vehicle Debt | |
| | |
| | U.S. Vehicle RCF | — |
| | — |
| | HVF II U.S. Vehicle Variable Funding Notes | 501 |
| | — |
| | HFLF Variable Funding Notes | 436 |
| | 15 |
| | European ABS | 112 |
| | — |
| | Canadian Securitization | — |
| | — |
| | Australian Securitization | 23 |
| | — |
| | U.K. Financing Facility | 19 |
| | — |
| | New Zealand RCF | 3 |
| | — |
| | Total Vehicle Debt | 1,094 |
| | 15 |
| | Total | $ | 1,495 |
| | $ | 416 |
|
(1) As a result of the filing of the Chapter 11 Cases, there is no longer remaining capacity or availability under these facilities, as such were terminated.
Letters of Credit
As of June 30, 2019,2020, there were outstanding standby letters of credit totaling $773$746 million. Such letters of credit have been issued primarily to support the Company's insurance programs, vehicle rental concessions and leaseholds as well as to provide credit enhancement for its asset-backed securitization facilities. Of this amount, $465$240 million waswere issued under the Senior RCF, and $301$299 million waswere issued under the Letter of Credit Facility and $200 million were issued under the Alternative Letter of Credit Facility. As of June 30, 2019, none2020, $2 million and $36 million of the issued letters of credit have been drawn upon.upon under the Senior RCF and Alternative Letter of Credit Facility, respectively, to fund interest payments due under the HVF II Notes. These draws remain unreimbursed by the Company, and, except as otherwise set forth in orders from the Bankruptcy Court, as a result are accruing interest at the non-default rate.
Special Purpose Entities
Substantially all of the Company's 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 the value of such assets (including the assets owned by Hertz Vehicle Financing II LP, HVF II GP Corp., 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) arewill be available to satisfy the claims of general creditors.unsecured creditors unless the secured creditors are paid in full.
The Company has a 25% ownership interest in International Fleet Financing II ("IFF No. 2"),2, 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. IFF No. 2 is a VIE and the Company is the primary beneficiary, therefore, the assets, liabilities and results of operations of IFF No. 2 are included in the Company'saccompanying unaudited condensed consolidated financial statements. As of June 30, 20192020 and December 31, 2018,2019, IFF No. 2 had total assets of $1.3$870
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Unaudited million and $1.1 billion, and $946 million, respectively, primarily comprised of loans receivable, and total liabilities of $1.3$870 million and $1.1 billion, and $946 million, respectively, primarily comprised of debt.
Covenant Compliance
ThePrior to the filing of the Chapter 11 Cases, the financial covenant providesprovided that Hertz’s consolidated first lien net leverage ratio, as defined in the credit agreements governing the Senior RCF, the Letter of Credit Facility and the Alternative Letter of Credit Facility, as of the last day of any fiscal quarter may not exceed a ratio of 3.00 to 1.00 (the "Covenant Leverage Ratio"). As a result of June 30, 2019, Hertz was in compliance with the Covenant Leverage Ratio.
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
Note 4—Leases
As disclosed in the Leases section of Note 2, “Basis of Presentation and Recently Issued Accounting Pronouncements” ("Note 2"),Chapter 11 Cases, the Company adopted Topic 842is currently in accordance withdefault under its Senior RCF, the effective date on January 1, 2019. Note 2 includes disclosures regarding the Company’s methodLetter of adoptionCredit Facility and the impact upon adoption to its financial position, resultsAlternative Letter of operations and cash flows.Credit Facility.
Note 6—Leases
The Company enters into certain agreements as a lessor under which it rents vehicles and leases fleets to customers. The Company enters into agreements as a lessee to rent real estate, vehicles and other equipment and to conduct its vehicle rental operations under concession agreements. If any of the following criteria is met, the Company classifies the lease as a financing lease (as a lessee) or as a direct financing or sales-type lease (as a lessor):
The lease transfers ownership of the underlying asset to the lessee by the end of the lease term;
The lease grants the lessee an option to purchase the underlying asset that the Company is reasonably certain to exercise;
The lease term is for 75% or more of the remaining economic life of the underlying asset, unless the commencement date falls within the last 25% of the economic life of the underlying asset;
The present value of the sum of the lease payments equals or exceeds 90% of the fair value of the underlying asset; or
The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term.
Leases that do not meet any of the above criteria are accounted for as operating leases.
The Company combines lease and non-lease components in its contracts under Topic 842.
The following further describes the Company's leasing transactions.
Lessor
The Company's operating leases for vehicle rentals have rental periods that are typically short term in nature (e.g., daily or weekly) and can generally be extended for up to one month or terminated at the customer's discretion. Rental charges are computed on a limited or unlimited mileage rate, or on a time rate plus a mileage charge. In connection with the vehicle rental, the Company offers supplemental equipment rentals (e.g., child seats and ski racks) and issues loyalty points to customers enrolled in its Hertz Gold Plus Rewards program, which are deemed lease components. The Company also offers value-added services in connection with the vehicle rental, which are deemed non-lease components, such as loss or collision damage waiver, theft protection, liability and personal accident/effects insurance coverage, premium emergency roadside service and satellite radio. Additionally, the Company charges for variable services primarily consisting of tolls and refueling charges incurred during the rental period, and for fees associated with the early or late termination of the vehicle lease. The Company mitigates residual value risk of its revenue earning vehicles by utilizing manufacturer repurchase and guaranteed depreciation programs, using sophisticated vehicle diagnostic and repair equipment to maintain the condition of its vehicles, and through periodic reviews of vehicle depreciation rates based on management's ongoing assessment of present and estimated future market conditions.
The Company's operating leases for fleets have lease periods that are typically for twelve months, after which the lease converts to a month-to-month lease, allowing the vehicle to be surrendered any time thereafter. The Company's fleet leases contain a terminal rental adjustment clause ("TRAC") where, upon sale of the vehicle following the termination of the lease, a TRAC adjustment may result through which the lessee is credited or charged with the gain or loss on the vehicle. Such TRAC adjustments are considered variable charges.
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
The following table summarizes the amount of operating lease income and other income included in total revenues in the accompanying condensed consolidated statements of operations for the three and six months ended June 30, 2019:operations: | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended
June 30, | | | | Six Months Ended
June 30, | | | | (In millions) | 2020 | | 2019 | | 2020 | | 2019 | | Operating lease income from vehicle rentals | $ | 604 | | | $ | 2,208 | | | $ | 2,241 | | | $ | 4,041 | | | Operating lease income from fleet leasing | 161 | | | 168 | | | 330 | | | 326 | | | Variable operating lease income | 1 | | | 43 | | | 34 | | | 77 | | | Revenue accounted for under Topic 842 | 766 | | | 2,419 | | | 2,605 | | | 4,444 | | | Revenue accounted for under Topic 606 | 66 | | | 92 | | | 150 | | | 174 | | | Total revenues | $ | 832 | | | $ | 2,511 | | | $ | 2,755 | | | $ | 4,618 | |
| | | | | | | | | | (In millions) | Three Months
Ended
June 30, 2019 | | Six Months
Ended
June 30, 2019 | | Operating lease income from vehicle rentals | $ | 2,208 |
| | $ | 4,041 |
| | Operating lease income from fleet leasing | 168 |
| | 326 |
| | Variable operating lease income | 43 |
| | 77 |
| | Revenue accounted for under Topic 842 | 2,419 |
| | 4,444 |
| | Revenue accounted for under Topic 606 | 92 |
| | 174 |
| | Total revenues | $ | 2,511 |
| | $ | 4,618 |
|
As a lessee, the Company has the following types of operating leases:
Concession agreements which grant the Company the right to conduct its vehicle rental operations at airports, hotels and train stations and to use building space such as terminal counters and parking garages;
Real estate leases for its off airport vehicle rental locations and other premises;
Revenue earning vehicle leases; and
Other equipment leases.
The Company's lease terms generally range from one month to thirty-five years and a number of agreements contain escalation clauses, which increase the payment obligation based on a fixed or variable rate, and renewal options. The length of renewals vary and may result in different payment terms. Payment terms are based on fixed rates explicit in the lease, including guaranteed minimums, and/or variable rates based on:
Operating expenses, such as common area charges, real estate taxes and insurance;
A percentage of revenues or sales arising at the relevant premises; and/or
Periodic inflation adjustments.
The Company recognizes a ROU asset and lease liability in its accompanying condensed consolidated balance sheets for leases with a term greater than twelve months. Options to extend or terminate a lease are included in the Company's ROU asset and lease liability when it is reasonably certain that such options will be exercised. The Company does not recognize ROU assets or lease liabilities for short-term leases (i.e., those with a term of twelve months or less) and recognizes lease expense on a straight-line basis over the lease term.
To determine the present value of its lease payments, the Company utilizes the interest rate implicit in the lease agreement. If the implicit interest rate was not provided in the lease agreement, the Company utilizes the Company's collateralized incremental borrowing rate as of the beginning of the reporting period or the commencement date of the lease, whichever is later.
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Unaudited Note 7—Restructuring
Due to the impact from COVID-19 as disclosed in Note 1, "Background," the Company initiated a restructuring program, beginning in April 2020, affecting approximately 11,000 employees in its U.S. Rental Car segment and corporate operations and incurred approximately $37 million of charges for termination benefits during the second quarter of 2020, of which $7 million were classified as liabilities subject to compromise in the accompanying unaudited condensed consolidated balance sheet as of June 30, 2020 as disclosed below. This program is expected to be completed within the next twelve months.
The following table summarizes restructuring charges under this program:
| | | | | | | | | | | | | (In millions) | Three Months Ended
June 30, 2020 | | Six Months Ended
June 30, 2020 | | Termination charges: | | | | | Direct vehicle and operating | $ | 25 | | | $ | 25 | | | Selling, general and administrative | 12 | | | 12 | | | Total | $ | 37 | | | $ | 37 | |
| | | | | | | | | | | | | (In millions) | Three Months Ended
June 30, 2020 | | Six Months Ended
June 30, 2020 | | Termination charges: | | | | | U.S. Rental Car Segment | $ | 34 | | | $ | 34 | | | | | | | | | | | Corporate operations | 3 | | | 3 | | | Total | $ | 37 | | | 37 | |
The tables above do not include pension-related settlement charges incurred during the three and six months ended June 30, 2020. See Note 10, "Employee Retirement Benefits".
The following table summarizes the amount of lease costs incurred byactivity affecting the Company: | | | | | | | | | | | | | | (In millions) | Three Months
Ended
June 30, 2019 | | Six Months
Ended
June 30, 2019 | | Year Ended
December 31,
2018 | Minimum fixed lease costs(1): | | | | | | | Short-term lease costs | $ | 32 |
| | $ | 62 |
| | N/A |
| | Other operating lease costs | 135 |
| | 269 |
| | N/A |
| | Total | $ | 167 |
| | $ | 331 |
| | $ | 577 |
| | Variable lease costs | 83 |
| | 146 |
| | 438 |
| | Total lease costs | $ | 250 |
| | $ | 477 |
| | $ | 1,015 |
|
(1)Topic 842, which was adopted on January 1, 2019, requires the Company to disclose the short term portion of minimum fixed lease costs. For the year ended December 31, 2018, under the then existing guidance in Topic 840, the Company was only required to disclose minimum fixed costs in total.
The following summarizes the weighted average remaining lease term and weighted average discount rate for the Company's operating leases as a lessee:
| | | | | | | | | | | (In millions) | AsTermination
Benefits | | | | | | Balance as of December 31, 2019 | $ | 1 | | | | | | | Charges incurred | 37 | | | | | | | Cash payments | (22) | | | | | | Liabilities subject to compromise(1) | (7) | | | | | | Balance as of June 30, 2019 | Weighted average remaining lease term (in years)2020 | 9$ |
| Weighted average discount rate9 | 10.9 | % | | | |
The following table summarizes(1) As a result of filing the Company's minimum fixed lease obligations under existing agreementsChapter 11 Cases, as a lessee, excluding variable concession obligations and short-term leases,disclosed in Note 1, "Background," the Company classified $7 million of restructuring charges as liabilities subject to compromise in the accompanying unaudited condensed consolidated balance sheet as of June 30, 2019:2020. See Note 15, "Liabilities Subject to Compromise".
| | | | | | (In millions) | | | July 1, 2019 - June 30, 2020 | $ | 465 |
| | July 1, 2020 - June 30, 2021 | 385 |
| | July 1, 2021 - June 30, 2022 | 311 |
| | July 1, 2022 - June 30, 2023 | 231 |
| | July 1, 2023 - June 30, 2024 | 174 |
| | After June 30, 2024 | 964 |
| | Total lease payments | 2,530 |
| | Interest | (992 | ) | | Operating lease liabilities at June 30, 2019 | $ | 1,538 |
|
Note 5—8—Income Tax (Provision) Benefit
On March 27, 2020, the U.S. federal government passed the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"). The CARES Act contains many tax provisions including, but not limited to, accelerated alternative minimum tax ("AMT") refunds, payroll tax payment deferrals, employee retention credits, enhanced net operating
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Unaudited loss ("NOL") carryback rules and an increase to the interest deduction limitation. The Company has considered the income tax provisions of the CARES Act in the tax benefit calculation for the three and six months ended June 30, 2020. The Company continues to monitor and analyze the CARES Act along with global legislation issued in response to the COVID-19 pandemic. Hertz Global
The effective tax rate is 18% and (9)% for the three months ended June 30, 20192020 and 2018 is (9)% and 27%,2019, respectively. The effective tax rate is 14% and (3)% for the six months ended June 30, 20192020 and 2018 is (3)% and 16%,2019, respectively.
The CompanyHertz Global recorded a tax benefit of $192 million and $196 million for the three and six months ended June 30, 2020, respectively, compared to a tax provision of $4 million and $3 million for the three and six months ended June 30, 2019, respectively,respectively. The tax benefit for the three and six months ended June 30, 2020 compared to 2019 is due to increased losses on Hertz Global's operations due to the effect of COVID-19, primarily offset by the impact of valuation allowances on net deferred tax assets for certain foreign and domestic jurisdictions. Additionally, Hertz Global no longer asserts permanent reinvestment of foreign earnings, due to the impact from COVID-19 as disclosed in Note 1, "Background." Hertz Global does not anticipate that the change in its assertion will have a material impact on its cash flows during the next twelve months, between July 1, 2020 and June 30, 2021.
Hertz
The effective tax rate is 19% and (11)% for the three months ended June 30, 2020 and 2019, respectively. The effective tax rate is 15% and (4)% for the six months ended June 30, 2020 and 2019, respectively.
Hertz recorded a tax benefit of $23$219 million and $52$224 million for the three and six months ended June 30, 2018, respectively. The effective income tax rate and related tax benefit are lower for the three and six months ended June 30, 2019 driven by overall improvement in results from operations, primarily due2020, respectively, compared to lower losses in the U.S. where an income tax benefit was recognized, and the composition of earnings by jurisdiction.
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
Hertz
The effective tax rate for the three months ended June 30, 2019 and 2018 is (11)% and 27%, respectively. The effective tax rate for the six months ended June 30, 2019 and 2018 is (4)% and 16%, respectively.
The Company recorded a tax provision of $5 million and $4 million for the three and six months ended June 30, 2019, respectively, compared to arespectively. The tax benefit of $23 million and $51 million for the three and six months ended June 30, 2018, respectively. The effective income2020 compared to 2019 is due to increased losses on Hertz's operations due to the effect of COVID-19, primarily offset by the impact of valuation allowances on net deferred tax rateassets for certain foreign and related tax benefit are lower fordomestic jurisdictions. Additionally, Hertz no longer asserts permanent reinvestment of foreign earnings, due to the threeimpact from COVID-19 as disclosed in Note 1, "Background." Hertz does not anticipate that the change in its assertion will have a material impact on its cash flows during the next twelve months, between July 1, 2020 and six months ended June 30, 2019 driven by overall improvement in results from operations, primarily due to lower losses in the U.S. where an income tax benefit was recognized, and the composition of earnings by jurisdiction.2021.
Note 6—9—Earnings (Loss) Per Share - Hertz Global
Basic earnings (loss) per share has been computed based upon the weighted averageweighted-average number of common shares outstanding. Diluted earnings (loss) per share has been computed based upon the weighted averageweighted-average number of common shares outstanding plus the effect of all potentially dilutive common stock equivalents, except when the effect would be anti-dilutive.
Rights Offering
In June 2019, Hertz Global filed a prospectus supplement to its Registration Statement on Form S-3 declared effective by the SEC on June 12, 2019 (the "Registration Statement") for a rights offering to raise gross proceeds of approximately $750 million and providing for the issuance of up to an aggregate of 57,915,055 new shares of Hertz Global common stock (the "Rights Offering"). Upon closing in July 2019, the Rights Offering was fully subscribed resulting in Hertz Global selling 57,915,055 shares of its common stock for gross proceeds of $750 million. Basic weighted averageweighted-average shares outstanding and weighted averageweighted-average shares used to calculate diluted earnings (loss) per share for the three and six months ended June 30, 20182019 have been adjusted to give effect to the rightsRights Offering.
Open Market Sale Agreement
In June 2020, subsequent to approval from the Bankruptcy Court and pursuant to a prospectus supplement to the Registration Statement, Hertz Global entered into an open market sale agreement under which it may offer and sell,
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Unaudited from time to time, shares of its common stock, par value $0.01 per share, having an aggregate offering describedprice of up to $500 million ("ATM Program"). Prior to its suspension on June 15, 2020 and ultimate termination on June 18, 2020, Hertz Global issued 13,912,368 shares under the ATM Program for net proceeds of approximately $29 million, which is included in Note 12,"Subsequent Events." Fornon-vehicle restricted cash in the three and six months endedaccompanying unaudited condensed consolidated balance sheet as of June 30, 2019, the basic weighted average shares outstanding and weighted average shares used to calculate diluted earnings (loss) per share also are adjusted for the rights offering.2020.
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) | 2020 | | 2019 | | 2020 | | 2019 | | Numerator: | | | | | | | | | Net income (loss) attributable to Hertz Global | $ | (847) | | | $ | 38 | | | $ | (1,203) | | | $ | (108) | | | Denominator: | | | | | | | | | Basic weighted-average shares outstanding (excluding the impact of the Rights Offering) | 144 | | | 84 | | | 143 | | | 84 | | Rights Offering adjustment(1) | — | | | 12 | | | — | | | 12 | | | Basic weighted-average shares outstanding | 144 | | | 96 | | | 143 | | | 96 | | | Dilutive stock options, RSUs and PSUs | — | | | 1 | | | — | | | — | | | Diluted weighted-average shares outstanding | 144 | | | 97 | | | 143 | | | 96 | | | Antidilutive stock options, RSUs, PSUs and PSAs | 2 | | | 1 | | | 2 | | | 2 | | | Earnings (loss) per share: | | | | | | | | | Basic earnings (loss) per share | $ | (5.86) | | | $ | 0.40 | | | $ | (8.39) | | | $ | (1.13) | | | Diluted earnings (loss) per share | $ | (5.86) | | | $ | 0.40 | | | $ | (8.39) | | | $ | (1.13) | |
| | | | | | | | | | | | | | | | | | | Three Months Ended
June 30, | | Six Months Ended
June 30, | | (In millions, except per share data) | 2019 | | 2018 | | 2019 | | 2018 | | Basic and diluted earnings (loss) per share: | | | | | | | | | Numerator: | | | | | | | | | Net income (loss) | $ | 40 |
| | $ | (63 | ) | | $ | (107 | ) | | $ | (265 | ) | | Net (income) loss attributable to noncontrolling interests | (2 | ) | | — |
| | (1 | ) | | — |
| | Net income (loss) attributable to Hertz Global | $ | 38 |
| | $ | (63 | ) | | $ | (108 | ) | | $ | (265 | ) | | Denominator: | | | | | | | | | Unadjusted basic weighted average shares outstanding | 84 |
| | 84 |
| | 84 |
| | 83 |
| | Rights offering adjustment | 12 |
| | 12 |
| | 12 |
| | 12 |
| | Basic weighted average shares outstanding | 96 |
| | 96 |
| | 96 |
| | 95 |
| | Dilutive stock options, RSUs and PSUs | 1 |
| | — |
| | — |
| | — |
| | Weighted average shares used to calculate diluted earnings (loss) per share | 97 |
| | 96 |
| | 96 |
| | 95 |
| | Antidilutive stock options, RSUs, PSUs and PSAs | 1 |
| | 3 |
| | 2 |
| | 3 |
| | Earnings (loss) per share: | | | | | | | | | Basic earnings (loss) per share | $ | 0.40 |
| | $ | (0.66 | ) | | $ | (1.13 | ) | | $ | (2.78 | ) | | Diluted earnings (loss) per share | $ | 0.40 |
| | $ | (0.66 | ) | | $ | (1.13 | ) | | $ | (2.78 | ) |
Note 10—Employee Retirement Benefits
The Company sponsors several employee retirement plans for its U.S. employees. The Hertz Corporation Account Balance Defined Benefit Pension Plan (the "Hertz Retirement Plan") is a U.S. cash balance plan which was amended in 2014 to permanently discontinue future benefit accruals and participation under the plan for non-union employees. Additionally, the Company sponsors the Hertz Corporation Benefit Equalization Plan ("BEP") and the Hertz Corporation Supplemental Executive Retirement Plans (together with the BEP, the "Supplemental Plans"), where benefit accruals and participation under the Supplemental Plans were discontinued by the Company effective December 31, 2014, although service continues to vest.
As a result of filing the Chapter 11 Cases, as disclosed in Note 1, "Background," participants of the Supplemental Plans are no longer entitled to benefit payments and are considered general creditors of the Company. As such, the Company classified $24 million of its U.S. pension benefit obligation as liabilities subject to compromise in the accompanying unaudited consolidated balance sheet as of June 30, 2020.
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Unaudited The following table sets forth the net periodic pension cost of the Hertz Retirement Plan and the Supplemental Plans (collectively, the "U.S. Plan"), which is included in other (income) expense, net in the accompanying unaudited condensed consolidated statements of operations, excluding service cost which is included in direct vehicle and operating expense. Due to settlement accounting, the discount rate for the U.S. Plan has been revised from a weighted average rate of 3.1% as of December 31, 2019 to 2.5% as of July 1, 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | U.S. Plan | | | | | | | | Three Months Ended June 30, | | | | Six Months Ended June 30, | | | | (in millions) | 2020 | | 2019 | | 2020 | | 2019 | | Service cost | $ | — | | | $ | — | | | $ | — | | | $ | — | | | Interest cost | 4 | | | 5 | | | 8 | | | 11 | | | Expected return on plan assets | (5) | | | (6) | | | (10) | | | (11) | | | Net amortizations | 1 | | | 2 | | | 2 | | | 3 | | Settlement loss(1) | 4 | | | — | | | 4 | | | — | | | Net pension expense (benefit) | $ | 4 | | | $ | 1 | | | $ | 4 | | | $ | 3 | |
(1) The Company incurred $4 million in settlement charges primarily associated with a restructuring program that commenced in the second quarter of 2020. See Note 7, "Restructuring".
Note 7—11—Fair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The fair value of cash, restricted cash, accounts receivable, accounts payable and accrued expenses,liabilities, 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, Restricted Cash Equivalents and Investments
The Company’s cash equivalents and restricted cash equivalents primarily consist of investments in money market funds and time deposits. The Company determines the fair value of cash equivalents using a market approach based on quoted prices in active markets (Level(i.e., Level 1 inputs).
Investments in equity securities that are measured at fair value on a recurring basis consistconsisted of marketable securities.securities as of December 31, 2019. See Note 3, "Divestitures." for further information.
The following table summarizes the ending balances of the Company's cash equivalents, restricted cash equivalents and investments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | June 30, 2020 | | | | | | | | December 31, 2019 | | | | | | | | (In millions) | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total | | Money market funds and time deposits | $ | 1,055 | | | $ | — | | | $ | — | | | $ | 1,055 | | | $ | 531 | | | $ | — | | | $ | — | | | $ | 531 | | | Marketable securities | — | | | — | | | — | | | — | | | 74 | | | — | | | — | | | 74 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | June 30, 2019 | | December 31, 2018 | | (In millions) | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total | | Money market funds and time deposits | $ | 202 |
| | $ | — |
| | $ | — |
| | $ | 202 |
| | $ | 701 |
| | $ | — |
| | $ | — |
| | $ | 701 |
| | Equity securities | 64 |
| | — |
| | — |
| | 64 |
| | 44 |
| | — |
| | — |
| | 44 |
|
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Unaudited
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(i.e., Level 2 inputs). | | | | | | | | | | | | | | | | | | | | | | | | | As of June 30, 2020 | | | | As of December 31, 2019 | | | | (In millions) | Nominal Unpaid Principal Balance | | Aggregate Fair Value (1) | | Nominal Unpaid Principal Balance | | Aggregate Fair Value | Non-Vehicle Debt(2) | $ | 4,406 | | | $ | 1,738 | | | $ | 3,755 | | | $ | 3,840 | | | Vehicle Debt | 12,999 | | | 12,660 | | | 13,415 | | | 13,529 | | | Total | $ | 17,405 | | | $ | 14,398 | | | $ | 17,170 | | | $ | 17,369 | |
| | | | | | | | | | | | | | | | | | | As of June 30, 2019 | | As of December 31, 2018 | | (In millions) | Nominal Unpaid Principal Balance | | Aggregate Fair Value | | Nominal Unpaid Principal Balance | | Aggregate Fair Value | | Non-Vehicle Debt | $ | 4,457 |
| | $ | 4,458 |
| | $ | 4,455 |
| | $ | 4,011 |
| | Vehicle Debt | 14,969 |
| | 15,080 |
| | 11,945 |
| | 11,891 |
| | Total | $ | 19,426 |
| | $ | 19,538 |
| | $ | 16,400 |
| | $ | 15,902 |
|
(2)Includes Non-Vehicle Debt included in liabilities subject to compromise in the accompanying balance sheet as of June 30, 2020. See Note 5, "Debt."
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
Assets and liabilities measured at fair value on a non-recurring basis as of June 30, 2020 consist of technology-related intangible assets and other assets, as disclosed in Note 4, "Goodwill and Intangible Assets, Net." Note 8—12—Contingencies and Off-Balance Sheet Commitments
Legal Proceedings
Public Liability and Property DamageSelf-insured Liabilities
The Company is currently a defendant in numerous actions and has received numerous claims on which actions have not yet commenced for public liability and property damageself-insured liabilities arising from the operation of motor vehicles rented from the Company. The obligation for public liability and property damageself-insured liabilities on self-insured U.S. and international vehicles, as stated in the accompanying unaudited condensed consolidated balance sheets, represents an estimate for both reported accident claims not yet paid and claims incurred but not yet reported. The related liabilitiesreported and are recorded on a non-discountedan undiscounted 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. As of June 30, 20192020 and December 31, 2018,2019, the Company's liability recorded for public liability and property damage mattersself-insured liabilities is $426$495 million and $418$553 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.assumptions. The liability is subject to significant
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
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.
Loss Contingencies
From time to time the Company is a party to various legal proceedings, typically involving operational issues common to the vehicle rental business, including claims by employees and former employees and governmental investigations. The Company has summarized below the most significant legal proceedings to which the Company was and/or is a party during the six months endedas of June 30, 20192020 or the period after June 30, 2019,2020, but before the filing of this Quarterly Report on Form 10‑Q.10-Q.
Governmental Investigations - The Company previously identified certain activities in Brazil that raised issues under the Foreign Corrupt Practices Act (the "FCPA") and other federal and local laws, which the Company self-reported to appropriate government entities. The matters associated with the FCPA and other federal matters have been resolved without further action by the applicable U.S. government entities. The
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Unaudited Company is continuing its cooperation with respect to matters under local Brazilian laws. The Company has accrued a loss contingency with respect to the ongoing Brazil-related matters that is not material.
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 (as defined in the Company's 2019 Form 10-K) 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 certain of its public disclosures 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. The complaint, as amended, was dismissed with prejudice on April 27, 2017 and on September 20, 2018, the Third Circuit affirmed the dismissal of the complaint with prejudice. On February 5, 2019, the plaintiffs filed a motion asking the federal district court to exercise its discretion and allow the plaintiffs to reinstate their claims to include additional allegations from the administrative order agreed to by the SEC and the Company in December 2018. The motion has been fully briefed and is pending before2018, which was supplemented by reference to the Company’s subsequently filed litigation against former executives (discussed below). On September 30, 2019, the federal district court.
In additioncourt of New Jersey denied the plaintiffs’ motion for relief from the April 27, 2017 judgment and a related motion to allow the filing of a proposed fifth amended complaint. On October 30, 2019, the plaintiffs filed a notice of appeal as to the matters described above,district court’s latest denial with the Company maintains an internal compliance program through which it from time to time identifies other potential violationsU. S. Court of lawsAppeals for the Third Circuit. The parties fully briefed the appeal and regulations applicableoral argument had been scheduled for June 19, 2020. The plaintiffs advocated that the appeal could proceed against the individual defendants and the case has been listed for “at the convenience to the Company. When the Company identifies such matters, the Company conducts an internal investigation and otherwise cooperates with governmental authorities, as appropriate.Court."
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,self-insured liabilities, 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. These matters are 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 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 accompanying consolidated financial condition, results of operations or cash flows in any particular reporting period.
Other Proceedings
Litigation Against Former Executives - On March 25, 2019, theThe Company filed a petitionlitigation in federal court in New Jersey against Mark Frissora, Elyse Douglas and John JeffreyJefferey Zimmerman on March 25, 2019, and in state court in Florida against Scott Sider on March 28, 2019, all of whom were former senior executive officers of the former Hertz Global Holdings, Inc. ("Old Hertz Holdings"), in the U.S. District Court for the District of New Jersey alleging four causes of action for breach
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
of contract, with a fifth cause of action seeking a declaratory judgment denying the defendants' entitlement to advances of fees and expenses under the Company's indemnification bylaws. On March 28, 2019, the Company filed a petition against Scott Sider, a former senior executive of Old Hertz Holdings, in the Circuit Court of the Twentieth Judicial Circuit in Lee County, Florida alleging three causes of action forHoldings. The complaints predominantly allege breach of contract with a fourth cause of action seeking a declaratory judgment denying the defendants' entitlement to advances of fees and expenses under the Company's indemnification bylaws. The Company is seekingseek repayment of incentive-based compensation received by the defendants in connection with the restatements included in the Old Hertz Holdings Form 10-K for the year ended December 31, 2014 and related accounting for prior periods. The Company is also seeking recovery for the costs of the SEC investigation that resulted in an administrative order on December 31, 2018 with respect to events generally involving the restatements included in Old Hertz Holdings Form 10-K for the year ended December 31, 2014 and other damages resulting from the necessity of the restatements. The Company is pursuing these legal proceedings in accordance with its clawback policy and contractual rights. After the defendantsThe parties are currently involved in motion practice in the New Jersey litigation filed motions to dismiss,action and discovery and depositions have commenced in the Florida action. In October 2019, the Company filedentered into a first amended complaint. Scott Sider similarly filed a motion to dismiss andconfidential Settlement Agreement with Elyse Douglas. Since then, the venue of the petition against Scott SiderCompany has been moved toengaged in motion practice in New Jersey by filing a Second Amended Complaint which was filed in May of 2020. In the Twentieth Judicial Circuit forFlorida action, the State of FloridaCompany has been engaged in Collier County.discovery and depositions. Pursuant to the agreements governing the separation of Herc Holdings from Hertz Global that occurred on June 30, 2016, Herc Holdings is entitled to 15% of the net proceeds of any such repayment or recovery.
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Unaudited Indemnification Obligations
In the ordinary course of business, the Company has executed contracts involving indemnification obligations customary in the relevant industry and indemnifications 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;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 (as defined in the Company's 2019 Form 10-K), 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. The Company regularly evaluates the probability of having to incur costs associated with these indemnification obligations and has accrued for expected losses that are probable and estimable.
Note 9—13—Related Party Transactions
Agreements with the Icahn Group
In the normal course of business, the Company purchases goods and services and leases property from entities controlled by Carl C. Icahn and his affiliates, including The Pep Boys - Manny, Moe & Jack (collectively, the "Icahn Group"). In May 2020, the Icahn Group fully divested all owned shares of Hertz Global common stock (the "Icahn Divestiture"). As a result of the Icahn Divestiture, the Icahn Group is no longer a related party of the Company.
During the threetwo and five months ended June 30, 2019 and 2018,May 31, 2020, the Company purchased approximately $12$6 million and $11$23 million, respectively, worth of goods and services from these related parties. During the three months and six months ended June 30, 2019, and 2018, the Company purchased approximately $24$12 million and $17$24 million, respectively, worth of goods and services from these related parties.
In May 2018, the Company sold approximately $36 million of marketable securitiesSubsequent to the Icahn Group atDivestiture, there continues to be arms-length transactions between the then current market price of such securities.Company and the Icahn Group.
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
Transactions and Agreements between Hertz Holdings and Hertz
In June 2018,2019, Hertz entered into a master loan agreement with Hertz Holdings for a facility size of $425 million with an expiration in June 2019 (the "2018 Master Loan"). The interest rate is based on the U.S. Dollar LIBOR rate plus a margin.
In June 2019, upon expiration of the 2018 Master Loan, Hertz entered into a new master loan agreement with Hertz Holdings for a facility size of $425 million with an expiration in June 2020 (the "2019 Master Loan") where amounts outstanding under the 2018 Master Loan were transferred to the 2019 Master Loan.. The interest rate is based on the U.S. Dollar LIBOR rate plus a margin. As of June 30, 2019 and December 31, 2018, there was $123 million and $117 million, respectively,2019, the amount outstanding under the 2019 Master Loan was $129 million, representing advances and any accrued but unpaid interest. Additionally, Hertz hashad a loan due to an affiliate in the amount of $65 million as of June 30, 2019 and December 31, 2018,2019 which represents a tax-related liability to Hertz Holdings.
The net impact of the above amounts are included in stockholder's equity in the accompanying unaudited condensed consolidated balance sheetssheet of Hertz.Hertz as of December 31, 2019.
As a result of filing the Chapter 11 Cases, as disclosed in Note 1, "Background," the full amount outstanding under the 2019 Master Loan was deemed uncollectible, resulting in a charge of $133 million which was recorded in the accompanying unaudited condensed consolidated statements of operations for Hertz for the three and six months ended June 30, 2020. Additionally, the loan due to an affiliate, which represents a tax-related liability from Hertz to
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Unaudited Hertz Holdings, in the amount of $65 million was classified as liabilities subject to compromise in the accompanying unaudited condensed consolidated balance sheet of Hertz as of June 30, 2020. See Note 15, "Liabilities Subject to Compromise".
On May 23, 2020, Hertz entered into a new master loan agreement with Hertz Holdings for a facility size of $25 million with an expiration in May 2021. The interest rate is based on the U.S. Dollar LIBOR rate plus a margin. As of June 30, 2020 no transactions had been recorded.
767 Auto Leasing LLC
In January 2018, Hertz entered into a Master Motor Vehicle Lease and Management Agreement (the “767 Lease Agreement”) pursuant to which Hertz granted 767 Auto Leasing LLC (“767”), an entity affiliated with the Icahn Group, the option to acquire certain vehicles from Hertz at rates aligned with the rates at which Hertz sells vehicles to third parties. As disclosed above, due to the Icahn Divestiture, the Icahn Group is no longer a related party of the Company. Hertz leases the vehicles purchased by 767 under the 767 Lease Agreement or from third parties, under a mutually developed fleet plan and Hertz manages, services, repairs, sells and maintains those leased vehicles on behalf of 767. Hertz currently rents the leased vehicles to drivers of transportation network companies ("TNC"), including Lyft, Inc. drivers, from rental counters within locations leased or owned by affiliates of 767 ("Icahn Locations"), including locations operated under a master lease agreement with The Pep Boys - Manny, Joe & Jack. The 767 Lease Agreement hashad an initial term, as extended, of 18approximately 22 months, and is subject to automatic six month renewals thereafter, unless terminated by either party (with or without cause) prior to the start of any such six month renewal.
767’s payment obligations under the 767 Lease Agreement are guaranteed by American Entertainment Properties Corp. ("American"AEPC"), an entity affiliated with the Icahn Group. During the three and six months ended June 30, 2019, AmericanAEPC contributed $20 million and $45 million, respectively, to 767 along with certain services. There were 0 cash contributions from AEPC to 767 during the three and six months ended June 30, 2020, except for certain services.
The Company is entitled to 25% of the profit from the rental of the leased vehicles, as specified in the 767 Lease Agreement, which is variable and based primarily on the rental revenue, less certain vehicle relatedvehicle-related costs, such as depreciation, licensing and maintenance expenses. The Company has determined that it is the primary beneficiary of 767 due to its power to direct the activities of 767 that most significantly impact 767's economic performance and the Company's obligation to absorb 25% of 767's gains/losses. Accordingly, 767 is consolidated by the Company as a VIE.
In October 2019, the 767 Lease Agreement was amended such that, among other changes, 767 vehicles will be available for rent from Hertz locations that are opened in replacement of closed Icahn Locations, and the 767 vehicles may be available for rent to traditional off-airport customers in addition to TNC drivers, when certain conditions apply.
Note 10—14—Segment Information
The Company’s chief operating decision maker assesses performance and allocates resources based upon the financial information for the Company’s operating segments. The Company aggregates certain of its operating segments into its reportable segments. The Company has identified three3 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,(i.e., cars, crossovers, vans and light trucks), as well as sales of value-added services, in the U.S. and consists of the Company's U.S. operating segment;
•International Rental Car ("International RAC") - rental and leasing of vehicles (cars,(i.e., cars, vans, crossovers and light trucks), as well as sales of value-added services, internationally and consists of the Company's Europe and Other International operating segments, which are aggregated into a reportable segment based primarily upon
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) 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 - primarily consists of the Company's Donlen business, which provides vehicle leasing and fleet management services, together with other business activities which represent less than 1% of revenues and expenses of the segment.
Effective during the three months ended June 30, 2019, the Company changed its segment measure of profitability for its reportable segments to Adjusted EBITDA, as shown in the Adjusted EBITDA reconciliation tables below. This measure better aligns with the way the Company reviews its overall vehicle rental and leasing business and determines management incentive compensation.business. Prior to the three months ended June 30, 2019, the Company’s segment measure of profitability was Adjusted Pre-tax Income (Loss) which included non-vehicle depreciation and amortization, net non-vehicle debt interest, net, and certain other items. For comparability purposes, the Company has revised the 2018 segment results to reflect the new segment measure of profitability.
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). Corporate includes other items necessary to reconcile the reportable segments to the Company's total amounts.
The following tables provide significant statementstatements of operations and balance sheet information by reportable segment for each of Hertz Global and Hertz, includingas well as Adjusted EBITDA, the measure used to determine segment profitability. | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended
June 30, | | | | Six Months Ended
June 30, | | | | (In millions) | 2020 | | 2019 | | 2020 | | 2019 | | Revenues | | | | | | | | | U.S. Rental Car | $ | 533 | | | $ | 1,784 | | | $ | 1,914 | | | $ | 3,304 | | | International Rental Car | 135 | | | 560 | | | 502 | | | 993 | | All Other Operations(1) | 164 | | | 167 | | | 339 | | | 321 | | | Total Hertz Global and Hertz | $ | 832 | | | $ | 2,511 | | | $ | 2,755 | | | $ | 4,618 | | | Depreciation of revenue earning vehicles and lease charges | | | | | | | | | U.S. Rental Car | $ | 408 | | | $ | 411 | | | $ | 871 | | | $ | 797 | | | International Rental Car | 81 | | | 106 | | | 170 | | | 203 | | | All Other Operations | 121 | | | 117 | | | 245 | | | 226 | | | Total Hertz Global and Hertz | $ | 610 | | | $ | 634 | | | $ | 1,286 | | | $ | 1,226 | | | Adjusted EBITDA | | | | | | | | | U.S. Rental Car | $ | (470) | | | $ | 156 | | | $ | (668) | | | $ | 163 | | | International Rental Car | (127) | | | 56 | | | (172) | | | 42 | | | All Other Operations | 23 | | | 24 | | | 48 | | | 45 | | | Corporate | (13) | | | (29) | | | (38) | | | (47) | | | Total Hertz Global and Hertz | $ | (587) | | | $ | 207 | | | $ | (830) | | | $ | 203 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | Three Months Ended
June 30, | | Six Months Ended
June 30, | | (In millions) | 2019 | | 2018 | | 2019 | | 2018 | | Revenues | | | | | | | | | U.S. Rental Car | $ | 1,784 |
| | $ | 1,628 |
| | $ | 3,304 |
| | $ | 3,054 |
| | International Rental Car | 560 |
| | 589 |
| | 993 |
| | 1,057 |
| | All Other Operations | 167 |
| | 172 |
| | 321 |
| | 341 |
| | Total Hertz Global and Hertz | $ | 2,511 |
| | $ | 2,389 |
| | $ | 4,618 |
| | $ | 4,452 |
| | Depreciation of revenue earning vehicles and lease charges | | | | | | | | | U.S. Rental Car | $ | 411 |
| | $ | 447 |
| | $ | 797 |
| | $ | 881 |
| | International Rental Car | 106 |
| | 112 |
| | 203 |
| | 214 |
| | All Other Operations | 117 |
| | 128 |
| | 226 |
| | 253 |
| | Total Hertz Global and Hertz | $ | 634 |
| | $ | 687 |
| | $ | 1,226 |
| | $ | 1,348 |
| | Adjusted EBITDA | | | | | | | | | U.S. Rental Car | $ | 156 |
| | $ | 18 |
| | $ | 163 |
| | $ | (30 | ) | | International Rental Car | 56 |
| | 81 |
| | 42 |
| | 81 |
| | All Other Operations | 24 |
| | 21 |
| | 45 |
| | 41 |
| | Corporate | (29 | ) | | (27 | ) | | (47 | ) | | (59 | ) | | Total Hertz Global and Hertz | $ | 207 |
| | $ | 93 |
| | $ | 203 |
| | $ | 33 |
|
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Unaudited
| | | | | | | | | | | | | (In millions) | June 30, 2020 | | December 31, 2019 | | Total assets | | | | | U.S. Rental Car | $ | 15,614 | | | $ | 16,459 | | | International Rental Car | 3,783 | | | 4,563 | | | All Other Operations | 1,970 | | | 2,115 | | | Corporate | 1,749 | | | 1,490 | | Total Hertz Global(1) | 23,116 | | | 24,627 | | Corporate - Hertz(2) | (29) | | | — | | Total Hertz(1) | $ | 23,087 | | | $ | 24,627 | |
(1) The consolidated total assets of Hertz Global and Hertz as of June 30, 2020 and December 31, 2019 include total assets of VIEs of $986 million and $1.3 billion, respectively, which can only be used to settle obligations of the VIEs. See "Special Purpose Entities" in Note 5, "Debt," and "767 Auto Leasing LLC" in Note 13, "Related Party Transactions," for further information. | | | | | | | | | | (In millions) | June 30, 2019 | | December 31, 2018 | | Total assets | | | | | U.S. Rental Car | $ | 17,775 |
| | $ | 13,983 |
| | International Rental Car | 5,470 |
| | 4,057 |
| | All Other Operations | 2,059 |
| | 1,843 |
| | Corporate | 1,050 |
| | 1,499 |
| | Total Hertz Global | 26,354 |
| | 21,382 |
| | Corporate - Hertz | (1 | ) | | — |
| | Hertz | $ | 26,353 |
| | $ | 21,382 |
|
Reconciliations of Adjusted EBITDA by reportable segment to the Company's totalconsolidated amounts are summarized below.below:
Hertz Global | | | | Three Months Ended
June 30, | | Six Months Ended
June 30, | | Three Months Ended
June 30, | | | Six Months Ended
June 30, | | | (In millions) | 2019 | | 2018 | | 2019 | | 2018 | (In millions) | 2020 | | 2019 | | 2020 | | 2019 | | Adjusted EBITDA: | | | | | | | | Adjusted EBITDA: | | | | | | | | | U.S. Rental Car | $ | 156 |
| | $ | 18 |
| | $ | 163 |
| | $ | (30 | ) | U.S. Rental Car | $ | (470) | | | $ | 156 | | | $ | (668) | | | $ | 163 | | | International Rental Car | 56 |
| | 81 |
| | 42 |
| | 81 |
| International Rental Car | (127) | | | 56 | | | (172) | | | 42 | | | All Other Operations | 24 |
| | 21 |
| | 45 |
| | 41 |
| All Other Operations | 23 | | | 24 | | | 48 | | | 45 | | | Total reportable segments | 236 |
| | 120 |
| | 250 |
| | 92 |
| Total reportable segments | (574) | | | 236 | | | (792) | | | 250 | | Corporate(1) | (29 | ) | | (27 | ) | | (47 | ) | | (59 | ) | Corporate(1) | (13) | | | (29) | | | (38) | | | (47) | | | Total Hertz Global | 207 |
| | 93 |
| | 203 |
| | 33 |
| Total Hertz Global | (587) | | | 207 | | | (830) | | | 203 | | | Adjustments: | | | | | | | | Adjustments: | | | Non-vehicle depreciation and amortization | (51 | ) | | (56 | ) | | (99 | ) | | (113 | ) | Non-vehicle depreciation and amortization | (57) | | | (51) | | | (110) | | | (99) | | | Non-vehicle debt interest, net of interest income | (72 | ) | | (73 | ) | | (144 | ) | | (146 | ) | | | Non-vehicle debt interest, net | | Non-vehicle debt interest, net | (44) | | | (72) | | | (101) | | | (144) | | Vehicle debt-related charges(2) | (9 | ) | | (9 | ) | | (19 | ) | | (19 | ) | Vehicle debt-related charges(2) | (15) | | | (9) | | | (24) | | | (19) | | Loss on extinguishment of vehicle debt(3) | — |
| | (20 | ) | | — |
| | (22 | ) | | Restructuring and restructuring related charges(4) | (4 | ) | | (10 | ) | | (10 | ) | | (13 | ) | | | Restructuring and restructuring related charges(3) | | Restructuring and restructuring related charges(3) | (41) | | | (4) | | | (47) | | | (10) | | Technology-related intangible and other asset impairments(4) | | Technology-related intangible and other asset impairments(4) | (193) | | | — | | | (193) | | | — | | Information technology and finance transformation costs(5) | (38 | ) | | (29 | ) | | (60 | ) | | (51 | ) | Information technology and finance transformation costs(5) | (8) | | | (38) | | | (25) | | | (60) | | Other items(6) | 11 |
|
| 18 |
|
| 25 |
|
| 14 |
| | Reorganization items, net(6) | | Reorganization items, net(6) | (23) | | | — | | | (23) | | | — | | Pre-reorganization charges and non-debtor financing charges(7) | | Pre-reorganization charges and non-debtor financing charges(7) | (45) | | | — | | | (45) | | | — | | Other items(8) | | Other items(8) | (31) | | | 11 | | | (7) | | | 25 | | | Income (loss) before income taxes | $ | 44 |
| | $ | (86 | ) | | $ | (104 | ) | | $ | (317 | ) | Income (loss) before income taxes | $ | (1,044) | | | $ | 44 | | | $ | (1,405) | | | $ | (104) | |
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Unaudited
Hertz | | | | | | | | | | | | | | | | | | | Three Months Ended
June 30, | | Six Months Ended
June 30, | | (In millions) | 2019 | | 2018 | | 2019 | | 2018 | | Adjusted EBITDA: | | | | | | | | | U.S. Rental Car | $ | 156 |
| | $ | 18 |
| | $ | 163 |
| | $ | (30 | ) | | International Rental Car | 56 |
| | 81 |
| | 42 |
| | 81 |
| | All Other Operations | 24 |
| | 21 |
| | 45 |
| | 41 |
| | Total reportable segments | 236 |
| | 120 |
| | 250 |
| | 92 |
| Corporate(1) | (29 | ) | | (27 | ) | | (47 | ) | | (59 | ) | | Total Hertz | 207 |
| | 93 |
| | 203 |
| | 33 |
| | Adjustments: | | | | | | | | | Non-vehicle depreciation and amortization | (51 | ) | | (56 | ) | | (99 | ) | | (113 | ) | | Non-vehicle debt interest, net of interest income | (70 | ) | | (71 | ) | | (141 | ) | | (143 | ) | Vehicle debt-related charges(2) | (9 | ) | | (9 | ) | | (19 | ) | | (19 | ) | Loss on extinguishment of vehicle debt(3) | — |
| | (20 | ) | | — |
| | (22 | ) | Restructuring and restructuring related charges(4) | (4 | ) | | (10 | ) | | (10 | ) | | (13 | ) | Information technology and finance transformation costs(5) | (38 | ) | | (29 | ) | | (60 | ) | | (51 | ) | Other items(6) | 11 |
|
| 18 |
|
| 25 |
|
| 14 |
| | Income (loss) before income taxes | $ | 46 |
| | $ | (84 | ) | | $ | (101 | ) | | $ | (314 | ) |
| | (1) | Represents other reconciling items primarily consisting of general corporate expenses, non-vehicle interest expense, as well as other business activities. |
| | (2) | Represents vehicle debt-related charges relating to the amortization of deferred financing costs and debt discounts and premiums. |
| | (3) | In 2018, primarily represents $20 million of early redemption premium and write-off of deferred financing costs associated with the full redemption of the 4.375% European Vehicle Senior Notes due January 2019 in April 2018.
|
| | (4) | Represents charges incurred under restructuring actions as defined in U.S. GAAP, excluding impairments and asset write-downs. Also includes restructuring related 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. In 2018, also includes consulting costs, legal fees, and other expenses related to the previously disclosed accounting review and investigation. |
| | (5) | Represents costs associated with the Company’s information technology and finance transformation programs, both of which are multi-year initiatives to upgrade and modernize the Company’s systems and processes. |
| | (6) | Represents miscellaneous items, including non-cash stock-based compensation charges, and amounts attributable to noncontrolling interests. In 2019, includes a $20 million gain on marketable securities, of which $9 million was recorded during the second quarter of 2019, and a $12 million gain on the sale of non-vehicle capital assets, of which $4 million was recorded in the second quarter of 2019. In 2018, includes a $17 million gain on marketable securities and a $6 million legal settlement received in the second quarter related to an oil spill in the Gulf of Mexico in 2010. |
| | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended
June 30, | | | | Six Months Ended
June 30, | | | | (In millions) | 2020 | | 2019 | | 2020 | | 2019 | | Adjusted EBITDA: | | | | | | | | | U.S. Rental Car | $ | (470) | | | $ | 156 | | | $ | (668) | | | $ | 163 | | | International Rental Car | (127) | | | 56 | | | (172) | | | 42 | | | All Other Operations | 23 | | | 24 | | | 48 | | | 45 | | | Total reportable segments | (574) | | | 236 | | | (792) | | | 250 | | Corporate(1) | (13) | | | (29) | | | (38) | | | (47) | | | Total Hertz Global | (587) | | | 207 | | | (830) | | | 203 | | | Adjustments: | | | | | | | | | Non-vehicle depreciation and amortization | (57) | | | (51) | | | (110) | | | (99) | | | Non-vehicle debt interest, net | (43) | | | (70) | | | (99) | | | (141) | | Vehicle debt-related charges(2) | (15) | | | (9) | | | (24) | | | (19) | | | | | | | | | | Restructuring and restructuring related charges(3) | (41) | | | (4) | | | (47) | | | (10) | | Technology-related intangible and other asset impairments(4) | (193) | | | — | | | (193) | | | — | | Write-off of intercompany loan(9) | (133) | | | — | | | (133) | | | — | | Information technology and finance transformation costs(5) | (8) | | | (38) | | | (25) | | | (60) | | Reorganization items, net(6) | (23) | | | — | | | (23) | | | — | | Pre-reorganization charges and non-debtor financing charges(7) | (45) | | | — | | | (45) | | | — | | Other items(8) | (31) | | | 11 | | | (7) | | | 25 | | | Income (loss) before income taxes | $ | (1,176) | | | $ | 46 | | | $ | (1,536) | | | $ | (101) | |
Note 11—Guarantor and Non-Guarantor Condensed Consolidating Financial Information - Hertz
The following tables present(2)Represents vehicle debt-related charges relating to the Condensed Consolidating Balance Sheetsamortization of deferred financing costs and debt discounts and premiums.
(3)Represents charges incurred under restructuring actions as defined in U.S. GAAP. See Note 7, "Restructuring" for further information. Also includes restructuring related charges such as incremental costs incurred directly supporting business transformation initiatives. (4)Represents the impairment of June 30, 2019technology-related intangible assets and December 31, 2018,capitalized cloud computing implementation costs, as disclosed in Note 4, "Goodwill and Intangible Assets, Net." (5)Represents costs associated with the Condensed Consolidating StatementsCompany’s information technology and finance transformation programs, both of Operationswhich are multi-year initiatives to upgrade and Comprehensive Income (Loss)modernize the Company’s systems and processes. (6)Represents charges incurred associated with the filing of the Chapter 11 Cases, as disclosed in Note 16, "Reorganization Items, Net," including professional fees. (7)Represents charges incurred prior to the filing of the Chapter 11 Cases, as disclosed in Note 1, "Background,"which are comprised of preparation charges for the threereorganization, such as professional fees and six months ended June 30,certain non-debtor financing charges. (8)Represents miscellaneous items, including non-cash stock-based compensation charges, and amounts attributable to noncontrolling interests. In 2020, also includes a $20 million gain on the sale of non-vehicle capital assets, which was recorded in the first quarter, partially offset by second quarter charges of $18 million for losses associated with certain vehicle damages. In 2019, includes a $20 million gain on marketable securities, of which $9 million was recorded in the second quarter, and 2018a $12 million gain on the sale of non-vehicle capital assets, of which $4 million was recorded in the second quarter. (9)Represents the write-off of the 2019 Master Loan between Hertz and the Condensed Consolidating Statements of Cash Flows for the six months ended June 30, 2019 and 2018 of (a) The Hertz Corporation, ("Parent”); (b) the Parent's subsidiaries that guarantee the Senior Notes issued by the Parent ("Guarantor Subsidiaries"); (c) the Parent's subsidiaries that do not guarantee the Senior 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 (e) Hertz on a consolidated basis.Holdings, as disclosed in Note 13, "Related Party Transactions."
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Unaudited
Investments
The accompanying unaudited condensed consolidated balance sheet as of June 30, 2020 includes amounts classified as liabilities subject to compromise, which represent pre-petition liabilities the Company anticipates will be allowed as claims in subsidiaries are accountedthe Chapter 11 Cases. These amounts represent the Debtors' current estimate of known or potential obligations to be resolved in connection with the Chapter 11 Cases and may differ from actual future settlement amounts. The Company will continue to evaluate these liabilities throughout the Chapter 11 process and adjust amounts as necessary. Such adjustments could be material and will be recorded in reorganization items, net in the accompanying unaudited condensed consolidated statements of operations.
The following table summarizes liabilities subject to compromise:
| | | | | | | (In millions) | June 30, 2020 | | | | Accounts payable | $ | 301 | | | | | Accrued liabilities | 226 | | | Accrued taxes, net | 27 | | | Accrued interest on debt subject to compromise | 46 | | | | Debt subject to compromise(1) | 4,312 | | | | | | | Liabilities subject to compromise - Hertz Global | $ | 4,912 | | Due from Affiliate - Hertz(2) | 65 | | | Liabilities subject to compromise - Hertz | $ | 4,977 | |
(1) See Note 5, "Debt" for usingdetails of pre-petition, non-vehicle debt reported as liabilities subject to compromise as of June 30, 2020. (2) See Note 13, "Related Party Transactions" for details of a pre-petition intercompany loan due to an affiliate reported as liabilities subject to compromise as of June 30, 2020.
Note 16—Reorganization Items, Net
The Debtors have incurred and will continue to incur costs associated with the equity methodreorganization, including professional and consulting fees. Charges associated with the Chapter 11 Cases have been recorded as reorganization items, net in the accompanying unaudited condensed consolidated statements of operations for purposesthe three and six months ended June 30, 2020.
For the three and six months ended June 30, 2020, the Company incurred $23 million 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, substantiallycharges primarily for professional fees, all of which are unpaid as of June 30, 2020, and recorded in accrued liabilities in the assetsaccompanying unaudited condensed consolidated balance sheet as 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 Hertz general creditors. In lieu of providing separate unauditedJune 30, 2020.
Note 17—Condensed Combined Debtor-in-Possession Financial Information
The following financial statements forrepresent the Guarantor Subsidiaries, Hertz has included the accompanyingunaudited condensed consolidating financial statements based on Rule 3-10 of the SEC's Regulation S-X. Management of Hertz does not believe that separatecombined financial statements of the Guarantor Subsidiaries are material to Hertz's investors; therefore, separate financial statements and other disclosures concerningDebtors. The results of the Guarantor Subsidiariesnon-debtor entities are not presented.included in these financial statements. Intercompany transactions among the Debtors have been eliminated in the following financial statements. Intercompany transactions among the Debtor and non-debtor entities have not been eliminated in the following financial statements.
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Unaudited
THE HERTZ CORPORATION AND SUBSIDIARIESDEBTORS CONDENSED CONSOLIDATINGCOMBINED BALANCE SHEET June 30, 2019
(Inin millions)
| | | | | | | June 30, 2020 | | ASSETS | | | Cash and cash equivalents | $ | 875 | | | Restricted cash and cash equivalents | 382 | | | Total cash, cash equivalents, restricted cash and restricted cash equivalents | 1,257 | | | Receivables, net | 454 | | | Due from non-debtor affiliates | 50,004 | | | Prepaid expenses and other assets | 629 | | | Revenue earning vehicles, net | 179 | | | Property and equipment, net | 633 | | | Operating lease right-of-use assets | 1,450 | | | Investment in subsidiaries, net | 4,458 | | | Intangible assets, net | 3,084 | | | Goodwill | 524 | | | Total assets | $ | 62,672 | | | | | LIABILITIES AND EQUITY | | | Accounts payable | $ | — | | | Due to non-debtor affiliates | 242 | | | Accrued liabilities | 506 | | | Accrued taxes, net | 19 | | | Debt | 150 | | | Operating lease liabilities | 1,422 | | | Self-insured liabilities | 263 | | | Deferred income taxes, net | — | | | Total liabilities not subject to compromise | 2,602 | | | Liabilities subject to compromise | 59,511 | | | Total liabilities | 62,113 | | | Total equity attributable to the Debtors | 559 | | | | | | | Total liabilities and equity | $ | 62,672 | |
40 | | | | | | | | | | | | | | | | | | | | | | | Parent (The Hertz Corporation) | | Guarantor Subsidiaries | | Non- Guarantor Subsidiaries | | Eliminations | | The Hertz Corporation & Subsidiaries | | ASSETS | | | | | | | | | | | Cash and cash equivalents | $ | 140 |
| | $ | 4 |
| | $ | 271 |
| | $ | — |
| | $ | 415 |
| | Restricted cash and cash equivalents | 76 |
| | 7 |
| | 156 |
| | — |
| | 239 |
| | Total cash, cash equivalents, restricted cash and restricted cash equivalents | 216 |
| | 11 |
| | 427 |
| | — |
| | 654 |
| | Receivables, net of allowance | 450 |
| | 187 |
| | 1,061 |
| | — |
| | 1,698 |
| | Due from affiliates | 3,460 |
| | 4,333 |
| | 7,687 |
| | (15,480 | ) | | — |
| | Prepaid expenses and other assets | 4,995 |
| | 29 |
| | 290 |
| | (4,389 | ) | | 925 |
| | Revenue earning vehicles, net | 431 |
| | — |
| | 16,014 |
| | — |
| | 16,445 |
| | Property and equipment, net | 610 |
| | 65 |
| | 97 |
| | — |
| | 772 |
| | Operating lease right-of-use assets | 1,005 |
| | 173 |
| | 369 |
| | — |
| | 1,547 |
| | Investment in subsidiaries, net | 7,770 |
| | 1,599 |
| | — |
| | (9,369 | ) | | — |
| | Intangible assets, net | 212 |
| | 3,013 |
| | 4 |
| | — |
| | 3,229 |
| | Goodwill | 102 |
| | 943 |
| | 38 |
| | — |
| | 1,083 |
| | Total assets | $ | 19,251 |
| | $ | 10,353 |
| | $ | 25,987 |
| | $ | (29,238 | ) | | $ | 26,353 |
| | LIABILITIES AND STOCKHOLDER'S EQUITY | | | | | | | | | | | Due to affiliates | $ | 11,203 |
| | $ | 1,132 |
| | $ | 3,145 |
| | $ | (15,480 | ) | | $ | — |
| | Accounts payable | 416 |
| | 114 |
| | 839 |
| | — |
| | 1,369 |
| | Accrued liabilities | 824 |
| | 55 |
| | 479 |
| | — |
| | 1,358 |
| | Accrued taxes, net | 89 |
| | 19 |
| | 2,479 |
| | (2,423 | ) | | 164 |
| | Debt | 4,574 |
| | — |
| | 14,773 |
| | — |
| | 19,347 |
| | Operating lease liabilities | 996 |
| | 172 |
| | 370 |
| | — |
| | 1,538 |
| | Public liability and property damage | 189 |
| | 39 |
| | 198 |
| | — |
| | 426 |
| | Deferred income taxes, net | — |
| | 1,733 |
| | 1,318 |
| | (1,966 | ) | | 1,085 |
| | Total liabilities | 18,291 |
| | 3,264 |
| | 23,601 |
| | (19,869 | ) | | 25,287 |
| | Stockholder's equity: | | | | | | | | | | | Total stockholder's equity attributable to Hertz | 960 |
| | 7,089 |
| | 2,280 |
| | (9,369 | ) | | 960 |
| | Noncontrolling interests | — |
| | — |
| | 106 |
| | — |
| | 106 |
| | Total stockholder's equity | 960 |
| | 7,089 |
| | 2,386 |
| | (9,369 | ) | | 1,066 |
| | Total liabilities and stockholder's equity | $ | 19,251 |
| | $ | 10,353 |
| | $ | 25,987 |
| | $ | (29,238 | ) | | $ | 26,353 |
|
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Unaudited
THE HERTZ CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2018
(In millions)
| | | | | | | | | | | | | | | | | | | | | | | Parent (The Hertz Corporation) | | Guarantor Subsidiaries | | Non- Guarantor Subsidiaries | | Eliminations | | The Hertz Corporation & Subsidiaries | | ASSETS | | | | | | | | | | | Cash and cash equivalents | $ | 576 |
| | $ | 3 |
| | $ | 548 |
| | $ | — |
| | $ | 1,127 |
| | Restricted cash and cash equivalents | 137 |
| | 8 |
| | 138 |
| | — |
| | 283 |
| | Total cash, cash equivalents, restricted cash and restricted cash equivalents | 713 |
| | 11 |
| | 686 |
| | — |
| | 1,410 |
| | Receivables, net of allowance | 421 |
| | 174 |
| | 992 |
| | — |
| | 1,587 |
| | Due from affiliates | 3,522 |
| | 5,312 |
| | 9,101 |
| | (17,935 | ) | | — |
| | Prepaid expenses and other assets | 4,863 |
| | 34 |
| | 269 |
| | (4,264 | ) | | 902 |
| | Revenue earning vehicles, net | 421 |
| | 1 |
| | 11,997 |
| | — |
| | 12,419 |
| | Property and equipment, net | 590 |
| | 64 |
| | 124 |
| | — |
| | 778 |
| | Investment in subsidiaries, net | 7,648 |
| | 1,526 |
| | — |
| | (9,174 | ) | | — |
| | Intangible assets, net | 160 |
| | 3,039 |
| | 4 |
| | — |
| | 3,203 |
| | Goodwill | 102 |
| | 943 |
| | 38 |
| | — |
| | 1,083 |
| | Total assets | $ | 18,440 |
| | $ | 11,104 |
| | $ | 23,211 |
| | $ | (31,373 | ) | | $ | 21,382 |
| | LIABILITIES AND STOCKHOLDER'S EQUITY | | | | | | | | | | | Due to affiliates | $ | 11,351 |
| | $ | 2,306 |
| | $ | 4,278 |
| | $ | (17,935 | ) | | $ | — |
| | Accounts payable | 388 |
| | 97 |
| | 503 |
| | — |
| | 988 |
| | Accrued liabilities | 823 |
| | 69 |
| | 412 |
| | — |
| | 1,304 |
| | Accrued taxes, net | 67 |
| | 15 |
| | 2,359 |
| | (2,305 | ) | | 136 |
| | Debt | 4,567 |
| | — |
| | 11,757 |
| | — |
| | 16,324 |
| | Public liability and property damage | 185 |
| | 41 |
| | 192 |
| | — |
| | 418 |
| | Deferred income taxes, net | — |
| | 1,729 |
| | 1,324 |
| | (1,959 | ) | | 1,094 |
| | Total liabilities | 17,381 |
| | 4,257 |
| | 20,825 |
| | (22,199 | ) | | 20,264 |
| | Stockholder's equity: | | | | | | | | | | | Total stockholder's equity attributable to Hertz | 1,059 |
| | 6,847 |
| | 2,327 |
| | (9,174 | ) | | 1,059 |
| | Noncontrolling interests | — |
| | — |
| | 59 |
| | — |
| | 59 |
| | Total stockholder's equity | 1,059 |
| | 6,847 |
| | 2,386 |
| | (9,174 | ) | | 1,118 |
| | Total liabilities and stockholder's equity | $ | 18,440 |
| | $ | 11,104 |
| | $ | 23,211 |
| | $ | (31,373 | ) | | $ | 21,382 |
|
(in millions)
| | | | | | | | | | | | | Three Months Ended
June 30, 2020 | | Six Months Ended
June 30, 2020 | | Total revenues | $ | 537 | | | $ | 1,873 | | | Expenses: | | | | | Direct vehicle and operating | 572 | | | 1,554 | | | Depreciation of revenue earning vehicles and lease charges | 667 | | | 2,364 | | | Selling, general and administrative | 126 | | | 297 | | | Interest (income) expense, net | 37 | | | 88 | | | Technology-related intangible and other asset impairments | 193 | | | 193 | | | Other (income) expense, net | 3 | | | (18) | | | Reorganization items, net | 23 | | | 23 | | | Total expenses | 1,621 | | | 4,501 | | | Income (loss) before income taxes and equity in earnings (losses) of non-debtor entities | (1,084) | | | (2,628) | | | Income tax (provision) benefit | 229 | | | 527 | | | Equity in earnings (losses) of non-debtor entities | 6 | | | 898 | | | Net income (loss) | (849) | | | (1,203) | | | | | | | | | | | Total other comprehensive income (loss), net of tax | 7 | | | (32) | | | Comprehensive income (loss) attributable to the Debtors | $ | (842) | | | $ | (1,235) | |
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Unaudited
THE HERTZ CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
For the Three Months Ended June 30, 2019
(In millions)
| | | | | | | | | | | | | | | | | | | | | | | Parent (The Hertz Corporation) | | Guarantor Subsidiaries | | Non- Guarantor Subsidiaries | | Eliminations | | The Hertz Corporation & Subsidiaries | | Total revenues | $ | 1,294 |
| | $ | 397 |
| | $ | 2,457 |
| | $ | (1,637 | ) | | $ | 2,511 |
| | Expenses: | | | | | | | | | | | Direct vehicle and operating | 727 |
| | 304 |
| | 357 |
| | — |
| | 1,388 |
| | Depreciation of revenue earning vehicles and lease charges | 1,585 |
| | 88 |
| | 598 |
| | (1,637 | ) | | 634 |
| | Selling, general and administrative | 148 |
| | 50 |
| | 60 |
| | — |
| | 258 |
| | Interest (income) expense, net | 108 |
| | (48 | ) | | 137 |
| | — |
| | 197 |
| | Other (income) expense, net | (12 | ) | | — |
| | — |
| | — |
| | (12 | ) | | Total expenses | 2,556 |
| | 394 |
| | 1,152 |
| | (1,637 | ) | | 2,465 |
| | Income (loss) before income taxes and equity in earnings (losses) of subsidiaries | (1,262 | ) | | 3 |
| | 1,305 |
| | — |
| | 46 |
| | Income tax (provision) benefit | 62 |
| | (1 | ) | | (66 | ) | | — |
| | (5 | ) | | Equity in earnings (losses) of subsidiaries, net of tax | 1,239 |
| | 33 |
| | — |
| | (1,272 | ) | | — |
| | Net income (loss) | 39 |
| | 35 |
| | 1,239 |
| | (1,272 | ) | | 41 |
| | Net (income) loss attributable to noncontrolling interests | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) | | Net income (loss) attributable to Hertz | 39 |
| | 35 |
| | 1,237 |
| | (1,272 | ) | | 39 |
| | Total other comprehensive income (loss), net of tax | (2 | ) | | 2 |
| | (3 | ) | | 1 |
| | (2 | ) | | Comprehensive income (loss) attributable to Hertz | $ | 37 |
| | $ | 37 |
| | $ | 1,234 |
| | $ | (1,271 | ) | | $ | 37 |
|
For the Three Months Ended June 30, 2018
(In millions)
| | | | | | | | | | | | | | | | | | | | | | | Parent (The Hertz Corporation) | | Guarantor Subsidiaries | | Non- Guarantor Subsidiaries | | Eliminations | | The Hertz Corporation & Subsidiaries | | Total revenues | $ | 1,193 |
| | $ | 368 |
| | $ | 2,129 |
| | $ | (1,301 | ) | | $ | 2,389 |
| | Expenses: | | | | | | | | | |
| | Direct vehicle and operating | 839 |
| | 182 |
| | 328 |
| | — |
| | 1,349 |
| | Depreciation of revenue earning vehicles and lease charges | 1,220 |
| | 98 |
| | 670 |
| | (1,301 | ) | | 687 |
| | Selling, general and administrative | 179 |
| | 16 |
| | 70 |
| | — |
| | 265 |
| | Interest (income) expense, net | 100 |
| | (37 | ) | | 135 |
| | — |
| | 198 |
| | Other (income) expense, net | (25 | ) | | — |
| | (1 | ) | | — |
| | (26 | ) | | Total expenses | 2,313 |
| | 259 |
| | 1,202 |
| | (1,301 | ) | | 2,473 |
| | Income (loss) before income taxes and equity in earnings (losses) of subsidiaries | (1,120 | ) | | 109 |
| | 927 |
| | — |
| | (84 | ) | | Income tax (provision) benefit | 235 |
| | (21 | ) | | (191 | ) | | — |
| | 23 |
| | Equity in earnings (losses) of subsidiaries, net of tax | 824 |
| | 34 |
| | — |
| | (858 | ) | | — |
| | Net income (loss) | (61 | ) | | 122 |
| | 736 |
| | (858 | ) | | (61 | ) | | Total other comprehensive income (loss), net of tax | (14 | ) | | (3 | ) | | (14 | ) | | 17 |
| | (14 | ) | | Comprehensive income (loss) | $ | (75 | ) | | $ | 119 |
| | $ | 722 |
| | $ | (841 | ) | | $ | (75 | ) |
THE DEBTORS CONDENSED COMBINED STATEMENT OF CASH FLOWS (in millions)
| | | | | | | Six Months Ended
June 30, 2020 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net cash provided by (used in) operating activities | $ | (26) | | | Cash flows from investing activities: | | | Revenue earning vehicles expenditures | (460) | | | Proceeds from disposal of revenue earning vehicles | 433 | | | Non-vehicle capital asset expenditures | (64) | | | Proceeds from non-vehicle capital assets disposed of or to be disposed of | 49 | | | Sales of marketable securities | 74 | | | Capital contributions to non-debtor entities | (741) | | | Return of capital from non-debtor entities | 838 | | | Loan to non-debtor entity | (180) | | | Loan repayment from non-debtor entity | 189 | | | | | Net cash provided by (used in) investing activities | 138 | | | Cash flows from financing activities: | | | Proceeds from issuance of vehicle debt | 321 | | | Repayments of vehicle debt | (374) | | | Proceeds from issuance of non-vehicle debt | 1,498 | | | Repayments of non-vehicle debt | (853) | | | Proceeds from the issuance of stock, net | 29 | | | | | | | | | | | | | Other | (2) | | | Net cash provided by (used in) financing activities | 619 | | | | | Net increase (decrease) in cash, cash equivalents, restricted cash and restricted cash equivalents during the period | 731 | | | Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period | 526 | | | Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period | $ | 1,257 | |
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED(DEBTORS-IN-POSSESSION)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL STATEMENTS (CONTINUED) Unaudited
THE HERTZ CORPORATIONCONDITION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTRESULTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
For the Six Months Ended June 30, 2019
(In millions)
| | | | | | | | | | | | | | | | | | | | | | | Parent (The Hertz Corporation) | | Guarantor Subsidiaries | | Non- Guarantor Subsidiaries | | Eliminations | | The Hertz Corporation & Subsidiaries | | Total revenues | $ | 2,445 |
| | $ | 717 |
| | $ | 4,531 |
| | $ | (3,075 | ) | | $ | 4,618 |
| | Expenses: | | | | | | | | | | | Direct vehicle and operating | 1,539 |
| | 462 |
| | 654 |
| | — |
| | 2,655 |
| | Depreciation of revenue earning vehicles and lease charges | 2,980 |
| | 162 |
| | 1,159 |
| | (3,075 | ) | | 1,226 |
| | Selling, general and administrative | 304 |
| | 66 |
| | 120 |
| | — |
| | 490 |
| | Interest (income) expense, net | 214 |
| | (94 | ) | | 259 |
| | — |
| | 379 |
| | Other (income) expense, net | (30 | ) | | (1 | ) | | — |
| | — |
| | (31 | ) | | Total expenses | 5,007 |
| | 595 |
| | 2,192 |
| | (3,075 | ) | | 4,719 |
| | Income (loss) before income taxes and equity in earnings (losses) of subsidiaries | (2,562 | ) | | 122 |
| | 2,339 |
| | — |
| | (101 | ) | | Income tax (provision) benefit | 105 |
| | (5 | ) | | (104 | ) | | — |
| | (4 | ) | | Equity in earnings (losses) of subsidiaries, net of tax | 2,351 |
| | 57 |
| | — |
| | (2,408 | ) | | — |
| | Net income (loss) | (106 | ) | | 174 |
| | 2,235 |
| | (2,408 | ) | | (105 | ) | | Net (income) loss attributable to noncontrolling interests | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) | | Net income (loss) attributable to Hertz | (106 | ) | | 174 |
| | 2,234 |
| | (2,408 | ) | | (106 | ) | | Total other comprehensive income (loss), net of tax | 5 |
| | 4 |
| | 3 |
| | (7 | ) | | 5 |
| | Comprehensive income (loss) attributable to Hertz | $ | (101 | ) | | $ | 178 |
| | $ | 2,237 |
| | $ | (2,415 | ) | | $ | (101 | ) |
For the Six Months Ended June 30, 2018
(In millions)
| | | | | | | | | | | | | | | | | | | | | | | Parent (The Hertz Corporation) | | Guarantor Subsidiaries | | Non- Guarantor Subsidiaries | | Eliminations | | The Hertz Corporation & Subsidiaries | | Total revenues | $ | 2,249 |
| | $ | 687 |
| | $ | 3,618 |
| | $ | (2,102 | ) | | $ | 4,452 |
| | Expenses: | | | | | | | | | | | Direct vehicle and operating | 1,590 |
| | 354 |
| | 641 |
| | — |
| | 2,585 |
| | Depreciation of revenue earning vehicles and lease charges | 1,985 |
| | 182 |
| | 1,283 |
| | (2,102 | ) | | 1,348 |
| | Selling, general and administrative | 340 |
| | 28 |
| | 130 |
| | — |
| | 498 |
| | Interest (income) expense, net | 204 |
| | (70 | ) | | 230 |
| | — |
| | 364 |
| | Other (income) expense, net | (27 | ) | | — |
| | (2 | ) | | — |
| | (29 | ) | | Total expenses | 4,092 |
| | 494 |
| | 2,282 |
| | (2,102 | ) | | 4,766 |
| | Income (loss) before income taxes and equity in earnings (losses) of subsidiaries | (1,843 | ) | | 193 |
| | 1,336 |
| | — |
| | (314 | ) | | Income tax (provision) benefit | 356 |
| | (35 | ) | | (270 | ) | | — |
| | 51 |
| | Equity in earnings (losses) of subsidiaries, net of tax | 1,224 |
| | 58 |
| | — |
| | (1,282 | ) | | — |
| | Net income (loss) | (263 | ) | | 216 |
| | 1,066 |
| | (1,282 | ) | | (263 | ) | | Total other comprehensive income (loss), net of tax | (17 | ) | | (5 | ) | | (17 | ) | | 22 |
| | (17 | ) | | Comprehensive income (loss) | $ | (280 | ) | | $ | 211 |
| | $ | 1,049 |
| | $ | (1,260 | ) | | $ | (280 | ) |
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
THE HERTZ CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 2019
(In millions)
| | | | | | | | | | | | | | | | | | | | | | | Parent (The Hertz Corporation) | | Guarantor Subsidiaries | | Non- Guarantor Subsidiaries | | Eliminations | | The Hertz Corporation & Subsidiaries | | Net cash provided by (used in) operating activities | $ | 336 |
| | $ | 4 |
| | $ | 2,871 |
| | $ | (2,154 | ) | | $ | 1,057 |
| | Cash flows from investing activities: | | | | | | | | | | | Revenue earning vehicles expenditures | (272 | ) | | — |
| | (8,675 | ) | | — |
| | (8,947 | ) | | Proceeds from disposal of revenue earning vehicles | 131 |
| | — |
| | 4,081 |
| | — |
| | 4,212 |
| | Capital asset expenditures, non-vehicle | (102 | ) | | (4 | ) | | (12 | ) | | — |
| | (118 | ) | | Proceeds from property and other equipment disposed of or to be disposed of | 19 |
| | — |
| | 2 |
| | — |
| | 21 |
| | Capital contributions to subsidiaries | (711 | ) | | — |
| | — |
| | 711 |
| | — |
| | Return of capital from subsidiaries | 442 |
| | — |
| | — |
| | (442 | ) | | — |
| | Proceeds from/repayments of intercompany loan | — |
| | — |
| | 325 |
| | (325 | ) | | — |
| | Net cash provided by (used in) investing activities | (493 | ) | | (4 | ) | | (4,279 | ) | | (56 | ) | | (4,832 | ) | | Cash flows from financing activities: | | | | | | | | | | | Proceeds from issuance of vehicle debt | 550 |
| | — |
| | 7,717 |
| | — |
| | 8,267 |
| | Repayments of vehicle debt | (550 | ) | | — |
| | (4,704 | ) | | — |
| | (5,254 | ) | | Proceeds from issuance of non-vehicle debt | 815 |
| | — |
| | — |
| | — |
| | 815 |
| | Repayments of non-vehicle debt | (823 | ) | | — |
| | — |
| | — |
| | (823 | ) | | Payment of financing costs | — |
| | — |
| | (23 | ) | | — |
| | (23 | ) | | Advances to Hertz Holdings | (6 | ) | | — |
| | — |
| | — |
| | (6 | ) | Contributions from noncontrolling interests
| — |
| | — |
| | 45 |
| | — |
| | 45 |
| | Other | (1 | ) | | — |
| | — |
| | — |
| | (1 | ) | | Capital contributions received from parent | — |
| | — |
| | 711 |
| | (711 | ) | | — |
| | Payment of dividends and return of capital | — |
| | — |
| | (2,596 | ) | | 2,596 |
| | — |
| | Proceeds from/repayments of intercompany loan | (325 | ) | | — |
| | — |
| | 325 |
| | — |
| | Net cash provided by (used in) financing activities | (340 | ) | | — |
| | 1,150 |
| | 2,210 |
| | 3,020 |
| | Effect of foreign currency exchange rate changes on cash, cash equivalents, restricted cash and restricted cash equivalents | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) | | Net increase (decrease) in cash, cash equivalents, restricted cash and restricted cash equivalents during the period | (497 | ) | | — |
| | (259 | ) | | — |
| | (756 | ) | | Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period | 713 |
| | 11 |
| | 686 |
| | — |
| | 1,410 |
| | Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period | $ | 216 |
| | $ | 11 |
| | $ | 427 |
| | $ | — |
| | $ | 654 |
|
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
THE HERTZ CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 2018
(In millions)
| | | | | | | | | | | | | | | | | | | | | | | Parent (The Hertz Corporation) | | Guarantor Subsidiaries | | Non- Guarantor Subsidiaries | | Eliminations | | The Hertz Corporation & Subsidiaries | | Net cash provided by (used in) operating activities | $ | (34 | ) | | $ | 5 |
| | $ | 2,093 |
| | $ | (1,119 | ) | | $ | 945 |
| | Cash flows from investing activities: | | | | | | | | | | | Revenue earning vehicles expenditures | (213 | ) | | — |
| | (7,397 | ) | | — |
| | (7,610 | ) | | Proceeds from disposal of revenue earning vehicles | 96 |
| | — |
| | 3,558 |
| | — |
| | 3,654 |
| | Capital asset expenditures, non-vehicle | (54 | ) | | (6 | ) | | (20 | ) | | — |
| | (80 | ) | | Proceeds from property and other equipment disposed of or to be disposed of | 3 |
| | — |
| | 5 |
| | — |
| | 8 |
| | Purchases of marketable securities | (60 | ) | | — |
| | (1 | ) | | — |
| | (61 | ) | | Sales of marketable securities | 36 |
| | — |
| | — |
| | — |
| | 36 |
| | Other | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) | | Capital contributions to subsidiaries | (1,978 | ) | | — |
| | — |
| | 1,978 |
| | — |
| | Return of capital from subsidiaries | 1,900 |
| | — |
| | — |
| | (1,900 | ) | | — |
| | Proceeds from/repayments of intercompany loan | — |
| | — |
| | 76 |
| | (76 | ) | | — |
| | Net cash provided by (used in) investing activities | (270 | ) | | (6 | ) | | (3,781 | ) | | 2 |
| | (4,055 | ) | | Cash flows from financing activities: | | | | | | | | | | | Proceeds from issuance of vehicle debt | 1,172 |
| | — |
| | 8,242 |
| | — |
| | 9,414 |
| | Repayments of vehicle debt | (1,226 | ) | | — |
| | (5,603 | ) | | — |
| | (6,829 | ) | | Proceeds from issuance of non-vehicle debt | 187 |
| | — |
| | — |
| | — |
| | 187 |
| | Repayments of non-vehicle debt | (194 | ) | | — |
| | — |
| | — |
| | (194 | ) | | Payment of financing costs | (1 | ) | | — |
| | (26 | ) | | — |
| | (27 | ) | | Early redemption premium payment | — |
| | — |
| | (19 | ) | | — |
| | (19 | ) | | Advances to Hertz Holdings | (6 | ) | | — |
| | — |
| | — |
| | (6 | ) | | Contributions from noncontrolling interests | — |
| | — |
| | 10 |
| | — |
| | 10 |
| | Other | 1 |
| | — |
| | — |
| | — |
| | 1 |
| | Capital contributions received from parent | — |
| | — |
| | 1,978 |
| | (1,978 | ) | | — |
| | Payment of dividends and return of capital | — |
| | — |
| | (3,019 | ) | | 3,019 |
| | — |
| | Proceeds from/repayments of intercompany loan | (76 | ) | | — |
| | — |
| | 76 |
| | — |
| | Net cash provided by (used in) financing activities | (143 | ) | | — |
| | 1,563 |
| | 1,117 |
| | 2,537 |
| | Effect of foreign currency exchange rate changes on cash, cash equivalents, restricted cash and restricted cash equivalents | — |
| | — |
| | (10 | ) | | — |
| | (10 | ) | | Net increase (decrease) in cash, cash equivalents, restricted cash and restricted cash equivalents during the period | (447 | ) | | (1 | ) | | (135 | ) | | — |
| | (583 | ) | | Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period | 911 |
| | 16 |
| | 577 |
| | — |
| | 1,504 |
| | Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period | $ | 464 |
| | $ | 15 |
| | $ | 442 |
| | $ | — |
| | $ | 921 |
|
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited
Note 12—Subsequent Events
Rights Offering
In June 2019, Hertz Global filed a prospectus supplement to its Registration Statement on Form S-3 declared effective by the SEC on June 12, 2019 for a rights offering to raise gross proceeds of approximately $750 million, providing for the issuance of up to an aggregate of 57,915,055 new shares of Hertz Global common stock (the "rights offering"). Under the terms of the rights offering, each stockholder of Hertz Global was eligible to receive one transferable subscription right ("right") for each share of common stock held as of 5:00 p.m., Eastern Time, on June 24, 2019 (the "record date"). Each right entitled the holder to purchase 0.688285 shares of common stock (the "basic subscription right") at a price of $12.95 per whole share of common stock (the "subscription price"). The rights offering also entitled rights holders who fully exercised their basic subscription rights to subscribe for additional shares of Hertz Global's common stock that remain unsubscribed as a result of any unexercised basic subscription rights (the “over-subscription right”). The rights offering expired at 5:00 p.m., Eastern Time, on July 12, 2019.
Upon closing in July 2019, the rights offering was fully subscribed resulting in Hertz Global selling 57,915,055 shares of its common stock at the subscription price for gross proceeds of $750 million. Pursuant to the terms of the rights offering, 55,816,783 shares of common stock were purchased under the basic subscription right and 2,098,272 shares of common stock were purchased under the over-subscription right.
Senior Notes
In July 2019, Hertz provided conditional notices of full redemption to the registered holders of its 2020 Notes and 2021 Notes. The redemptions of the 2020 Notes and 2021 Notes are each subject to the satisfaction of specified conditions precedent set forth in the applicable notice of conditional redemption, on terms and conditions satisfactory in all respects to Hertz. The anticipated redemption date is August 11, 2019 or, if the conditions precedent are not satisfied on or prior to August 11, 2019, such later date (but not later than September 10, 2019) as such conditions precedent are so satisfied. The redemption price for the 2020 Notes and 2021 notes, respectively, will be equal to 100% of the outstanding principal amount of the 2020 Notes and 2021 Notes, plus accrued but unpaid interest thereon to the date of redemption.
In August 2019, Hertz issued $500 million in aggregate principal amount of 7.125% Senior Notes due 2026 (the "2026 Notes"). The Company intends to utilize the proceeds from the issuance of the 2026 Notes, together with net proceeds from the rights offering described above, to redeem the 2020 Notes and 2021 Notes.
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 |
Hertz Global Holdings, Inc. (together with its consolidated subsidiaries and variable interest entities, "Hertz Global") is a holding company and its principal, wholly ownedwholly-owned subsidiary is The Hertz Corporation (together with its consolidated subsidiaries and variable interest entities, "Hertz"). Hertz Global consolidates Hertz for financial statement purposes, and 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 herein is for Hertz and also applies to Hertz Global in all material respects, unless noted. Differences between the operations and results of Hertz and Hertz Global are separately disclosed and explained. We sometimes use the words "we," "our," "us,""us" and the "Company" in this MD&A for disclosures that relate to all of Hertz and Hertz Global. Please refer to the defined terms in the Notes to the Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q when reviewing the MD&A.
This MD&A should be read in conjunction with the MD&A presented in our 20182019 Form 10‑K10-K together with the sections entitled “Cautionary Note Regarding Forward-Looking Statements,” Part II, Item 1A, "Risk Factors,” and theour unaudited condensed consolidated financial statements and accompanying notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 20192020 (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 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 the following non-GAAP measure and key metrics: •Adjusted Corporate EBITDA - important non-GAAP measure 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. Adjusted EBITDA, the segment measure of profitability and accordingly a GAAP measure, is calculated exclusive of certain items which are largely consistent with those used in the calculation of Adjusted Corporate EBITDA. •Depreciation Per Unit Per Month - important key metric 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 expected time of disposal and expected hold period of the vehicles. 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. •Total Revenue Per Transaction Day ("Total RPD," also referred to as "pricing") - important key metric 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.
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) •Total Revenue Per Unit Per Month ("Total RPU") - important key metric to management and investors as it provides a measure of revenue productivity relative to the total number of vehicles in our fleet whether owned or leased ("Average Vehicles" or "fleet capacity"). •Transaction Days - important key metric 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.
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) |
Vehicle Utilization - important key metric to management and investors because it is the measurement of the proportion of our vehicles that are being used to generate revenues relative to fleet capacity. Higher Vehicle Utilization means more vehicles are being utilized to generate revenue.revenues.
Our non-GAAP measure 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 non-GAAP measure and key metrics are defined, and the non-GAAP measure is reconciled to its 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.
OUR COMPANY
Hertz Holdings 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 is a successor to corporations that have been engaged in the vehicle rental and leasing business since 1918.
We operate our vehicle rental business globally primarily through the Hertz, Dollar and Thrifty brands from approximately 10,200 company-owned, licensee 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 vehicle rental companies and our Hertz brand name is one of the most recognized globally, signifying leadership in quality rental services and products. We have an extensive network of airport and off airport rental locations in the U.S. and in all major European markets. We are also a provider of integrated vehicle leasing and fleet management solutions through our Donlen subsidiary.
OVERVIEW OF OUR BUSINESS AND OPERATING ENVIRONMENT
We are engaged principally in the business of renting vehicles primarily through our Hertz, Dollar and Thrifty brands. In addition to vehicle rental, we provide integrated vehicle leasing and fleet management solutions through our Donlen subsidiary. We operate our vehicle rental business globally from company-owned, licensee and franchisee locations in North America, Europe, Latin America, Africa, Asia, Australia, the Caribbean, the Middle East and New Zealand.
OVERVIEW OF OUR BUSINESS AND OPERATING ENVIRONMENT
Overview of the Impact from COVID-19 on our Business
The outbreak of COVID-19 was declared a pandemic in March 2020 and has spread to multiple global regions. The impact of this pandemic has been and will likely continue to be extensive in many aspects of society, which has resulted in, and will likely continue to result in, significant disruptions to the global economy, as well as businesses around the world. In an effort to halt the outbreak of COVID-19, many governments around the world have placed significant restrictions on travel and many businesses have announced closures and imposed travel restrictions. There is continued uncertainty about the magnitude and duration of the negative impact from COVID-19 and the length and scope of travel restrictions and business closures imposed by governments of impacted countries and private businesses.
In response, we began aggressively managing costs, and (i) initiated a diversified revenue baserestructuring program affecting approximately 11,000 employees in our U.S. RAC segment and U.S. corporate operations, the majority of which were previously furloughed, (ii) actively negotiated to abate or defer our airport rent and concession payments, (iii) substantially reduced capital expenditures; (iv) eliminated discretionary marketing spend; and (v) reduced our commitments to purchase vehicles by approximately $4.0 billion from original commitments in our U.S. RAC segment, the majority of which were due to be delivered during the second quarter of 2020.
Although we took aggressive action to eliminate costs, we faced significant ongoing monthly expenses, including monthly payments under our Operating Lease, pursuant to which Hertz leases vehicles which we use in our U.S.
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) rental car operations. On April 27, 2020, Hertz did not make certain payments in accordance with the Operating Lease, and as a result, an amortization event was in effect as of May 5, 2020 for all series of notes issued by HVF II and a highlyliquidation event was in effect with respect to the Series 2013-A Notes issued by HVF II. Refer to Part I, Item 1 of this Quarterly Report on Form 10-Q in Note 1, "Background" for additional information on the Forbearance Agreement and Waiver Agreements which expired on May 22, 2020.
Voluntary Petitions for Bankruptcy
In connection with the expiration of the Forbearance Agreement and the Waiver Agreements described above and the continuing economic impact from COVID-19, on May 22, 2020, the Debtors filed Petitions under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. The Chapter 11 Cases are being jointly administered under the caption In re: the Hertz Corporation, et al., Case No. 20-11218 (MFW). Additional information about the Chapter 11 Cases, including access to documents filed with the Bankruptcy Court, is available online at https://restructuring.primeclerk.com/hertz, a website administered by Prime Clerk, a third party bankruptcy claims and noticing agent. The information on this web site is not incorporated by reference and does not constitute part of this Form 10-Q.
COVID-19 Mitigation Actions Following the Chapter 11 Filing
As a result of our ongoing actions to eliminate costs in the second quarter of 2020, we have: (i) negotiated rent concessions in the form of abatement and payment deferrals of fixed and variable rent payments for our airport and off-airport locations in the amount of $30 million which represent amounts previously due in the period between April 1, 2020 and June 30, 2020; (ii) reduced our revenue earning vehicle expenditures by $4.4 billion, or 88%, in the second quarter of 2020 compared to 2019; (iii) reduced our non-vehicle capital asset expenditures by $51 million, or 80%,in the second quarter of 2020 compared to 2019 primarily due to a reduction in information technology and finance transformation program costs; (iv) returned approximately 19,000 program vehicles in our U.S. RAC segment in the second quarter of 2020 compared to 14,000 program vehicles in the second quarter of 2019, an increase of 36% period over period; and (v) sold 6,000, or 8%, more vehicles in our U.S. RAC segment in the second quarter of 2020 compared to 2019 due to strength in residual values. We are continuing to review our cost structure and fleet size to align with expected rental car volumes.
Liquidity Considerations Following the Chapter 11 Filing
On July 24, 2020, per the terms of the Interim Lease Order entered on July 24, 2020, the Debtors were directed, among other things, to: (i) make $650 million of base rent payments under the Operating Lease to the HVF trustee in the amount of six equal monthly payments of approximately $108 million commencing in July 2020 through December 2020; and (ii) dispose of at least 182,521 lease vehicles between June 1, 2020 and December 31, 2020, inclusive, where the proceeds of the dispositions, subject to certain exclusions set forth in the Interim Lease Order, will be used to make payments under the Master Lease. Litigation relating to the Master Lease will be suspended until January 15, 2021. For the period from June 1, 2020 through July 31, 2020, we disposed of approximately 100,000 vehicles which are generally ableassociated with the Interim Order. Also, refer to adjust fleet capacity, the most significant determinant of our costs, to meet expectations of market demand. "Liquidity and Capital Resources" section below.
Our Business
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, including residual values. Our business requires significant expenditures for vehicles, and consequentlyas such, we require substantial liquidity to finance such expenditures. However, as a result of the Interim Order, Hertz will dispose of at least 182,521 lease vehicles between June 1, 2020 and December 31, 2020, where the proceeds from
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) the dispositions will be used to make payments under the Master Lease. See the "Liquidity and Capital Resources" section of this MD&A.&A for further information. Our strategy includes optimization of our vehicle rental operations, disciplined performance management and evaluation of all locations and the pursuit of same-store sales growth.
Our total revenues are primarily derived from rental and related charges and consist of: •Worldwide 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 value-added services, including the sale of loss or collision damage waivers, theft protection, liability and personal accident/effects insurance coverage, premium emergency roadside service and other products and fees. Also included are ancillary revenues associated with retail vehicle sales and certain royalty fees from our franchisees (such fees are less than 2% of total revenues each period); and •All other operations revenues - revenues from vehicle leasing and fleet management services by our Donlen business 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 expense ("DOE"), 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 relating to revenue earning vehicles, including costs associated with the disposal of vehicles; •Selling, general and administrative expense ("SG&A"), which includes advertising and administrative personnel costs, along with costs for information technology and finance transformation programs; and •Interest expense, net.net; and
•Reorganization items, net, which includes charges associated with the Chapter 11 Cases, primarily professional and consulting fees.
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. RAC - Rental of vehicles, as well as sales of value-added services, in the U.S.; •International RAC - Rental and leasing of vehicles, as well as sales of value-added services, internationally; and •All Other Operations - Comprised primarily 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. We assess performance and allocate resources based upon the financial information for our operating segments.
Revenue Earning Vehicles
Revenue earning vehicles used in our rental and leasing operations are stated at cost, net of related discounts and incentives from manufacturers. Holding periods typically range from six to thirty-six months. Also included in revenue earning vehicles are vehicles placed on our retail lots for sale or actively in the process of being sold through other disposition channels.
Program vehicles are purchased under repurchase or guaranteed depreciation programs with vehicle manufacturers wherein the manufacturers agree to repurchase vehicles at a specified price or guarantee the depreciation rate on the vehicles during established repurchase or auction periods, subject to, among other things, certain vehicle condition, mileage and holding period requirements. Guaranteed depreciation programs guarantee on an aggregate basis the residual value of the program vehicle upon sale. Program vehicles generally provide us with flexibility to increase or reduce the size of our fleet based on economic 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 that for non-program vehicles.
When a revenue earning vehicle is acquired outside of a vehicle repurchase program, we estimate the period that we will hold the asset, primarily based on historical measures of the amount of rental activity (e.g., automobile mileage). We also estimate the residual value of the applicable revenue earning vehicles at the expected time of disposal, taking into consideration factors such as make, model and options, age, physical condition, mileage, sale location, time of the year and channel of disposition (e.g., auction, retail, dealer direct) and market conditions. The vehicle is depreciated using a rate based on these estimates. 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 expected time of disposal and the estimated holding period of the vehicle. Differences between actual residual values and those estimated result in an adjustment to depreciation upon disposition of the vehicle. Our depreciation of revenue earning vehicles and lease charges also includes costs associated with the disposal of vehicles and rents paid for vehicles leased.
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) |
We dispose of our non-program vehicles via auction, dealer-direct and our retail locations. Non-program vehicles disposed of through our retail locations allow us the opportunity for value-added revenue, such as warranty, financing and title fees. We periodically review and adjust the mix between program and non-program vehicles in our fleet based on contract negotiations and the economic environment pertaining to our industry in an effort to optimize the mix of vehicles.
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 peakmonths ("our peak season") for the majority of countries where we generate our revenues. To accommodate increased demand, we typically increase our available fleet and staff
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) during the second and third quarters of the year. As business demand declines,However, as a result of the COVID-19 mitigation actions discussed above, we initiated a restructuring program in the second quarter of 2020 affecting approximately 11,000 employees in our U.S. RAC segment and U.S. corporate operations. Additionally, as a result of the Interim Order, Hertz will dispose of at least 182,521 lease vehicles between June 1, 2020 and staff are decreased accordingly.December 31, 2020, where the proceeds from the dispositions will be used to make payments under the Master Lease. 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. Generally, between 70% and 75% of our 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. Certain 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.
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) |
2019Three and Six Months Ended June 30, 2020 Operating Overview
The pandemic has continued to cause a substantial reduction to airline travel. As a large portion of our business is generated at airport locations, these disruptions during our peak season have had, and we expect it to continue to have, a material adverse impact on our results of operations until such travel returns to historic levels. The following provides an overview of our business and financial performance and key factors influencing our results:
U.S. RAC | | ▪ | Total revenues increased $156 million, or 10%
|
| | ▪ | Total RPD and Total RPU increased 3% |
| | ▪ | Transaction Days increased 6% |
| | ▪ | Depreciation of revenue earning vehicles and lease charges decreased 8% to $411 million
|
| | ▪ | Depreciation Per Unit Per Month decreased 13% to $247
|
| | ▪ | Vehicle Utilization increased to 82% from 81%
|
| | ◦ | First Half 2019 versus First Half 2018: |
| | ▪ | Total revenues increased $250 million, or 8%
|
| | ▪ | Total RPD increased 3% and Total RPU increased 2%
|
| | ▪ | Transaction Days increased 5%
|
| | ▪ | Depreciation of revenue earning vehicles and lease charges decreased 10% to $797 million
|
| | ▪ | Depreciation Per Unit Per Month decreased 14% to $251
|
| | ▪ | Vehicle Utilization was comparable at 80%
|
•◦2Q 2020 versus 2Q 2019:
▪Total revenues decreased $1.3 billion, or 70% ▪Total RPU decreased 69% and Total RPD decreased 10% ▪Transaction Days decreased 69% ▪Depreciation of revenue earning vehicles and lease charges decreased 1% to $408 million ▪Depreciation Per Unit Per Month increased 10% to $271 ▪Vehicle Utilization decreased to 28% from 82% ▪DOE as a percentage of total revenues increased to 105% from 59% ▪SG&A as a percentage of total revenues increased to 12% from 7%
◦First Half 2020 versus First Half 2019: ▪Total revenues decreased $1.4 billion, or 42% ▪Total RPU decreased 41% and Total RPD decreased 2% ▪Transaction Days decreased 42% ▪Depreciation of revenue earning vehicles and lease charges increased 9% to $871 million ▪Depreciation Per Unit Per Month increased 13% to $284 ▪Vehicle Utilization decreased to 48% from 80% ▪DOE as a percentage of total revenues increased to 80% from 61% ▪SG&A as a percentage of total revenues increased to 9% from 7%
International RAC | | ▪ | Total revenues decreased $29 million, or 5%, and were flat, excluding the impact of foreign currency exchange at average rates ("fx") |
| | ▪ | Total RPD and Total RPU increased 1% |
| | ▪ | Transaction Days decreased 1%
◦2Q 2020 versus 2Q 2019: ▪Total revenues decreased $425 million, or 76%, and decreased $421 million, or 76%, excluding the impact of foreign currency exchange at average rates ("fx") ▪Total RPU decreased 64% and Total RPD decreased 24% ▪Transaction Days decreased 68% ▪Depreciation of revenue earning vehicles and lease charges decreased 24% to $81 million, and decreased $23 million, or 22%, excluding fx ▪Depreciation Per Unit Per Month increased 14% to $215 ▪Vehicle Utilization decreased to 36% from 77%
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) ▪DOE as a percentage of total revenues increased to 101% from 59% ▪SG&A as a percentage of total revenues increased to 29% from 10%
◦First Half 2020 versus First Half 2019: ▪Total revenues decreased $490 million, or 49%, and decreased $474 million or 49%, excluding fx ▪Total RPU decreased 36% and Total RPD decreased 8% ▪Transaction Days decreased 44% ▪Depreciation of revenue earning vehicles and lease charges decreased 16% to $170 million, and decreased $28 million, or 14%, excluding fx ▪Depreciation Per Unit Per Month increased 6% to $209 ▪Vehicle Utilization decreased to 52% from 76% ▪DOE as a percentage of total revenues increased to 80% from 62% ▪SG&A as a percentage of total revenues increased to 17% from 11%
|
| | ▪ | Depreciation of revenue earning vehicles and lease charges decreased 5% to $106 million, and remained flat, excluding fx |
| | ▪ | Depreciation Per Unit Per Month was comparable ($191 versus $189) |
| | ▪ | Vehicle Utilization slightly decreased to 77% from 78% |
| | ◦ | First Half 2019 versus First Half 2018: |
| | ▪ | Total revenues decreased $64 million, or 6%, and was flat, excluding fx |
| | ▪ | Total RPD was flat, and Total RPU decreased 1%
|
| | ▪ | Transaction Days were flat |
| | ▪ | Depreciation of revenue earning vehicles and lease charges decreased 5% to $203 million, and increased $3 million, or 2%, excluding fx |
| | ▪ | Depreciation Per Unit Per Month was comparable ($200 versus $199) |
| | ▪ | Vehicle Utilization was comparable at 76% |
For more information on the above, see the discussion of our results on a consolidated basis and by segment that follows herein.
Adoption of In this MD&A, certain amounts in the New Lease Standard
Effective January 1, 2019, we adoptedfollowing tables are denoted as in millions. Amounts such as percentages are calculated from the new lease standard, Topic 842, which didunderlying numbers in thousands, and as a result, may not have a significant impact to our results of operations for the three and six months ended June 30, 2019. See Note 2, "Basis of Presentation and Recently Issued Accounting Pronouncements"agree to the Notes to our unaudited condensed consolidated financial statements includedamount when calculated from the tables in this Report for further information.millions.
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) |
Change in Segment Measure of Profitability
Effective during the three months ended June 30, 2019, we changed our segment measure of profitability to Adjusted EBITDA. Prior to the three months ended June 30, 2019, our segment measure of profitability was Adjusted Pre-tax Income (Loss), which included non-vehicle depreciation and amortization, net non-vehicle debt interest, net and certain other items. For comparability purposes,
Critical Accounting Estimates
The impacts from COVID-19 could have a material impact to certain critical accounting estimates, and as a result, may have an adverse impact on our future operating results.
Revenue Earning Vehicles
COVID-19 may have a significant impact on the used-vehicle market, resulting in a material deterioration of residual values. This deterioration could impact our current fleet and sales plans resulting in changes to the holding period of our vehicles as well as our ability to dispose of vehicles in the period originally anticipated. As a result of the Chapter 11 Cases, the Bankruptcy Court may issue orders directing us to dispose of vehicles sooner than anticipated. Changes in any or all of these variables could cause a material change in our estimates regarding depreciation expense.
Recoverability of Goodwill and Intangible Assets
As of June 30, 2020, we have revisedtested the recoverability of our 2018 segment resultsgoodwill and indefinite-lived intangible assets due to the impact to our business related to COVID-19, our reduction in this MD&Acash flow projections and declines in the stock price of Hertz Global. The quantitative fair value test utilized our most recent cash flow projections, including a range of potential outcomes, along with a long-term growth rate of 1% and a range of discount rates between 12.5% and 13.0%. Based on the quantitative tests, no material impairments were recorded in the second quarter of 2020. However, the fair values of certain tradenames, which are indefinite-lived intangible assets, in our U.S. RAC and International RAC segments were in excess by 3% and 18% of the carrying values of $934 million and $560 million, respectively.
Subsequent to reflectJune 30, 2020, the new segment measureadverse impact from COVID-19 to the overall travel industry and our business has continued. If there is further deterioration in cash flow projections, our ability to obtain future financing to
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) maintain our fleet or the weighted average cost of capital assumptions used in our impairment analyses or if we are unable to execute our strategies, we may incur impairment charges related to our goodwill and indefinite-lived intangible assets which could be material.
Subrogation Receivables
The impact of COVID-19 could result in a deterioration of the credit worthiness of our customers and third-parties regarding our subrogation receivables, and as a result we could incur material write-offs or a reduction in future collections.
Tax
We may record additional valuation allowances on our deferred tax assets. Further, in some jurisdictions, we may incur additional cash taxes due to changes in fleet acquisitions and dispositions and limitations on utilization of net operating losses.
CONSOLIDATED RESULTS OF OPERATIONS - HERTZ | | | | | | | | | | | | | | | | Three Months Ended June 30, | | | Percent Increase/(Decrease) | | Six Months Ended
June 30, | | | Percent Increase/(Decrease) | | | Three Months Ended June 30, | | Percent Increase/(Decrease) | | Six Months Ended
June 30, | | Percent Increase/(Decrease) | | | ($ in millions) | 2019 | | 2018 | | 2019 | | 2018 | | | | ($ In millions) | | ($ In millions) | 2020 | | 2019 | | | | Percent Increase/(Decrease) | 2020 | | 2019 | | | Percent Increase/(Decrease) | | Total revenues | $ | 2,511 |
| | $ | 2,389 |
| | 5 | % | | $ | 4,618 |
| | $ | 4,452 |
| | 4 | % | Total revenues | $ | 832 | | | $ | 2,511 | | | (67) | % | | $ | 4,618 | | | (40) | % | | Direct vehicle and operating expenses | 1,388 |
| | 1,349 |
| | 3 |
| | 2,655 |
| | 2,585 |
| | 3 |
| Direct vehicle and operating expenses | 704 | | | 1,388 | | | (49) | | 1,945 | | | 2,655 | | | (27) | | Depreciation of revenue earning vehicles and lease charges | 634 |
| | 687 |
| | (8 | ) | | 1,226 |
| | 1,348 |
| | (9 | ) | Depreciation of revenue earning vehicles and lease charges | 610 | | | 634 | | | (4) | | 1,286 | | | 1,226 | | | 5 | | Selling, general and administrative expenses | 258 |
| | 265 |
| | (3 | ) | | 490 |
| | 498 |
| | (2 | ) | Selling, general and administrative expenses | 168 | | | 258 | | | (35) | | 377 | | | 490 | | | (23) | | Interest expense, net: | | | | | | | | | | | | Interest expense, net: | | | Vehicle | 127 |
| | 127 |
| | — |
| | 238 |
| | 221 |
| | 8 |
| Vehicle | 132 | | | 127 | | | 4 | | 250 | | | 238 | | | 5 | | Non-vehicle | 70 |
| | 71 |
| | (1 | ) | | 141 |
| | 143 |
| | (1 | ) | Non-vehicle | 43 | | | 70 | | | (40) | | 99 | | | 141 | | | (30) | | Interest expense, net | 197 |
| | 198 |
| | (1 | ) | | 379 |
| | 364 |
| | 4 |
| Interest expense, net | 175 | | | 197 | | | (11) | | 349 | | | 379 | | | (8) | | Technology-related intangible and other asset impairments | | Technology-related intangible and other asset impairments | 193 | | | — | | | NM | | 193 | | | — | | | NM | | Write-off of intercompany loan | | Write-off of intercompany loan | 133 | | | — | | | NM | | 133 | | | — | | | NM | | Other (income) expense, net | (12 | ) | | (26 | ) | | (54 | ) | | (31 | ) | | (29 | ) | | 7 |
| Other (income) expense, net | 2 | | | (12) | | | NM | | (15) | | | (31) | | | (49) | | Reorganization items, net | | Reorganization items, net | 23 | | | — | | | NM | | 23 | | | — | | | NM | | Income (loss) before income taxes | 46 |
| | (84 | ) | | NM |
| | (101 | ) | | (314 | ) | | (68 | ) | Income (loss) before income taxes | (1,176) | | | 46 | | | NM | | (1,536) | | | (101) | | | NM | | Income tax (provision) benefit | (5 | ) | | 23 |
| | NM |
| | (4 | ) | | 51 |
| | NM |
| Income tax (provision) benefit | 219 | | | (5) | | | NM | | 224 | | | (4) | | | NM | | Net income (loss) | 41 |
| | (61 | ) | | NM |
| | (105 | ) | | (263 | ) | | (60 | ) | Net income (loss) | (957) | | | 41 | | | NM | | (1,312) | | | (105) | | | NM | | Net (income) loss attributable to noncontrolling interests | (2 | ) | | — |
| | — |
| | (1 | ) | | — |
| | — |
| Net (income) loss attributable to noncontrolling interests | 5 | | | (2) | | | NM | | 6 | | | (1) | | | NM | | Net income (loss) attributable to Hertz | $ | 39 |
| | $ | (61 | ) | | NM |
| | $ | (106 | ) | | $ | (263 | ) | | (60 | ) | Net income (loss) attributable to Hertz | $ | (952) | | | $ | 39 | | | NM | | $ | (1,306) | | | $ | (106) | | | NM | Adjusted Corporate EBITDA(a) | $ | 207 |
| | $ | 93 |
| | 124 |
| | $ | 203 |
| | $ | 33 |
| | NM |
| Adjusted Corporate EBITDA(a) | $ | (587) | | | $ | 207 | | | NM | | $ | (830) | | | $ | 203 | | | NM |
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
49 Three Months Ended June 30, 2019 Compared with Three Months Ended June 30, 2018
Total revenues increased $122 million in the second quarter of 2019 compared to 2018 primarily due to an increase of $156 million in our U.S. RAC segment, partially offset by a decrease of $29 million and $5 million in our International RAC and All Other Operations segments, respectively. U.S. RAC revenues increased due to higher volume and pricing. Excluding the impact of fx, revenues for our International RAC segment were flat.
DOE increased $39 million in the second quarter of 2019 compared to 2018 primarily due to an increase of $31 million and $8 million in our U.S. RAC and International RAC segments, respectively. The increase in our U.S. RAC segment was primarily due to volume growth. Excluding a $21 million fx impact, DOE for International RAC increased $29 million driven primarily by an increase in public liability and property damage ("PLPD") expense.
Depreciation of revenue earning vehicles and lease charges decreased $53 million in the second quarter of 2019 compared to 2018 primarily due to a $36 million decrease in our U.S. RAC segment and an $11 million decrease in our All Other Operations segment. The decrease in our U.S. RAC segment resulted from our vehicle acquisition strategy and continued strength in residual values. The decrease in All Other Operations is due to the impact of a change in presentation for certain leased vehicles during the second quarter of 2019.
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) |
(DEBTORS-IN-POSSESSION)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Three Months Ended June 30, 2020 Compared with Three Months Ended June 30, 2019
Total revenues decreased $1.7 billion in the second quarter of 2020 compared to 2019 due primarily to the impact from COVID-19 where there was a decrease of $1.3 billion and $425 million in our U.S. RAC and International RAC segments, respectively. U.S. RAC revenues decreased due to lower volume and pricing. Excluding a $4 million fx impact, revenues for our International RAC segment decreased $421 million also due to lower volume and pricing.
DOE decreased $684 million in the second quarter of 2020 compared to 2019 due primarily to a decrease of $491 million and $194 million in our U.S. RAC and International RAC segments, respectively. DOE in our U.S. RAC segment decreased due primarily to lower volume driven by the impact from COVID-19 on total revenues described above. Excluding a $5 million fx impact, DOE in our International RAC segment decreased $190 million due primarily to lower volume driven by the impact from COVID-19 on total revenues described above.
Depreciation of revenue earning vehicles and lease charges decreased $24 million in the second quarter of 2020 compared to 2019 due primarily to a decrease of $25 million in our International RAC segment. Excluding a $3 million fx impact, depreciation in our International RAC segment decreased $23 million.
SG&A decreased $7$90 million in the second quarter of 2020 compared to 2019 due primarily to lower marketing and personnel costs in our U.S. and International RAC segments and lower Information technology and finance transformation costs in our corporate operations.
Vehicle interest expense, net increased $5 million in the second quarter of 2020 compared to 2019.
Non-vehicle interest expense, net decreased $28 million in the second quarter of 2020 compared to 2019 due primarily to lower debt levels in the second quarter of 2020 compared to 2019 and lower market interest rates. Additionally, interest on certain non-vehicle debt was suspended as a result of filing the Chapter 11 Cases.
We had a $193 million impairment in the second quarter of 2020 of technology-related intangible assets and capitalized cloud computing implementation costs in our corporate operations due to uncertainty surrounding our financial ability to complete certain information technology projects as a result of COVID-19 and the filing of the Chapter 11 Cases.
We incurred a charge of $133 million in the second quarter of 2020 in our corporate operations resulting from the full write-off of the 2019 Master Loan with Hertz Holdings due to the filing of the Chapter 11 Cases.
We had other expense of $2 million for the second quarter of 2020 compared to $12 million in the second quarter of 2019, compared to 2018 primarily due to decreased legal fees, restructuring related expenses and the impact of fx in our International RAC segment, mostly offset by increased information technology and finance transformation program costs and advertising charges. The above changes are primarily related to our International RAC and corporate operations.
Vehicle and non-vehicle interest expense, net in the second quarter of 2019 were comparable to the prior year quarter.
We had other income of $12 million for the second quarter of 2019 compared to $26 million in the second quarter of 2018. Other income in 2019which was primarily comprised of a $9 million gain on marketable securities. Other income in 2018 was primarily comprised
We incurred $23 million of a $17 million gain on marketable securities and a $6 million legal settlement received related to an oil spillnet reorganization charges in the Gulfsecond quarter of Mexico2020 in 2010.our corporate operations for professional fees associated with the Chapter 11 Cases.
The effective tax rate was 19% and (11)% in the second quarter of 2020 and 2019, was (11)% compared to 27%respectively, and we recorded a tax benefit of $219 million in the second quarter of 2018. We recorded2020 compared to a tax provision of $5 million in the second quarter of 2019 compared to a tax benefit2019. The increase of $23 million in the second quarter of 2018. The effective income tax rate and related tax benefit were lower driven by overall improvement inincreased losses on our results of operations primarily due to lower losses in the U.S. where an income tax benefit was recognized, andeffect of COVID-19, primarily offset by the impact of the composition of earnings by jurisdiction.valuation allowances on net deferred tax assets for certain foreign and domestic jurisdictions.
Six Months Ended June 30, 20192020 Compared with Six Months Ended June 30, 20182019
Total revenues increased $166 milliondecreased $1.9 billion in the first half of 20192020 compared to 20182019 due primarily to an increasea decrease of $250$1.4 billion and $490 million in our U.S. RAC segment, partially offset by a decrease of $64 million and $20 million in our International RAC and All Other Operations segments, respectively. U.S. RAC revenues increaseddecreased due to higherlower volume and pricing. Excluding thea $16 million impact of fx, revenues for our International RAC segment were flat.decreased $474 million also due to lower volume and pricing.
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
DOE increased $70decreased $710 million in the first half of 20192020 compared to 20182019 due primarily to a decrease of $498 million and $213 million in our U.S. RAC and International RAC segments, respectively. The decrease in U.S. RAC DOE was primarily due to an increaselower volume driven by the impact from COVID-19 on total revenues described above. Excluding the $14 million impact of $81fx, DOE for International RAC decreased $200 million due to lower volume driven by the impact from COVID-19 on total revenues described above.
Depreciation of revenue earning vehicles and lease charges increased $61 million in the first half of 2020 compared to 2019 due to increases of $75 million and $20 million in our U.S. RAC segment and All Other Operations, respectively. The increase was partially offset by a decrease of $8$33 million in our International RAC segment. The increase in U.S. RAC DOE was driven by increased growth in TNC and core rentals. Excluding the $43 million impact of fx, DOE for International RAC increased $35 million driven primarily by an increase in PLPD expense.
Depreciation of revenue earning vehicles and lease charges decreased $122 million in the first half of 2019 compared to 2018 due to decreases of $84 million, $27 million and $11 million in our U.S. RAC, All Other Operations and International RAC segments, respectively. The decrease in our U.S. RAC segment is primarily due in part to our vehicle acquisition strategy and continued strength in residual values. The decrease in our All Other Operations segment is due tolower year over year retail sales volume as a result of the impactCOVID-19 shut-down of a change in presentation for certain leased vehicles during the second quarter of 2019.retail lots. Excluding the $14$5 million impact of fx, depreciation of revenue earning vehicles and lease charges for our International RAC segment increased $3decreased $28 million.
SG&A decreased $8$114 million in the first half of 20192020 compared to 2018,2019 due primarily to a decreaselower marketing and personnel costs in costs for legalour U.S. and consulting services, non-vehicle depreciation and other expenses primarily in International RAC segments and our corporate operations and the impact of fx in International RAC. This was offset by an increase in advertising charges in U.S. RAC and an increase inlower information technology and finance transformation program costs in our corporate operations.
Vehicle interest expense, net increased $17$11 million in the first half of 20192020 compared to 20182019 due primarily due to an increase inhigher vehicle debt levels resulting from higher average fleet and higher market interest rates. This wasprimarily in our U.S. RAC segment, partially offset by the $20 million loss on extinguishment of debt recorded in our International RAC segment in the first half of 2018.lower market interest rates.
Non-vehicle interest expense, net in the first half of 2020 decreased by $42 million compared to 2019 was comparabledue primarily to the prior year period.redemption of the 2020 and 2021 Notes in the third quarter of 2019 and the suspension of interest on certain non-vehicle debt as a result of filing the Chapter 11 Cases.
We had a $193 million impairment of technology-related intangible assets and capitalized cloud computing implementation costs in the first half of 2020 in our corporate operations due to uncertainty surrounding our financial ability to complete certain information technology projects as a result of COVID-19 and the filing of the Chapter 11 Cases.
We incurred a charge of $133 million in the first half of 2020 in our corporate operations resulting from the full write-off of the 2019 Master Loan with Hertz Holdings due to the filing of the Chapter 11 Cases.
We had other income of $15 million in the first half of 2020 compared to $31 million in the first half of 2019. Other income in 2020 was primarily comprised of a $20 million gain due to additional cash received from the sale of non-vehicle capital assets, which was completed in the fourth quarter of 2019, compared to $29partially offset by $4 million in the first half of 2018.pension-related settlement charges. Other income in 2019 was primarily comprised of a $20 million gain on marketable securities and a $12 million gain on the sale of non-vehicle capital assets. Other income in 2018 was primarily comprised
We incurred $23 million of a $17 million gain on marketable securities and a $6 million legal settlement received related to an oil spillnet reorganization charges in the Gulffirst half of Mexico2020 in 2010.our corporate operations for professional fees associated with the Chapter 11 Cases.
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) |
The effective tax rate in the first half of 20192020 was (4)%15% compared to 16%4% in the first half of 2018.2019. We recorded a tax benefit of $224 million in the first half of 2020 compared to a tax provision of $4 million in the first half of 2019 compared to a tax benefit2019. The increase of $51 million in the first half of 2018. The effective income tax rate and related tax benefit were lower driven by overall improvement in our results of operations, primarily 2020 compared to 2019 isdue to lowerincreased losses inon our operations due to the U.S. where an income tax benefit was recognized, andeffect of COVID-19, primarily offset by the impact of the composition of earnings by jurisdiction.valuation allowances on net deferred tax assets for certain foreign and domestic jurisdictions.
CONSOLIDATED RESULTS OF OPERATIONS - HERTZ GLOBAL
The above discussion for Hertz also applies to Hertz Global.
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Hertz Global had $1 million and $2 million of interest expense, net, for the second quarter and first half of 2020, respectively, and $2 million and $3 million of interest expense, net for the second quarter and first half of 2019, respectively, and $2 million and $3 million of interest expense, net for second quarter and first half of 2018, respectively, that was incremental to the amounts shown for Hertz. This amount represents interest associated with amounts outstanding under a 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 presenting Hertz Global. For the second quarter and first half of 2020, Hertz had $27 million and $28 million, respectively, of income tax benefit that was incremental to the amounts shown for Hertz Global due primarily to the master loan write-off included in Hertz's unaudited condensed consolidated statements of operations in Part I, Item 1 of this Quarterly Report on Form 10-Q. For the second quarter and first half of 2019, Hertz Global had $1 million respectively, of income tax benefit and $1 million of income tax benefit for the first half of 2018 that was incremental to the amounts shown for Hertz.
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES
| | ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
(DEBTORS-IN-POSSESSION)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESULTS OF OPERATIONS AND SELECTED OPERATING DATA BY SEGMENT
U.S. Rental Car | | | | | | | | | | | | | | | | Three Months Ended
June 30, | | | Percent Increase/(Decrease) | | Six Months Ended
June 30, | | | Percent Increase/(Decrease) | | | Three Months Ended
June 30, | | Percent Increase/(Decrease) | | Six Months Ended
June 30, | | Percent Increase/(Decrease) | | | ($ in millions, except as noted) | 2019 | | 2018 | | 2019 | | 2018 | | | | ($ In millions, except as noted) | | ($ In millions, except as noted) | 2020 | | 2019 | | | | Percent Increase/(Decrease) | 2020 | | 2019 | | | Percent Increase/(Decrease) | | Total revenues | $ | 1,784 |
| | $ | 1,628 |
| | 10 | % | | $ | 3,304 |
| | $ | 3,054 |
| | 8 | % | Total revenues | $ | 533 | | | $ | 1,784 | | | (70) | % | | $ | 3,304 | | | (42) | % | | Depreciation of revenue earning vehicles and lease charges | $ | 411 |
| | $ | 447 |
| | (8 | )% | | $ | 797 |
| | $ | 881 |
| | (10 | ) | Depreciation of revenue earning vehicles and lease charges | $ | 408 | | | $ | 411 | | | (1) | | $ | 871 | | | $ | 797 | | | 9 | | Direct vehicle and operating expenses | $ | 1,052 |
| | $ | 1,021 |
| | 3 |
| | $ | 2,028 |
| | $ | 1,947 |
| | 4 |
| Direct vehicle and operating expenses | $ | 561 | | | $ | 1,052 | | | (47) | | $ | 1,530 | | | $ | 2,028 | | | (25) | | Direct vehicle and operating expenses as a percentage of total revenues | | Direct vehicle and operating expenses as a percentage of total revenues | 105 | % | | 59 | % | | 80 | % | | 61 | % | | | Selling, general and administrative expenses | $ | 119 |
| | $ | 118 |
| | 1 |
| | $ | 241 |
| | $ | 220 |
| | 10 |
| Selling, general and administrative expenses | $ | 63 | | | $ | 119 | | | (47) | | $ | 180 | | | $ | 241 | | | (25) | | Selling, general and administrative expenses as a percentage of total revenues | | Selling, general and administrative expenses as a percentage of total revenues | 12 | % | | 7 | % | | 9 | % | | 7 | % | | | Vehicle interest expense | $ | 90 |
| | $ | 73 |
| | 23 |
| | $ | 166 |
| | $ | 137 |
| | 21 |
| Vehicle interest expense | $ | 98 | | | $ | 90 | | | 8 | | $ | 183 | | | $ | 166 | | | 11 | | Adjusted EBITDA | $ | 156 |
| | $ | 18 |
| | NM |
| | $ | 163 |
| | $ | (30 | ) | | NM |
| Adjusted EBITDA | $ | (470) | | | $ | 156 | | | NM | | $ | (668) | | | $ | 163 | | | NM | Transaction Days (in thousands)(b) | 41,173 |
| | 38,747 |
| | 6 |
| | 76,754 |
| | 72,949 |
| | 5 |
| Transaction Days (in thousands)(b) | 12,964 | | | 41,173 | | | (69) | | 44,529 | | | 76,754 | | | (42) | Average Vehicles (in whole units)(c) | 554,794 |
| | 523,000 |
| | 6 |
| | 528,281 |
| | 500,800 |
| | 5 |
| Average Vehicles (in whole units)(c) | 502,763 | | | 554,794 | | | (9) | | 510,672 | | | 528,281 | | | (3) | Vehicle Utilization(c) | 82 | % | | 81 | % | | | | 80 | % | | 80 | % | | | Vehicle Utilization(c) | 28 | % | | 82 | % | | 48 | % | | 80 | % | | Total RPD (in whole dollars)(d) | $ | 42.54 |
| | $ | 41.37 |
| | 3 |
| | $ | 42.24 |
| | $ | 41.17 |
| | 3 |
| Total RPD (in whole dollars)(d) | $ | 38.17 | | | $ | 42.54 | | | (10) | | $ | 41.41 | | | $ | 42.24 | | | (2) | Total RPU Per Month (in whole dollars)(e) | $ | 1,052 |
| | $ | 1,022 |
| | 3 |
| | $ | 1,023 |
| | $ | 999 |
| | 2 |
| Total RPU Per Month (in whole dollars)(e) | $ | 328 | | | $ | 1,052 | | | (69) | | $ | 602 | | | $ | 1,023 | | | (41) | Depreciation Per Unit Per Month (in whole dollars)(f) | $ | 247 |
| | $ | 285 |
| | (13 | ) | | $ | 251 |
| | $ | 293 |
| | (14 | ) | Depreciation Per Unit Per Month (in whole dollars)(f) | $ | 271 | | | $ | 247 | | | 10 | | $ | 284 | | | $ | 251 | | | 13 | | Percentage of program vehicles at period end | 16 | % | | 13 | % | | | | 16 | % | | 13 | % | | | | | Percentage of program vehicles as of period end | | Percentage of program vehicles as of period end | 6 | % | | 16 | % | | 6 | % | | 16 | % | |
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, 20192020 Compared with Three Months Ended June 30, 20182019
Total U.S. RAC revenues increased $156 milliondecreased $1.3 billion in the second quarter of 20192020 compared to 20182019 due to higherlower volume and pricing. The 6% increase69% decrease in Transaction Days wasand 10% decrease in Total RPD were driven by growththe impact from COVID-19 with declines in TNCleisure and retail rentals, withmost business categories, excluding delivery services where volume increasesand pricing increased year over year. Volume decreased in both our airport and off airport business by 82% and airport business of 13% and 2%47%, respectively. The 3% increase in Total RPD was driven by leisure and insurance replacement rentals. Off airport revenues comprised 32%60% of total revenues for the segment in the second quarter of 20192020 as compared to 29%32% in the second quarter of 2018.2019.
Depreciation of revenue earning vehicles and lease charges for U.S. RAC decreased by $36$2 million in the second quarter of 20192020 compared to 2018 primarily due to our vehicle acquisition strategy and continued strength in residual values.2019. Depreciation Per Unit Per Month decreasedincreased to $271 in the second quarter of 2020 compared to $247 in the second quarter of 2019 compared to $285 in the second quarter of 2018.
DOE for U.S. RAC increased $31 million in the second quarter of 2019 compared to 2018 of which $36 million was driven by core rental volume, $23 million was driven by growth in TNC rentals and $12 million was due to increased other vehicle operating expenses. The above were partially offset by a $33 million decrease in personnel, transportation and other charges.
SG&A in the second quarter of 2019 was comparableprimarily to the prior year quarter.impact of residual values on certain vehicle models.
Vehicle interest expense increased $17 million in the second quarter of 2019 compared to 2018 due to an increase in debt levels resulting from higher average fleet and higher market interest rates.
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) |
(DEBTORS-IN-POSSESSION)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) DOE for U.S. RAC decreased $491 million in the second quarter of 2020 compared to 2019 due primarily to lower volume driven by the impact from COVID-19 on total revenues described above and lower personnel costs due to an employee restructuring program in response to COVID-19.
SG&A for U.S. RAC decreased $56 million in the second quarter of 2020 compared to 2019 due primarily to lower marketing and personnel costs in response to COVID-19.
Vehicle interest expense for U.S. RAC increased $8 million in the second quarter of 2020 compared to 2019.
Six Months Ended June 30, 20192020 Compared with Six Months Ended June 30, 20182019
Total U.S. RAC revenues increased $250 milliondecreased $1.4 billion in the first half of 20192020 compared to 20182019 due to higherlower volume and pricing. The 5% increase42% decrease in Transaction Days wasand 2% decrease in Total RPD were driven by growththe impact from COVID-19 with declines in TNCleisure and retail rentals, withmost business categories, excluding delivery services, where volume increasesand pricing increased year over year. Volume decreased in both our airport and off airport locations by 51% and airport locations of 12% and 1%28%, respectively. The 3% increase in Total RPD was driven by leisure, insurance replacement and TNC rentals. Off airport revenues comprised 32%42% of total revenues for the segment in the first half of 20192020 as compared to 30%32% in the first half of 2018.2019.
Depreciation of revenue earning vehicles and lease charges for U.S. RAC decreasedincreased by $84$75 million in the first half of 20192020 compared to 2018 primarily due to our vehicle acquisition strategy and continued strength in residual values.2019. Depreciation Per Unit Per Month decreasedincreased to $284 in the first half of 2020 compared to $251 in the first half of 2019 compareddue in part to $293 inlower year over year retail sales volume as a result of the first halfCOVID-19 shut-down of 2018.retail lots.
DOE for U.S. RAC increased $81decreased $498 million in the first half of 20192020 compared to 2018 of which $51 million was2019 due primarily to lower volume driven by growth in TNC rentals, $48 million was driven by core rental volumethe impact from COVID-19 on total revenues for the first half of 2020 described above and $40 millionlower personnel costs due to increased other vehicle operating expenses. The above were partially offset by a $44 million decrease personnel, facility and other charges.an employee restructuring program in response to COVID-19.
SG&A increased $21decreased $60 million in the first half of 20192020 compared to 20182019 due primarily due to advertising charges.lower marketing and personnel costs in response to COVID-19.
Vehicle interest expense increased $29$18 million in the first half of 20192020 compared to 20182019 due to an increase inhigher vehicle debt levels, resulting from higher average fleet and higherpartially offset by lower market interest rates.
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) International Rental Car | | | | Three Months Ended
June 30, | | Percent Increase/(Decrease) | | Six Months Ended
June 30, | | Percent Increase/(Decrease) | | Three Months Ended
June 30, | | | Percent Increase/(Decrease) | | Six Months Ended
June 30, | | | Percent Increase/(Decrease) | | ($ in millions, except as noted) | 2019 | | 2018 | | 2019 | | 2018 | | ($ in millions, except as noted) | 2020 | | 2019 | | | | 2020 | | 2019 | | | Percent Increase/(Decrease) | | Total revenues | $ | 560 |
| | $ | 589 |
| | (5 | )% | | $ | 993 |
| | $ | 1,057 |
| | (6 | )% | Total revenues | $ | 135 | | | $ | 560 | | | (76) | % | | $ | 502 | | | $ | 993 | | | (49) | % | | Depreciation of revenue earning vehicles and lease charges | $ | 106 |
| | $ | 112 |
| | (5 | ) | | $ | 203 |
| | $ | 214 |
| | (5 | ) | Depreciation of revenue earning vehicles and lease charges | $ | 81 | | | $ | 106 | | | (24) | | $ | 170 | | | $ | 203 | | | (16) | | Direct vehicle and operating expenses | $ | 330 |
| | $ | 322 |
| | 2 |
| | $ | 614 |
| | $ | 622 |
| | (1 | ) | Direct vehicle and operating expenses | $ | 136 | | | $ | 330 | | | (59) | | $ | 401 | | | $ | 614 | | | (35) | | Direct vehicle and operating expenses as a percentage of total revenues | | Direct vehicle and operating expenses as a percentage of total revenues | 101 | % | | 59 | % | | 80 | % | | 62 | % | | | Selling, general and administrative expenses | $ | 55 |
| | $ | 62 |
| | (11 | ) | | $ | 111 |
| | $ | 121 |
| | (8 | ) | Selling, general and administrative expenses | $ | 39 | | | $ | 55 | | | (28) | | $ | 85 | | | $ | 111 | | | (23) | | Selling, general and administrative expenses as a percentage of total revenues | | Selling, general and administrative expenses as a percentage of total revenues | 29 | % | | 10 | % | | 17 | % | | 11 | % | | | Vehicle interest expense | $ | 24 |
| | $ | 44 |
| | (45 | ) | | $ | 47 |
| | $ | 64 |
| | (27 | ) | Vehicle interest expense | $ | 23 | | | $ | 24 | | | (3) | | $ | 44 | | | $ | 47 | | | (5) | | Adjusted EBITDA | $ | 56 |
| | $ | 81 |
| | (31 | ) | | $ | 42 |
| | $ | 81 |
| | (48 | ) | Adjusted EBITDA | $ | (127) | | | $ | 56 | | | NM | | $ | (172) | | | $ | 42 | | | NM | Transaction Days (in thousands)(b) | 13,125 |
| | 13,225 |
| | (1 | ) | | 23,252 |
| | 23,199 |
| | — |
| Transaction Days (in thousands)(b) | 4,256 | | | 13,125 | | | (68) | | 13,119 | | | 23,252 | | | (44) | Average Vehicles (in whole units)(c) | 186,881 |
| | 187,300 |
| | — |
| | 169,814 |
| | 168,000 |
| | 1 |
| Average Vehicles (in whole units)(c) | 129,615 | | | 186,881 | | | (31) | | 138,801 | | | 169,814 | | | (18) | Vehicle Utilization(c) | 77 | % | | 78 | % | | | | 76 | % | | 76 | % | | | Vehicle Utilization(c) | 36 | % | | 77 | % | | 52 | % | | 76 | % | | Total RPD (in whole dollars)(d) | $ | 42.97 |
| | $ | 42.45 |
| | 1 |
| | $ | 42.79 |
| | $ | 42.86 |
| | — |
| Total RPD (in whole dollars)(d) | $ | 32.56 | | | $ | 42.68 | | | (24) | | $ | 39.18 | | | $ | 42.49 | | | (8) | Total RPU Per Month (in whole dollars)(e) | $ | 1,006 |
| | $ | 999 |
| | 1 |
| | $ | 977 |
| | $ | 987 |
| | (1 | ) | Total RPU Per Month (in whole dollars)(e) | $ | 356 | | | $ | 999 | | | (64) | | $ | 617 | | | $ | 970 | | | (36) | Depreciation Per Unit Per Month (in whole dollars)(f) | $ | 191 |
| | $ | 189 |
| | 1 |
| | $ | 200 |
| | $ | 199 |
| | 1 |
| Depreciation Per Unit Per Month (in whole dollars)(f) | $ | 215 | | | $ | 189 | | | 14 | | $ | 209 | | | $ | 198 | | | 6 | | Percentage of program vehicles at period end | 50 | % | | 51 | % | | | | 50 | % | | 51 | % | | | | | Percentage of program vehicles as of period end | | Percentage of program vehicles as of period end | 34 | % | | 50 | % | | 34 | % | | 50 | % | |
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, 20192020 Compared with Three Months Ended June 30, 20182019
Total revenues for International RAC decreased $29$425 million in the second quarter of 20192020 compared to 2018.2019 due to lower volume and pricing. Transaction days decreased 68% and Total RPD decreased 24%. Excluding a $4 million fx impact, revenues decreased $421 million due to lower volume and pricing across all leisure and business categories driven by the impact of COVID-19.
Depreciation of revenue earning vehicles and lease charges for International RAC decreased $25 million in the second quarter of 2020 compared to 2019. Excluding a $3 million fx impact, depreciation decreased $23 million. Depreciation Per Unit Per Month for International RAC increased to $215 for the second quarter of 2020 compared to $189 in 2019 due to a decline in the residual values of risk vehicles and the accelerated return of program vehicles due to COVID-19.
DOE for International RAC decreased $194 million in the second quarter of 2020 compared to 2019. Excluding a $5 million fx impact, DOE decreased $190 million due primarily to lower volume driven by the impact from COVID-19 on total revenues were flat.described above and lower personnel costs due to government support across Europe related to COVID-19.
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) |
(DEBTORS-IN-POSSESSION)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) SG&A for International RAC decreased $15 million in the second quarter of 2020 compared to 2019 due in part to lower marketing costs and decreases due to lower personnel costs attributable to government support across Europe related to COVID-19.
Six Months Ended June 30, 2020 Compared with Six Months Ended June 30, 2019
Total revenues for International RAC decreased $490 million in the first half of 2020 compared to 2019 due to lower volume and pricing. Transactions Days decreased 44% and Total RPD decreased 8%. Excluding a $16 million fx impact, revenues decreased $474 million due to lower volume and pricing across all leisure and business categories driven by the impact of COVID-19.
Depreciation of revenue earning vehicles and lease charges for International RAC decreased $6$33 million in the second quarterfirst half of 20192020 compared to 2018 largely due to2019. Excluding the $5 million fx impact, of fx.depreciation decreased $28 million. Depreciation Per Unit Per Month for International RAC increased to $191 for$209 in the second quarterfirst half of 2020 compared to $198 in the first half of 2019 compared to $189 in the second quarter of 2018 due to richer fleetthe mix in Europe.of risk and program vehicles as we accelerated the return of program vehicles due to COVID-19.
DOE for International RAC increased $8 million in the second quarter of 2019 compared to 2018. Excluding a $21 million fx impact, DOE increased $29 million primarily driven by lower PLPD expense in 2018 due to favorable case development and fewer large claims.
SG&A decreased $7 million in the second quarter of 2019 compared to 2018 largely due to lower legal fees and the impact from fx.
Vehicle interest expense decreased $20 million in the second quarter of 2019 compared to 2018 due to the $20 million loss on extinguishment of debt associated with the redemption in 2018 of the 4.375% European Vehicle Senior Notes.
Six Months Ended June 30, 2019 Compared with Six Months Ended June 30, 2018
Total revenues for International RAC decreased $64$213 million in the first half of 20192020 compared to 2018.2019. Excluding a $14 million fx impact, DOE decreased $200 million due primarily to lower volume driven by the impact from fx,COVID-19 on total revenues Transactions Daysfor the first half of 2020 described above and Total RPD were flat.lower personnel costs due to government support across Europe related to COVID-19.
Depreciation of revenue earning vehicles and lease charges for International RACSG&A decreased $11$26 million in the first half of 20192020 compared to 2018 largely2019 due in part to lower marketing costs and decreases due to a $14 million fx impact. Depreciation Per Unit Per Month for International RAC increasedlower personnel costs attributable to $200 in the first half of 2019 comparedgovernment support across Europe related to $199 in the first half of 2018 due to richer fleet mix in Europe.COVID-19.
DOE for International RAC decreased $8 million in the first half of 2019 compared to 2018. Excluding a $43 million fx impact, DOE increased $35 million primarily driven by lower PLPD expense in 2018 due to favorable case development and fewer large claims, and higher field compensation and facility expenses in 2019.
SG&A decreased $10 million in the first half of 2019 compared to 2018 largely due to an $8 million fx impact.
Vehicle interest expense decreased $17 million in the first half of 2019 compared to 2018 primarily due to a $20 million loss on extinguishment of debt associated with the redemption in 2018 of the 4.375% European Vehicle Senior Notes.
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
| | ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
All Other Operations
The All Other Operations segment is primarily comprised of our Donlen business and, as such, our discussion is limited to Donlen.
Results of operations for this segment are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended
June 30, | | Percent Increase/(Decrease) | | Six Months Ended
June 30, | | Percent Increase/(Decrease) | | ($ in millions) | 2019 | | 2018 | | | 2019 | | 2018 | | | Total revenues | $ | 167 |
| | $ | 172 |
| | (3 | )% | | $ | 321 |
| | $ | 341 |
| | (6 | )% | | Depreciation of revenue earning vehicles and lease charges | $ | 117 |
| | $ | 128 |
| | (9 | ) | | $ | 226 |
| | $ | 253 |
| | (11 | ) | | Direct vehicle and operating expenses | $ | 7 |
| | $ | 8 |
| | (13 | ) | | $ | 13 |
| | $ | 17 |
| | (24 | ) | | Selling, general and administrative expenses | $ | 7 |
| | $ | 9 |
| | (22 | ) | | $ | 14 |
| | $ | 18 |
| | (22 | ) | | Vehicle interest expense | $ | 13 |
| | $ | 10 |
| | 30 |
| | $ | 25 |
| | $ | 20 |
| | 25 |
| | Adjusted EBITDA | $ | 24 |
| | $ | 21 |
| | 14 |
| | $ | 45 |
| | $ | 41 |
| | 10 |
| | Average Vehicles - Donlen | 207,704 |
| | 187,600 |
| | 11 |
| | 200,251 |
| | 189,600 |
| | 6 |
|
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, | | | | Percent Increase/(Decrease) | | Six Months Ended
June 30, | | | | Percent Increase/(Decrease) | | ($ in millions) | 2020 | | 2019 | | | | 2020 | | 2019 | | | | Total revenues | $ | 164 | | | $ | 167 | | | (1)% | | $ | 339 | | | $ | 321 | | | 6 | % | | Depreciation of revenue earning vehicles and lease charges | $ | 121 | | | $ | 117 | | | 4 | | $ | 245 | | | $ | 226 | | | 9 | | | Direct vehicle and operating expenses | $ | 6 | | | $ | 7 | | | (13) | | $ | 13 | | | $ | 13 | | | (3) | | | Selling, general and administrative expenses | $ | 8 | | | $ | 7 | | | 19 | | $ | 5 | | | $ | 14 | | | (65) | | | Vehicle interest expense | $ | 11 | | | $ | 13 | | | (13) | | $ | 23 | | | $ | 25 | | | (8) | | | Adjusted EBITDA | $ | 23 | | | $ | 24 | | | (3) | | $ | 48 | | | $ | 45 | | | 5 | | | Average Vehicles - Donlen | 196,018 | | | 207,704 | | | (6) | | 198,691 | | | 200,251 | | | (1) | |
Donlen had favorable re
sults in
In the second quarter andof 2020 as compared to 2019, Donlen's results decreased slightly due to lower leasing volume from vehicles used in ride sharing, which also resulted in the reduction to average vehicles. In the first half of 2020 versus 2019, as compared to the second quarter and first half of 2018. Lower year-over-year revenue and depreciation of revenue earning vehicles and lease chargesDonlen's results were driven by the impact of a change in presentation for certain leased vehicles in the second quarter and first half of 2019 versus 2018. The increase in overall average vehicles in the second quarter and first half of 2019 as compared to the second quarter and first half of 2018 isfavorable due to new customer acquisitionshigher leasing volume generated during the first quarter of 2020 and growtha decrease in the existing customer portfolio.SG&A due to gains on interest rate derivative financial instruments.
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Footnotes to the Results of Operations and Selected Operating Data by Segment Tables
| | (a) | Adjusted Corporate EBITDA is calculated as net income (loss) attributable to Hertz or Hertz Global, adjusted for income taxes, non-vehicle depreciation and amortization, net non-vehicle debt interest, vehicle debt-related charges, loss on extinguishment of vehicle debt, restructuring and restructuring related charges, goodwill, intangible and tangible asset impairments and write-downs, information technology and finance transformation costs and certain other miscellaneous items. When evaluating our operating performance, investors should not consider Adjusted Corporate EBITDA in isolation of, or as a substitute for, measures of our financial performance determined in accordance with U.S. GAAP. The reconciliations to the most comparable consolidated U.S. GAAP measure are presented below: |
(a)Adjusted Corporate EBITDA is calculated as net income (loss) attributable to Hertz or Hertz Global, adjusted for income taxes, non-vehicle depreciation and amortization, non-vehicle debt interest, net, vehicle debt-related charges, loss on extinguishment of vehicle debt, restructuring and restructuring related charges, goodwill, intangible and tangible asset impairments and write-downs, intercompany loan write-offs, information technology and finance transformation costs, reorganization items, net, pre-reorganization items and non-debtor financing charges and certain other miscellaneous items. When evaluating our operating performance, investors should not consider Adjusted Corporate EBITDA in isolation of, or as a substitute for, measures of our financial performance determined in accordance with U.S. GAAP. The reconciliations to the most comparable consolidated U.S. GAAP measure are presented below:
Hertz | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended
June 30, | | | | Six Months Ended
June 30, | | | | (In millions) | 2020 | | 2019 | | 2020 | | 2019 | | Net income (loss) attributable to Hertz | $ | (952) | | | $ | 39 | | | $ | (1,306) | | | $ | (106) | | | Adjustments: | | | | | | | | | Income tax provision (benefit) | (219) | | | 5 | | | (224) | | | 4 | | | Non-vehicle depreciation and amortization | 57 | | | 51 | | | 110 | | | 99 | | | Non-vehicle debt interest, net | 43 | | | 70 | | | 99 | | | 141 | | Vehicle debt-related charges(1) | 15 | | | 9 | | | 24 | | | 19 | | Restructuring and restructuring related charges(2) | 41 | | | 4 | | | 47 | | | 10 | | Technology-related intangible and other asset impairment(3) | 193 | | | — | | | 193 | | | — | | Write-off of intercompany loan(4) | 133 | | | — | | | 133 | | | — | | Information technology and finance transformation costs(5) | 8 | | | 38 | | | 25 | | | 60 | | Reorganization items, net(6) | 23 | | | — | | | 23 | | | — | | Pre-reorganization and non-debtor financing charges(7) | 45 | | | — | | | 45 | | | — | | Other items(8) | 26 | | | (9) | | | 1 | | | (24) | | | Adjusted Corporate EBITDA | $ | (587) | | | $ | 207 | | | $ | (830) | | | $ | 203 | |
| | | | | | | | | | | | | | | | | | | Three Months Ended
June 30, | | Six Months Ended
June 30, | | (In millions) | 2019 | | 2018 | | 2019 | | 2018 | | Net income (loss) attributable to Hertz | $ | 39 |
| | $ | (61 | ) | | $ | (106 | ) | | $ | (263 | ) | | Adjustments: | | | | | | | | | Income tax provision (benefit) | 5 |
| | (23 | ) | | 4 |
| | (51 | ) | | Non-vehicle depreciation and amortization | 51 |
| | 56 |
| | 99 |
| | 113 |
| | Non-vehicle debt interest, net of interest income | 70 |
| | 71 |
| | 141 |
| | 143 |
| Vehicle debt-related charges(1) | 9 |
| | 9 |
| | 19 |
| | 19 |
| Loss on extinguishment of vehicle debt(2) | — |
| | 20 |
| | — |
| | 22 |
| Restructuring and restructuring related charges(3) | 4 |
| | 10 |
| | 10 |
| | 13 |
| Information technology and finance transformation costs(4) | 38 |
| | 29 |
| | 60 |
| | 51 |
| Other items(5) | (9 | ) | | (18 | ) | | (24 | ) | | (14 | ) | | Adjusted Corporate EBITDA | $ | 207 |
| | $ | 93 |
| | $ | 203 |
| | $ | 33 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended
June 30, | | | | Six Months Ended
June 30, | | | | (In millions) | 2020 | | 2019 | | 2020 | | 2019 | | Net income (loss) attributable to Hertz Global | $ | (847) | | | $ | 38 | | | $ | (1,203) | | | $ | (108) | | | Adjustments: | | | | | | | | | Income tax provision (benefit) | (192) | | | 4 | | | (196) | | | 3 | | | Non-vehicle depreciation and amortization | 57 | | | 51 | | | 110 | | | 99 | | | Non-vehicle debt interest, net | 44 | | | 72 | | | 101 | | | 144 | | Vehicle debt-related charges(1) | 15 | | | 9 | | | 24 | | | 19 | | Restructuring and restructuring related charges(2) | 41 | | | 4 | | | 47 | | | 10 | | Technology-related intangible and other asset impairment(3) | 193 | | | — | | | 193 | | | — | | Information technology and finance transformation costs(5) | 8 | | | 38 | | | 25 | | | 60 | | Reorganization items, net(6) | 23 | | | — | | | 23 | | | — | | Pre-reorganization and non-debtor financing charges(7) | 45 | | | — | | | 45 | | | — | | Other items(8) | 26 | | | (9) | | | 1 | | | (24) | | | Adjusted Corporate EBITDA | $ | (587) | | | $ | 207 | | | $ | (830) | | | $ | 203 | |
(1)Represents vehicle debt-related charges relating to the amortization of deferred financing costs and debt discounts and premiums. (2)Represents charges incurred under restructuring actions as defined in U.S. GAAP. See Note 7, "Restructuring" in the Notes to the Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information. Also includes restructuring related charges such as incremental costs incurred directly supporting business transformation initiatives.
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) |
(DEBTORS-IN-POSSESSION)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) (3)Represents the impairment of technology-related intangible assets and capitalized cloud computing implementation costs, as disclosed in Note 4, "Goodwill and Intangible Assets, Net," in the Notes to the Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. (4)Represents the write-off of the 2019 Master Loan between Hertz Globaland Hertz Holdings, as disclosed in Note 13, "Related Party Transactions," in the Notes to the Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. (5)Represents costs associated with our information technology and finance transformation programs, both of which are multi-year initiatives to upgrade and modernize our systems and processes. (6)Represents charges incurred associated with the filing of the Chapter 11 Cases, as described in Note 16, "Reorganization Items, Net," in the Notes to the Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, including professional fees. (7)Represents charges incurred prior to the filing of the Chapter 11 Cases comprised of preparation charges for the reorganization, such as professional fees and certain non-debtor financing charges. (8)Represents miscellaneous items, including non-cash stock-based compensation charges. In 2020, also includes a $20 million gain on the sale of non-vehicle capital assets, which was recorded in the first quarter, partially offset by second quarter charges of $18 million for losses associated with certain vehicle damages. In 2019, includes a $20 million gain on marketable securities, of which $9 million was recorded in the second quarter, and a $12 million gain on the sale of non-vehicle capital assets, of which $4 million was recorded in the second quarter.
(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.
(c)Average Vehicles are 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 revenues. 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 | | | | Three Months Ended June 30, | | | | | | | | 2020 | | 2019 | | 2020 | | 2019 | | Transaction Days (in thousands) | 12,964 | | | 41,173 | | | 4,256 | | | 13,125 | | | Average Vehicles (in whole units) | 502,763 | | | 554,794 | | | 129,615 | | | 186,881 | | | Number of days in period (in whole units) | 91 | | | 91 | | | 91 | | | 91 | | | Available Car Days (in thousands) | 45,751 | | | 50,486 | | | 11,795 | | | 17,006 | | | Vehicle Utilization | 28 | % | | 82 | % | | 36 | % | | 77 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | U.S. Rental Car | | | | International Rental Car | | | | Six Months Ended June 30, | | | | | | | | 2020 | | 2019 | | 2020 | | 2019 | | Transaction Days (in thousands) | 44,529 | | | 76,754 | | | 13,119 | | | 23,252 | | | Average Vehicles (in whole units) | 510,672 | | | 528,281 | | | 138,801 | | | 169,814 | | | Number of days in period (in whole units) | 182 | | | 181 | | | 182 | | | 181 | | | Available Car Days (in thousands) | 92,942 | | | 95,619 | | | 25,262 | | | 30,736 | | | Vehicle Utilization | 48 | % | | 80 | % | | 52 | % | | 76 | % |
58 | | | | | | | | | | | | | | | | | | | Three Months Ended
June 30, | | Six Months Ended
June 30, | | (In millions) | 2019 | | 2018 | | 2019 | | 2018 | | Net income (loss) attributable to Hertz Global | $ | 38 |
| | $ | (63 | ) | | $ | (108 | ) | | $ | (265 | ) | | Adjustments: | | | | | | | | | Income tax provision (benefit) | 4 |
| | (23 | ) | | 3 |
| | (52 | ) | | Non-vehicle depreciation and amortization | 51 |
| | 56 |
| | 99 |
| | 113 |
| | Non-vehicle debt interest, net of interest income | 72 |
| | 73 |
| | 144 |
| | 146 |
| Vehicle debt-related charges(1) | 9 |
| | 9 |
| | 19 |
| | 19 |
| Loss on extinguishment of vehicle debt(2) | — |
| | 20 |
| | — |
| | 22 |
| Restructuring and restructuring related charges(3) | 4 |
| | 10 |
| | 10 |
| | 13 |
| Information technology and finance transformation costs(4) | 38 |
| | 29 |
| | 60 |
| | 51 |
| Other items(5) | (9 | ) | | (18 | ) | | (24 | ) | | (14 | ) | | Adjusted Corporate EBITDA | $ | 207 |
| | $ | 93 |
| | $ | 203 |
| | $ | 33 |
|
| | (1) | Represents vehicle debt-related charges relating to the amortization of deferred financing costs and debt discounts and premiums. |
| | (2) | In 2018, primarily represents $20 million of early redemption premium and write-off of deferred financing costs associated with the full redemption of the 4.375% European Vehicle Senior Notes due January 2019 in April 2018. |
| | (3) | Represents charges incurred under restructuring actions as defined in U.S. GAAP, excluding impairments and asset write-downs. Also includes restructuring related 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. In 2018, also includes consulting costs, legal fees, and other expenses related to the previously disclosed accounting review and investigation. |
| | (4) | Represents costs associated with our information technology and finance transformation programs, both of which are multi-year initiatives to upgrade and modernize our systems and processes. |
| | (5) | Represents miscellaneous items, including non-cash stock-based compensation charges. In 2019, includes a $20 million gain on marketable securities, of which $9 million was recorded during the second quarter of 2019, and a $12 million gain on the sale of non-vehicle capital assets, of which $4 million was recorded in the second quarter of 2019. In 2018, includes a $17 million gain on marketable securities and a $6 million legal settlement received in the second quarter related to an oil spill in the Gulf of Mexico in 2010. |
| | (b) | Transaction Days represent the total number of 24-hour periods, with any partial period counted as one Transaction Day, that vehicles were on rent (the period between when a rental contract is opened and closed) in a given period. Thus, it is possible for a vehicle to attain more than one Transaction Day in a 24-hour period. |
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION)
| | ITEM 2. | ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
| | (c) | Average Vehicles are determined using a simple average of the number of vehicles at the beginning and end of a given period. Among other things, Average Vehicles is used to calculate our Vehicle Utilization which represents the portion of our vehicles that are being utilized to generate revenue. Vehicle Utilization is calculated by dividing total Transaction Days by Available Car Days. The calculation of Vehicle Utilization is shown in the table below: |
| | | | | | | | | | | | | | | U.S. Rental Car | | International Rental Car | | | Three Months Ended June 30, | | | 2019 | | 2018 | | 2019 | | 2018 | | Transaction Days (in thousands) | 41,173 |
| | 38,747 |
| | 13,125 |
| | 13,225 |
| | Average Vehicles | 554,794 |
| | 523,000 |
| | 186,881 |
| | 187,300 |
| | Number of days in period | 91 |
| | 91 |
| | 91 |
| | 91 |
| | Available Car Days (in thousands) | 50,486 |
| | 47,593 |
| | 17,006 |
| | 17,044 |
| | Vehicle Utilization | 82 | % | | 81 | % | | 77 | % | | 78 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | U.S. Rental Car | | | | International Rental Car | | | | Three Months Ended June 30, | | | | | | | | ($ in millions, except as noted) | 2020 | | 2019 | | 2020 | | 2019 | | Total revenues | $ | 533 | | | $ | 1,784 | | | $ | 135 | | | $ | 560 | | | Ancillary retail vehicle sales revenues | (38) | | | (33) | | | — | | | — | | Foreign currency adjustment(1) | — | | | — | | | 4 | | | — | | | Total Rental Revenues | $ | 495 | | | $ | 1,751 | | | $ | 139 | | | $ | 560 | | | Transaction Days (in thousands) | 12,964 | | | 41,173 | | | 4,256 | | | 13,125 | | | Total RPD (in whole dollars) | $ | 38.17 | | | $ | 42.54 | | | $ | 32.56 | | | $ | 42.68 | |
| | | | | | | | | | | | | | | | | | | | | | | | | U.S. Rental Car | | | | International Rental Car | | | | Six Months Ended June 30, | | | | | | | | ($ in millions, except as noted) | 2020 | | 2019 | | 2020 | | 2019 | | Total revenues | $ | 1,914 | | | $ | 3,304 | | | $ | 502 | | | $ | 993 | | | Ancillary retail vehicle sales revenues | (70) | | | (62) | | | — | | | — | | | Foreign currency adjustment(1) | — | | | — | | | 12 | | | (4) | | | Total Rental Revenues | $ | 1,844 | | | $ | 3,242 | | | $ | 514 | | | $ | 989 | | | Transaction Days (in thousands) | 44,529 | | | 76,754 | | | 13,119 | | | 23,252 | | | Total RPD (in whole dollars) | $ | 41.41 | | | $ | 42.24 | | | $ | 39.18 | | | $ | 42.49 | |
(1)Based on December 31, 2019 foreign currency exchange rates for all periods presented.
(e)Total RPU Per Month is calculated as Total Rental Revenues divided by the Average Vehicles in each period and then divided by the number of months in the period reported. The calculation of Total RPU Per Month is shown below: | | | | | | | | | | | | | | | | | | | | | | | | | U.S. Rental Car | | | | International Rental Car | | | | Three Months Ended June 30, | | | | | | | | ($ in millions, except as noted) | 2020 | | 2019 | | 2020 | | 2019 | | Total Rental Revenues | $ | 495 | | | $ | 1,751 | | | $ | 139 | | | $ | 560 | | Average Vehicles (in whole units) | 502,763 | | | 554,794 | | | 129,615 | | | 186,881 | | | Total revenue per unit (in whole dollars) | $ | 985 | | | $ | 3,156 | | | $ | 1,072 | | | $ | 2,997 | | Number of months in period (in whole units) | 3 | | | 3 | | | 3 | | | 3 | | | Total RPU Per Month (in whole dollars) | $ | 328 | | | $ | 1,052 | | | $ | 356 | | | $ | 999 | |
| | | | | | | | | | | | | | | | | | | | | | | | | U.S. Rental Car | | | | International Rental Car | | | | Six Months Ended June 30, | | | | | | | | ($ in millions, except as noted) | 2020 | | 2019 | | 2020 | | 2019 | | Total Rental Revenues | $ | 1,844 | | | $ | 3,242 | | | $ | 514 | | | $ | 989 | | Average Vehicles (in whole units) | 510,672 | | | 528,281 | | | 138,801 | | | 169,814 | | | Total revenue per unit (in whole dollars) | $ | 3,611 | | | $ | 6,137 | | | $ | 3,703 | | | $ | 5,824 | | Number of months in period (in whole units) | 6 | | | 6 | | | 6 | | | 6 | | | Total RPU Per Month (in whole dollars) | $ | 602 | | | $ | 1,023 | | | $ | 617 | | | $ | 970 | |
59 | | | | | | | | | | | | | | | U.S. Rental Car | | International Rental Car | | | Six Months Ended June 30, | | | 2019 | | 2018 | | 2019 | | 2018 | | Transaction Days (in thousands) | 76,754 |
| | 72,949 |
| | 23,252 |
| | 23,199 |
| | Average Vehicles | 528,281 |
| | 500,800 |
| | 169,814 |
| | 168,000 |
| | Number of days in period | 181 |
| | 181 |
| | 181 |
| | 181 |
| | Available Car Days (in thousands) | 95,619 |
| | 90,645 |
| | 30,736 |
| | 30,408 |
| | Vehicle Utilization | 80 | % | | 80 | % | | 76 | % | | 76 | % |
| | (d) | Total RPD is calculated as total revenue less ancillary retail vehicle sales revenue, with all periods adjusted to eliminate the effect of fluctuations in foreign currency exchange rates ("Total Rental Revenue"), divided by the total number of Transaction Days. Our management believes eliminating the effect of fluctuations in foreign currency exchange rates is useful in analyzing underlying trends. The calculation of Total RPD is shown below: |
| | | | | | | | | | | | | | | | | | | U.S. Rental Car | | International Rental Car | | | Three Months Ended June 30, | | ($ in millions, except as noted) | 2019 | | 2018 | | 2019 | | 2018 | | Revenues | $ | 1,784 |
| | $ | 1,628 |
| | $ | 560 |
| | $ | 589 |
| | Ancillary retail vehicle sales revenue | (33 | ) | | (25 | ) | | — |
| | — |
| Foreign currency adjustment(1) | — |
| | — |
| | 4 |
| | (28 | ) | | Total Rental Revenue | $ | 1,751 |
| | $ | 1,603 |
| | $ | 564 |
| | $ | 561 |
| | Transaction Days (in thousands) | 41,173 |
| | 38,747 |
| | 13,125 |
| | 13,225 |
| | Total RPD (in whole dollars) | $ | 42.54 |
| | $ | 41.37 |
| | $ | 42.97 |
| | $ | 42.45 |
|
| | | | | | | | | | | | | | | | | | | U.S. Rental Car | | International Rental Car | | | Six Months Ended June 30, | | ($ in millions, except as noted) | 2019 | | 2018 | | 2019 | | 2018 | | Revenues | $ | 3,304 |
| | $ | 3,054 |
| | $ | 993 |
| | $ | 1,057 |
| | Ancillary retail vehicle sales revenue | (62 | ) | | (51 | ) | | — |
| | — |
| Foreign currency adjustment(1) | — |
| | — |
| | 2 |
| | (63 | ) | | Total Rental Revenue | $ | 3,242 |
| | $ | 3,003 |
| | $ | 995 |
| | $ | 994 |
| | Transaction Days (in thousands) | 76,754 |
| | 72,949 |
| | 23,252 |
| | 23,199 |
| | Total RPD (in whole dollars) | $ | 42.24 |
| | $ | 41.17 |
| | $ | 42.79 |
| | $ | 42.86 |
|
| | (1) | Based on December 31, 2018 foreign currency exchange rates for all periods presented. |
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION)
| | ITEM 2. | ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
| | (e) | Total RPU Per Month is calculated as Total Rental Revenue divided by the Average Vehicles in each period and then divided by the number of months in the period reported. The calculation of Total RPU Per Month is shown below: |
| | | | | | | | | | | | | | | | | | | U.S. Rental Car | | International Rental Car | | | Three Months Ended June 30, | | ($ in millions, except as noted) | 2019 | | 2018 | | 2019 | | 2018 | | Total Rental Revenue | $ | 1,751 |
| | $ | 1,603 |
| | $ | 564 |
| | $ | 561 |
| | Average Vehicles | 554,794 |
| | 523,000 |
| | 186,881 |
| | 187,300 |
| | Total revenue per unit (in whole dollars) | $ | 3,156 |
| | $ | 3,065 |
| | $ | 3,018 |
| | $ | 2,995 |
| | Number of months in period | 3 |
| | 3 |
| | 3 |
| | 3 |
| | Total RPU Per Month (in whole dollars) | $ | 1,052 |
| | $ | 1,022 |
| | $ | 1,006 |
| | $ | 999 |
|
(f)Depreciation Per Unit Per Month represents the amount of average depreciation expense and lease charges per vehicle per month and is calculated as depreciation of revenue earning vehicles and lease charges, with all periods adjusted to eliminate the effect of fluctuations in foreign currency exchange rates, divided by the Average Vehicles in each period and then dividing by the number of months in the period reported. Our management believes eliminating the effect of fluctuations in foreign currency exchange rates is useful in analyzing underlying trends. The calculation of Depreciation Per Unit Per Month is shown below: | | | | | | | | | | | | | | | | | | | | | | | | | U.S. Rental Car | | | | International Rental Car | | | | Three Months Ended June 30, | | | | | | | | ($ in millions, except as noted) | 2020 | | 2019 | | 2020 | | 2019 | | Depreciation of revenue earning vehicles and lease charges | $ | 408 | | | $ | 411 | | | $ | 81 | | | $ | 106 | | Foreign currency adjustment(1) | — | | | — | | | 3 | | | — | | | Adjusted depreciation of revenue earning vehicles and lease charges | $ | 408 | | | $ | 411 | | | $ | 84 | | | $ | 106 | | Average Vehicles (in whole units) | 502,763 | | | 554,794 | | | 129,615 | | | 186,881 | | | Adjusted depreciation of revenue earning vehicles and lease charges divided by Average Vehicles (in whole dollars) | $ | 812 | | | $ | 741 | | | $ | 648 | | | $ | 567 | | Number of months in period (in whole units) | 3 | | | 3 | | | 3 | | | 3 | | | Depreciation Per Unit Per Month (in whole dollars) | $ | 271 | | | $ | 247 | | | $ | 215 | | | $ | 189 | |
| | | | | | | | | | | | | | | | | | | | | | | | | U.S. Rental Car | | | | International Rental Car | | | | Six Months Ended June 30, | | | | | | | | ($ in millions, except as noted) | 2020 | | 2019 | | 2020 | | 2019 | | Depreciation of revenue earning vehicles and lease charges | $ | 871 | | | $ | 797 | | | $ | 170 | | | $ | 203 | | Foreign currency adjustment(1) | — | | | — | | | 4 | | | (1) | | | Adjusted depreciation of revenue earning vehicles and lease charges | $ | 871 | | | $ | 797 | | | $ | 174 | | | $ | 202 | | Average Vehicles (in whole units) | 510,672 | | | 528,281 | | | 138,801 | | | 169,814 | | | Adjusted depreciation of revenue earning vehicles and lease charges divided by Average Vehicles (in whole dollars) | $ | 1,706 | | | $ | 1,509 | | | $ | 1,254 | | | $ | 1,190 | | Number of months in period (in whole units) | 6 | | | 6 | | | 6 | | | 6 | | | Depreciation Per Unit Per Month (in whole dollars) | $ | 284 | | | $ | 251 | | | $ | 209 | | | $ | 198 | |
(1)Based on December 31, 2019 foreign currency exchange rates for all periods presented. | | | | | | | | | | | | | | | | | | | U.S. Rental Car | | International Rental Car | | | Six Months Ended June 30, | | ($ in millions, except as noted) | 2019 | | 2018 | | 2019 | | 2018 | | Total Rental Revenue | $ | 3,242 |
| | $ | 3,003 |
| | $ | 995 |
| | $ | 994 |
| | Average Vehicles | 528,281 |
| | 500,800 |
| | 169,814 |
| | 168,000 |
| | Total revenue per unit (in whole dollars) | $ | 6,137 |
| | $ | 5,996 |
| | $ | 5,859 |
| | $ | 5,917 |
| | Number of months in period | 6 |
| | 6 |
| | 6 |
| | 6 |
| | Total RPU Per Month (in whole dollars) | $ | 1,023 |
| | $ | 999 |
| | $ | 977 |
| | $ | 987 |
|
| | (f) | Depreciation Per Unit Per Month represents the amount of average depreciation expense and lease charges per vehicle per month and is calculated as depreciation of revenue earning vehicles and lease charges, with all periods adjusted to eliminate the effect of fluctuations in foreign currency exchange rates, divided by the Average Vehicles in each period and then dividing by the number of months in the period reported. Our management believes eliminating the effect of fluctuations in foreign currency exchange rates is useful in analyzing underlying trends. The calculation of Depreciation Per Unit Per Month is shown below: |
| | | | | | | | | | | | | | | | | | | U.S. Rental Car | | International Rental Car | | | Three Months Ended June 30, | | ($ in millions, except as noted) | 2019 | | 2018 | | 2019 | | 2018 | | Depreciation of revenue earning vehicles and lease charges | $ | 411 |
| | $ | 447 |
| | $ | 106 |
| | $ | 112 |
| Foreign currency adjustment(1) | — |
| | — |
| | 1 |
| | (6 | ) | | Adjusted depreciation of revenue earning vehicles and lease charges | $ | 411 |
| | $ | 447 |
| | $ | 107 |
| | $ | 106 |
| | Average Vehicles | 554,794 |
| | 523,000 |
| | 186,881 |
| | 187,300 |
| | Adjusted depreciation of revenue earning vehicles and lease charges divided by Average Vehicles (in whole dollars) | $ | 741 |
| | $ | 855 |
| | $ | 573 |
| | $ | 566 |
| | Number of months in period | 3 |
| | 3 |
| | 3 |
| | 3 |
| | Depreciation Per Unit Per Month (in whole dollars) | $ | 247 |
| | $ | 285 |
| | $ | 191 |
| | $ | 189 |
|
| | | | | | | | | | | | | | | | | | | U.S. Rental Car | | International Rental Car | | | Six Months Ended June 30, | | ($ in millions, except as noted) | 2019 | | 2018 | | 2019 | | 2018 | | Depreciation of revenue earning vehicles and lease charges | $ | 797 |
| | $ | 881 |
| | $ | 203 |
| | $ | 214 |
| Foreign currency adjustment(1) | — |
| | — |
| | — |
| | (13 | ) | | Adjusted depreciation of revenue earning vehicles and lease charges | $ | 797 |
| | $ | 881 |
| | $ | 203 |
| | $ | 201 |
| | Average Vehicles | 528,281 |
| | 500,800 |
| | 169,814 |
| | 168,000 |
| | Adjusted depreciation of revenue earning vehicles and lease charges divided by Average Vehicles (in whole dollars) | $ | 1,509 |
| | $ | 1,759 |
| | $ | 1,195 |
| | $ | 1,196 |
| | Number of months in period | 6 |
| | 6 |
| | 6 |
| | 6 |
| | Depreciation Per Unit Per Month (in whole dollars) | $ | 251 |
| | $ | 293 |
| | $ | 200 |
| | $ | 199 |
|
| | (1) | Based on December 31, 2018 foreign currency exchange rates for all periods presented. |
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) |
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, 2019,2020, we had $415 millionapproximately $1.4 billion of unrestricted cash and unrestricted cash equivalents and $239$916 million of restricted cash.cash and restricted cash equivalents. Of these amounts, as of June 30, 2019, $147approximately $375 million of unrestricted cash and unrestricted cash equivalents and $33$81 million of restricted cash and restricted cash equivalents was held by our subsidiaries outside of the U.S. IfAs a result of the impact of COVID-19 discussed above, we changed our indefinite investment assertion with respect to our non-U.S. earnings, and if not in the form of loan repayments or subject to favorable tax treaties, repatriation of some of these funds under current regulatory and tax law for use in domestic operations could expose us to additional cash taxes.
Liquidity Considerations Related to COVID-19 As noted above, the outbreak of COVID-19 has spread across the globe, resulting in a global economic slowdown and disruptions of travel and other industries, all of which are continuing to negatively impact our industry. In addition, COVID-19 has resulted in our employees, contractors, suppliers, customers and other business partners being prevented from conducting normal business activities for an indefinite period of time. This has been caused largely by shutdowns that have been requested or mandated by governmental authorities.
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) As a result, we (i) initiated a restructuring program affecting approximately 11,000 employees in our U.S. RAC segment and U.S. corporate operations, the majority of which were previously furloughed, (ii) actively negotiated to abate or defer our airport rent and concession payments, (iii) substantially reduced capital expenditures and (iv) eliminated discretionary marketing spend; and (v) reduced our commitments to purchase vehicles by approximately $4.0 billion from original commitments in our U.S. RAC segment, the majority of which were due to be delivered during the second quarter of 2020.
Although we took aggressive action to eliminate costs, we faced significant ongoing monthly expenses, including monthly payments under our Operating Lease, pursuant to which Hertz leases vehicles which we use in our U.S. rental car operations. On April 27, 2020, Hertz did not make certain payments in accordance with its Operating Lease, and as a result, an amortization event was in effect as of May 5, 2020 for all series of notes issued by HVF II and a liquidation event was in effect with respect to the Series 2013-A Notes issued by HVF II. Refer to Part I, Item 1 of this Quarterly Report on Form 10-Q in Note 1, "Background" for additional information on the Forbearance Agreement and Waiver Agreements which expired on May 22, 2020.
Voluntary Petitions for Bankruptcy
In connection with the expiration of the Forbearance Agreement and the Waiver Agreements described above and the continuing economic impact from COVID-19, on May 22, 2020, the Debtors filed Petitions under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. The Chapter 11 Cases are being jointly administered under the caption In re: the Hertz Corporation, et al., Case No. 20-11218 (MFW). Additional information about the Chapter 11 Cases, including access to documents filed with the Bankruptcy Court, is available online at https://restructuring.primeclerk.com/hertz, a website administered by Prime Clerk, a third party bankruptcy claims and noticing agent. The information on this web site is not incorporated by reference and does not constitute part of this Form 10-Q.
The Bankruptcy Court has approved motions filed by the Debtors that were designed primarily to mitigate the impact of the Chapter 11 Cases on the Company’s operations, customers and employees. The Debtors are authorized to conduct their business activities in the ordinary course, and pursuant to orders entered by the Bankruptcy Court, the Debtors are authorized to, among other things and subject to the terms and conditions of such orders: (i) pay employees’ wages and related obligations; (ii) pay certain taxes; (iii) pay critical vendors and certain fees to airport authorities; (iv) continue to maintain certain customer programs; (v) maintain their insurance program; (vi) use cash collateral on an interim basis; and (viii) continue their cash management system.
COVID-19 Mitigation Actions Following the Chapter 11 Filing
As a result of our ongoing actions to eliminate costs in the second quarter of 2020, we have: (i) negotiated rent concessions in the form of abatement and payment deferrals of fixed and variable rent payments for our airport and off-airport locations in the amount of $30 million which represent amounts previously due in the period between April 1, 2020 and June 30, 2020; (ii) reduced our revenue earning vehicle expenditures by $4.4 billion, or 88%, in the second quarter of 2020 compared to 2019; (iii) reduced our non-vehicle capital asset expenditures by $51 million, or 80%,in the second quarter of 2020 compared to 2019 primarily due to a reduction in information technology and finance transformation program costs; (iv) returned approximately 19,000 program vehicles in our U.S. RAC segment in the second quarter of 2020 compared to 14,000 program vehicles in the second quarter of 2019, an increase of 36% period over period; and (v) sold 6,000, or 8%, more vehicles in our U.S. RAC segment in the second quarter of 2020 compared to 2019 due to strength in residual values. We are continuing to review our cost structure and fleet size to align with expected rental car volumes.
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Borrowing Capacity and Availability
The filing of the Chapter 11 Cases constituted defaults, termination events and/or amortization events with respect to certain of the Company's existing debt obligations. As a result of the filing of the Chapter 11 Cases, the remaining capacity under almost all of our revolving credit facilities was terminated, as disclosed in Part I, Item 1 of this Quarterly Report on Form 10-Q in Note 5, "Debt." Consequently, the proceeds of sales of vehicles which serve as collateral for such vehicle finance facilities must be applied to the payment of the related indebtedness of the Non-Debtor Financing Subsidiaries and are not otherwise available to fund our operations. Additionally, we are precluded from accessing any of our subordinated investment in the vehicle collateral until the related defaults are waived or the third party funding under those facilities has been retired, either through the monetization of the underlying collateral or the refinancing of the related indebtedness. Additionally, proceeds from vehicle receivables, excluding manufacturer rebates, as of June 30, 2020 and ongoing vehicle sales must be applied to vehicle debt in amortization.
On July 24, 2020, per the terms of the Interim Lease Order entered on July 24, 2020, the Debtors were directed, among other things, to: (i) make $650 million of base rent payments under the Operating Lease to the HVF trustee in the amount of six equal monthly payments of approximately $108 million commencing in July 2020 through December 2020; (ii) dispose of at least 182,521 lease vehicles between June 1, 2020 and December 31, 2020, inclusive, where the proceeds of the dispositions, subject to certain exclusions set forth in the Interim Lease Order, will be used to make payments under the Master Lease; and (iii) fund interest payments on the Master Lease from draws on certain existing letters of credit, which are reimbursable by the Debtors. Litigation relating to the Master Lease will be suspended until January 15, 2021. For the period from June 1, 2020 through July 31, 2020, we disposed of approximately 100,000 vehicles which are associated with the Interim Order.
We believecurrently have waivers related to the filing of the Chapter 11 Cases under our European Vehicle Notes, European ABS and U.K. Fleet Financing facility that expire on September 30, 2020, as disclosed in Part I, Item 1 of this Quarterly Report on Form 10-Q in Note 5, "Debt."
Our inability to access our Senior RCF facility or retain any proceeds from the sale of vehicles under our U.S. ABS programs means that our source of liquidity is almost entirely our cash and cash equivalents on hand and cash generated from our operations. As of June 30, 2020, we had $1.4 billion of unrestricted cash and unrestricted cash equivalents which we believe will be sufficient to fund our operations through approximately December 31, 2020, assuming we do not experience any unforeseen liquidity needs before then, which could result in the utilization of the liquidity in advance of December 31, 2020. We believe, however, that if, among other things, (i) we cannot successfully extend the international vehicle debt waivers that expire on September 30, 2020, (ii) we cannot successfully implement a plan of reorganization, and (iii) there is not a significant recovery in the economic conditions in our major markets, our available cash and cash equivalents and cash generated by our operations and cash received on the disposal of vehicles, together with amounts available under various liquidity facilities and refinancing options available to us in the capital markets, will not be sufficient to fund operating requirements for the next twelve months. Consequently, the Debtors are seeking debtor-in-possession financing and pursuing vehicle financing for certain of their operations, either through waivers on existing facilities or entering into new arrangements to fund vehicles and vehicle leases, to supplement their sources of funding.
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Cash Flows - Hertz
As of June 30, 2020 and December 31, 2019, Hertz had unrestricted cash and unrestricted cash equivalents of $1.4 billion and $865 million, respectively, and restricted cash and restricted cash equivalents of $654$916 million compared to $1.4 billion as of December 31, 2018.and $495 million, respectively. The following table summarizes the net change in cash, cash equivalents, restricted cash and restricted cash equivalents for the periods shown: | | | | | | | | | | | | | | | | | | | | Six Months Ended
June 30, | | | | | | (In millions) | 2020 | | 2019 | | $ Change | | Cash provided by (used in): | | | | | | | Operating activities | $ | 629 | | | $ | 1,057 | | | $ | (428) | | | Investing activities | 100 | | | (4,832) | | | 4,932 | | | Financing activities | 190 | | | 3,020 | | | (2,830) | | | Effect of exchange rate changes | 3 | | | (1) | | | 4 | | | Net change in cash, cash equivalents, restricted cash and restricted cash equivalents | $ | 922 | | | $ | (756) | | | $ | 1,678 | |
| | | | | | | | | | | | | | | Six Months Ended
June 30, | | | | (In millions) | 2019 | | 2018 | | $ Change | | Cash provided by (used in): | | | | | | | Operating activities | $ | 1,057 |
| | $ | 945 |
| | $ | 112 |
| | Investing activities | (4,832 | ) | | (4,055 | ) | | (777 | ) | | Financing activities | 3,020 |
| | 2,537 |
| | 483 |
| | Effect of exchange rate changes | (1 | ) | | (10 | ) | | 9 |
| | Net change in cash, cash equivalents, restricted cash and restricted cash equivalents | $ | (756 | ) | | $ | (583 | ) | | $ | (173 | ) |
During the first half of 2019,2020, cash flows from net income (loss), adjusted for non-cash and non-operating items, increased $183operating activities decreased by $428 million period over period. Excludingperiod primarily due to the net impact from operating leases, cash flows from the$1.2 billion change in certain asset and liability accounts decreased by $60 million due in partnet loss attributable to an increase in customer receivables primarily in our U.S. RAC operationsHertz driven by revenue growth and the previously disclosed SEC investigation payment,impact of COVID-19 discussed above, partially offset by an increasethe associated reduction of $578 million in accrued sales tax.working capital requirements.
Our primary investing activities relate to the acquisition and disposal of revenue earning vehicles. ThereHowever, as a result of the Interim Order, Hertz will dispose of at least 182,521 lease vehicles between June 1, 2020 and December 31, 2020, where the proceeds from the dispositions will be used to make payments under the Master Lease. During the first half of 2020, there was a $777 million increase$4.9 billion decrease in the use of cash for investing activities yearperiod over year.period. Cash outflows for the purchase of revenue earning vehicles increased $1.3decreased $4.0 billion primarily dueas we reduced our commitments to a higher volume of vehicles acquired in our U.S. RAC operations in 2019 versus 2018, which was partially offset by a $558 million increase in proceeds from the sale of revenue earningpurchase vehicles, primarily in our U.S. RAC operationssegment, due to increased vehicle dispositionsthe impact from COVID-19 and pricing a $793 million increase of cash from disposals of revenue earning vehicles as we accelerated the disposition of vehicles due primarily to a richer fleet mix.strength in residual values.
Net financing cash inflows were $190 million in the first half of 2020 compared to $3.0 billion in the first half of 2019, due to a $4.1 billion reduction in vehicle debt borrowings in 2020 compared to $2.5 billion2019 as we reduced our commitments to purchase vehicles and a reduction in the first half of 2018. The variance was primarily driven by increased vehicle debt associated withrepayments on our investmentOperating Lease as discussed above, partially offset by $615 million increase in revenue earning vehicles.borrowings under the Senior RCF.
Cash Flows - Hertz Global
As of June 30, 2020 and December 31, 2019, Hertz Global had unrestricted cash and unrestricted cash equivalents of $1.4 billion and $865 million, respectively, and restricted cash and restricted cash equivalents of $945 million and
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) |
(DEBTORS-IN-POSSESSION)
Cash Flows - Hertz GlobalITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
As of June 30, 2019, Hertz Global had cash, cash equivalents, restricted cash and restricted cash equivalents of $654$495 million, compared to $1.4 billion as of December 31, 2018.respectively. The following table summarizes the net change in cash, cash equivalents, restricted cash and restricted cash equivalents for the periods shown:
| | | | | | | | | | | | | | | | | | | | Six Months Ended
June 30, | | | | | | (In millions) | 2020 | | 2019 | | $ Change | | Cash provided by (used in): | | | | | | | Operating activities | $ | 626 | | | $ | 1,054 | | | $ | (428) | | | Investing activities | 100 | | | (4,832) | | | 4,932 | | | Financing activities | 222 | | | 3,023 | | | (2,801) | | | Effect of exchange rate changes | 3 | | | (1) | | | 4 | | | Net change in cash, cash equivalents, restricted cash and restricted cash equivalents | $ | 951 | | | $ | (756) | | | $ | 1,707 | |
| | | | | | | | | | | | | | | Six Months Ended
June 30, | | | | (In millions) | 2019 | | 2018 | | $ Change | | Cash provided by (used in): | | | | | | | Operating activities | $ | 1,054 |
| | $ | 942 |
| | $ | 112 |
| | Investing activities | (4,832 | ) | | (4,055 | ) | | (777 | ) | | Financing activities | 3,023 |
| | 2,540 |
| | 483 |
| | Effect of exchange rate changes | (1 | ) | | (10 | ) | | 9 |
| | Net change in cash, cash equivalents, restricted cash and restricted cash equivalents | $ | (756 | ) | | $ | (583 | ) | | $ | (173 | ) |
Fluctuations in operating, investing and financing cash flows from period to period are due to the same factors as those discloseddiscussed for Hertz above, with the exception of any cash inflows or outflows related to the master loan agreement between Hertz and Hertz Global.Global and proceeds from the issuance of stock under the ATM Program as disclosed in Note 9, "Earnings (Loss) Per Share - Hertz Global" to the Notes to our unaudited condensed consolidated financial statements included in this Report.
Financing
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 suchThese assets are only available to satisfy the claims of our general creditors.
We are highly leveraged, andthe secured creditors associated with such financings. For a substantial portiondiscussion of our liquidity requirements arise from servicing our indebtedness, funding our operations, including purchasesadditional risks associated with COVID-19, see Part II, Item 1A, "Risk Factors" of revenue earning vehicles, and funding non-vehicle capital expenditures. Our practice is to maintain sufficient liquidity through cash from operations, credit facilities and other financing arrangements, to mitigate any adverse effectthis Quarterly Report on operations resulting from adverse financial market conditions.
Refer to Part I, Item 1, Note 3,5, "Debt," to the Notes to our unaudited condensed consolidated financial statements included in this Report for information on our outstanding debt obligations and our borrowing capacity and availability under our revolving credit facilities as of June 30, 2019.2020. Cash paid for interest during the first half of 2020 was $67 million for interest on non-vehicle debt and $193 million for interest on vehicle debt. Cash paid for interest during the first half of 2019 was $140 million for interest on non-vehicle debt and $213 million for interest on vehicle debt. Cash paid for interest during the first half of 2018 was $142The $73 million for interest onreduction in non-vehicle debt and $175 million for interest is primarily due to suspending interest payments on vehicle debt.certain debt, due to the filing of the Chapter 11 Cases.
Our corporate liquidity, which excludes unused commitments under our vehicle debt, was as follows: | | | | | | | | | | (In millions) | June 30, 2019 | | December 31, 2018 | | Cash and cash equivalents | $ | 415 |
| | $ | 1,127 |
| | Availability under the Senior RCF | 397 |
| | 496 |
| | Corporate liquidity | $ | 812 |
| | $ | 1,623 |
|
| | | | | | | | | | | | | (In millions) | 6/30/2020 | | 12/31/2019 | | Cash and cash equivalents | $ | 1,366 | | | $ | 865 | | | Availability under the Senior RCF | — | | | 526 | | | Corporate liquidity | $ | 1,366 | | | $ | 1,391 | |
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) |
(DEBTORS-IN-POSSESSION)
In June 2019, Hertz Global filed a prospectus supplementCovenants
Prior to its Registration Statement on Form S-3 declared effective by the SEC on June 12, 2019 for a rights offering to raise gross proceeds of approximately $750 million, providing for the issuance of up to an aggregate of 57,915,055 new shares of Hertz Global common stock. Under the termsfiling of the rights offering, each stockholder of Hertz Global was eligible to receive one transferable subscription right for each share of common stock held as of 5:00 p.m., Eastern Time, on June 24, 2019. Each right entitled the holder to purchase 0.688285 shares of common stock at a price of $12.95 per whole share of common stock. The rights offering also entitled rights holders who fully exercised their basic subscription rights to subscribe for additional shares of Hertz Global's common stock that remain unsubscribed as a result of any unexercised basic subscription rights. The rights offering expired at 5:00 p.m., Eastern Time, on July 12, 2019 and was fully subscribed resulting in Hertz Global selling 57,915,055 shares of its common stock at the subscription price for gross proceeds of $750 million. Pursuant to the terms of the rights offering, 55,816,783 shares of common stock were purchased under the basic subscription right and 2,098,272 shares of common stock were purchased under the over-subscription right.
In July 2019, Hertz provided conditional notices of full redemption to the registered holders of its 2020 Notes and 2021 Notes pursuant to the requirements of the indentures governing the 2020 Notes and 2021 Notes. Excluding the completion of the aforementioned activity, approximately $18 million of non-vehicle debt and $2.3 billion of vehicle debt will mature during the twelve months following the issuance of this Report and we will need to refinance a portion of these obligations. We have reviewed the maturing debt obligations and determined that it is probable that we will be able, and have the intent, to repay or refinance these facilities at such times as we deem appropriate prior to their maturities.
In August 2019, Hertz issued $500 million in aggregate principal amount of the 2026 Notes. The Company intends to utilize the proceeds, together with net proceeds from the rights offering described above, to redeem the 2020 Notes and 2021 Notes.
Refer to Part I, Item I, Note 12, "Subsequent Events," to the Notes to our unaudited condensed consolidated financial statements included in this Report for further information on the above transactions.
Covenants
The indentures forChapter 11 Cases, the Senior Notes and the 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 our other debt instruments and credit facilities (including the Senior Facilities and the Letter of Credit Facility) 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, and the Letter of Credit Facility containand the Alternative Letter of Credit Facility contained a financial maintenance covenant applicable to such facilities. Such covenant providesprovided that Hertz’s consolidated first lien net leverage ratio, as defined in the credit agreements governing such facilities, (together, the "Senior Credit Agreement"), as of the last day of any fiscal quarter, may not exceed a ratio of 3.00 to 1.00 (the "Covenant Leverage Ratio"1.00. As a result of the filing of the Chapter 11 Cases, the Company is currently in default under its Senior RCF, the Letter of Credit Facility and the Alternative Letter of Credit Facility.
Summarized Financial Information - Hertz
The following tables present the summarized financial information as combined for The Hertz Corporation, ("Parent”), and the Parent's subsidiaries that guarantee the Senior Notes issued by the Parent ("Guarantor Subsidiaries"). 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 the value of such assets will not be available to satisfy the claims of the unsecured creditors of Hertz until the claims of secured creditors are paid in full.
AsDuring the first quarter of 2020, we early adopted Rule 13-01 of the SEC's Regulation S-X that simplifies the existing disclosure requirements for the Guarantor Subsidiaries and allows for the simplified disclosure to be included within Part 1, Item II, "Management’s Discussion and Analysis of Financial Condition and Results of Operations." In lieu of providing separate unaudited financial statements for the Guarantor Subsidiaries, Hertz has included the accompanying summarized financial information based on Rule 13-01 of the SEC's Regulation S-X. Management of Hertz does not believe that separate financial statements of the Guarantor Subsidiaries are material to Hertz's investors; therefore, separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented.
| | | | | | | | | | | | | | | | | | | | (In millions) | June 30,
2020 | | | | | | | | | December 31,
2019 | | Due from affiliates | $ | 66,268 | | | | | | | | | | $ | 3,562 | | | Total assets | 67,096 | | | | | | | | | | 25,964 | | Due to affiliates(1) | 53,509 | | | | | | | | | | 8,188 | | | Total liabilities | 62,795 | | | | | | | | | | 16,982 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(1) Due to affiliates classified as liabilities subject to compromise as of June 30, 2019, Hertz was in compliance with the Covenant Leverage Ratio. Consolidated EBITDA, as defined in the Senior Credit Agreement, is a component2020.
| | | | | | | | | (In millions) | | | Six Months Ended June 30, | | | | 2020 | | Total revenues | | | $ | 1,846 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Income (loss) before income taxes and equity in earnings (losses) of subsidiaries(1) | | | (2,724) | | | | | | | | | | | Net income (loss) | | | (1,306) | | | | | | | Net income (loss) attributable to Hertz | | | (1,306) | | | | | | | | | |
(1)Includes $2.2 billion of the calculation of the Covenant Leverage Ratio and is a 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 Credit Agreement. Consolidated EBITDA is generally defined inintercompany vehicle lease charges from non-guarantor subsidiaries.
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) |
(DEBTORS-IN-POSSESSION)
the Senior 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 and the Letter of Credit Facility, including add-backs for non-recurring, unusual or extraordinary charges, business optimization expenses or other restructuring charges or reserves.ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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.
Capital Expenditures
Revenue Earning Vehicles Expenditures and Disposals
The table below sets forth our revenue earning vehicles expenditures and related disposal proceeds for the periods shown: | | | | | | | | | | | | | | | | | | | Cash inflow (cash outflow) | Revenue Earning Vehicles | | | | | | (In millions) | Capital
Expenditures | | Disposal
Proceeds | | Net Capital
Expenditures | | 2020 | | | | | | | First Quarter | $ | (4,346) | | | $ | 2,212 | | | $ | (2,134) | | | Second Quarter | (610) | | | 2,793 | | | 2,183 | | | | | | | | | | | | | | | Total | $ | (4,956) | | | $ | 5,005 | | | $ | 49 | | | 2019 | | | | | | | First Quarter | $ | (3,973) | | | $ | 2,153 | | | $ | (1,820) | | | Second Quarter | (4,974) | | | 2,059 | | | (2,915) | | | | | | | | | | | | | | | Total | $ | (8,947) | | | $ | 4,212 | | | $ | (4,735) | |
| | | | | | | | | | | | | | Cash inflow (cash outflow) | Revenue Earning Vehicles | | (In millions) | Capital Expenditures | | Disposal Proceeds | | Net Capital Expenditures | | 2019 | | | | | | | First Quarter | $ | (3,973 | ) | | $ | 2,153 |
| | $ | (1,820 | ) | | Second Quarter | (4,974 | ) | | 2,059 |
| | (2,915 | ) | | Total | $ | (8,947 | ) | | $ | 4,212 |
| | $ | (4,735 | ) | | 2018 | | | | | | | First Quarter | $ | (3,565 | ) | | $ | 1,782 |
| | $ | (1,783 | ) | | Second Quarter | (4,045 | ) | | 1,872 |
| | (2,173 | ) | | Total | $ | (7,610 | ) | | $ | 3,654 |
| | $ | (3,956 | ) |
The table below sets forth expenditures for revenue earning vehicles, net of disposal proceeds, from disposal, by segment: | | | | | | | | | | | | | | | | | | | | | | | | | Cash inflow (cash outflow) | Six Months Ended
June 30, | | | | | | | | ($ in millions) | 2020 | | 2019 | | $ Change | | % Change | | U.S. Rental Car | $ | (64) | | | $ | (3,516) | | | $ | 3,452 | | | (98) | % | | International Rental Car | 285 | | | (826) | | | 1,111 | | | (135) | | | All Other Operations | (172) | | | (393) | | | 221 | | | (56) | | | Total | $ | 49 | | | $ | (4,735) | | | $ | 4,784 | | | (101) | |
| | | | | | | | | | | | | | | | | Cash inflow (cash outflow) | Six Months Ended
June 30, | | | | | | ($ in millions) | 2019 | | 2018 | | $ Change | | % Change | | U.S. Rental Car | $ | (3,516 | ) | | $ | (2,968 | ) | | $ | (548 | ) | | 18 | % | | International Rental Car | (826 | ) | | (705 | ) | | (121 | ) | | 17 |
| | All Other Operations | (393 | ) | | (283 | ) | | (110 | ) | | 39 |
| | Total | $ | (4,735 | ) | | $ | (3,956 | ) | | $ | (779 | ) | | 20 |
|
Non-Vehicle Capital Assets, Non-VehicleAsset Expenditures and Disposals
The table below sets forth our non-vehicle capital asset expenditures non-vehicle, and related disposal proceeds from property and other equipmentnon-vehicle capital assets disposed of or to be disposed of for the periods shown: | | | | | | | | | | | | | | Cash inflow (cash outflow) | Capital Assets, Non-Vehicle | | (In millions) | Capital Expenditures | | Disposal Proceeds | | Net Capital Expenditures | | 2019 | | | | | | | First Quarter | $ | (54 | ) | | $ | 19 |
| | $ | (35 | ) | | Second Quarter | (64 | ) | | 2 |
| | (62 | ) | | Total | $ | (118 | ) | | $ | 21 |
| | $ | (97 | ) | | 2018 | | | | | | | First Quarter | $ | (44 | ) | | $ | 4 |
| | $ | (40 | ) | | Second Quarter | (36 | ) | | 4 |
| | (32 | ) | | Total | $ | (80 | ) | | $ | 8 |
| | $ | (72 | ) |
| | | | | | | | | | | | | | | | | | | Cash inflow (cash outflow) | Non-Vehicle Capital Assets | | | | | | (In millions) | Capital
Expenditures | | Disposal
Proceeds | | Net Capital
Expenditures | | 2020 | | | | | | | First Quarter | $ | (59) | | | $ | 23 | | | $ | (36) | | | Second Quarter | (13) | | | 27 | | | 14 | | | | | | | | | | | | | | | Total | $ | (72) | | | $ | 50 | | | $ | (22) | | | 2019 | | | | | | | First Quarter | $ | (54) | | | $ | 19 | | | $ | (35) | | | Second Quarter | (64) | | | 2 | | | (62) | | | | | | | | | | | | | | | Total | $ | (118) | | | $ | 21 | | | $ | (97) | |
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) |
(DEBTORS-IN-POSSESSION)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
As discussed above, we reduced our non-vehicle capital asset expenditures by $51 million, or 80%, in the second quarter of 2020 compared to 2019 primarily due to a reduction in information technology and finance transformation program costs.
The table below sets forth non-vehicle capital asset expenditures, non-vehicle, net of disposal proceeds, by segment: | | | | | | | | | | | | | | | | | | | | | | | | | Cash inflow (cash outflow) | Six Months Ended
June 30, | | | | | | | | ($ in millions) | 2020 | | 2019 | | $ Change | | % Change | | U.S. Rental Car | $ | 15 | | | $ | (28) | | | $ | 43 | | | (154) | % | | International Rental Car | (8) | | | (8) | | | — | | | — | | | All Other Operations | (2) | | | (2) | | | — | | | — | | | Corporate | (27) | | | (59) | | | 32 | | | (54) | | | Total | $ | (22) | | | $ | (97) | | | $ | 75 | | | (77) | |
| | | | | | | | | | | | | | | | | Cash inflow (cash outflow) | Six Months Ended
June 30, | | | | | | ($ in millions) | 2019 | | 2018 | | $ Change | | % Change | | U.S. Rental Car | $ | (28 | ) | | $ | (38 | ) | | $ | 10 |
| | (26 | )% | | International Rental Car | (8 | ) | | (7 | ) | | (1 | ) | | 14 |
| | All Other Operations | (2 | ) | | (2 | ) | | — |
| | — |
| | Corporate | (59 | ) | | (25 | ) | | (34 | ) | | 136 |
| | Total | $ | (97 | ) | | $ | (72 | ) | | $ | (25 | ) | | 35 |
|
CONTRACTUAL OBLIGATIONS
As of June 30, 2019,2020, there have been no material changes, with the exception of fleet commitments, outside of the ordinary course of business to our known contractual obligations as set forth in the table included in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our 20182019 Form 10‑K. Changes10-K. Due to the impact of COVID-19 discussed above, we have reduced commitments to purchase vehicles with approximately a $4.0 billion reduction from original commitments in our U.S. RAC segment, the majority of which were due to be delivered during the second quarter of 2020.
Additionally, as a result of filing the Chapter 11 Cases, as disclosed in Note 1, "Background," to the Notes to our aggregate indebtedness, including related interest and terms for new issuances,unaudited condensed consolidated financial statements included in this Report, certain financings are described in Part I, Item 1,subject to change following the conclusion of such proceedings. Refer to Note 3,5, "Debt," to the Notes to our unaudited condensed consolidated financial statements included in this Report.Report for debt classified as liabilities subject to compromise as of June 30, 2020 and changes to our aggregate indebtedness.
OFF-BALANCE SHEET COMMITMENTS AND ARRANGEMENTS
Indemnification Obligations
There have been no significant changes to our indemnification obligations as compared to those disclosed in Note 16,14, "Contingencies and Off-Balance Sheet Commitments" of the Notes to our consolidated financial statements included in our 20182019 Form 10‑K10-K under the caption Item 8, "Financial Statements and Supplementary Data."
We regularly evaluate the probability of having to incur costs associated with indemnification obligations and will accrue for expected losses when they are probable and estimable.
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 unaudited condensed consolidated financial statements included in this Report.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained or incorporated by reference in this Report on Form 10-Q and in reports we subsequently file with the SEC on Forms 10-K and 10-Q and file or furnish on Form 8-K, and in related comments by our management, include "forward-looking statements." Forward-looking statements 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
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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.negative.
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
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) |
with or furnished to the SEC, those described under "Item 1A—Risk1A-Risk Factors" included in our 20182019 Form 10‑K10-K and this Report on Form 10-Q and the following, which were derived in part from the risks set forth in "Item 1A—Risk1A-Risk Factors" of our 20182019 Form 10‑K:10-K and this Report on Form 10-Q:
•our ability to navigate the Chapter 11 process, including obtaining Bankruptcy Court approval for certain requirements, complying with and operating under the requirements and constraints of the Bankruptcy Code, negotiating and consummating a Chapter 11 plan, developing, funding and executing our business plan and continuing as a going concern; •our ability to maintain a listing of our common stock on the New York Stock Exchange; •the value of our common stock due to the Chapter 11 process; •levels of travel demand, particularly with respect to airline passenger trafficbusiness and leisure travel in the United States and in global markets; •the effectlength and severity of our separation ofthe COVID-19 pandemic and the impact on our vehicle rental business as a result of travel restrictions and equipment rental businesses, any failure by Herc Holdings Inc.business closures or disruptions; •the impact of the COVID-19 pandemic and actions taken in response to comply with the agreements entered intopandemic on global and regional economies and economic factors; •general economic uncertainty and the pace of economic recovery, including in connection withkey global markets, when the separation and COVID-19 pandemic subsides; •our ability to obtain successfully restructure our substantial indebtedness or raise additional capital; •our post-bankruptcy capital structure; •our ability to maintain an effective employee retention and talent management strategy and resulting changes in personnel and employee relations; •the expected benefitsrecoverability of our goodwill and indefinite-lived intangible assets when performing impairment analysis; •our ability to dispose of vehicles in the separation;used-vehicle market, use the proceeds of such sales to acquire new vehicles and to reduce exposure to residual risk; •actions creditors may take with respect to the vehicles used in the rental car operations; •significant changes in the competitive environment and the effect of competition in our markets on rental volume and pricing, including on our pricing policies or use of incentives; •occurrences that disrupt rental activity during our peak periods; •our ability to accurately estimate future levels of rental activity and adjust the number and mix of vehicles used in our rental operations accordingly; •increased vehicle costs due to declines in thedeclining value of our non-program vehicles;
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) •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 purchase adequate supplies of competitively priced vehicles and risks relating to increases in the cost of the vehicles we purchase;
our ability to adequately respond to changes in technology and customer demands;
our ability to retain customer loyalty and market share;
our recognition of previously deferred tax gains on the disposition of revenue earning vehicles;
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;
our access to third-party distribution channels and related prices, commission structures and transaction volumes;
our ability to execute a business continuity plan;
a major disruption in our communication or centralized information networks;
a failure to maintain, upgrade and consolidate our information technology 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 sustain 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;
our ability to maintain favorable brand recognition and a coordinated branding and portfolio strategy;
our ability to maintain an effective employee retention and talent management strategy and resulting changes in personnel and employee relations;
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;
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 ability to meet the financial and other covenants contained in our senior credit facilities and letter of credit facility,facilities, our outstanding unsecured senior notes, our outstanding senior second priority secured notes and certain asset-backed and asset-based arrangements; •our ability to access financial markets, including the financing of our vehicle fleet through the issuance of asset-backed securities; •fluctuations in interest rates, foreign currency exchange rates and commodity prices; •our ability to sustain operations during adverse economic cycles and unfavorable external events (including war, terrorist acts, natural disasters and epidemic disease); •our ability to prevent the misuse or theft of information we possess, including as a result of cyber security breaches and other security threats; •our ability to adequately respond to changes in technology, customer demands and market competition; •our ability to purchase adequate supplies of competitively priced vehicles and risks relating to increases in the cost of the vehicles we purchase; •our recognition of previously deferred tax gains on the disposition of revenue earning vehicles; •financial instability of the manufacturers of our vehicles, which could impact their ability to fulfill obligations under repurchase or guaranteed depreciation programs; •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; •our ability to execute a business continuity plan; •our access to third-party distribution channels and related prices, commission structures and transaction volumes; •our ability to retain customer loyalty and market share; •risks associated with operating in many different countries, including the risk of a violation or alleged violation of applicable anticorruption or antibribery laws, our ability to repatriate cash from non-U.S. affiliates without adverse tax consequences, our exposure to fluctuations in foreign currency exchange rates and our ability to effectively manage our international operations after the United Kingdom's withdrawal from the European Union; •a major disruption in our communication or centralized information networks; •a failure to maintain, upgrade and consolidate our information technology systems; •costs and risks associated with litigation and investigations or any failure or inability to comply with laws and regulations or any changes in the legal and regulatory environment, including laws and regulations relating to environmental matters and consumer privacy and data security; •our ability to maintain our network of leases and vehicle rental concessions at airports in the U.S. and internationally; •our ability to maintain favorable brand recognition and a coordinated branding and portfolio strategy;
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) •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; •risks relating to our deferred tax assets, including the risk of an "ownership change" under the Internal Revenue Code of 1986, as amended; •our exposure to uninsured claims in excess of historical levels; •risks relating to our participation in multiemployer pension plans; •shortages of fuel and increases or volatility in fuel costs; •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 operating results; and risks associated with operating in many different countries, including the risk of a violation or alleged violation of applicable anticorruption or antibribery laws and our ability to repatriate cash from non-U.S. affiliates without adverse tax consequences;
our ability to prevent the misuse or theft of information we possess, including as a result of cyber security breaches and other security threats;
changes in the existing, or the adoption of new laws, regulations, policies or other activities of governments, agencies and similar organizations, such as the adoption of new regulations under the Tax Cuts and Jobs Act, where such actions may affect our operations, the cost thereof or applicable tax rates;
risks relating to our deferred tax assets, including the risk of an "ownership change" under the Internal Revenue Code of 1986, as amended;
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 and uncertainties 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 statements speak only as of the date made, and, except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION)
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We 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. We manage our exposure to these market risks through our 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 our exposure to counterparty nonperformance on such instruments.
As a result of our declining credit profile from the COVID-19 impact disclosed in Note 1, "Background," we are no longer able to enter into certain derivative financial instruments or renew existing derivative financial instruments in order to mitigate market risks arising from the effects of changes in foreign currency exchange rates and interest rates (including credit spreads). As a result, we have exposure to foreign currency exchange rate fluctuations on cross currency obligations, primarily intercompany loans. Assuming a hypothetical change of one percentage point to the foreign currency exchange rates on our intercompany loan balance as of June 30, 2020, our pre-tax operating results would increase (decrease) by approximately $3 million. There
Additionally, we were party to various interest rate caps (the "Interest Rate Caps") and an interest rate swap which have been unwound or terminated. The Interest Rate Caps were used to mitigate the cost at inception of purchased caps (the "Purchased Caps") on our variable rate HVF II U.S. ABS program debt. The Purchased Caps remain in place and provide protection against increases in rates on our variable rate HVF II U.S. ABS debt. As a result of terminating the Interest Rate Caps, we are no longer exposed to their associated market risk.
We were also party to an (receive fixed-pay floating) interest rate swap (the "Interest Rate Swap") to better match the mix of fixed and floating rate on our Donlen U.S. ABS program debt to the mix of fixed and floating rate assets (i.e. vehicle leases in our All Other Operations segment). The termination of the Interest Rate Swap may result in decreased earnings from variable rate leases in a declining rate environment, and as such, variable rate vehicle leases are now supported by a fixed rate cost of debt. We estimate the impact on our operations in our All Other Operations segment to be approximately a $5 million increase to interest expense in the second half of 2020.
Current year to date dispositions of Hertz Global's common stock by certain significant shareholders, as disclosed in Part I, Item 1 of this Quarterly Report on Form 10-Q in Note 13, "Related Party Transactions", likely resulted in an "ownership change" as that term is defined in Internal Revenue Code (“IRC”) Section 382. IRC Section 382 can limit the utilization of the federal and state net operating loss ("NOL") and tax credit carryforwards. We currently believe that this "ownership change" will not significantly impact our ability to utilize these U.S. tax attributes. However, there are numerous factors that are considered in the calculation of the IRC Section 382 limitation and, if one or several of these factors should be revised in the future, our ability to utilize our tax attributes could change.
Except for the effects described above and the impact from COVID-19 on the global economy, there have been no other material changes to the information reported under Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," included in our 20182019 Form 1010-K. ‑K.
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. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of June 30, 2019,2020, our disclosure controls and procedures were effective.
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION)
ITEM 4. CONTROLS AND PROCEDURES (CONTINUED) Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the three months ended June 30, 20192020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
HERTZ
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, 2019,2020, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the three months ended June 30, 20192020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION)
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information related to the Chapter 11 Cases that were filed on May 22, 2020 is included in Part 1, Item 1, Note 1, "Background," to the Notes to our unaudited condensed consolidated financial statements included in this Report.
For a description of certain pending legal proceedings see Part I, Item 1, Note 8,12, "Contingencies and Off-Balance Sheet Commitments," to the Notes to our unaudited condensed consolidated financial statements included in this Report.
ITEM 1A. RISK FACTORS We are in the process of Chapter 11 reorganization cases under the Bankruptcy Code, which may cause our common stock to decrease in value or may render our common stock worthless.
On May 22, 2020, we filed voluntary petitions under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court, thereby commencing the Chapter 11 Cases for certain debtors, including Hertz Global. The price of our common stock has been volatile following the commencement of the Chapter 11 Cases and may decrease in value or become worthless. Accordingly, any trading in our common stock during the pendency of our Chapter 11 Cases is highly speculative and poses substantial risks to purchasers of our common stock. Recoveries in the Chapter 11 Cases for holders of common stock, if any, will depend upon our ability to negotiate and confirm a plan, the terms of such plan, the recovery of our business from the COVID-19 pandemic, if any, and the value of our assets. Although we cannot predict how our common stock will be treated under a plan, we expect that common stock holders would not receive a recovery through any plan unless the holders of more senior claims and interests, such as secured and unsecured indebtedness, are paid in full, which would require a significant and rapid and currently unanticipated improvement in business conditions to pre-COVID-19 or close to pre-COVID-19 levels. We also expect our stockholders’ equity to decrease as we use cash on hand to support our operations in bankruptcy. Consequently, there is a significant risk that the holders of our common stock will receive no recovery under the Chapter 11 Cases and that our common stock will be worthless.
As a result of the Chapter 11 Cases, we are subject to the risks and uncertainties associated with Chapter 11 Cases and operating under Chapter 11 may restrict our ability to pursue strategic and operational initiatives.
For the duration of the Chapter 11 Cases, our operations and our ability to execute our business strategy will be subject to the risks and uncertainties associated with bankruptcy. These risks include:
•our ability to obtain Bankruptcy Court approval with respect to motions filed in the Chapter 11 Cases from time to time; •our ability to comply with and operate under the requirements and constraints of the Bankruptcy Code and under any cash management, cash collateral, adequate protection, or other orders entered by the Bankruptcy Court from time to time; •our ability to engage in intercompany transactions and to fund operations from cash on hand or from financings and, in the event of such financings, our ability to comply with the terms of such financings; •our ability to negotiate and consummate a Chapter 11 plan; •our ability to develop, fund, and execute our business plan; and •our ability to continue as a going concern.
These risks and uncertainties could affect our business and operations in various ways. For example, negative events or publicity associated with the Chapter 11 Cases could adversely affect our relationships with our suppliers, customers and employees. In particular, critical vendors, suppliers, and/or customers may determine not to do business with us due to the Chapter 11 Cases and we may not be successful in securing alternative sources. Also,
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION)
ITEM 1A. RISK FACTORS (CONTINUED) transactions outside the ordinary course of business are subject to the prior approval of the Bankruptcy Court, which may limit our ability to respond timely to certain events or take advantage of opportunities. Additionally, uncertainty with respect to intercompany transactions may negatively impact our captive insurance companies’ ability to meet insurance regulatory requirements. Because of the risks and uncertainties associated with the Chapter 11 Cases, we cannot predict or quantify the ultimate impact that events occurring during the Chapter 11 process may have on our business, financial condition and results of operations, and there is no certainty as to our ability to continue as a going concern.
We may not be able to maintain a listing of our common stock on the New York Stock Exchange (“NYSE”).
On May 26, 2020, we received a letter from the staff of NYSE Regulation stating that it had determined to commence proceedings to delist our common stock from the NYSE. NYSE Regulation reached its decision that we are no longer suitable for listing pursuant to NYSE Listed Company Manual Section 802.01D after our disclosure on May 22, 2020 that we have filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code. We appealed the determination in a timely manner and requested a hearing before the NYSE. At this time, our common stock will continue to be listed and trade on the NYSE pending resolution of such appeal. We cannot provide any assurance as to the ultimate resolution of the appeal. Delisting our common stock may adversely impact its liquidity, impair our stockholders’ ability to buy and sell our common stock, impair our ability to raise capital, and the market price of our common stock could decrease. Delisting our common stock could also adversely impact the perception of our financial condition and have additional negative ramifications, including further loss of confidence by our employees, the loss of institutional investor interest and fewer business opportunities.
Prosecution of the Chapter 11 Cases has consumed and will continue to consume a substantial portion of the time and attention of our management, which may have an adverse effect on our business and results of operations, and we may face increased levels of employee attrition.
While the Chapter 11 Cases continue, our management will be required to spend a significant amount of time and effort focusing on the cases. This diversion of attention may materially adversely affect the conduct of our business, and, as a result, our financial condition and results of operations, particularly if the Chapter 11 Cases are protracted. During the Chapter 11 Cases, our employees will face considerable distraction and uncertainty and we may experience increased levels of employee attrition. A loss of key personnel or material erosion of employee morale could have a materially adverse effect on our ability to meet customer expectations, thereby adversely affecting our business and results of operations. The failure to retain or attract members of our management team and other key personnel could impair our ability to execute our strategy and implement operational initiatives, thereby having a material adverse effect on our financial condition and results of operations.
If we are unable to negotiate and confirm a Chapter 11 plan of reorganization, we could be required to liquidate under chapter 7 (“Chapter 7”) of the Bankruptcy Code in which case our common stock would likely be worthless.
We have not yet negotiated a plan of reorganization with our creditors. If we are unable to negotiate a plan of reorganization that will result in our remaining a going concern, upon a showing of cause, the Bankruptcy Court may convert the Chapter 11 Cases to cases under Chapter 7. In such event, a Chapter 7 trustee would be appointed or elected to liquidate our assets for distribution to creditors in accordance with the priorities established by the Bankruptcy Code. Holders of our common stock would likely lose their entire investment in a Chapter 7 bankruptcy.
Our post-bankruptcy capital structure is yet to be determined, and any changes to our capital structure may have a material adverse effect on existing debt and security holders.
Our post-bankruptcy capital structure has yet to be determined and will be set pursuant to a plan that requires Bankruptcy Court approval. The reorganization of our capital structure may include exchanges of new debt or equity securities for our existing debt, equity securities, and claims against us. Such new debt may be issued at different interest rates, payment schedules and maturities than our existing debt securities. Existing equity securities are
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION)
ITEM 1A. RISK FACTORS (CONTINUED) subject to a high risk of being cancelled. The success of a reorganization through any such exchanges or modifications will depend on approval by the Bankruptcy Court and the willingness of existing debt and security holders to agree to the exchange or modification, subject to the provisions of the Bankruptcy Code, and there can be no guarantee of success. If such exchanges or modifications are successful, holders of our debt or of claims against us may find their holdings no longer have any value or are materially reduced in value, or they may be converted to equity and be diluted or may be modified or replaced by debt with a principal amount that is less than the outstanding principal amount, longer maturities and reduced interest rates. Holders of our common stock may also find that their holdings no longer have any value and face highly uncertain or no recoveries under a plan. There can be no assurance that any new debt or equity securities will maintain their value at the time of issuance. If existing debt or equity holders are adversely affected by a reorganization, it may adversely affect our ability to issue new debt or equity in the future. Although we cannot predict how the claims and interests of stakeholders in the Chapter 11 Cases, including holders of common stock, will ultimately be resolved, we expect that common stock holders will not receive a recovery through any plan unless the holders of more senior claims and interests, such as secured and unsecured indebtedness (which is currently trading at a significant discount), are paid in full. Consequently, there is a significant risk that the holders of our common stock would receive no recovery under the Chapter 11 Cases and that our common stock will be worthless.
Any Chapter 11 plan that we may implement will likely be based in large part upon assumptions and analyses developed by us. If these assumptions and analyses prove to be incorrect, or adverse market conditions persist or worsen, our plan may be unsuccessful in its execution.
Any Chapter 11 plan that we may implement will affect both our capital structure and the ownership, structure and operation of our remaining businesses and will likely reflect assumptions and analyses based on our experience and perception of historical trends, current conditions and expected future developments, as well as other factors that we consider appropriate under the circumstances. Whether actual future results and developments will be consistent with our expectations and assumptions depends on a number of factors, including but not limited to (i) our ability to substantially change our capital structure; and (ii) the overall strength and stability of general economic conditions, both in the U.S. and in global markets. The failure of any of these factors could materially adversely affect the successful reorganization of our businesses.
In addition, any plan of reorganization will likely rely upon financial projections, including with respect to revenues, consolidated adjusted EBITDA, capital expenditures, debt service and cash flow. Financial forecasts are necessarily speculative, and it is likely that one or more of the assumptions and estimates that are the basis of these financial forecasts will not be accurate. In our case, the forecasts will be even more speculative than normal, because they may involve fundamental changes in the nature of our capital structure. Additionally, the impact of the COVID-19 pandemic on the travel industry in general, and on us, make it even more challenging than usual to develop forecasts on business. Accordingly, we expect that our actual financial condition and results of operations will differ, perhaps materially, from what we have anticipated. Consequently, there can be no assurance that the results or developments contemplated by any plan of reorganization we may implement will occur or, even if they do occur, that they will have the anticipated effects on us and our subsidiaries or our businesses or operations. The failure of any such results or developments to materialize as anticipated could materially adversely affect the successful implementation of any plan of reorganization.
We may be subject to claims that will not be discharged in the Chapter 11 cases, which could have a material adverse effect on our financial condition and results of operations.
The Bankruptcy Code provides that the confirmation of a Chapter 11 plan of reorganization discharges a debtor from substantially all debts arising prior to confirmation. With few exceptions, all claims that arose prior to confirmation of the plan of reorganization (i) would be subject to compromise and/or treatment under the plan of reorganization and (ii) would be discharged in accordance with the Bankruptcy Code and the terms of the plan of reorganization. Any claims not ultimately discharged through a Chapter 11 plan of reorganization could be asserted
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION)
ITEM 1A. RISK FACTORS (CONTINUED) against the reorganized entities and may have an adverse effect on our financial condition and results of operations on a post-reorganization basis.
Operating in bankruptcy for a long period of time may harm our business.
A long period of operations in the Chapter 11 Cases under Bankruptcy Court protection could have a material adverse effect on our business, financial condition, results of operations, and liquidity. So long as the Chapter 11 Cases continue, senior management will be required to spend a significant amount of time and effort dealing with the reorganization instead of focusing exclusively on business operations. A prolonged period of operating under Bankruptcy Court protection also may make it more difficult to retain management and other key personnel necessary to the success of our business. In addition, the longer the Chapter 11 Cases continue, the more likely it is that customers and suppliers will lose confidence in our ability to reorganize our business successfully and will seek to establish alternative commercial relationships.
So long as the Chapter 11 Cases continue, we will be required to incur substantial costs for professional fees and other expenses associated with the administration of the Chapter 11 Cases, including potentially the cost of litigation. In general, litigation can be expensive and time consuming to bring or defend against. Such litigation could result in settlements or damages that could significantly affect our financial results. It is also possible that certain parties will commence litigation with respect to the treatment of their claims under a plan. It is not possible to predict the potential litigation that we may become party to, nor the final resolution of such litigation. The impact of any such litigation on our business and financial stability, however, could be material.
Should the Chapter 11 Cases be protracted, we may also need to seek new financing to fund operations. If we are unable to obtain such financing on favorable terms or at all, the chances of confirming a Chapter 11 plan may be seriously jeopardized and the likelihood that we will instead be required to liquidate our assets may increase.
There is no certainty as to amount of vehicle lease payments we will be required to make during the pendency of the bankruptcy case.
We leased the bulk of our vehicles used in our United States rental car operations under the Operating Lease. The Operating Lease requires material monthly rental payments for the use of the vehicles, and those rental payments may vary significantly under the terms of the Operating Lease. Prior to the filing of the Chapter 11 Cases, we failed to make the April 2020 rent payment under the Operating Lease, and the lessor has a prepetition claim for the unpaid April rent. In addition, under Section 365 of the Bankruptcy Code, we were not required to make, and did do not make, the May and June 2020 rent payments. Ultimately, the lessor will have the right to seek an administrative claim against us for an amount that the Bankruptcy Court determines to be equal to the actual and necessary benefit to us for the use of the vehicles during this period. We cannot predict the amount of such claim.
On June 11, 2020, we filed a motion with the Bankruptcy Court to reject the leases of approximately 144,000 cars under the Operating Lease (the “Rejection Motion”). On July 24, 2020, the Bankruptcy Court entered an order (the “Order”) that contained an interim settlement and agreement to suspend litigation relating to the Rejection Motion until January 15, 2020, as well as other issues related to the Operating Lease.
The Order provides that:
•THC in its capacity as servicer, shall dispose of at least 182,521 lease vehicles between June 1, 2020 and December 31, 2020, inclusive. The proceeds of the dispositions, subject to certain exclusions set forth in the order, will be used to repay debt incurred under THC’s asset backed finance facility (the “ABS”); •THC, in its capacity as lessee, will pay in cash a total of $650 million of rent in equal monthly installments from July to December, which rent will result in additional principal payments on the ABS; •Interest payments on the debt incurred under the ABS will be funded from draws on certain existing letters of credit, which are reimbursable by the Debtors;
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION)
ITEM 1A. RISK FACTORS (CONTINUED) •The Debtors will pay certain reasonable and documented fees and expenses of advisors to the ABS creditors (including the agent and trustee), as well as additional fees to the agent under the ABS; and •Litigation relating to the Operating Lease pursuant to which the debtors lease vehicles under the ABS will be suspended and all parties reserve all rights with respect to future litigation claims.
There is no assurance that we will come to further agreement with the ABS lenders and, consequently, there is no certainty as to amount of vehicle lease payments we will be required to make during the pendency of the bankruptcy case.
Our ability to use certain of our tax assets may have been limited or may be limited in the future.
On May 26, 2020, entities affiliated with Carl Icahn filed a Schedule 13D/A indicating that they sold approximately 38.90% of our outstanding stock. Although we are still analyzing the impact of this sale, we believe that such sale resulted in an “ownership change” under Section 382 of the federal income tax rules. An “ownership change” could significantly 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 and tax liabilities. 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 limitations under Section 382 should not limit our ability to use such tax attributes to offset future taxable income and tax liabilities. Nonetheless, our potential limitations on our ability to use such tax attributes is uncertain. If we experience a subsequent ownership change, however, it is possible that a significant portion of our tax attributes will 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.
Our Chapter 11 Cases and financial condition may adversely impact our non-U.S. businesses and affiliates, which may themselves become subject to Chapter 11 Cases or other insolvency proceedings.
We have significant businesses and affiliates that are located outside of the United States. The filing of the Chapter 11 Cases may result in negative consequences to our businesses outside of the United States.
On May 22, 2020, Hertz Netherlands and certain other International Subsidiaries entered into a limited waiver agreement in respect of the Issuer Facility Agreement, dated as of September 25, 2018, between, among others, International Fleet Financing No.2 B.V. as issuer, Hertz Europe Limited as issuer administrator, Credit Agricole Corporate and Investment Bank as administrative agent and BNP Paribas Trust Corporation UK Limited as issuer security trustee, as amended, restated or otherwise modified from time to time (the “European ABS Waiver”) pursuant to which the waiving parties agreed to waive any default or event of default that could have resulted from the Chapter 11 Cases. The European ABS Waiver will expire on September 30, 2020 or, if sooner, the date on which the Hertz parties to the European ABS Waiver fail to comply with certain agreements contained in the European ABS Waiver. Additionally, our affiliates received similar waivers with respect to (i) the VFN Issuance Facility Agreement, dated as of December 7, 2010, (as amended and restated from time to time) by and among HA Fleet Pty Limited, as issuer, Hertz Australia Pty Limited, as administrator, Westpac Banking Corporation as administrative agent, certain committed note purchasers, certain conduit investors, certain funding agents for the investor groups and P.T. Limited, as security trustee, (ii) the Vehicle Funding Facilities Agreement dated February 7, 2013 (as amended and restated from time to time) between Hertz (U.K.) Limited, Hertz Vehicle Financing U.K. Limited and Lombard North Central Plc, and (iii) the €225,000,000 aggregate principal amount outstanding of 4.125% Senior Notes due 2021 and the €500,000,000 aggregate principal amount outstanding of 5.500% Senior Notes due 2023, each of which is scheduled to expire no later than September 30, 2020.
There can be no assurance that the European ABS Waiver and related waivers will be extended or the International Subsidiaries will not in the future become or be deemed to be insolvent or otherwise need to reorganize their debt, either through the Chapter 11 proceedings or proceedings in other jurisdictions. Any such insolvency, reorganization
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION)
ITEM 1A. RISK FACTORS (CONTINUED) or proceedings could have additional negative consequences with respect to our global operations and could materially and adversely affect the successful execution of any reorganization of us and our subsidiaries. Furthermore, even if additional waivers are granted or the International Subsidiaries do not otherwise file Chapter 11 or other insolvency, reorganization, or other proceedings, the Chapter 11 Cases may result in negative consequences to such businesses and affiliates.
The effects of the COVID-19 outbreak have been and continue to be disruptive to our vehicle rental business and will likely continue to adversely affect our business, results of operations and financial condition. The global COVID-19 pandemic continues to rapidly evolve and we cannot anticipate with any certainty the length or severity of the effects of COVID-19. The extent to which COVID-19 continues to adversely impact our business will depend on future developments that are highly uncertain, such as the following: the ultimate severity of the disease; the duration of the outbreak or future outbreaks; travel restrictions imposed by governments or businesses in the markets in which we operate; the duration and scope of business closures or business disruptions; changes in customer travel preferences and demand; the impact of increasing unemployment on discretionary spending; the length of time it takes for rental pricing and volume and normal economic conditions to return; technology disruptions; our relationships with vehicle manufacturers; our liquidity position; the development of effective vaccines or treatments; and the effectiveness of actions taken to contain the disease and future outbreaks. The impacts of COVID-19 could include those areas described below:
•Changes in our revenues, profitability and customer demand: Our revenues and profitability have been negatively impacted during the first half of 2020 and we expect this to continue for the remainder of the 2020 fiscal year. We have experienced a high level of rental cancellations and a significant decline in forward bookings due to the decreased customer demand and other economic factors. Historically, we have generated a majority of our rental revenues from on-airport locations, which makes our rental car business sensitive to any decreases in air travel. Although we believe that renting a vehicle will continue to be a safe alternative and we have implemented certain procedures to mitigate the impact of COVID-19, we cannot predict when or if customer demand will return to levels before the COVID-19 pandemic.
•Changes to our liquidity: We incur ongoing costs, which we cannot reduce in line with the significant reduction in revenues we have experienced from the COVID-19 outbreak. Such costs include our monthly fleet rental costs under our Operating Lease, facility rentals and concessions, debt service and labor costs. These costs require significant liquidity generated by operations or access to additional financing. If COVID-19 continues to have a significant negative impact on our cash flow from operations and we cannot access the capital markets, we may not be able to generate sufficient liquidity to cover our costs.
•Our peak season: The second and third quarters of the year have historically been the strongest quarters for our vehicle rental business due to increased levels of leisure travel. COVID-19 has disrupted our business in the second quarter and we expect that it will continue to disrupt our business in the third quarter. We expect these disruptions during our peak season to have material adverse effects on our results of operations, financial condition, liquidity and cash flows.
•Our fleet: In response to reduced demand due to COVID-19, we began adjusting fleet levels, leveraging our multiple used-vehicle channels, and negotiating with suppliers to reduce fleet commitments in the first half of 2020. We have initiated efforts to reduce our fleet size, and the related cost base, to be in line with our reduced operating results but we may not be able to continue to do so. As the downturn in our rental car business has resulted in excess fleet, we must store our vehicles in certain overflow parking areas which subjects our vehicles to possible loss due to peril and theft. We may also experience a decline in vehicle values which could increase the monthly payments under the Operating Lease.
•Our workforce: The COVID-19 pandemic has caused us to furlough approximately 20,000 employees worldwide and we have terminated approximately 11,000 employees in our U.S. RAC segment and U.S.
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION)
ITEM 1A. RISK FACTORS (CONTINUED) corporate operations, the majority of which were previously furloughed, in an effort to reduce our operating costs. This reduction in our operating costs related to our employees could create risks, including but not limited to, our ability to manage the size of our workforce given uncertain future economic conditions and the ability to operate locations in affected jurisdictions. Additionally, we may incur additional costs as a result of workforce reductions or suffer from employee morale issues. We may also be unable to timely respond to a business recovery due to reductions in our workforce already enacted.
We do not expect our business to improve until customer demand increases and the global economy improves. To the extent that the COVID-19 outbreak continues to adversely affect our business, financial performance, liquidity and cash flows, it may also have the effect of heightening many of the other risks identified in this Quarterly Report on Form 10-Q and in the “Risk Factors” section of our 2019 Form 10-K.
If our business does not recover quickly and we are unable to successfully restructure our substantial indebtedness, obtain further waivers or forbearance or raise additional capital, there is substantial doubt that we will be able to continue as a going concern.
As a result of the adverse impact from COVID-19 and the uncertainty about the timing and strength of recovery in our markets, Hertz did not make certain payments in accordance with the Operating Lease, pursuant to which Hertz leases vehicles used in its U.S. rental car operations. As a result of the failure to make the full rent payments on April 27th, as of May 5, 2020 an amortization event was in effect for all series of notes issued by HVF II and a liquidation event was in effect with respect to the Series 2013-A Notes issued by HVF II. As a result of the amortization event, and notwithstanding the forbearance agreement described below, proceeds of the sales of vehicles that collateralize the notes issued by HVF II must be applied to the payment of principal and interest under those notes and will not be available to finance new vehicle acquisitions for Hertz. A liquidation event means that, unless the affected noteholders otherwise agree, the affected noteholders can direct the liquidation of vehicles serving as collateral for their notes.
On May 4, 2020, prior to the occurrence of the liquidation event with respect to the Series 2013-A Notes, Hertz, HVF, HVF II and DTG Operations, Inc. entered into the Forbearance Agreement with the VFN Noteholders. Pursuant to the Forbearance Agreement that is effective against all VFN Noteholders, the VFN Noteholders agreed to forbear from exercising their liquidation remedies. The agreement with the VFN Noteholders expired on May 22, 2020. Concurrently with entering into the Forbearance Agreement, on May 4, 2020, Hertz entered into the Waiver Agreements with certain of the Lenders under its Facilities. Pursuant to the Waiver Agreements, the Lenders agreed to waive any default or event of default that could have resulted from the above referenced missed payment under the Operating Lease, waive certain defaults or events of default and extend the grace period to cure a default with respect to Hertz’s obligation to reimburse drawings that occurred under certain letters of credit during the waiver period. The Waiver Agreements expired on May 22, 2020.
In connection with the expiration of the Forbearance Agreement and the Waiver Agreements and the continuing economic impact from COVID-19, on the Petition Date, the Debtors filed voluntary Petitions under Chapter 11 of the U.S. Bankruptcy Code in the Bankruptcy Court. The Bankruptcy Court approved motions filed by the Debtors that were designed primarily to mitigate the impact of the Chapter 11 Cases on the Company’s operations, customers and employees. The Debtors are authorized to conduct their business activities in the ordinary course, and pursuant to orders entered by the Bankruptcy Court, the Debtors are authorized to, among other things and subject to the terms and conditions of such orders: (i) pay employees’ wages and related obligations; (ii) pay certain taxes; (iii) pay critical vendors and certain fees to airport authorities; (iv) continue to maintain certain customer programs; (v) maintain their insurance program; (vi) use cash collateral on an interim basis; and (vii) continue their cash management system.
As part of its bankruptcy restructuring, Hertz has been and expects to be in discussions with key stakeholders and advisors to develop a financing strategy and structure that better reflects the economic impact of the COVID-19 global pandemic and Hertz’s ongoing operating and financing requirements. However, there can be no assurances that Hertz will be able to successfully restructure its substantial indebtedness.
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION)
ITEM 1A. RISK FACTORS (CONTINUED)
Although the Order from the Bankruptcy Court was helpful to us, if our business does not recover and we cannot reach agreement to restructure our indebtedness, we may not be able to meet our obligations under our debt facilities and may not have sufficient cash flows from operations or liquidity to sustain our operations. In such circumstances, we may not be able to continue as a going concern.
An impairment of our goodwill and other indefinite-lived intangible assets could have a material impact to our results of operations.
On an annual basis as of October 1, and at interim periods when circumstances require as a result of a triggering event, we test the recoverability of our goodwill and indefinite-lived intangible assets by performing an impairment analysis. An impairment is deemed to exist if the carrying value of goodwill or indefinite-lived intangible assets exceed their fair value as determined using level 3 inputs under the GAAP fair value hierarchy. The reviews of fair value involve judgment and estimates, including projected revenues, royalty rates and discount rates. A significant decline in either projected revenues, projected cash flows or the weighted average cost of capital used to determine fair value could result in a material impairment charge.
We have experienced an amortization event under our vehicle debt financing instruments.
As a result of the amortization event, proceeds of the sales of vehicles that collateralize the HVF II U.S. ABS Program and the medium term notes must be applied to the payment of principal and interest under the HVF II U.S. ABS Program and will not be available to finance new vehicle acquisitions. Currently, we cannot use any cash in the HVF II U.S. ABS Program to purchase new vehicles for our fleet. Although we anticipate that, because of the COVID-19 pandemic, we will not need to acquire additional fleet through the remainder of 2020, if our business recovers, we will ultimately need to finance new vehicle acquisitions, but we may not be able to utilize the HVF II U.S. ABS Program for that purpose.
Other than the items listed above, there have been no material amendments or additions to the information reported underchanges in our risk factors from those disclosed in Part I, Item 1A “Risk Factors” contained inof our 2018 Form 10‑K.10-K for the fiscal year ended December 31, 2020 and Part II, Item 1A "Risk Factors" of our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 5. OTHER INFORMATION
None.Supplemental Information
As previously disclosed, on May 22, 2020, Hertz Global, Hertz and the Debtors filed voluntary Petitions for relief under Chapter 11 of the Bankruptcy Code in the Court), thereby commencing Chapter 11 Cases for the Debtors. The Debtors’ Chapter 11 Cases are being jointly administered under the caption “In re The Hertz Corporation, et al., Case No. 20-11218 MFW.” The Debtors exclude, without limitation, (i) Hertz International Limited, Hertz Netherlands and the International Subsidiaries and (ii) HVF, HVF II, HFLF and the Non-Debtor Financing Subsidiaries.
Operation of Chapter 11
Chapter 11 is the principal business reorganization chapter of the Bankruptcy Code. Under Chapter 11, a debtor is authorized to reorganize its business for the benefit of itself, its creditors and equity security holders, which includes
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) a debtor’s shareholders. Another goal of Chapter 11 is to promote equality of treatment for similarly situated creditors and equality of treatment for similarly situated equity security holders, in each case, with respect to the distribution of a debtor’s value or assets.
The commencement of a Chapter 11 case creates an estate that is comprised of all of the legal and equitable interests of the debtor as of the filing date. The Bankruptcy Code generally provides that the debtor may continue to operate its business in the ordinary course and remain in possession of its property as a “debtor in possession.”
The consummation of a plan of reorganization is the principal objective of a Chapter 11 case. A plan of reorganization sets forth the means for satisfying claims against and equity interests in a debtor. Confirmation and consummation of a plan of reorganization by the Bankruptcy Court makes the plan binding upon the debtor, any issuer of securities under the plan, any person or entity acquiring property under the plan and any creditor of, or equity security holder in, the debtor, whether or not such creditor or equity security holder (i) is impaired under or has accepted the plan or (ii) receives or retains any property under the plan. Subject to certain limited exceptions and other than as provided in the plan itself or the order of the bankruptcy court approving the plan (a “confirmation order”), the confirmation order discharges the debtor from any debt that arose prior to the date of confirmation of the plan and substitutes therefore the obligations specified under the confirmed plan, and terminates all rights and interests of existing equity security holders. The reorganization of a debtor’s capital structure under a plan of reorganization may include, among other things, exchanges of new debt or equity securities for existing claims against and/or equity securities in the debtor. As previously disclosed, existing equity securities in a debtor, however, are subject to a high risk of being cancelled through a Chapter 11 plan of reorganization without receiving any consideration or otherwise receiving any value. The reason for this high risk of cancellation is because equity securities in a debtor generally sit last in line of priority in bankruptcy. This is referred to as the “absolute priority rule.” Under the absolute priority rule, unless holders of more senior claims otherwise agree, holders of equity securities are generally precluded from receiving any value unless and until holders of claims or interests senior to them are paid in full. Therefore, equity securities are subordinate to all claims against the debtor, including, claims with valid, perfected security interests in collateral, unsecured priority claims related to, among other things, administration of and the preservation of the value of a debtor’s bankruptcy estate, other secured and unsecured debt, and other general unsecured claims, including trade creditors.
Background to Chapter 11 Cases
The Chapter 11 Cases were necessitated by the impact of COVID-19 on travel demand, which was sudden and dramatic, causing an abrupt decline in the Company’s revenue and future bookings. As disclosed in connection with the Debtors’ filings in the Chapter 11 Cases, in April 2020, the first full month after the COVID-19 crisis took hold in the United States, the Company’s global revenue declined by 73% compared to April 2019. While revenues decreased dramatically, the Company continued to face significant ongoing operating expenses, including monthly lease payments under its Operating Lease, pursuant to which the Company leases vehicles used in its day-to-day U.S. rental car fleet operations from its special-purpose vehicle finance subsidiary. As disclosed in its most recent Form 10-Q, the Company is required to pay not only scheduled monthly depreciation on the fleet but also an amount corresponding to estimated market depreciation of the fleet.
With the global economy shut down, rising unemployment and many potential car buyers subject to stay-at-home orders, the demand for used vehicles declined dramatically resulting in a significant drop in used-vehicle values. This decrease in used-vehicle values would have required the Company to pay an additional approximately $135 million under the Operating Lease in April 2020. Additionally, the challenging used-vehicle market made it difficult for the Company to sell vehicles to reduce the scheduled depreciation element of the monthly rent payments. Consequently, the Company determined not to make lease payments totaling approximately $400 million in April 2020. Although this default could have resulted in the forced liquidation of vehicles in the Company’s fleet, the Company obtained forbearances and waivers from certain of its lenders to avoid such consequences through May 22, 2020. Although the Company sought to extend such forbearances and waivers, the Company was unable to reach further agreements with its U.S. and Canadian creditors by the end of that period, and made the difficult decision to commence the Chapter 11 Cases.
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION)
Given the potential impact of renewed lease payments on the Company, the Debtors are pursuing a range of options to reduce the impact of the lease payments that may otherwise recommence in July 2020. Such options may include negotiating with the Company’s creditors for temporarily reduced rental payments, seeking court approval to reject the leases with respect to approximately 144,000 vehicles and to otherwise reduce the rent payments under the “equities of the case” doctrine of section 365(d)(5) of the Bankruptcy Code. In addition to these options potentially being unavailable or exposing the Company to other claims, a failure to achieve any of these options and the recommencement of full lease payments would likely require the Debtors to obtain new financing and could otherwise have a material adverse effect on the Company.
Financing During Chapter 11
Debtors often need funding to cover ongoing operating expenses and the expenses of a Chapter 11 case. It is common for a debtor to meet such need through a debtor-in-possession, or DIP, loan. A DIP loan often takes the form of a new secured debt facility that has priority over pre-bankruptcy secured and unsecured creditors and a claim with super-priority over administrative expenses (including vendor and employee claims) incurred during Chapter 11 and over all other claims. While a DIP loan offers the benefit of a source of funding that is well-established in the market and under the Bankruptcy Code, its priority over other claims reduces the recovery available to other junior creditors and interest holders, including equity security holders. Additionally, it is common for a DIP loan to contain certain, sometimes significant, restrictions on the ability of the debtor to operate its business during bankruptcy.
It is not common for a debtor to seek equity financing during a bankruptcy case. Such equity financing, unlike a DIP loan, does not impose restrictions on a debtor’s operations and does not take priority over other creditors and equity security holders, thereby potentially improving the possibility that equity security holders could receive a recovery in a plan of reorganization as compared to raising financing through a DIP loan that would be senior to any equity securities in the Debtors. Nonetheless, investing in the equity securities of any company, including the Company, while it is in bankruptcy involves significant risks. The circumstances of each bankruptcy case are unique, but it is commonplace for equity securities to be cancelled as a result of bankruptcy without the holders thereof receiving any value. As previously disclosed, recoveries in the Chapter 11 Cases for holders of common stock, if any, will depend upon our ability to negotiate and confirm a plan, the terms of such plan, the recovery of our business from the COVID-19 pandemic, if any, and the value of our assets.
ATM Program
An ATM program involves a company making sales into an existing trading market in a series of transactions over a period of time at prevailing market prices. There are no special marketing efforts associated with an ATM program and sales are made by an agent that is a broker-dealer on behalf of the issuing company. The trades are “broker-to-broker” trades made to fulfill market demand without the issuing company knowing the identity of the purchaser. Our agent for the ATM program would be deemed to be an “underwriter” within the meaning of that term under the Securities Act. As previously disclosed, we have terminated the ATM program.
The use of proceeds designated in the Company’s prospectus supplement for its ATM program is general corporate purposes and such use was set forth in the Company’s motion to the Bankruptcy Court dated June 11, 2020 seeking approval of the ATM program. At a hearing on that motion on June 12, 2020, the Company undertook not to transfer any funds raised in the ATM program out of Hertz Global absent court approval of the means by which such funds would be transferred to subsidiaries. This was stipulated in order to allow the then newly-formed Official Committee of Unsecured Creditors an opportunity to provide its input. As a general matter, subject to such stipulation, the Company’s use of the proceeds is governed by Section 363 (c) of the Bankruptcy Code which permits it to use the proceeds in the ordinary course of its business without a notice or a hearing “unless the court orders otherwise.” On June 25, 2020, the Bankruptcy Court entered an agreed form of final order approving the Company’s use of its existing cash management system. In connection with that order and consistent with the Company’s previous undertaking, the Bankruptcy Court ordered and the Company agreed, that any funds raised in
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) connection with the ATM program would not be transferred by Hertz Global to any entity absent further order of the Bankruptcy Court.
NYSE Delisting Proceedings
As previously disclosed, on May 26, 2020, the Company received a letter from the staff of NYSE Regulation, Inc. (“NYSE Regulation”) that it had determined to commence proceedings to delist the common stock of the Company from the NYSE. NYSE Regulation reached its decision that the Company is no longer suitable for listing pursuant to NYSE Listed Company Manual Section 802.01D after the Company’s disclosure on May 22, 2020 that it has commenced the Chapter 11 Cases. The Company appealed the determination in a timely manner and requested a hearing before the NYSE. The date of the hearing has been set for October 15, 2020. Provided the Company continues to comply with the NYSE’s ongoing listing requirements, the Company expects that its common stock will continue to be listed and trade on the NYSE pending resolution of such appeal. There can be no assurance that the NYSE will grant the Company’s request for continued listing at the hearing and whether there will be equity value in the Company’s common stock. The Company does not know the timing of any delisting event if the outcome of the appeal is adverse.
ITEM 6. EXHIBITS
(a)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 (DEBTORS-IN-POSSESSION)
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized. | | | | | | | | | | | | | Date: | August 7, 201910, 2020 | HERTZ GLOBAL HOLDINGS, INC.
THE HERTZ CORPORATION
(Registrants)
| | | | By: | /s/ JAMERE JACKSON | | | | Jamere Jackson Executive Vice President and Chief Financial Officer |
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION)
EXHIBIT INDEX | | | | | | | | | Exhibit
Number | | Description | 4.110.1 | Hertz Holdings
Hertz | Indenture,Forbearance Agreement, dated as of August 1, 2019,May 4, 2020, by and among The Hertz Corporation, as Issuer, the Subsidiary Guarantors from time to timeHertz Vehicle Financing LLC, Hertz Vehicle Financing II LP, DTG Operations, Inc., Deutsche Bank AG, New York Branch, and certain other parties thereto, and Wells Fargo Bank, National Association, as Trustee. | 4.2 | Hertz | | 10.1 | Hertz Holdings
Hertz
| | | 10.2 | Hertz Holdings
Hertz | Hertz
| | 31.110.3 | Hertz Holdings
Hertz | Limited Waiver, Forbearance and First Amendment, dated as of May 4, 2020, in connection with that certain Credit Agreement, dated as of December 13, 2019, by and among The Hertz Corporation, the other loan parties party thereto, the several banks and other financial institutions parties thereto as lenders, the issuing lender and administrative agent (Incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K of Hertz Global Holdings, Inc. (File No. 001-37665) and The Hertz Corporation (File No. 001-07541), as filed on May 5, 2020). | | 10.4 | Hertz Holdings
Hertz | Limited Waiver, Forbearance and First Amendment, dated as of May 4, 2020, in connection with that certain Letter of Credit Agreement, dated as of November 2, 2017, by and among The Hertz Corporation, the other credit parties party thereto, the several banks and other financial institutions parties thereto as lenders and administrative agent (Incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K of Hertz Global Holdings, Inc. (File No. 001-37665) and The Hertz Corporation (File No. 001-07541), as filed on May 5, 2020). | | 10.5 | Hertz Holdings
Hertz | Limited Waiver and First Amendment, dated as of May 4, 2020, in connection with that certain Credit Agreement, dated as of June 30, 2016, by and among The Hertz Corporation, the other loan parties party thereto, the several banks and other financial institutions parties thereto as lenders and administrative agent (Incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K of Hertz Global Holdings, Inc. (File No. 001-37665) and The Hertz Corporation (File No. 001-07541), as filed on May 5, 2020). | | 10.6 | Hertz Holdings
Hertz | | | 10.7 | Hertz Holdings
Hertz | Limited Waiver Agreement dated May 22, 2020, by and among others International Fleet Financing No.2 B.V. as issuer, Hertz Europe Limited as issuer administrator, Hertz Holdings Netherlands, Credit Agricole Corporate and Investment Bank as administrative agent, BNP Paribas Trust Corporation UK Limited as security trustee and the several committed note purchasers, commercial paper conduits, and certain funding agents for the investor groups, in each case, party thereto (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Hertz Global Holdings, Inc. (File No. 001-37665) and The Hertz Corporation (File No. 001-07541), as filed on May 26, 2020). | | 10.8 | Hertz Holdings
Hertz | | | 10.9 | Hertz Holdings
Hertz | |
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES THE HERTZ CORPORATION AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) | | | | | | | | | Exhibit
Number | | Description | | 22 | Hertz | | | 31.1 | Hertz Holdings | | | 31.2 | Hertz Holdings | | | 31.3 | Hertz | | | 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 - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL 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* | | 104 | Hertz Holdings
Hertz | Cover Page Interactive Data File (Embedded within the Inline XBRL document) |
*Filed herewith **Furnished herewith 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.
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