Hertz details reasons behind accounting errors

Uber is disrupting Hertz and the others. Aivars Lode avantce

Hertz details reasons behind accounting errors

Laura Layden

Updated 9:05 PM EDT

While Hertz treated Mark Frissora’s resignation as its CEO and chairman as a termination “without cause,” the company is now saying his management style may have led to the rental car giant’s accounting missteps.

In a recent regulatory filing, Hertz Global Holdings Inc., said his “management style and temperament created a pressurized operating environment at the company, where challenging targets were set and achieving those targets was a key performance expectation.”

The filing, made July 16 with the U.S. Securities and Exchange Commission, came as Hertz wrapped up its financial restatements, which cut the company’s reported earnings from 2011 through 2013 by a total of $144 million.

Hertz, which is building its new world headquarters in Estero, first disclosed it had uncovered accounting problems in May 2014. Less than a month later, the company announced it would have to restate and correct three years worth of financial results.

Frissora resigned in September, citing personal reasons, and received a severance package that included a cash payment of nearly $10.5 million, along with other benefits.

While Hertz did not comment publicly on what role Frissora may have played in its financial reporting mess, an explanatory note in its recently filed 2014 annual report said the company’s internal investigation found “an inconsistent and sometimes inappropriate tone at the top” that may have influenced one or more employees to record improper accounting entries.

“There was in certain instances an inappropriate emphasis on meeting internal budgets, business plans, and current estimates. Our former chief executive officer further encouraged employees to focus on potential business risks and opportunities, and on potential financial or operating performance gaps, as well as ways of ameliorating potential risks or gaps, including through accounting reviews, ” the 10-K filing states.

As a result, Hertz concluded there was an environment that may have led to inappropriate accounting decisions and the failure to disclose critical information needed for an effective accounting review.

Frissora isn’t commenting on the filing. He’s now president and CEO of Caesars Entertainment Corp. In a statement, a spokeswoman for Caesars defended him.

“Hertz’s disclosure very specifically did not suggest any wrongdoing by Mark. In fact, it described a CEO focused on driving performance and results and merely posits that this focus on driving performance and results may have led to some of the accounting errors. I suppose that it is also possible that the errors were caused by the weak accounting practices and skills of those that made them. Caesars Entertainment is fortunate to have Mark at its helm,” said Jan Jones Blackhurst, Caesars Entertainment’s executive vice president of communications.

Some have speculated Hertz could consider exercising its so-called clawback policy. Such policies allow companies to recover compensation from executive officers if it’s determined to have been wrongly awarded.

A spokesman for Hertz said, “We do maintain clawback policies with respect to our compensation arrangements. The applicability of those policies is a matter for the board.”

Charles Elson, an expert in corporate governance and a finance professor at the University of Delaware, said many companies have clawback policies, but exercising them can be tricky, if not impossible.

“Clawbacks are just really hard to do,” he said. “One is the money has usually been spent and two they are just hard to enforce legally.”

Though the Securities and Exchange Commission has proposed a rule that would require U.S. companies to recover incentive-based compensation from current and former executives when there’s an accounting restatement, it has not yet been adopted and experts say it’s unlikely to apply retroactively to Hertz.

Frissora’s management style was just one of many issues Hertz found in its internal control over financial reporting that led to its restatement. According to the filing, a few of the other weaknesses were:

Not having the right employees, with the right level of knowledge, experience and training needed to meet its financial reporting requirements.

Not establishing clear reporting structures, reporting lines and decisional authority responsibilities.

Not designing effective controls over its procurement processes for goods and services, outside of its fleet of vehicles.

Hertz also identified weaknesses in its risk assessment, information and communication and monitoring processes.

The financial misstatements prompted governmental investigations by the Securities and Exchange Commission and a state securities regulator, which the company has warned could lead to enforcement actions.

Over the past 18 months, Hertz has seen a shake-up in its management, which includes a new CEO, chief financial officer and general counsel. The company said it has hired more than 20 highly qualified vice president and director level accounting employees, and has put together a new senior accounting team.

“As individuals and as a company, our commitment is clear. Only the highest standards of financial reporting and discipline will be accepted. The talent we’ve put in place is a testament to the seriousness with which we approach this commitment,” said John Tague, Hertz’s CEO in a conference call about the company’s financial restatement.

He said there was still plenty of work to be done.

“While the number of material weaknesses are significant, remediation work is well underway with considerable progress expected still this year,” Tague said.

With its financial restatement finalized, Hertz can now focus on completing the separation of its equipment rental business, HERC, headquartered in Bonita Springs. The spinoff is targeted for completion in the second quarter of 2016. Hertz plans to use the cash from the transaction to fund share repurchases and reduce its debt.

As it looks to drive forward, Hertz will continue to work on strengthening its foundation. Initiatives include refreshing its car rental fleet, cutting operational costs, and improving the customer experience.

Andrew Hill, president and co-founder of Naples-based Andrew Hill Investment Advisors Inc., said in the end Hertz’s financial restatement could have been much worse, putting them into the negative.

“They got rid of a problem. They were in a penalty box. Now they are out,” he said.

But, he said, Hertz still faces some big challenges, including its low stock price and the growing popularity of more affordable ride-sharing services such as Lyft and Uber.

“I think Uber is killing them,” Hill said. “Whether it’s my perception or reality, I think that is what is going on.”

Hertz, he said, needs to get more innovative and shed its stodgy image.

“It seems like an old dinosaur company,” Hill said. “It seems like an IBM, or something like that, that’s just not keeping up with the technology of today. But they do have a heck of a brand.”

Unisys halts and catches fire: Mainframe builder dives into the red

Continued softness for legacy hardware software businesses. Aivars Lode avantce

Unisys halts and catches fire: Mainframe builder dives into the red 

By | Kat Hall 

24th July 2015 

It did see ‘solid revenue growth on a constant currency basis’ though, so there's that

Mainframe maker Unisys plunged into the red during its second quarter of 2015, posting losses of $58.2m (£37.6m).

The losses quadrupled compared with its second quarter in 2014, when the biz dropped $12.1m over the three-month period. Overall revenues dropped five per cent to $765m (£494m).

Nevertheless, chief exec Peter Altabef remained upbeat. In his best Pollyanna impression he said: "We were pleased to see solid revenue growth on a constant currency basis during the quarter", adding that the company is "aggressively implementing" its new operating model.

The biz is currently putting in place "organisational initiatives" intended to shave off $200m (£129m) in costs by the end of 2016.

Sales in the US and Canada rose 23 per cent in the quarter, while revenue from the rest of the world (including the UK) dropped 24 per cent.

John O'Brien, analyst at TechMarketView, noted the company has been quiet in Blighty for sometime.

"There are some signs of things improving in the public sector at least," he said. "Meanwhile, a new global partnership with fast-growing SaaS specialist ServiceNow for cloud service management may help Unisys shrug off its legacy provider image, and move faster into newer 'as-a-service' delivery model," he said. ®

Ballmer's billion-dollar blunders: When he gambled Microsoft's money and lost

Making legacy software companies succeed in new markets is hard, check out Microsoft's track record. Aivars Lode avantce

Ballmer's billion-dollar blunders: When he gambled Microsoft's money and lost 

By | Neil McAllister 

27th July 2015  

Nokia is the biggest write-off yet, but it wasn't the first

Analysis Less than two years into Satya Nadella's tenure as CEO of Microsoft, he's already had to report a lossmaking quarter. It's only the second time that's happened in the software giant's three decades as a public company, and the $8.44bn write-off Redmond posted earlier this week is the largest in its history.

Don't blame Nadella, though. He's just the janitor. The mess he's been forced to clean up was left for him by his predecessor, Steve Ballmer.

In this case, the source of the red ink was Ballmer's crash-and-burn acquisition of Nokia's phone business, which seemingly has now cost Microsoft more than it originally paid for it. It's emerging as the single most disastrous event in all of Microsoft's history. It was such a contentious move, in fact, that it reportedly destroyed Ballmer's friendshipwith his old college buddy, Bill Gates.

But this wasn't the first time one of Ballmer's plans cost Microsoft some serious coin. In fact, on several occasions during his tenure he bet big on the wrong idea when he probably should have known better, ultimately costing the company millions or even billions in the process.

While it's true that Ballmer's 14 years in the corner office left Microsoft a more profitable and more valuable company than when he first became chief exec, his legacy also includes a series of bad gambles that didn't pay off. Here we remember a few of the biggest ones – and time will tell whether Nadella can avoid similar mistakes.

1. Nokia

It's worth revisiting this one, because it's a doozy. Microsoft paid $7.1bn to gobble Nokia's former Devices and Services business in April 2014. Less than a year and a half later, it would write down $8.44bn in a single quarter, with almost all of the charges related to the Nokia deal.

That wasn't all, though. Just three months after the deal closed, Nadella announced 18,000 layoffs, again with most of the cuts coming from the former Nokia division. That move cost Microsoft $1.57bn in restructuring costs over the next three quarters, bringing the total losses related to the acquisition to $10.01bn.

We're not done yet, though. Even before Microsoft agreed to take the phone business off Nokia's hands, Ballmer was seemingly convinced that he could make the Finnish firm into Redmond's own pet smartphone franchise while keeping it as an independent company.

Best buddies? Nadella showed former Nokia CEO Stephen Elop the door in June

In 2011, Microsoft paid Nokia $1bn to drop Symbian and make Windows Phone its exclusive smartphone OS. Given that Redmond would buy the moribund business outright just three years later, one could easily argue that the billion-dollar investment yielded zero return.

All told, Ballmer's smartphone misadventure looks to have cost Microsoft more than HP spent on its botched acquisition of Autonomy – and that's saying something.

2. aQuantive

Nokia wasn't Ballmer's first duff deal, though. Microsoft has only posted a quarterly loss one other time, and that was when it wrote off costs related to its $6.3bn buyout of online advertising firm aQuantive.

Ballmer snapped up the ad outfit in 2007, with the assumption that it would get Microsoft an oar into the ad-revenue river that has floated Google's boat so nicely over the years.

It was partly a defensive move. Google had just bought ad-delivery network DoubleClick for $3.1bn, and Ballmer fretted that his Mountain View rival was gaining too much momentum in a market that had never provided much revenue for Microsoft.

As it turned out, buying aQuantive didn't change that. Over the next five years, far from making Microsoft an "advertising company," as Ballmer promised, the gobble delivered little return. Former aQuantive CEO Brian McAndrews quit a year after the deal closed, and ex-aQuantive employees complained of being marginalized.

In July 2012, Ballmer admitted defeat, and Microsoft wrote down $6.2bn of the ads business – virtually every penny it paid for it. The result was a quarterly net loss of $492m, where previously Redmond had been expected to report a profit.

3. Online Services

The aQuantive debacle was such a high-profile misstep, though, that it distracted from other losses going on right in its own backyard.

After acquiring aQuantive, Microsoft folded it into its Online Services reporting segment. That was fitting in two senses: First, because aQuantive's business was online advertising; and second, because nobody else in Online Services was making any money, either.

Online Services grew out of Redmond's MSN business and would eventually include the Bing search engine, Hotmail, maps, and various other efforts designed to make it look like Microsoft was competing head-to-head with Google. Problem was, while Google was raking in money for its efforts, Microsoft was spending it while it played catch-up.

Over the course of its lifetime, Online Services posted an average net operating loss of nearly $1.5bn per year. That's eight years of operation for a total cost of $11.78bn.

And the thing is, Ballmer never actually pulled the plug. Instead, when he got tired of analysts pointing out how much the segment was costing Redmond each quarter, he changed Microsoft's reporting structure. The business units that were under the Online Services umbrella are now scattered among several of the software giant's new segments, so their performance is no longer as visible. For all we know, they're still burning through cash.

4. Zune

The biggest failing of Microsoft's ill-fated Zune media player line wasn't that the first versions were brown, as some suggested at the time. Rather, it was how badly out of step the venture was with the rest of the market.

When Redmond launched the first Zune in September 2006, it did so with prices that matched what Apple was charging for its iPod line at the time. Trouble was, by 2006 Apple had already been selling iPods for five years.

By early 2007, Apple boasted that there were already 100 million iPods in customers' hands. In May of that year, Microsoft said it expected Zune to hit the one million mark in June. Nobody remembers whether it really did or not. June 2007 was when Apple launched the first iPhone, and from that moment, the days of the standalone MP3 player were effectively numbered.

Remember us? While Apple was working on the iPhone, Ballmer's Microsoft brought you these

But Ballmer didn't take the hint. Despite widespread derision from Apple fanbois, the Zune line lumbered on. The last model, the Zune HD, was released in 2009 – although it's a bad sign when your product's top marketing exec quits mere weeks before it launches. And the Zune line itself wasn't officially discontinued until 2011.

It's hard to say just how much Redmond's misguided media-player play cost it, because it never disclosed hard figures. But at the outset of the effort, an eager Zune boss said Microsoft planned to spend "millions of dollars" establishing the brand and that it planned to lose money over the next few years in the process. We bet it did.

5. Danger Inc / Kin

With the iPhone turning heads and Zune dying on the vine, Ballmer reckoned Microsoft needed to get in on the smartphone business, and fast. What better way than to buy up a company that had already established itself in the game?

The company in question was a plucky outfit called Danger Inc, and the price tag was $500m. Danger was best known for its flagship product, the T-Mobile Sidekick handset. It wasn't as sexy as the iPhone and it didn't sell as well as Research in Motion's BlackBerry line, but hey – Paris Hilton had one.

Alas, Microsoft dropped the ball almost immediately. Shortly after shifting over the Sidekick service to its own data centers, Redmond experienced a major outage that wiped the data from countless customers' devices. Some of the data was eventually recovered. Most never was.

But the Sidekick was never meant to be the endgame. Ballmer put Danger's engineering staff to work on a pair of new devices that were meant to give Microsoft its big break into the smartphone market.

Unfortunately, that effort was a disaster almost from the beginning. Ex-Danger staffers complained of upper management interference, and the devices that eventually resulted from the effort received failing grades in early user testing.

They were brought to market anyway, albeit briefly. The devices, dubbed the Kin One and Kin Two, were soon recognized as being so awful – and potentially so damaging to Redmond's reputation – that they were pulled a mere six weeks after launch, resulting in the shortest lifecycle of any product in Microsoft's history.

Just how much the whole episode cost the software giant is hard to judge. But Microsoft's erstwhile Entertainment and Devices division posted a $172m operating loss for the quarter in which Kin was killed, while it had reported an average operating profit of $284m per quarter for the previous nine months.

6. Surface RT

Having been late to market with a media player and late to market with a smartphone, Ballmer's next trick was to try to take on the iPad. While Microsoft's Surface line has since gone on to be a successful business, particularly with the launch of the Surface Pro 3, the first model to ship was the utterly misguided Surface RT.

Sporting an underpowered ARM processor, an OS that looked like Windows 8 but wasn't, and an app store worthy of Old Mother Hubbard's kitchen, the Surface RT showed every sign of being a flop before it ever launched. Acer CEO JT Wang even urged Microsoft to abort the idea, saying, "It is not something you are good at, so please think twice." Microsoft pushed ahead anyway, and the rest is history.

Almost nobody bought Surface RT. But that may have been just as well, because Microsoft was said to be so bullish on the devices that it was selling them at a loss, expecting to make up the difference later by hooking customers into its media store and online services.

No amount of advertising would get you to buy one of these. We know because you didn't

When he finally had to admit the blunder, a sheepish Ballmer told an audience at a company event, "We built a few more devices than we could sell." That was something of an understatement, as Redmond had been forced to write down $900m of unsold inventory.

And that's not to mention the extra $1bn the software giant pumped into its marketing budget to promote the devices, which were flogged everywhere from bus stops to TV ads in desirable time slots. Needless to say, it didn't work.

Postmortem of an era

Steve Ballmer stepped down as CEO of Microsoft in February 2014, after holding the position for 14 years. In August 2014 he also resigned his seat on Redmond's board to concentrate on his new role as owner of the Los Angeles Clippers basketball franchise. He remains Microsoft's largest individual shareholder.

During his time in Redmond, Ballmer oversaw numerous projects and initiatives. Many succeeded. He preserved Windows' position as the dominant desktop operating system and Office as the leading productivity suite. He built Microsoft's enterprise business and he brought the company, at long last, into the cloud.

You might ask why some of the other missteps aren't on the above list. Where are Windows ME and Windows Vista? What about Microsoft Bob? But before Windows XP there was Windows ME; after Vista was Windows 7. Bob, meanwhile, may have been silly, but it didn't even make a blip on the financial radar.

In hindsight, however, one thing the major errors – the costly ones – have in common is that they are often the result of reactive management, where Ballmer sought to chase down one of Microsoft's competitors when it reached into a market that Redmond hadn't already conquered.

Apple makes money from iPhones? Microsoft should make its own phones. Google makes money from ads? Microsoft should be an ad business, never mind software. Apple makes iPods and iPads? Microsoft should be in media players and slabs that don't run Windows.

So in that sense, it's probably a good thing that Nadella has had the courage to euthanize what's left of the Nokia phones business, rather than putting it on life support. There's something to be said for sticking to what you're good at. And with any luck, Nadella – who oversaw Microsoft's Azure cloud business before being named CEO – may be the man to keep it on the right path from now on. ®