UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
Amendment No. 1
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2012 | |
OR | |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 001-07541
THE HERTZ CORPORATION
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) | 13-1938568 (I.R.S. Employer Identification Number) |
225 Brae Boulevard
Park Ridge, New Jersey 07656-0713
(201) 307-2000
(Address, including Zip Code, and telephone number,
including area code, of registrant's principal executive offices)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report.)
The registrant meets the conditions as set forth in General Instructions H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format as permitted.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | o | Non-accelerated filer | x | Smaller reporting company | o |
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of November 2, 2012, all of the common stock of the registrant was owned by its affiliate, Hertz Investors, Inc. As of November 2, 2012, 100 shares of the registrant's common stock (par value $0.01) were issued and outstanding.
Explanatory Note
We are filing this Amendment No. 1 to our Report on Form 10-Q for the three months ended September 30, 2012 which was filed with the U.S. Securities and Exchange Commission on November 2, 2012, or the "Original Filing." The sole purpose of this Amendment No. 1 is to correct a typographical error in exhibits 32.1 and 32.2 to the Original Filing. We have repeated the entire text of the Original Filing in this Amendment No. 1. We have made no other changes to the Original Filing other than the correction to the exhibits noted above.
THE HERTZ CORPORATION AND SUBSIDIARIES
INDEX
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PART I—FINANCIAL INFORMATION
ITEM l. Condensed Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Shareholder of The Hertz Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of The Hertz Corporation and its subsidiaries as of September 30, 2012, and the related consolidated statements of operations and comprehensive income (loss) for the three-month and nine-month periods ended September 30, 2012 and September 30, 2011 and the consolidated statements of cash flows for the nine-month periods ended September 30, 2012 and September 30, 2011. These interim financial statements are the responsibility of the Company's management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2011, and the related consolidated statements of operations, of changes in equity and of cash flows for the year then ended (not presented herein), and in our report dated February 27, 2012, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2011, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
Florham Park, New Jersey
November 2, 2012
1
THE HERTZ CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars)
Unaudited
September 30, 2012 | December 31, 2011 | ||||||
ASSETS | |||||||
Cash and cash equivalents | $ | 453,294 | $ | 931,208 | |||
Restricted cash and cash equivalents | 376,773 | 308,039 | |||||
Receivables, less allowance for doubtful accounts of $23,681 and $20,282 | 1,731,795 | 1,616,382 | |||||
Due from Hertz Global Holdings, Inc. | 11,865 | — | |||||
Inventories, at lower of cost or market | 105,982 | 83,978 | |||||
Prepaid expenses and other assets | 380,256 | 416,134 | |||||
Revenue earning equipment, at cost: | |||||||
Cars | 11,850,783 | 9,678,765 | |||||
Less accumulated depreciation | (1,814,403 | ) | (1,360,012 | ) | |||
Other equipment | 3,226,306 | 2,830,176 | |||||
Less accumulated depreciation | (1,041,477 | ) | (1,043,520 | ) | |||
Total revenue earning equipment | 12,221,209 | 10,105,409 | |||||
Property and equipment, at cost: | |||||||
Land, buildings and leasehold improvements | 1,191,140 | 1,146,112 | |||||
Service equipment and other | 1,138,356 | 1,050,915 | |||||
2,329,496 | 2,197,027 | ||||||
Less accumulated depreciation | (1,049,775 | ) | (945,173 | ) | |||
Total property and equipment | 1,279,721 | 1,251,854 | |||||
Other intangible assets, net | 2,531,522 | 2,562,234 | |||||
Goodwill | 454,663 | 392,094 | |||||
Total assets | $ | 19,547,080 | $ | 17,667,332 | |||
LIABILITIES AND EQUITY | |||||||
Accounts payable | $ | 975,098 | $ | 897,489 | |||
Due to Hertz Global Holdings, Inc. | — | 412 | |||||
Accrued liabilities | 1,012,188 | 1,126,338 | |||||
Accrued taxes | 242,218 | 162,984 | |||||
Debt | 12,293,232 | 10,907,849 | |||||
Public liability and property damage | 279,755 | 281,534 | |||||
Deferred taxes on income | 1,783,240 | 1,661,872 | |||||
Total liabilities | 16,585,731 | 15,038,478 | |||||
Commitments and contingencies | |||||||
Equity: | |||||||
The Hertz Corporation and Subsidiaries stockholder's equity | |||||||
Common Stock, $0.01 par value, 3,000 shares authorized, 100 shares issued | |||||||
and outstanding | — | — | |||||
Additional paid-in capital | 3,501,007 | 3,473,625 | |||||
Accumulated deficit | (524,848 | ) | (816,376 | ) | |||
Accumulated other comprehensive loss | (14,829 | ) | (28,414 | ) | |||
Total The Hertz Corporation and Subsidiaries stockholder's equity | 2,961,330 | 2,628,835 | |||||
Noncontrolling interest | 19 | 19 | |||||
Total equity | 2,961,349 | 2,628,854 | |||||
Total liabilities and equity | $ | 19,547,080 | $ | 17,667,332 |
The accompanying notes are an integral part of these financial statements.
2
THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands of Dollars)
Unaudited
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||||||
Revenues: | |||||||||||||||
Car rental | $ | 2,105,987 | $ | 2,062,457 | $ | 5,578,544 | $ | 5,272,595 | |||||||
Equipment rental | 362,933 | 321,555 | 998,458 | 891,282 | |||||||||||
Other | 47,302 | 48,254 | 125,292 | 120,685 | |||||||||||
Total revenues | 2,516,222 | 2,432,266 | 6,702,294 | 6,284,562 | |||||||||||
Expenses: | |||||||||||||||
Direct operating | 1,241,082 | 1,247,617 | 3,545,162 | 3,508,588 | |||||||||||
Depreciation of revenue earning equipment and | |||||||||||||||
lease charges | 560,529 | 523,283 | 1,594,396 | 1,379,041 | |||||||||||
Selling, general and administrative | 200,993 | 197,543 | 615,279 | 575,231 | |||||||||||
Interest expense | 141,773 | 156,795 | 430,549 | 495,145 | |||||||||||
Interest income | (716 | ) | (1,249 | ) | (2,276 | ) | (4,651 | ) | |||||||
Other (income) expense, net | (9,514 | ) | 29 | (10,526 | ) | 62,706 | |||||||||
Total expenses | 2,134,147 | 2,124,018 | 6,172,584 | 6,016,060 | |||||||||||
Income before income taxes | 382,075 | 308,248 | 529,710 | 268,502 | |||||||||||
Provision for taxes on income | (130,772 | ) | (89,915 | ) | (225,682 | ) | (102,280 | ) | |||||||
Net income | 251,303 | 218,333 | 304,028 | 166,222 | |||||||||||
Less: Net income attributable to noncontrolling | |||||||||||||||
interest | — | (5,771 | ) | — | (14,531 | ) | |||||||||
Net income attributable to The Hertz | |||||||||||||||
Corporation and Subsidiaries' common stockholder | $ | 251,303 | $ | 212,562 | $ | 304,028 | $ | 151,691 |
The accompanying notes are an integral part of these financial statements.
3
THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In Thousands of Dollars)
Unaudited
Three Months Ended September 30, 2012 | Three Months Ended September 30, 2011 | ||||||||||||||
Net income | $ | 251,303 | $ | 218,333 | |||||||||||
Other comprehensive income (loss), net of tax: | |||||||||||||||
Translation adjustment changes, (net of tax | |||||||||||||||
of 2012: $(2,936) and 2011: $3,363) | $ | 20,175 | $ | (66,580 | ) | ||||||||||
Unrealized holding gains (losses) on securities, | |||||||||||||||
(net of tax of 2012: $1,095 and 2011: $(3,215)) | 1,720 | (5,026 | ) | ||||||||||||
Other, (net of tax of 2012: $0 and 2011: $0) | (103 | ) | 92 | ||||||||||||
Unrealized gain on Euro-denominated debt, (net | |||||||||||||||
of tax of 2012: $0 and 2011: $6,898) | — | 10,777 | |||||||||||||
Defined benefit pension plans | |||||||||||||||
Net gains (losses) arising during the period, | |||||||||||||||
(net of tax of 2012: $1,064 and 2011: | |||||||||||||||
$(4,834) | 1,437 | (14,007 | ) | ||||||||||||
Defined benefit pension plans | 1,437 | (14,007 | ) | ||||||||||||
Other comprehensive income (loss) | 23,229 | (74,744 | ) | ||||||||||||
Comprehensive income | 274,532 | 143,589 | |||||||||||||
Less: Comprehensive income attributable | |||||||||||||||
to noncontrolling interest | — | (5,771 | ) | ||||||||||||
Comprehensive income attributable to The Hertz | |||||||||||||||
Corporation and Subsidiaries' common stockholder | $ | 274,532 | $ | 137,818 |
Nine Months Ended September 30, 2012 | Nine Months Ended September 30, 2011 | ||||||||||||||
Net income | $ | 304,028 | $ | 166,222 | |||||||||||
Other comprehensive income (loss), net of tax: | |||||||||||||||
Translation adjustment changes, (net of tax | |||||||||||||||
of 2012: $(2,729) and 2011: $1,713) | $ | 3,655 | $ | (7,850 | ) | ||||||||||
Unrealized holding gains (losses) on securities, | |||||||||||||||
(net of tax of 2012: $3,063 and 2011: $(2,450)) | 4,817 | (3,791 | ) | ||||||||||||
Other, (net of tax of 2012: $0 and 2011: $0) | 5 | 32 | |||||||||||||
Unrealized loss on Euro-denominated debt, (net | |||||||||||||||
of tax of 2012: $0 and 2011: $(2,650)) | — | (4,139 | ) | ||||||||||||
Defined benefit pension plans | |||||||||||||||
Net gains arising during the period, (net of tax | |||||||||||||||
of 2012: $3,333 and 2011: $2,037) | 5,109 | 3,074 | |||||||||||||
Defined benefit pension plans | 5,109 | 3,074 | |||||||||||||
Other comprehensive income (loss) | 13,586 | (12,674 | ) | ||||||||||||
Comprehensive income | 317,614 | 153,548 | |||||||||||||
Less: Comprehensive income attributable | |||||||||||||||
to noncontrolling interest | — | (14,531 | ) | ||||||||||||
Comprehensive income attributable to The Hertz | |||||||||||||||
Corporation and Subsidiaries' common stockholder | $ | 317,614 | $ | 139,017 |
The accompanying notes are an integral part of these financial statements.
4
THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
Unaudited
Nine Months Ended September 30, | |||||||
2012 | 2011 | ||||||
Cash flows from operating activities: | |||||||
Net income | $ | 304,028 | $ | 166,222 | |||
Adjustments to reconcile net income to net cash provided by operating | |||||||
activities: | |||||||
Depreciation of revenue earning equipment | 1,530,775 | 1,306,661 | |||||
Depreciation of property and equipment | 125,132 | 117,837 | |||||
Amortization of other intangible assets | 58,899 | 51,175 | |||||
Amortization and write-off of deferred financing costs | 41,721 | 75,891 | |||||
Amortization and write-off of debt discount | 4,124 | 13,914 | |||||
Stock-based compensation charges | 22,260 | 24,438 | |||||
(Gain) loss on derivatives | 731 | (14,330 | ) | ||||
Gain on disposal of business | (9,116 | ) | — | ||||
Loss on revaluation of foreign denominated debt | 2,498 | — | |||||
Provision for losses on doubtful accounts | 23,472 | 21,211 | |||||
Asset writedowns | 3,181 | 22,782 | |||||
Deferred taxes on income | 118,731 | 42,268 | |||||
Gain on sale of property and equipment | (1,935 | ) | (5,199 | ) | |||
Changes in assets and liabilities, net of effects of acquisition: | |||||||
Receivables | (232,336 | ) | (150,212 | ) | |||
Inventories, prepaid expenses and other assets | (6,176 | ) | (12,547 | ) | |||
Accounts payable | 83,112 | 66,808 | |||||
Accrued liabilities | 10,410 | (130,558 | ) | ||||
Accrued taxes | 66,104 | 56,268 | |||||
Public liability and property damage | (3,189 | ) | 8,628 | ||||
Net cash provided by operating activities | 2,142,426 | 1,661,257 | |||||
Cash flows from investing activities: | |||||||
Net change in restricted cash and cash equivalents | (69,301 | ) | (123,511 | ) | |||
Revenue earning equipment expenditures | (7,681,018 | ) | (7,864,609 | ) | |||
Proceeds from disposal of revenue earning equipment | 4,815,374 | 4,932,410 | |||||
Property and equipment expenditures | (229,440 | ) | (202,276 | ) | |||
Proceeds from disposal of property and equipment | 94,644 | 48,133 | |||||
Acquisitions, net of cash acquired | (196,220 | ) | (222,988 | ) | |||
Purchase of short-term investments, net | — | (32,891 | ) | ||||
Proceeds from disposal of business | 11,691 | — | |||||
Other investing activities | (1,400 | ) | 760 | ||||
Net cash used in investing activities | $ | (3,255,670 | ) | $ | (3,464,972 | ) |
The accompanying notes are an integral part of these financial statements.
5
THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In Thousands of Dollars)
Unaudited
Nine Months Ended September 30, | |||||||
2012 | 2011 | ||||||
Cash flows from financing activities: | |||||||
Proceeds from issuance of long-term debt | $ | 282,382 | $ | 3,058,395 | |||
Payment of long-term debt | (656,111 | ) | (3,641,281 | ) | |||
Short-term borrowings: | |||||||
Proceeds | 367,988 | 371,994 | |||||
Payments | (962,690 | ) | (814,894 | ) | |||
Proceeds (payments) under the revolving lines of credit, net | 1,675,987 | 934,364 | |||||
Distributions to noncontrolling interest | — | (10,500 | ) | ||||
Purchase of noncontrolling interest | (38,000 | ) | |||||
Proceeds from employee stock purchase plan | 3,186 | 2,690 | |||||
Loan with Hertz Global Holdings, Inc. | (12,277 | ) | 317 | ||||
Payment of financing costs | (13,679 | ) | (87,640 | ) | |||
Dividends paid | (12,500 | ) | (12,450 | ) | |||
Net cash provided by (used in) financing activities | 634,286 | (199,005 | ) | ||||
Effect of foreign exchange rate changes on cash and cash equivalents | 1,044 | 13,987 | |||||
Net decrease in cash and cash equivalents during the period | (477,914 | ) | (1,988,733 | ) | |||
Cash and cash equivalents at beginning of period | 931,208 | 2,374,006 | |||||
Cash and cash equivalents at end of period | $ | 453,294 | $ | 385,273 | |||
Supplemental disclosures of cash flow information: | |||||||
Cash paid during the period for: | |||||||
Interest (net of amounts capitalized) | $ | 383,166 | $ | 475,464 | |||
Income taxes | 43,024 | 32,544 | |||||
Supplemental disclosures of non-cash flow information: | |||||||
Purchases of revenue earning equipment included in accounts payable and | |||||||
accrued liabilities | $ | 289,798 | $ | 217,675 | |||
Sales of revenue earning equipment included in receivables | 504,930 | 949,824 | |||||
Purchases of property and equipment included in accounts payable | 53,708 | 52,787 | |||||
Sales of property and equipment included in receivables | 38,052 | 10,777 |
The accompanying notes are an integral part of these financial statements.
6
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
Note 1—Background
The Hertz Corporation together with its subsidiaries are referred to herein as ‘‘we,’’ ‘‘our’’ and ‘‘us.’’ The Hertz Corporation is referred to herein as ‘‘Hertz,’’ 100% of Hertz outstanding capital stock is owned by Hertz Global Holdings, Inc., and 100% of Hertz Investors, Inc.’s capital stock is owned by Hertz Global Holdings, Inc., our ultimate parent company, is referred to herein as ‘‘Hertz Holdings.’’
We are a successor to corporations that have been engaged in the car and truck rental and leasing business since 1918 and the equipment rental business since 1965. Hertz was incorporated in Delaware in 1967. Ford Motor Company acquired an ownership interest in Hertz in 1987. Prior to this, Hertz was a subsidiary of United Continental Holdings, Inc. (formerly Allegis Corporation), which acquired Hertz's outstanding capital stock from RCA Corporation in 1985.
On December 21, 2005, investment funds associated with or designated by:
• | Clayton, Dubilier & Rice, Inc., which was succeeded by Clayton, Dubilier & Rice, LLC, or "CD&R," |
• | The Carlyle Group, or "Carlyle," and |
• | Merrill Lynch Global Private Equity, Inc., or "MLGPE," |
acquired all of our common stock from Ford Holdings LLC. In January 2009, Bank of America Corporation, or "Bank of America," acquired Merrill Lynch & Co., Inc., the former parent company of MLGPE. Accordingly, Bank of America is now an indirect beneficial owner of Hertz Holdings' common stock held by the investment funds associated with MLGPE. We refer to CD&R, Carlyle and MLGPE collectively as the "Sponsors." We refer to the acquisition of all of our common stock by the Sponsors as the "Acquisition."
After giving effect to Hertz Holdings' initial public offering in November 2006 and subsequent offerings, the Sponsors' holdings represent approximately 38% of the outstanding shares of common stock of Hertz Holdings as of September 30, 2012.
On September 1, 2011, Hertz completed the acquisition of Donlen Corporation, or "Donlen," a leading provider of fleet leasing and management services.
On December 31, 2011, Hertz purchased the noncontrolling interest of Navigation Solutions, L.L.C., thereby increasing its ownership interest from 65% to 100%.
On August 26, 2012, Hertz Holdings, HDTMS, Inc., a wholly owned subsidiary of Hertz Holdings, and Dollar Thrifty Automotive Group, Inc., a Delaware corporation, or "Dollar Thrifty," entered into an Agreement and Plan of Merger, or the "Merger Agreement," pursuant to which Hertz Holdings would acquire Dollar Thrifty for $87.50 per share, net to the seller in cash, without any interest and less any required withholding taxes, in a transaction valued at a corporate enterprise value of approximately $2.3 billion. After taking into account our use of approximately $400 million of cash and cash equivalents available from Dollar Thrifty, we expect to use approximately $345 million of our cash and cash equivalents to consummate the acquisition of Dollar Thrifty and to finance the remaining $1.95 billion through a combination of $750 million in incremental term loans under our Senior Term Facility and $1.2 billion in senior notes which was raised in October 2012. The boards of directors of both companies have unanimously approved the transaction. The transaction has been structured as a two-step acquisition including a cash tender offer for all outstanding shares of Dollar Thrifty common stock followed by a cash merger in which Hertz Holdings would acquire any remaining outstanding shares of Dollar Thrifty common stock. The transaction is subject to the tender of at least a majority of the shares of Dollar Thrifty common stock, as well as other customary closing conditions. The successful completion of the transaction is also subject to regulatory clearance by the Federal Trade Commission. Hertz Holdings has also reached a definitive agreement with Adreca Holdings Corp., a subsidiary of Macquarie Capital which is expected to be operated by Franchise Services of North America Inc., to sell the Advantage Rent A Car business, selected Dollar Thrifty airport concessions and certain other assets. The closing of that divestiture is conditioned upon, among other things, Hertz Holdings completing an acquisition of Dollar Thrifty. Hertz Holdings estimates that it would realize a loss before income taxes of approximately $30 million to $35 million as a result of this divestiture. We can offer no assurance that the Merger Agreement will be consummated.
7
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
Note 2—Basis of Presentation and Recently Issued Accounting Pronouncements
Basis of Presentation
The significant accounting policies summarized in Note 2 to our audited consolidated financial statements contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, filed with the United States Securities and Exchange Commission, or "SEC," on February 27, 2012, or the "Form 10-K," have been followed in preparing the accompanying condensed consolidated financial statements.
Franchise revenues and transactions
“Franchise revenues” includes franchise fees for use of our brands and services. Generally franchise fees from franchised locations are based on a percentage of net sales of the franchised business and are recognized as earned and when collectability is reasonably assured.
Initial franchise fees are recorded as deferred income when received and are recognized as revenue when all material services and conditions related to the franchise fee have been substantially performed.
Renewal franchise fees are recognized as revenue when the license agreements are effective and collectability is reasonably assured.
Other (income) and expenses, net includes the gains or losses from the sales of our operations or assets to new and existing franchisees. Such gains or losses are included in operating income because they are expected to be a recurring part of our business.
The December 31, 2011 condensed consolidated balance sheet data was derived from our audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America, or "GAAP."
The preparation of financial statements in conformity with 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.
In our opinion, all adjustments necessary for a fair presentation of the results of operations for the interim periods have been made. Results for interim periods are not necessarily indicative of results for a full year.
Certain prior period amounts have been reclassified to conform with current period presentation.
Recently Issued Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board, or "FASB," issued Accounting Standards Update No. 2011-05, "Presentation of Comprehensive Income," requiring companies to present items of net income and other comprehensive income either in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements of net income and other comprehensive income. The amendments in this update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. These provisions became effective for us beginning with the quarterly report for the period ended March 31, 2012. In December 2011, the FASB issued Accounting Standards Update No. 2011-12, "Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05," which defers the timing of implementing only those changes in Update 2011-05 that relate to the presentation of reclassification adjustments.
In July 2012, the FASB issued Accounting Standards Update No. 2012-02, "Intangibles--Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment", which states that that an entity has the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to
8
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount.
This provision is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The Company is presently assessing whether to adopt in relation to its annual impairment test scheduled for the fourth quarter.
Note 3—Cash and Cash Equivalents and Restricted Cash and Cash Equivalents
We consider all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.
In our Consolidated Statements of Cash Flows, we net cash flows from revolving borrowings in the line item "Proceeds (payments) under the revolving lines of credit, net."
Restricted cash and cash equivalents includes cash and cash equivalents that are not readily available for our normal disbursements. Restricted cash and cash equivalents are restricted for the purchase of revenue earning vehicles and other specified uses under our Fleet Debt facilities, for our Like-Kind Exchange Program, or "LKE Program," and to satisfy certain of our self-insurance regulatory reserve requirements. As of September 30, 2012 and December 31, 2011, the portion of total restricted cash and cash equivalents that was associated with our Fleet Debt facilities was $302.2 million and $213.6 million, respectively. The increase in restricted cash and cash equivalents associated with our fleet debt of $88.6 million from December 31, 2011 to September 30, 2012 was primarily related to the timing of purchases and sales of revenue earning vehicles.
Note 4—Goodwill and Other Intangible Assets
The following summarizes the changes in our goodwill, by segment (in millions of dollars):
Car Rental | Equipment Rental | Total | |||||||||
Balance as of January 1, 2012 | |||||||||||
Goodwill | $ | 419.3 | $ | 693.8 | $ | 1,113.1 | |||||
Accumulated impairment losses | (46.1 | ) | (674.9 | ) | (721.0 | ) | |||||
373.2 | 18.9 | 392.1 | |||||||||
Goodwill acquired during the period | — | 79.4 | 79.4 | ||||||||
Adjustments to previously recorded purchase price allocation | (15.3 | ) | — | (15.3 | ) | ||||||
Other changes during the period(1) | (1.0 | ) | (0.5 | ) | (1.5 | ) | |||||
(16.3 | ) | 78.9 | 62.6 | ||||||||
Balance as of September 30, 2012 | |||||||||||
Goodwill | 403.0 | 772.7 | 1,175.7 | ||||||||
Accumulated impairment losses | (46.1 | ) | (674.9 | ) | (721.0 | ) | |||||
$ | 356.9 | $ | 97.8 | $ | 454.7 |
9
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
Car Rental | Equipment Rental | Total | |||||||||
Balance as of January 1, 2011 | |||||||||||
Goodwill | $ | 367.9 | $ | 681.7 | $ | 1,049.6 | |||||
Accumulated impairment losses | (46.1 | ) | (674.9 | ) | (721.0 | ) | |||||
321.8 | 6.8 | 328.6 | |||||||||
Goodwill acquired during the year | 53.1 | 12.3 | 65.4 | ||||||||
Adjustments to previously recorded purchase price allocation | (0.9 | ) | (0.1 | ) | (1.0 | ) | |||||
Other changes during the year(1) | (0.8 | ) | (0.1 | ) | (0.9 | ) | |||||
51.4 | 12.1 | 63.5 | |||||||||
Balance as of December 31, 2011 | |||||||||||
Goodwill | 419.3 | 693.8 | 1,113.1 | ||||||||
Accumulated impairment losses | (46.1 | ) | (674.9 | ) | (721.0 | ) | |||||
$ | 373.2 | $ | 18.9 | $ | 392.1 |
_______________________________________________________________________________
(1) | Primarily consists of changes resulting from disposals and the translation of foreign currencies at different exchange rates from the beginning of the period to the end of the period. |
Other intangible assets, net, consisted of the following major classes (in millions of dollars):
September 30, 2012 | |||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Value | |||||||||
Amortizable intangible assets: | |||||||||||
Customer-related | $ | 694.6 | $ | (416.5 | ) | $ | 278.1 | ||||
Other(1) | 81.0 | (35.8 | ) | 45.2 | |||||||
Total | 775.6 | (452.3 | ) | 323.3 | |||||||
Indefinite-lived intangible assets: | |||||||||||
Trade name | 2,190.0 | — | 2,190.0 | ||||||||
Other(2) | 18.2 | — | 18.2 | ||||||||
Total | 2,208.2 | — | 2,208.2 | ||||||||
Total other intangible assets, net | $ | 2,983.8 | $ | (452.3 | ) | $ | 2,531.5 |
December 31, 2011 | |||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Value | |||||||||
Amortizable intangible assets: | |||||||||||
Customer-related | $ | 672.6 | $ | (365.5 | ) | $ | 307.1 | ||||
Other(1) | 74.7 | (27.8 | ) | 46.9 | |||||||
Total | 747.3 | (393.3 | ) | 354.0 | |||||||
Indefinite-lived intangible assets: | |||||||||||
Trade name | 2,190.0 | — | 2,190.0 | ||||||||
Other(2) | 18.2 | — | 18.2 | ||||||||
Total | 2,208.2 | — | 2,208.2 | ||||||||
Total other intangible assets, net | $ | 2,955.5 | $ | (393.3 | ) | $ | 2,562.2 |
_______________________________________________________________________________
10
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
(1) | Other amortizable intangible assets primarily consist of our Advantage trade name and concession rights, Donlen trade name, reacquired franchise rights, non-compete agreements and technology-related intangibles. |
(2) | Other indefinite-lived intangible assets primarily consist of reacquired franchise rights. |
Amortization of other intangible assets for the three months ended September 30, 2012 and 2011 was approximately $19.9 million and $17.5 million, respectively, and for the nine months ended September 30, 2012 and 2011 was approximately $58.9 million and $51.2 million, respectively. Based on our amortizable intangible assets as of September 30, 2012, we expect amortization expense to be approximately $18.5 million for the remainder of 2012, $77.2 million in 2013, $72.8 million in 2014, $70.5 million in 2015, $21.7 million in 2016 and $8.7 million in 2017.
On September 1, 2011, Hertz acquired 100% of the equity interest in Donlen, a leading provider of fleet leasing and management services. The amount of revenue and earnings of the combined entity had the acquisition date been January 1, 2010, are as follows (in millions):
Revenue | Earnings | ||||||
2011 supplemental pro forma for the third quarter of 2011 (combined entity) | $ | 2,500.8 | $ | 215.1 | |||
2011 supplemental pro forma for the first nine months of 2011 (combined entity) | 6,545.8 | 159.8 |
2011 supplemental pro forma revenue for the three months ended September 30, 2011 excludes $0.6 million related to deferred revenue which was eliminated as part of acquisition accounting. 2011 supplemental pro forma earnings for the three months ended September 30, 2011 excludes $0.4 million related to deferred income which was eliminated as part of acquisition accounting. 2011 supplemental pro forma revenue for the nine months ended September 30, 2011 excludes $3.2 million related to deferred revenue which was eliminated as part of acquisition accounting. 2011 supplemental pro forma earnings for the nine months ended September 30, 2011 excludes $2.0 million related to deferred income which was eliminated as part of acquisition accounting.
This transaction has been accounted for using the acquisition method of accounting in accordance with GAAP and operating results of Donlen from the date of acquisition are included in our consolidated statements of operations. The allocation of the purchase price to the tangible and intangible net assets acquired is complete.
Advantage Divestiture
On August 26, 2012, Hertz Holdings entered into a Merger Agreement with HDTMS, Inc., a Delaware corporation and an indirect wholly owned subsidiary of Hertz Holdings, and Dollar Thrifty pursuant to which Hertz Holdings has agreed to acquire Dollar Thrifty. The Merger Agreement provides that, with respect to obtaining antitrust approval of the acquisition, Hertz Holdings is required to, among other actions, divest its Advantage Rent A Car, or "Advantage," business, together with certain additional assets and airport concessions, pursuant to a proposed consent agreement currently under discussion between Hertz Holdings and the United States Federal Trade Commission, or the "FTC;" provided, however, that any such divestitures shall be conditioned upon the consummation of the Merger. To that end, Hertz Holdings has reached a definitive agreement with Adreca Holdings Corp., a subsidiary of Macquarie Capital which is expected to be operated by Franchise Services of North America Inc., providing for the divestiture of its Advantage business, or the "Advantage Divestiture," selected Dollar Thrifty airport concessions and certain other assets, contingent on a successful acquisition of Dollar Thrifty.
As of September 30, 2012, the Advantage business was classified as held and used as the sale transaction was not probable and was contingent upon acquisition of Dollar Thrifty as of such date. Hertz's agreement to divest its Advantage business, which if consummated would result in a loss, triggered an interim impairment analysis. The assets were evaluated for impairment under a probability-weighted approach for developing estimates of future cash flows used to test a long-lived asset for recoverability. The sum of future undiscounted cash flows of the Advantage business exceeds the carrying value as of September 30, 2012. Accordingly, no impairment has been recognized at September 30, 2012.
Hertz estimates that the occurrence of the Advantage Divestiture would cause Hertz to realize a loss (before income taxes) in the range of approximately $30 million to $35 million. This estimated loss associated with the Advantage Divestiture is preliminary and subject to further adjustments. We can offer no assurance that the Merger Agreement
11
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
will be consummated.
Other Acquisitions
During the nine months ended September 30, 2012, we added nineteen domestic equipment rental locations through external acquisitions. These acquisitions are not material to the consolidated amounts presented within our statement of operations for the three-month and nine-month periods ended September 30, 2012.
Note 5—Taxes on Income
The effective tax rate for the three and nine months ended September 30, 2012 was 34.2% and 42.6%, respectively. The provision for taxes on income of $130.8 million in the three months ended September 30, 2012 increased from $89.9 million in the three months ended September 30, 2011, primarily due to higher income before income taxes, changes in geographic earnings mix and changes in losses in certain non-U.S. jurisdictions for which tax benefits are not realized. The provision for taxes on income of $225.7 million in the nine months ended September 30, 2012 increased from $102.3 million in the nine months ended September 30, 2011, primarily due to higher income before income taxes, changes in geographic earnings mix and changes in losses in certain non-U.S. jurisdictions for which tax benefits are not realized.
Note 6—Depreciation of Revenue Earning Equipment and Lease Charges
Depreciation of revenue earning equipment and lease charges includes the following (in millions of dollars):
Three Months Ended September 30, | |||||||
2012 | 2011 | ||||||
Depreciation of revenue earning equipment | $ | 554.1 | $ | 528.1 | |||
Adjustment of depreciation upon disposal of revenue earning equipment | (12.7 | ) | (30.9 | ) | |||
Rents paid for vehicles leased | 19.1 | 26.1 | |||||
Total | $ | 560.5 | $ | 523.3 |
Nine Months Ended September 30, | |||||||
2012 | 2011 | ||||||
Depreciation of revenue earning equipment | $ | 1,624.1 | $ | 1,399.9 | |||
Adjustment of depreciation upon disposal of revenue earning equipment | (93.3 | ) | (93.3 | ) | |||
Rents paid for vehicles leased | 63.6 | 72.4 | |||||
Total | $ | 1,594.4 | $ | 1,379.0 |
The adjustment of depreciation upon disposal of revenue earning equipment for the three months ended September 30, 2012 and 2011, included net gains of $9.7 million and $26.3 million, respectively, on the disposal of vehicles used in our car rental operations and net gains of $3.0 million and $4.6 million, respectively, on the disposal of industrial and construction equipment used in our equipment rental operations. The adjustment of depreciation upon disposal of revenue earning equipment for the nine months ended September 30, 2012 and 2011, included net gains of $82.9 million and $86.0 million, respectively, on the disposal of vehicles used in our car rental operations and net gains of $10.4 million and $7.3 million, respectively, on the disposal of industrial and construction equipment used in our equipment rental operations.
Depreciation rates are reviewed on a quarterly basis based on management's routine review of present and estimated future market conditions and their effect on residual values at the time of disposal. During the nine months ended September 30, 2012, depreciation rates being used to compute the provision for depreciation of revenue earning equipment were adjusted on certain vehicles in our car rental operations to reflect changes in the estimated residual
12
values to be realized when revenue earning equipment is sold. These depreciation rate changes resulted in net decreases of $59.4 million and $96.7 million in depreciation expense for the three and nine months ended September 30, 2012, respectively. During the three-month and nine-month periods ended September 30, 2012, the depreciation rate changes in certain of our equipment rental operations resulted in an increase of $0.1 million in depreciation expense.
13
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
Note 7—Debt
Our debt consists of the following (in millions of dollars):
Facility | Average Interest Rate at September 30, 2012(1) | Fixed or Floating Interest Rate | Maturity | September 30, 2012 | December 31, 2011 | ||||||||
Corporate Debt | |||||||||||||
Senior Term Facility | 3.75% | Floating | 3/2018 | $ | 1,379.0 | $ | 1,389.5 | ||||||
Senior ABL Facility | 2.47% | Floating | 3/2016 | 410.0 | — | ||||||||
Senior Notes(2) | 7.09% | Fixed | 10/2018–1/2021 | 2,450.0 | 2,638.6 | ||||||||
Promissory Notes | 6.96% | Fixed | 6/2012–1/2028 | 48.7 | 224.7 | ||||||||
Other Corporate Debt | 5.05% | Floating | Various | 65.7 | 49.6 | ||||||||
Unamortized Net | |||||||||||||
(Discount) Premium (Corporate) | 3.3 | (6.9 | ) | ||||||||||
Total Corporate Debt | 4,356.7 | 4,295.5 | |||||||||||
Fleet Debt | |||||||||||||
U.S. ABS Program | |||||||||||||
U.S. Fleet Variable | |||||||||||||
Funding Notes: | |||||||||||||
Series 2009-1(3)(4) | 1.25% | Floating | 3/2013 | 1,900.0 | 1,000.0 | ||||||||
Series 2010-2(3) | 1.36% | Floating | 3/2013 | 200.0 | 170.0 | ||||||||
Series 2011-2(3) | N/A | Floating | 4/2012 | — | 175.0 | ||||||||
2,100.0 | 1,345.0 | ||||||||||||
U.S. Fleet Medium Term | |||||||||||||
Notes | |||||||||||||
Series 2009-2(3) | 4.95% | Fixed | 3/2013–3/2015 | 1,384.3 | 1,384.3 | ||||||||
Series 2010-1(3) | 3.77% | Fixed | 2/2014–2/2018 | 749.8 | 749.8 | ||||||||
Series 2011-1(3) | 2.86% | Fixed | 3/2015–3/2017 | 598.0 | 598.0 | ||||||||
2,732.1 | 2,732.1 | ||||||||||||
Donlen ABS Program | |||||||||||||
Donlen GN II Variable | |||||||||||||
Funding Notes(5) | 1.17% | Floating | 12/2012 | 899.3 | 811.2 | ||||||||
Other Fleet Debt | |||||||||||||
U.S. Fleet Financing | |||||||||||||
Facility | 3.27% | Floating | 9/2015 | 158.9 | 136.0 | ||||||||
European Revolving Credit | |||||||||||||
Facility | 2.72% | Floating | 6/2015 | 393.6 | 200.6 | ||||||||
European Fleet Notes | 8.50% | Fixed | 7/2015 | 514.9 | 517.7 | ||||||||
European Securitization(3) | 2.51% | Floating | 7/2014 | 413.6 | 256.2 | ||||||||
Canadian Securitization | 2.16% | Floating | 6/2013 | 147.1 | 68.3 | ||||||||
Australian Securitization(3)(6) | 5.02% | Floating | 12/2012 | 162.3 | 169.3 | ||||||||
Brazilian Fleet Financing | |||||||||||||
Facility | 13.53% | Floating | 2/2013 | 14.0 | 23.1 | ||||||||
Capitalized Leases | 4.40% | Floating | Various | 407.7 | 363.7 | ||||||||
Unamortized Discount | |||||||||||||
(Fleet) | (7.0 | ) | (10.9 | ) | |||||||||
2,205.1 | 1,724.0 | ||||||||||||
Total Fleet Debt | 7,936.5 | 6,612.3 | |||||||||||
Total Debt | $ | 12,293.2 | $ | 10,907.8 |
_______________________________________________________________________________
14
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
Note: | For further information on the definitions and terms of our debt, see Note 4 of the Notes to our audited annual consolidated financial statements included in our Form 10-K under the caption "Item 8—Financial Statements and Supplementary Data." |
(1) | As applicable, reference is to the September 30, 2012 weighted average interest rate (weighted by principal balance). |
(2) | References to our "Senior Notes" include the series of Hertz's unsecured senior notes set forth in the table below. As of September 30, 2012 and December 31, 2011, the outstanding principal amount for each such series of the Senior Notes is also specified below. |
Outstanding Principal (in millions) | |||||||||
Senior Notes | September 30, 2012 | December 31, 2011 | |||||||
8.875% Senior Notes due January 2014 | $ | — | $ | 162.3 | |||||
7.875% Senior Notes due January 2014 | — | 276.3 | €(213.5) | ||||||
7.50% Senior Notes due October 2018 | 700.0 | 700.0 | |||||||
7.375% Senior Notes due January 2021 | 500.0 | 500.0 | |||||||
6.75% Senior Notes due April 2019 | 1,250.0 | 1,000.0 | |||||||
$ | 2,450.0 | $ | 2,638.6 |
(3) | Maturity reference is to the "expected final maturity date" as opposed to the subsequent "legal maturity date." The expected final maturity date is the date by which Hertz and investors in the relevant indebtedness expect the relevant indebtedness to be repaid. The legal final maturity date is the date on which the relevant indebtedness is legally due and payable. |
(4) | In October 2012, extended to 3/2014. See Note 17—Subsequent Events. |
(5) | In October 2012, extended to 12/2013. See Note 17—Subsequent Events. |
(6) | In October 2012, extended to 12/2014. See Note 17—Subsequent Events. |
Maturities
The aggregate amounts of maturities of debt for each of the twelve-month periods ending September 30 (in millions of dollars) are as follows:
2013 | $ | 5,785.1 | (including $5,136.2 of other short-term borrowings*) | ||
2014 | $ | 254.0 | |||
2015 | $ | 1,769.6 | |||
2016 | $ | 329.2 | |||
2017 | $ | 266.0 | |||
After 2017 | $ | 3,893.0 |
_______________________________________________________________________________
* | Our short-term borrowings as of September 30, 2012 include, among other items, the amounts outstanding under the European Securitization, Australian Securitization, Senior ABL Facility, U.S. Fleet Financing Facility, U.S. Fleet Variable Funding Notes, Brazilian Fleet Financing Facility, Canadian Securitization, Capitalized Leases, European Revolving Credit Facility and the Donlen GN II Variable Funding Notes. These amounts are reflected as short-term borrowings, regardless of the facility maturity date, as these facilities are revolving in nature and/or the outstanding borrowings have maturities of three months or less. As of September 30, 2012, short-term borrowings had a weighted average interest rate of 2.1%. |
We are highly leveraged and a substantial portion of our liquidity needs arise from debt service on our indebtedness and from the funding of our costs of operations and capital expenditures. We believe that cash generated from operations and cash received on the disposal of vehicles and equipment, together with amounts available under various liquidity facilities will be adequate to permit us to meet our debt maturities over the next twelve months.
Letters of Credit
As of September 30, 2012, there were outstanding standby letters of credit totaling $601.1 million. Of this amount, $553.3 million was issued under the Senior Credit Facilities ($291.0 million of which was issued for the benefit of the U.S. ABS Program, and $65.7 million was related to other debt obligations primarily to support self-insurance programs as well as airport concession obligations in the United States, Canada and Europe). As of September 30, 2012, none of these letters of credit have been drawn upon.
15
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
2012 Events
In February 2012, Hertz called the remainder of its outstanding 8.875% Senior Notes due 2014 and 7.875% Senior Notes due January 2014 for redemption. Hertz redeemed these notes in full during March 2012.
In February 2012, Hertz caused its wholly-owned subsidiary GN Funding II L.L.C. to increase the capacity of the Donlen GN II Variable Funding Notes from $850 million to $900 million. In July 2012 Hertz caused its wholly-owned subsidiary GN Funding II L.L.C. to further increase the capacity of the Donlen GN II Variable Funding Notes from $900 million to $1 billion and to extend the maturity date of the Donlen GN II Variable Funding Notes from August 2012 to December 2012.
In March 2012, Hertz issued an additional $250 million in aggregate principal amount of the 6.75% Senior Notes due 2019. The proceeds of this March 2012 offering were used to redeem all of the outstanding 8.875% Senior Notes due 2014 and together with cash on hand, all of the outstanding 7.875% Senior Notes due 2014 which resulted in the write-off of unamortized debt costs of $3.2 million.
In March 2012, Hertz caused its wholly-owned subsidiary HC Limited Partnership to amend the Canadian Securitization to extend the maturity date from March 2012 to May 2012. In the second quarter of 2012, the maturity date was extended to June 2013.
In April 2012, Hertz caused its wholly-owned subsidiary Hertz Vehicle Financing LLC, or "HVF," to pay off the remaining debt outstanding under the U.S. ABS Program Series 2011-2 U.S. Fleet Variable Funding Notes and terminated the facility.
In May 2012, Hertz caused its wholly-owned subsidiary HVF to increase the borrowing capacity of its Series 2009-1 U.S. Fleet Variable Funding Notes by $250 million.
In June 2012, Hertz amended the European Revolving Credit Facility to extend the maturity date from June 2013 to June 2015.
In June 2012, Hertz amended the Brazilian Fleet Financing Facility to extend the maturity date from June 2012 to February 2013.
In June 2012, Hertz amended the European Seasonal Revolving Credit Facility under the European Revolving Credit Facility to create a commitment period running from June 2012 to November 2012 that provides for aggregate maximum borrowings of €85.7 million (the equivalent of $110.3 million as of September 30, 2012), subject to borrowing base availability.
In July 2012, Hertz caused its subsidiary, International Fleet Financing No. 2 B.V. to amend the European Securitization to extend the maturity from July 2013 to July 2014.
In August 2012, Hertz obtained commitments to make unsecured bridge loans in an aggregate amount of $1.95 billion, or the “Bridge Commitments,” in connection with the offer to acquire Dollar Thrifty. The proceeds of the bridge loans, if any, would be used to, among other things, finance a portion of the consideration Dollar Thrifty stockholders would receive in connection with the acquisition of Dollar Thrifty.
For subsequent events relating to our indebtedness, see Note 17—Subsequent Events.
Registration Rights
Pursuant to the terms of exchange and registration rights agreements entered into in connection with the issuance of $250 million in aggregate principal amount of the 6.75% Senior Notes due 2019 in March 2012, Hertz has agreed to file a registration statement under the Securities Act of 1933, as amended, to permit either the exchange of such notes for registered notes or, in the alternative, the registered resale of such notes. Hertz plans to enter into an exchange and registration rights agreements in connection with the release from escrow of $700 million aggregate principal amount of 5.875% Senior Notes due 2020 and $500 million aggregate principal amount of 6.250% Senior Notes due 2022 issued by its newly-formed, wholly-owned subsidiary, HDTFS, Inc. Hertz expects to agree to file a registration statement under the Securities Act of 1933, as amended, to permit either the exchange of such notes for registered notes or, in the alternative, the registered resale of such notes. Hertz's failure to meet its obligations under either
16
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
exchange and registration rights agreement, including by failing to have the registration statement become effective by the date that is 365 days after the respective date of the exchange and registration rights agreement or failing to complete the exchange offer by the date that is 395 days after the date of the exchange and registration rights agreement, will result in Hertz incurring special interest on such notes at a per annum rate of 0.25% for the first 90 days of any period where a default has occurred and is continuing, which rate will be increased by an additional 0.25% during each subsequent 90 day period, up to a maximum of 0.50%. We do not believe the special interest obligation is probable, and as such, we have not recorded any amounts with respect to this registration payment arrangement.
Guarantees and Security
There have been no material changes to the guarantees and security provisions of the debt instruments and credit facilities under which our indebtedness as of September 30, 2012 has been issued from the terms disclosed in our Form 10-K.
Financial Covenant Compliance
Under the terms of our Senior Term Facility and Senior ABL Facility, we are not subject to ongoing financial maintenance covenants; however, under the Senior ABL Facility, failure to maintain certain levels of liquidity will subject the Hertz credit group to a contractually specified fixed charge coverage ratio of not less than 1:1 for the four quarters most recently ended. As of September 30, 2012, we were not subject to such contractually specified fixed charge coverage ratio.
Borrowing Capacity and Availability
As of September 30, 2012, the following facilities were available for the use of Hertz and its subsidiaries (in millions of dollars):
Remaining Capacity | Availability Under Borrowing Base Limitation | ||||||
Corporate Debt | |||||||
Senior ABL Facility | $ | 1,037.3 | $ | 1,016.5 | |||
Total Corporate Debt | 1,037.3 | 1,016.5 | |||||
Fleet Debt | |||||||
U.S. Fleet Variable Funding Notes | 288.1 | — | |||||
Donlen GN II Variable Funding Notes | 105.8 | — | |||||
U.S. Fleet Financing Facility | 31.1 | — | |||||
European Revolving Credit Facility | — | — | |||||
European Securitization | 101.3 | — | |||||
Canadian Securitization | 55.8 | — | |||||
Australian Securitization | 97.0 | 1.2 | |||||
Capitalized Leases | 117.0 | — | |||||
Total Fleet Debt | 796.1 | 1.2 | |||||
Total | $ | 1,833.4 | $ | 1,017.7 |
Our borrowing capacity and availability primarily comes from our "revolving credit facilities," which are a combination of asset-backed securitization facilities and asset-based revolving credit facilities. Creditors under each of our revolving credit facilities have a claim on a specific pool of assets as collateral. Our ability to borrow under each revolving credit facility is a function of, among other things, the value of the assets in the relevant collateral pool. We refer to the amount of debt we can borrow given a certain pool of assets as the "borrowing base."
We refer to "Remaining Capacity" as the maximum principal amount of debt permitted to be outstanding under the respective facility (i.e., the amount of debt we could borrow assuming we possessed sufficient assets as collateral) less the principal amount of debt then-outstanding under such facility.
17
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
We refer to "Availability Under Borrowing Base Limitation" as the lower of Remaining Capacity or the borrowing base less the principal amount of debt then-outstanding under such facility (i.e., the amount of debt we could borrow given the collateral we possess at such time).
As of September 30, 2012, the Senior Term Facility had approximately $0.3 million available under the letter of credit facility and the Senior ABL Facility had $1,092.3 million available under the letter of credit facility sublimit, subject to borrowing base restrictions.
Substantially all of our revenue earning equipment and certain related assets are owned by special purpose entities, or are encumbered in favor of our lenders under our various credit facilities.
Some of these special purpose entities are consolidated variable interest entities, of which we are the primary beneficiary, whose sole purpose is to provide commitments to lend in various currencies subject to borrowing bases comprised of rental vehicles and related assets of certain of Hertz International, Ltd.'s subsidiaries. As of September 30, 2012 and December 31, 2011, our International Fleet Financing No. 1 B.V., International Fleet Financing No. 2 B.V. and HA Funding Pty, Ltd. variable interest entities had total assets primarily comprised of loans receivable and revenue earning equipment of $658.5 million and $456.3 million, respectively, and total liabilities primarily comprised of debt of $658.0 million and $455.8 million, respectively.
Note 8—Employee Retirement Benefits
The following table sets forth the net periodic pension and postretirement (including health care, life insurance and auto) expense (in millions of dollars):
Pension Benefits | Postretirement Benefits (U.S.) | ||||||||||||||||||||||
U.S. | Non-U.S. | ||||||||||||||||||||||
Three Months Ended September 30, | |||||||||||||||||||||||
2012 | 2011 | 2012 | 2011 | 2012 | 2011 | ||||||||||||||||||
Components of Net Periodic | |||||||||||||||||||||||
Benefit Cost: | |||||||||||||||||||||||
Service cost | $ | 5.2 | $ | 6.6 | $ | 0.3 | $ | (0.5 | ) | $ | — | $ | 0.1 | ||||||||||
Interest cost | 7.3 | 6.6 | 2.2 | 2.9 | 0.2 | 0.2 | |||||||||||||||||
Expected return on plan assets | (8.3 | ) | (7.7 | ) | (3.0 | ) | (3.5 | ) | — | — | |||||||||||||
Net amortizations | 2.9 | 1.1 | — | 0.1 | — | (0.1 | ) | ||||||||||||||||
Settlement loss | — | 1.5 | — | — | — | — | |||||||||||||||||
Curtailment gain | — | — | — | — | — | — | |||||||||||||||||
Net pension / | |||||||||||||||||||||||
postretirement expense | $ | 7.1 | $ | 8.1 | $ | (0.5 | ) | $ | (1.0 | ) | $ | 0.2 | $ | 0.2 |
Pension Benefits | Postretirement Benefits (U.S.) | ||||||||||||||||||||||
U.S. | Non-U.S. | ||||||||||||||||||||||
Nine Months Ended September 30, | |||||||||||||||||||||||
2012 | 2011 | 2012 | 2011 | 2012 | 2011 | ||||||||||||||||||
Components of Net Periodic | |||||||||||||||||||||||
Benefit Cost: | |||||||||||||||||||||||
Service cost | $ | 18.5 | $ | 19.7 | $ | 0.9 | $ | 3.0 | $ | 0.2 | $ | 0.2 | |||||||||||
Interest cost | 21.2 | 20.6 | 6.8 | 8.5 | 0.6 | 0.7 | |||||||||||||||||
Expected return on plan assets | (23.6 | ) | (22.9 | ) | (9.0 | ) | (9.7 | ) | — | — | |||||||||||||
Net amortizations | 8.9 | 5.4 | (0.1 | ) | (0.5 | ) | — | — | |||||||||||||||
Settlement loss | — | 2.2 | — | — | — | — | |||||||||||||||||
Curtailment gain | — | — | — | (13.1 | ) | — | — | ||||||||||||||||
Net pension / | |||||||||||||||||||||||
postretirement expense | $ | 25.0 | $ | 25.0 | $ | (1.4 | ) | $ | (11.8 | ) | $ | 0.8 | $ | 0.9 |
18
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
Our policy for funded plans is to contribute annually, at a minimum, amounts required by applicable laws, regulations and union agreements. From time to time we make contributions beyond those legally required. For the three and nine months ended September 30, 2012, we contributed $14.5 million and $46.7 million, respectively, to our worldwide pension plans, including discretionary contributions of $0 and $3.2 million, respectively, to our United Kingdom, or "U.K.," defined benefit pension plan and benefit payments made through unfunded plans. For the three and nine months ended September 30, 2011, we contributed $16.6 million and $73.7 million, respectively, to our worldwide pension plans, including discretionary contributions of $0.5 million and $13.7 million, respectively, to our U.K. defined benefit pension plan and benefit payments made through unfunded plans. The level of future contributions will vary, and is dependent on a number of factors including investment returns, interest rate fluctuations, plan demographics, funding regulations and the results of the final actuarial valuation.
On June 30, 2011, we approved an agreement with the trustees of our U.K. defined benefit pension plan to cease all future benefit accruals to existing members and to close the plan to new members. Effective July 1, 2011, we introduced a defined contribution plan with company matching contributions to replace the U.K. defined benefit pension plan. The company matching contributions are generally 100% of the employee contributions, up to 8% of pay, except that former members of the defined benefit pension plan receive an enhanced match for five years. In the year ended December 31, 2011, we recognized a gain of $13.1 million for the U.K. plan that represented unamortized prior service cost from a 2010 amendment that eliminated discretionary pension increases related to pre-1997 service primarily for inactive employees.
We also sponsor postretirement health care and life insurance benefits for a limited number of employees with hire dates prior to January 1, 1990. The postretirement health care plan is contributory with participants' contributions adjusted annually. An unfunded liability is recorded. We also have a key officer postretirement car benefit plan that provides the use of a vehicle from our fleet and insurance for the participants' benefit for retired Senior Vice Presidents and above who have a minimum of 20 years of service and who retire at age 58 or above. The assigned car benefit is available for 15 years post-retirement or until the participant reaches the age of 80, whichever occurs last.
We participate in various "multiemployer" pension plans. In the event that we withdraw from participation in one of these plans, then applicable law could require us to make an additional lump-sum contribution to the plan, and we would have to reflect that as an expense in our consolidated statement of operations and as a liability on our condensed consolidated balance sheet. Our withdrawal liability for any multiemployer plan would depend on the extent of the plan's funding of vested benefits. At least one multiemployer plan in which we participate is reported to have, and other of our multiemployer plans could have, significant underfunded liabilities. Such underfunding may increase in the event other employers become insolvent or withdraw from the applicable plan or upon the inability or failure of withdrawing employers to pay their withdrawal liability. In addition, such underfunding may increase as a result of lower than expected returns on pension fund assets or other funding deficiencies. The occurrence of any of these events could have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Note 9—Stock-Based Compensation
In March 2012, Hertz Holdings granted 543,880 Restricted Stock Units, or "RSUs," to certain executives and employees at fair values ranging from $13.65 to $14.47, 747,423 Performance Stock Units, or "PSUs," at a fair value of $13.65, and 1,098,591 PSUs (referred to as Price Vesting Units, or "PVUs") at fair values ranging from $10.13 to $11.26 under the Hertz Global Holdings, Inc. 2008 Omnibus Incentive Plan, or the "Omnibus Plan." The PSUs have a performance condition under which the number of units that will ultimately be awarded will vary from 0% to 150% of the original grant, based on 2012 and 2013 Hertz Holdings' Corporate EBITDA results. "EBITDA" means consolidated net income before net interest expense, consolidated income taxes and consolidated depreciation (which includes revenue earning equipment lease charges) and amortization and "Corporate EBITDA," represents EBITDA as adjusted for car rental fleet interest, car rental fleet depreciation and certain other items, as provided in the applicable award agreements. Of the PVUs granted, one half will fully vest after three years if Hertz Holdings' stock price appreciates 15% over the grant date price, and one half will fully vest after four years if Hertz Holdings' stock price appreciates 25% over the grant date price. Partial attainment of Hertz Holdings' stock appreciation targets will result in partial vesting. The achievement of the market condition for the PVUs is determined based on the average closing stock price for the 20 trading day period ending March 6, 2015 and 2016, respectively. In May 2012, Hertz Holdings granted 146,301 RSUs at a fair value of $15.48 and in August 2012, Hertz Holdings granted 59,480 RSUs at a fair value of $12.12.
19
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
The non-cash stock-based compensation expense associated with the Prior Plans (as defined below) and the Omnibus Plan is pushed down from Hertz Holdings and recorded on the books at the Hertz level.
A summary of the total compensation expense and associated income tax benefits recognized under the Hertz Global Holdings, Inc. Stock Incentive Plan and Hertz Global Holdings, Inc. Director Stock Incentive Plan, or the "Prior Plans," and the Omnibus Plan, including the cost of stock options, RSUs, and PSUs, is as follows (in millions of dollars):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||||||
Compensation expense | $ | 7.3 | $ | 7.8 | $ | 22.3 | $ | 24.4 | |||||||
Income tax benefit | (2.8 | ) | (3.0 | ) | (8.6 | ) | (9.4 | ) | |||||||
Total | $ | 4.5 | $ | 4.8 | $ | 13.7 | $ | 15.0 |
As of September 30, 2012, there was approximately $44.4 million of total unrecognized compensation cost related to non-vested stock options, RSUs and PSUs granted by Hertz Holdings under the Prior Plans and the Omnibus Plan. The total unrecognized compensation cost is expected to be recognized over the remaining 1.4 years, on a weighted average basis, of the requisite service period that began on the grant dates.
Note 10—Segment Information
Our operating segments are aggregated into reportable business segments based primarily upon similar economic characteristics, products, services, customers, and delivery methods. We have identified two reportable segments: rental and leasing of cars, crossovers and light trucks, or "car rental," and rental of industrial, construction, material handling and other equipment, or "equipment rental." Other reconciling items include general corporate assets and expenses, certain interest expense (including net interest on corporate debt), as well as other business activities. Donlen is included in the car rental reportable segment.
Adjusted pre-tax income is calculated as income (loss) before income taxes plus non-cash purchase accounting charges, non-cash debt charges relating to the amortization and write-off of debt financing costs and debt discounts and certain one-time charges and non-operational items. Adjusted pre-tax income is important to management because it allows management to assess operational performance of our business, exclusive of the items mentioned above. It also allows management to assess the performance of the entire business on the same basis as the segment measure of profitability. Management believes that it is important to investors for the same reasons it is important to management and because it allows them to assess our operational performance on the same basis that management uses internally. The contribution of our reportable segments to revenues and adjusted pre-tax income (loss) and the reconciliation to consolidated amounts are summarized below (in millions of dollars).
20
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
Three Months Ended September 30, | |||||||||||||||
Revenues | Adjusted Pre-Tax Income (Loss) | ||||||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||||||
Car rental | $ | 2,152.6 | $ | 2,109.1 | $ | 428.7 | $ | 375.3 | |||||||
Equipment rental | 363.0 | 321.7 | 76.2 | 55.9 | |||||||||||
Total reportable segments | 2,515.6 | 2,430.8 | 504.9 | 431.2 | |||||||||||
Other | 0.6 | 1.5 | |||||||||||||
Total | $ | 2,516.2 | $ | 2,432.3 | |||||||||||
Adjustments: | |||||||||||||||
Other reconciling items(1) | (73.8 | ) | (77.9 | ) | |||||||||||
Purchase accounting(2) | (23.9 | ) | (19.1 | ) | |||||||||||
Non-cash debt charges(3) | (13.6 | ) | (14.8 | ) | |||||||||||
Restructuring charges | (1.5 | ) | (1.9 | ) | |||||||||||
Restructuring related charges(4) | (2.0 | ) | (3.2 | ) | |||||||||||
Derivative gains(5) | 0.1 | 0.1 | |||||||||||||
Management transition costs | — | (1.5 | ) | ||||||||||||
Acquisition related costs | (8.1 | ) | (4.6 | ) | |||||||||||
Income before income taxes | $ | 382.1 | $ | 308.3 |
Nine Months Ended September 30, | |||||||||||||||
Revenues | Adjusted Pre-Tax Income (Loss) | ||||||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||||||
Car rental | $ | 5,700.4 | $ | 5,388.3 | $ | 797.8 | $ | 678.8 | |||||||
Equipment rental | 1,000.1 | 891.6 | 144.6 | 99.5 | |||||||||||
Total reportable segments | 6,700.5 | 6,279.9 | 942.4 | 778.3 | |||||||||||
Other | 1.8 | 4.7 | |||||||||||||
Total | $ | 6,702.3 | $ | 6,284.6 | |||||||||||
Adjustments: | |||||||||||||||
Other reconciling items(1) | (235.6 | ) | (244.1 | ) | |||||||||||
Purchase accounting(2) | (76.9 | ) | (62.2 | ) | |||||||||||
Non-cash debt charges(3) | (46.1 | ) | (89.9 | ) | |||||||||||
Restructuring charges | (27.0 | ) | (40.4 | ) | |||||||||||
Restructuring related charges(4) | (7.6 | ) | (6.4 | ) | |||||||||||
Derivative gains(5) | 0.1 | 0.1 | |||||||||||||
Acquisition related costs | (19.6 | ) | (13.6 | ) | |||||||||||
Management transition costs | — | (4.0 | ) | ||||||||||||
Pension adjustment(6) | — | 13.1 | |||||||||||||
Premiums paid on debt(7) | — | (62.4 | ) | ||||||||||||
Income before income taxes | $ | 529.7 | $ | 268.5 |
_______________________________________________________________________________
(1) | Represents general corporate expenses, certain interest expense (including net interest on corporate debt), as well as other business activities. |
(2) | Represents the purchase accounting effects of the Acquisition on our results of operations relating to increased depreciation and amortization of tangible and intangible assets and accretion of revalued workers' compensation and public liability and property |
21
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
damage liabilities. Also represents the purchase accounting effects of subsequent acquisitions on our results of operations relating to increased depreciation and amortization of tangible and intangible assets.
(3) | Represents non-cash debt charges relating to the amortization and write-off of deferred debt financing costs and debt discounts. |
(4) | Represents incremental costs incurred directly supporting our business transformation initiatives. Such costs include transition costs incurred in connection with our 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. |
(5) | Represents the mark-to-market adjustment on our interest rate cap. |
(6) | Represents a gain for the U.K. pension plan relating to unamortized prior service cost from a 2010 amendment that eliminated discretionary pension increases related to pre-1997 service primarily pertaining to inactive employees. |
(7) | Represents premiums paid to redeem our 10.5% Senior Subordinated Notes and a portion of our 8.875% Senior Notes. |
Total assets increased $1,879.7 million from December 31, 2011 to September 30, 2012. The increase was primarily related to increases in our car rental and equipment rental segments' revenue earning equipment and receivables, driven by increased volumes, and an increase in restricted cash and cash equivalents related to the timing of purchases and sales of revenue earning vehicles, partly offset by a decreases in our cash and cash equivalents, primarily relating to the redemption of our 8.875% Senior Notes and our 7.875% Senior Notes.
Note 11—Total Equity
100 Shares Common Stock | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Non- Controlling Interest | Total Equity | |||||||||||||||||
(In Millions) | ||||||||||||||||||||||
December 31, 2011 | — | $ | 3,473.6 | $ | (816.4 | ) | $ | (28.4 | ) | $ | — | $ | 2,628.8 | |||||||||
Net income attributable to The Hertz | ||||||||||||||||||||||
Corporation and Subsidiaries' common stockholder | 304.0 | 304.0 | ||||||||||||||||||||
Other comprehensive income | 13.6 | 13.6 | ||||||||||||||||||||
Dividends paid | — | (12.5 | ) | (12.5 | ) | |||||||||||||||||
Stock-based employee | ||||||||||||||||||||||
compensation charges, net of tax | 22.2 | 22.2 | ||||||||||||||||||||
Proceeds from employee | ||||||||||||||||||||||
stock purchase plan | 3.7 | 3.7 | ||||||||||||||||||||
Hertz Holdings common shares | ||||||||||||||||||||||
issued to Directors | 1.5 | 1.5 | ||||||||||||||||||||
September 30, 2012 | — | $ | 3,501.0 | $ | (524.9 | ) | $ | (14.8 | ) | $ | — | $ | 2,961.3 |
22
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
100 Shares Common Stock | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Non- Controlling Interest | Total Equity | ||||||||||||||||||
(In Millions) | |||||||||||||||||||||||
December 31, 2010 | $ | — | $ | 3,452.0 | $ | (1,004.0 | ) | $ | 37.8 | $ | 16.5 | $ | 2,502.3 | ||||||||||
Net income attributable to The Hertz | |||||||||||||||||||||||
Corporation and Subsidiaries' common stockholder | 151.7 | 151.7 | |||||||||||||||||||||
Other comprehensive loss | (12.6 | ) | (12.6 | ) | |||||||||||||||||||
Dividend payment to noncontrolling | |||||||||||||||||||||||
interest | (10.5 | ) | (10.5 | ) | |||||||||||||||||||
Net income relating to noncontrolling | |||||||||||||||||||||||
interest | 14.5 | 14.5 | |||||||||||||||||||||
Dividends paid | (12.4 | ) | (12.4 | ) | |||||||||||||||||||
Stock-based employee compensation | |||||||||||||||||||||||
charges, net of tax | 24.4 | 24.4 | |||||||||||||||||||||
Proceeds from employee stock | |||||||||||||||||||||||
purchase plan | 3.2 | 3.2 | |||||||||||||||||||||
Hertz Holdings common shares | |||||||||||||||||||||||
issued to Directors | 1.5 | 1.5 | |||||||||||||||||||||
September 30, 2011 | $ | — | $ | 3,481.1 | $ | (864.7 | ) | $ | 25.2 | $ | 20.5 | $ | 2,662.1 |
Accumulated other comprehensive loss as of September 30, 2012 and December 31, 2011 includes accumulated translation gains of $95.0 million and $91.3 million, respectively, pension benefits (expense) of $(94.5) million and $(99.6) million, respectively, unrealized losses on our Euro-denominated debt of $(19.4) million and $(19.4) million, respectively, unrealized holding gains of $5.1 million and $0.3 million, respectively, and other of $(1.0) million and $(1.0) million, respectively.
Note 12—Restructuring
As part of our ongoing effort to implement our strategy of reducing operating costs, we have evaluated our workforce and operations and made adjustments, including headcount reductions and business process reengineering resulting in optimized work flow at rental locations and maintenance facilities as well as streamlined our back-office operations and evaluated potential outsourcing opportunities. When we made adjustments to our workforce and operations, we incurred incremental expenses that delay the benefit of a more efficient workforce and operating structure, but we believe that increased operating efficiency and reduced costs associated with the operation of our business are important to our long-term competitiveness.
During 2007 through 2011, we announced several initiatives to improve our competitiveness and industry leadership through targeted job reductions. These initiatives included, but were not limited to, job reductions at our corporate headquarters and back-office operations in the U.S. and Europe. As part of our re-engineering optimization we outsourced selected functions globally. In addition, we streamlined operations and reduced costs by initiating the closure of targeted car rental locations and equipment rental branches throughout the world. The largest of these closures occurred in 2008 which resulted in closures of approximately 250 off-airport locations and 22 branches in our U.S. equipment rental business. These initiatives impacted approximately 8,960 employees.
During the first, second and third quarters of 2012, we continued to streamline operations and reduce costs with the closure of several car rental and equipment rental locations globally as well as a reduction in our workforce by approximately 65 employees, 280 employees and 240 employees, respectively.
From January 1, 2007 through September 30, 2012, we incurred $557.5 million ($273.5 million for our car rental segment, $229.5 million for our equipment rental segment and $54.5 million of other) of restructuring charges.
Additional efficiency and cost saving initiatives are being developed; however, we presently do not have firm plans or estimates of any related expenses.
23
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
Restructuring charges in our consolidated statement of operations can be summarized as follows (in millions of dollars).
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||||||
By Type: | |||||||||||||||
Termination benefits | $ | 0.3 | $ | 2.4 | $ | 16.5 | $ | 6.8 | |||||||
Pension and post retirement expense | — | — | — | 0.3 | |||||||||||
Consultant costs | 0.1 | 0.3 | 0.7 | 0.6 | |||||||||||
Asset writedowns | — | (0.5 | ) | 2.7 | 22.8 | ||||||||||
Facility closure and lease obligation costs | 0.9 | (0.4 | ) | 6.6 | 9.6 | ||||||||||
Relocation costs and temporary labor costs | 0.1 | 0.1 | 0.1 | 0.1 | |||||||||||
Other | 0.1 | — | 0.4 | 0.2 | |||||||||||
Total | $ | 1.5 | $ | 1.9 | $ | 27.0 | $ | 40.4 |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||||||
By Caption: | |||||||||||||||
Direct operating | $ | 3.7 | $ | 0.7 | $ | 18.3 | $ | 35.3 | |||||||
Selling, general and administrative | (2.2 | ) | 1.2 | 8.7 | 5.1 | ||||||||||
Total | $ | 1.5 | $ | 1.9 | $ | 27.0 | $ | 40.4 |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||||||
By Segment: | |||||||||||||||
Car rental | $ | 0.2 | $ | 2.8 | $ | 17.2 | $ | 7.3 | |||||||
Equipment rental | 1.3 | (0.9 | ) | 8.1 | 32.7 | ||||||||||
Other reconciling items | — | — | 1.7 | 0.4 | |||||||||||
Total | $ | 1.5 | $ | 1.9 | $ | 27.0 | $ | 40.4 |
The following table sets forth the activity affecting the restructuring accrual during the nine months ended September 30, 2012 (in millions of dollars). We expect to pay the remaining restructuring obligations relating to termination benefits over the next twelve months. The remainder of the restructuring accrual relates to future lease obligations which will be paid over the remaining term of the applicable leases.
Termination Benefits | Pension and Post Retirement Expense | Consultant Costs | Other | Total | |||||||||||||||
Balance as of January 1, 2012 | $ | 9.1 | $ | 0.2 | $ | 0.6 | $ | 11.7 | $ | 21.6 | |||||||||
Charges incurred | 16.5 | — | 0.7 | 9.8 | 27.0 | ||||||||||||||
Cash payments | (14.0 | ) | — | (0.5 | ) | (4.0 | ) | (18.5 | ) | ||||||||||
Other(1) | (0.3 | ) | — | (0.1 | ) | (8.9 | ) | (9.3 | ) | ||||||||||
Balance as of September 30, 2012 | $ | 11.3 | $ | 0.2 | $ | 0.7 | $ | 8.6 | $ | 20.8 |
_______________________________________________________________________________
(1) | Primarily consists of decreases of $6.4 million for facility closures and $2.7 million for asset writedowns. |
24
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
Note 13—Financial Instruments
Cash and Cash Equivalents and Restricted Cash and Cash Equivalents
Fair value approximates the amount indicated on the balance sheet at September 30, 2012 and December 31, 2011 because of the short-term maturity of these instruments. Money market accounts, whose fair value at September 30, 2012, is measured using Level 1 inputs, totaling $65.4 million and $300.4 million are included in "Cash and cash equivalents" and "Restricted cash and cash equivalents," respectively. Money market accounts, whose fair value at December 31, 2011, is measured using Level 1 inputs, totaling $566.0 million and $142.9 million are included in "Cash and cash equivalents" and "Restricted cash and cash equivalents," respectively.
Marketable Securities
Marketable securities held by us consist of equity securities classified as available-for-sale, which are carried at fair value and are included within "Prepaid expenses and other assets." Unrealized gains and losses, net of related income taxes, are included in "Accumulated other comprehensive loss." As of September 30, 2012 and December 31, 2011, the fair value of marketable securities was $41.1 million and $33.2 million, respectively. For the three and nine months ended September 30, 2012, unrealized gains of $2.8 million and $7.9 million, respectively, were recorded in "Accumulated other comprehensive loss." For the three and nine months ended September 30, 2011, unrealized gains of $8.2 million and $6.3 million, respectively, were recorded in "Accumulated other comprehensive loss." Fair values for marketable securities are based on Level 1 inputs consisting of quoted market prices.
Debt
For borrowings with an initial maturity of 93 days or less, fair value approximates carrying value because of the short-term nature of these instruments. For all other debt, fair value is estimated based on quoted market rates as well as borrowing rates currently available to us for loans with similar terms and average maturities (Level 2 inputs). The aggregate fair value of all debt at September 30, 2012 was $12,623.8 million, compared to its aggregate unpaid principal balance of $12,296.9 million. The aggregate fair value of all debt at December 31, 2011 was $11,092.4 million, compared to its aggregate unpaid principal balance of $10,925.6 million.
Derivative Instruments and Hedging Activities
The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis (in millions of dollars):
Fair Value of Derivative Instruments(1) | ||||||||||||||||
Asset Derivatives(2) | Liability Derivatives(2) | |||||||||||||||
September 30, 2012 | December 31, 2011 | September 30, 2012 | December 31, 2011 | |||||||||||||
Derivatives not designated as hedging | ||||||||||||||||
instruments under ASC 815: | ||||||||||||||||
Gasoline swaps | $ | 0.3 | $ | — | $ | — | $ | 0.4 | ||||||||
Interest rate caps | — | 0.5 | — | 0.4 | ||||||||||||
Foreign exchange forward contracts | 4.2 | 4.4 | 3.3 | 1.9 | ||||||||||||
Interest rate swaps | — | — | — | 0.2 | ||||||||||||
Foreign exchange options | 0.1 | 0.1 | — | — | ||||||||||||
Total derivatives not designated as hedging | ||||||||||||||||
instruments under ASC 815 | $ | 4.6 | $ | 5.0 | $ | 3.3 | $ | 2.9 |
_______________________________________________________________________________
(1) | All fair value measurements were primarily based upon significant observable (Level 2) inputs. |
(2) | All asset derivatives are recorded in "Prepaid expenses and other assets" and all liability derivatives are recorded in "Accrued liabilities" on our condensed consolidated balance sheets. |
25
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
Location of Gain or (Loss) Recognized on Derivatives | Amount of Gain or (Loss) Recognized in Income on Derivatives | ||||||||
Three Months Ended September 30, | |||||||||
2012 | 2011 | ||||||||
Derivatives not designated as hedging | |||||||||
instruments under ASC 815: | |||||||||
Gasoline swaps | Direct operating | $ | 2.1 | $ | (1.9 | ) | |||
Interest rate caps | Selling, general and administrative | — | 0.1 | ||||||
Foreign exchange forward contracts | Selling, general and administrative | (6.2 | ) | 11.3 | |||||
Foreign exchange options | Selling, general and administrative | — | (0.1 | ) | |||||
Total | $ | (4.1 | ) | $ | 9.4 |
Location of Gain or (Loss) Recognized on Derivatives | Amount of Gain or (Loss) Recognized in Income on Derivatives | ||||||||
Nine Months Ended September 30, | |||||||||
2012 | 2011 | ||||||||
Derivatives not designated as hedging | |||||||||
instruments under ASC 815: | |||||||||
Gasoline swaps | Direct operating | $ | 0.6 | $ | 1.0 | ||||
Interest rate caps | Selling, general and administrative | (0.1 | ) | 0.1 | |||||
Foreign exchange forward contracts | Selling, general and administrative | (11.8 | ) | 3.4 | |||||
Foreign exchange options | Selling, general and administrative | 0.1 | (0.1 | ) | |||||
Total | $ | (11.2 | ) | $ | 4.4 |
In conjunction with the refinanced Series 2009-1 and the Series 2010-2, HVF purchased an interest rate cap for $6.7 million, with a maximum notional amount equal to the refinanced Series 2009-1 and the Series 2010-2 with a combined maximum principal amount of $2.1 billion, a strike rate of 5% and expected maturity date of March 25, 2013. Additionally, Hertz sold a 5% interest rate cap for $6.2 million, with a matching notional amount and term to the HVF interest rate cap. In March 2012, an additional $250 million of the Series 2009-1 notes was issued, for which HVF and Hertz amended their interest rate cap agreements to increase the maximum notional amounts by $250 million. Also, in December 2010, the Australian Securitization was completed and our Australian operating subsidiary purchased an interest rate cap for $0.5 million, with a maximum notional amount equal to the Australian Securitization maximum principal amount of A$250 million, a strike rate of 7% and expected maturity date of December 2012. Additionally, Hertz sold a 7% interest rate cap for $0.4 million with a matching notional amount and term to the Australian operating subsidiary's interest rate cap. The fair values of all interest rate caps were calculated using a discounted cash flow method and applying observable market data (i.e. the 1-month LIBOR yield curve and credit default swap spreads). Gains and losses resulting from changes in the fair value of these interest rate caps are included in our results of operations in the periods incurred.
In connection with our acquisition of Donlen, we acquired interest rate swaps associated with floating rate debt. As of September 30, 2012, these interest rate swaps have expired. These interest rate swaps are used to effectively convert an amount of floating rate debt into fixed rate debt. The fair values of these interest rate swaps were calculated using a discounted cash flow method and applying observable market data (i.e. the 1-month LIBOR yield curve). Gains and losses resulting from changes in the fair value of these interest rate swaps are included in our results of operations in the periods incurred (in Selling, general and administrative).
We purchase unleaded gasoline and diesel fuel at prevailing market rates and maintain a program to manage our exposure to changes in fuel prices through the use of derivative commodity instruments. We currently have in place swaps to cover a portion of our fuel price exposure through November 2013. We presently hedge a portion of our overall unleaded gasoline and diesel fuel purchases with commodity swaps and have contracts in place that settle on a monthly basis. As of September 30, 2012, our outstanding commodity instruments for unleaded gasoline and diesel fuel totaled approximately 7.8 million gallons and 1.5 million gallons, respectively. The fair value of these commodity
26
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
instruments was calculated using a discounted cash flow method and applying observable market data (including NYMEX RBOB Gasoline and U.S. Department of Energy surveys). Gains and losses resulting from changes in the fair value of these commodity instruments are included in our results of operations in the periods incurred.
We manage our foreign currency risk primarily by incurring, to the extent practicable, operating and financing expenses in the local currency in the countries in which we operate, including making fleet and equipment purchases and borrowing locally. Also, we have purchased foreign exchange options to manage exposure to fluctuations in foreign exchange rates for selected marketing programs. The effect of exchange rate changes on these financial instruments would not materially affect our consolidated financial position, results of operations or cash flows. Our risks with respect to foreign exchange options are limited to the premium paid for the right to exercise the option and the future performance of the option's counterparty. Premiums paid for options outstanding as of September 30, 2012, were approximately $0.2 million. We limit counterparties to the transactions to financial institutions that have strong credit ratings. As of September 30, 2012 and December 31, 2011, the total notional amount of these foreign exchange options was $45.0 million and $9.1 million, respectively. As of September 30, 2012, these foreign exchange options mature through January 2014. The fair value of the foreign exchange options was calculated using a discounted cash flow method and applying observable market data (i.e. foreign currency exchange rates). Gains and losses resulting from changes in the fair value of these options are included in our results of operations in the periods incurred.
We also manage exposure to fluctuations in currency risk on intercompany loans we make to certain of our subsidiaries by entering into foreign currency forward contracts at the time of the loans which are intended to offset the impact of foreign currency movements on the underlying intercompany loan obligations. As of September 30, 2012, the total notional amount of these forward contracts was $986.9 million, maturing within four months. The fair value of these foreign currency forward contracts was calculated based on foreign currency forward exchange rates.
Note 14—Related Party Transactions
Relationship with Hertz Investors, Inc., Hertz Holdings and the Sponsors
Other than as disclosed below, in the nine months ended September 30, 2012, there were no material changes to our relationship with Hertz Investors, Inc., Hertz Holdings or the Sponsors.
Financing Arrangements with Related Parties
Affiliates of MLGPE (which is one of the Sponsors), including Bank of America and certain of its affiliates, have provided various investment and commercial banking and financial advisory services to us for which they have received customary fees and commissions. In addition, these parties have acted as agents, lenders, purchasers and/or underwriters to us under our respective financing arrangements, for which they have received customary fees, commissions, expenses and/or other compensation. More specifically, these parties have acted in the following capacities, or similar capacities, with respect to our financing arrangements: lenders and/or agents under the Senior Credit Facilities, the U.S. Fleet Financing Facility and certain of the U.S. Fleet Variable Funding Notes; purchasers and/or underwriters under the Senior Notes and certain of the U.S. Fleet Medium Term Notes; and structuring advisors and/or agents under the U.S. ABS Program.
As of September 30, 2012 and December 31, 2011, approximately $185 million and $174 million, respectively, of our outstanding debt was with related parties.
For information on our total indebtedness, see Note 7—Debt.
On June 29, 2007, we entered into a master loan agreement with Hertz Holdings. The maximum amount which may be borrowed by us under this facility is $100 million. The facility expired June 29, 2012 and was renewed through June 28, 2013, or on an earlier date if mutually agreed by both parties. The interest rate is based on the U.S. Dollar LIBOR rate plus a margin. As of September 30, 2012, there was a $11.9 million receivable from Hertz Holdings and as of December 31, 2011, there was $0.4 million in borrowings due to Hertz Holdings.
27
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
Note 15—Contingencies and Off-Balance Sheet Commitments
Off-Balance Sheet Commitments
As of September 30, 2012 and December 31, 2011, the following guarantees (including indemnification commitments) were issued and outstanding.
Indemnification Obligations
In the ordinary course of business, we execute 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; and financial matters. Performance under these indemnification obligations would generally be triggered by a breach of terms of the contract or by a third party claim. We regularly evaluate the probability of having to incur costs associated with these indemnification obligations and have accrued for expected losses that are probable and estimable. The types of indemnification obligations for which payments are possible include the following:
Sponsors; Directors
We have entered into customary indemnification agreements with Hertz Holdings, the Sponsors and Hertz Holdings' stockholders affiliated with the Sponsors, pursuant to which Hertz Holdings and we will indemnify the Sponsors, Hertz Holdings' stockholders affiliated with the Sponsors 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 the Sponsors and certain other claims and liabilities, including liabilities arising out of financing arrangements or securities offerings. We do not believe that these indemnifications are reasonably likely to have a material impact on us. Hertz Holdings has entered into indemnification agreements with each of its directors.
Environmental
We have 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 we may be held responsible could be substantial. The probable expenses that we expect to incur for such matters have been accrued, and those expenses are reflected in our condensed consolidated financial statements. As of September 30, 2012 and December 31, 2011, the aggregate amounts accrued for environmental liabilities including liability for environmental indemnities, reflected in our condensed consolidated balance sheets in "Accrued liabilities" were $1.5 million and $1.5 million, respectively. The accrual generally represents the estimated cost to study potential environmental issues at sites deemed to require investigation or clean-up activities, and the estimated cost to implement remediation actions, including on-going maintenance, as required. Cost estimates are developed by site. Initial cost estimates are based on historical experience at similar sites and are refined over time on the basis of in-depth studies of the sites. For many sites, the remediation costs and other damages for which we ultimately may be responsible cannot be reasonably estimated because of uncertainties with respect to factors such as our connection to the site, the materials there, the involvement of other potentially responsible parties, the application of laws and other standards or regulations, site conditions, and the nature and scope of investigations, studies, and remediation to be undertaken (including the technologies to be required and the extent, duration, and success of remediation).
Legal Proceedings
From time to time we are a party to various legal proceedings. We are currently a defendant in numerous actions and have received numerous claims on which actions have not yet been commenced for public liability and property damage arising from the operation of motor vehicles and equipment rented from us and our licensees. The obligation for public liability and property damage on self-insured U.S. and international vehicles and equipment, as stated on our balance sheet, represents an estimate for both reported accident claims not yet paid and claims incurred but not yet reported. The related liabilities are recorded on a non-discounted basis. Reserve requirements are based on actuarial evaluations of historical accident claim experience and trends, as well as future projections of ultimate losses, expenses, premiums and costs. At September 30, 2012 and December 31, 2011 our liability recorded for public liability and property damage
28
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
matters was $279.8 million and $281.5 million, respectively. We believe that our analysis is based on the most relevant information available, combined with reasonable assumptions, and that we may prudently rely on this information to determine the estimated liability. We note the liability is subject to significant uncertainties. The adequacy of the liability reserve is regularly monitored based on evolving accident claim history and insurance related state legislation changes. If our estimates change or if actual results differ from these assumptions, the amount of the recorded liability is adjusted to reflect these results.
For a detailed description of certain of our legal proceedings please see Note 11 of the Notes to our audited annual consolidated financial statements included in our Form 10-K under the caption "Item 8—Financial Statements and Supplementary Data."
There were no material changes in the legal proceedings described in our Form 10-K and in our subsequent quarterly reports on Form 10-Q.
As previously disclosed, on June 15, 2011 we received a subpoena from the staff of the Securities and Exchange Commission, or "SEC," seeking production of documents related to our proposed business combination with Dollar Thrifty Automotive Group, Inc. SEC staff later took the testimony of a Hertz executive and has indicated that they may or may not take further testimony. We are cooperating fully with the SEC's investigation. We do not expect this investigation to have any effect on a proposed business combination with Dollar Thrifty.
In addition to the above mentioned and those described in our Form 10-K or in our other filings with Securities and Exchange Commission, various other legal actions, claims and governmental inquiries and proceedings are pending or may be instituted or asserted in the future against us and our subsidiaries. Other than with respect to the aggregate claims for public liability and property damage pending against us, management, based on the advice of legal counsel, does not believe that any of the matters resolved, or pending against us, are material to us and our subsidiaries taken as a whole.
We have established reserves for matters where we believe that the losses are probable and reasonably estimated. Other than with respect to the aggregate reserve established for claims for public liability and property damage, none of those reserves are material. For matters where we have not established a reserve, the ultimate outcome or resolution cannot be predicted at this time, or the amount of ultimate loss, if any, cannot be reasonably estimated. Litigation is subject to many uncertainties and the outcome of the individual litigated matters is not predictable with assurance. It is possible that certain of the actions, claims, inquiries or proceedings, including those discussed in our Form 10-K or in our other filings with Securities and Exchange Commission, could be decided unfavorably to us or any of our 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 our consolidated financial condition, results of operations or cash flows in any particular reporting period.
Note 16—Guarantor and Non-Guarantor Condensed Consolidating Financial Statements
The following condensed consolidating financial information presents the Condensed Consolidating Balance Sheets as of September 30, 2012 and December 31, 2011 and the Condensed Consolidating Statements of Operations and Comprehensive Income (Loss) for the three and nine month periods ended September 30, 2012 and 2011, and Statements of Cash Flows for the nine months ended September 30, 2012 and 2011, of (a) The Hertz Corporation, (“the Company” or “the Parent”); (b) the Parent's subsidiaries that guarantee the Parent's indebtedness, or the Guarantor Subsidiaries; (c) the Parent's subsidiaries that do not guarantee the Parent's indebtedness, or the Non-Guarantor Subsidiaries; (d) elimination entries necessary to consolidate the Parent with the Guarantor Subsidiaries and Non-Guarantor Subsidiaries; and of (e) the Company on a consolidated basis.
Investments in subsidiaries are accounted for using the equity method for purposes of the consolidating presentation. The principal elimination entries relate to investments in subsidiaries and intercompany balances and transactions. Separate financial statements and other disclosures with respect to the Guarantor Subsidiaries have not been provided, as 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 Credit Facilities, and consequently will not be available to satisfy the claims of our general creditors.
29
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
CONDENSED CONSOLIDATING BALANCE SHEET
September 30, 2012
(In Thousands of Dollars)
Parent (The Hertz Corporation) | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminations | The Hertz Corporation & Subsidiaries | |||||||||||||||
ASSETS | |||||||||||||||||||
Cash and cash equivalents | $ | 34,093 | $ | 8,161 | $ | 411,040 | $ | — | $ | 453,294 | |||||||||
Restricted cash and | |||||||||||||||||||
cash equivalents | 44,016 | 11,634 | 321,123 | 376,773 | |||||||||||||||
Receivables, less allowance | |||||||||||||||||||
for doubtful accounts | 403,599 | 300,725 | 1,027,471 | 1,731,795 | |||||||||||||||
Due from Hertz affiliate | 1,279,380 | 101,210 | 1,316,228 | (2,684,953 | ) | 11,865 | |||||||||||||
Inventories, at lower cost or market | 30,143 | 34,367 | 41,472 | 105,982 | |||||||||||||||
Prepaid expenses and other assets | 2,372,807 | 28,717 | 114,087 | (2,135,355 | ) | 380,256 | |||||||||||||
Revenue earning equipment, net | 103,636 | 1,727,717 | 10,389,856 | 12,221,209 | |||||||||||||||
Property and equipment, net | 846,346 | 194,153 | 239,222 | 1,279,721 | |||||||||||||||
Investment in subsidiaries, net | 4,494,564 | 493,430 | — | (4,987,994 | ) | — | |||||||||||||
Other intangible assets, net | 79,626 | 2,383,844 | 68,052 | 2,531,522 | |||||||||||||||
Goodwill | 100,221 | 138,790 | 215,652 | 454,663 | |||||||||||||||
Total assets | $ | 9,788,431 | $ | 5,422,748 | $ | 14,144,203 | $ | (9,808,302 | ) | $ | 19,547,080 | ||||||||
LIABILITIES AND EQUITY | |||||||||||||||||||
Due to Hertz affiliate | $ | 1,405,733 | $ | 656,427 | $ | 622,794 | $ | (2,684,954 | ) | $ | — | ||||||||
Accounts payable | 154,390 | 209,685 | 611,023 | 975,098 | |||||||||||||||
Accrued liabilities | 649,782 | 77,313 | 285,093 | 1,012,188 | |||||||||||||||
Accrued taxes | 65,711 | 160,686 | 419,515 | (403,694 | ) | 242,218 | |||||||||||||
Debt | 4,448,746 | 27,551 | 7,816,935 | 12,293,232 | |||||||||||||||
Public liability and property damage | 102,739 | 13,267 | 163,749 | 279,755 | |||||||||||||||
Deferred taxes on income | — | 1,465,091 | 2,049,809 | (1,731,660 | ) | 1,783,240 | |||||||||||||
Total liabilities | 6,827,101 | 2,610,020 | 11,968,918 | (4,820,308 | ) | 16,585,731 | |||||||||||||
Equity: | |||||||||||||||||||
The Hertz Corporation and | |||||||||||||||||||
Subsidiaries stockholder's equity | 2,961,330 | 2,812,728 | 2,175,266 | (4,987,994 | ) | 2,961,330 | |||||||||||||
Noncontrolling interest | — | — | 19 | — | 19 | ||||||||||||||
Total equity | 2,961,330 | 2,812,728 | 2,175,285 | (4,987,994 | ) | 2,961,349 | |||||||||||||
Total liabilities and equity | $ | 9,788,431 | $ | 5,422,748 | $ | 14,144,203 | $ | (9,808,302 | ) | $ | 19,547,080 |
30
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2011
(In Thousands of Dollars)
Parent (The Hertz Corporation) | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminations | The Hertz Corporation & Subsidiaries | |||||||||||||||
ASSETS | |||||||||||||||||||
Cash and cash equivalents | $ | 565,002 | $ | 7,410 | $ | 358,796 | $ | — | $ | 931,208 | |||||||||
Restricted cash and cash equivalents | 44,663 | 28,130 | 235,246 | — | 308,039 | ||||||||||||||
Receivables, less allowance | |||||||||||||||||||
for doubtful accounts | 297,292 | 226,143 | 1,092,947 | — | 1,616,382 | ||||||||||||||
Due from Hertz affiliate | 655,411 | 78,660 | 1,181,387 | (1,915,458 | ) | — | |||||||||||||
Inventories, at lower cost or market | 22,440 | 27,505 | 34,033 | — | 83,978 | ||||||||||||||
Prepaid expenses and other assets | 2,088,579 | 33,432 | 136,731 | (1,842,608 | ) | 416,134 | |||||||||||||
Revenue earning equipment, net | 167,304 | 1,505,867 | 8,432,238 | — | 10,105,409 | ||||||||||||||
Property and equipment, net | 824,381 | 178,399 | 249,074 | — | 1,251,854 | ||||||||||||||
Investment in subsidiaries, net | 4,413,289 | 460,201 | — | (4,873,490 | ) | — | |||||||||||||
Other intangible assets, net | 94,682 | 2,387,017 | 80,535 | — | 2,562,234 | ||||||||||||||
Goodwill | 100,221 | 74,738 | 217,135 | — | 392,094 | ||||||||||||||
Total assets | $ | 9,273,264 | $ | 5,007,502 | $ | 12,018,122 | $ | (8,631,556 | ) | $ | 17,667,332 | ||||||||
LIABILITIES AND EQUITY | |||||||||||||||||||
Due to Hertz affiliate | $ | 1,251,347 | $ | 268,026 | $ | 396,497 | $ | (1,915,458 | ) | $ | 412 | ||||||||
Accounts payable | 188,695 | 164,989 | 543,805 | — | 897,489 | ||||||||||||||
Accrued liabilities | 607,673 | 212,361 | 306,304 | — | 1,126,338 | ||||||||||||||
Accrued taxes | 54,559 | 146,682 | (26,385 | ) | (11,872 | ) | 162,984 | ||||||||||||
Debt | 4,434,274 | 4,237 | 6,469,338 | — | 10,907,849 | ||||||||||||||
Public liability and property damage | 107,881 | 16,618 | 157,035 | — | 281,534 | ||||||||||||||
Deferred taxes on income | — | 1,445,856 | 2,046,752 | (1,830,736 | ) | 1,661,872 | |||||||||||||
Total liabilities | 6,644,429 | 2,258,769 | 9,893,346 | (3,758,066 | ) | 15,038,478 | |||||||||||||
Equity: | |||||||||||||||||||
The Hertz Corporation and | |||||||||||||||||||
Subsidiaries stockholder's equity | 2,628,835 | 2,748,733 | 2,124,757 | (4,873,490 | ) | 2,628,835 | |||||||||||||
Noncontrolling interest | — | — | 19 | — | 19 | ||||||||||||||
Total equity | 2,628,835 | 2,748,733 | 2,124,776 | (4,873,490 | ) | 2,628,854 | |||||||||||||
Total liabilities and equity | $ | 9,273,264 | $ | 5,007,502 | $ | 12,018,122 | $ | (8,631,556 | ) | $ | 17,667,332 |
31
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Three Months Ended September 30, 2012
(In Thousands of Dollars)
Parent (The Hertz Corporation) | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminations | The Hertz Corporation & Subsidiaries | |||||||||||||||
Total revenues | $ | 1,189,646 | $ | 329,602 | $ | 1,710,695 | $ | (713,721 | ) | $ | 2,516,222 | ||||||||
Expenses: | |||||||||||||||||||
Direct operating | 614,291 | 171,900 | 454,891 | 1,241,082 | |||||||||||||||
Depreciation of revenue earning | |||||||||||||||||||
equipment and lease charges | 690,370 | 64,666 | 519,214 | (713,721 | ) | 560,529 | |||||||||||||
Selling, general and administrative | 95,685 | 26,614 | 78,694 | — | 200,993 | ||||||||||||||
Interest expense | 52,511 | 12,254 | 77,008 | — | 141,773 | ||||||||||||||
Interest income | (1 | ) | (228 | ) | (487 | ) | — | (716 | ) | ||||||||||
Other (income) expense, net | — | (5 | ) | (9,509 | ) | — | (9,514 | ) | |||||||||||
Total expenses | 1,452,856 | 275,201 | 1,119,811 | (713,721 | ) | 2,134,147 | |||||||||||||
Income (loss) before income taxes | |||||||||||||||||||
and equity in earnings (losses) of subsidiaries | (263,210 | ) | 54,401 | 590,884 | — | 382,075 | |||||||||||||
(Provision) benefit for taxes | |||||||||||||||||||
on income | 93,652 | (20,319 | ) | (204,105 | ) | — | (130,772 | ) | |||||||||||
Equity in earnings (losses) of | |||||||||||||||||||
subsidiaries (net of tax) | 420,861 | 55,785 | — | (476,646 | ) | — | |||||||||||||
Net income (loss) | $ | 251,303 | $ | 89,867 | $ | 386,779 | $ | (476,646 | ) | $ | 251,303 |
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 2012
(In Thousands of Dollars)
Parent (The Hertz Corporation) | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminations | The Hertz Corporation & Subsidiaries | |||||||||||||||
Total revenues | $ | 3,232,554 | $ | 885,134 | $ | 4,432,368 | $ | (1,847,762 | ) | $ | 6,702,294 | ||||||||
Expenses: | |||||||||||||||||||
Direct operating | 1,795,547 | 515,541 | 1,234,074 | — | 3,545,162 | ||||||||||||||
Depreciation of revenue earning | |||||||||||||||||||
equipment and lease charges | 1,789,646 | 180,826 | 1,471,686 | (1,847,762 | ) | 1,594,396 | |||||||||||||
Selling, general and administrative | 294,244 | 85,135 | 235,900 | — | 615,279 | ||||||||||||||
Interest expense | 172,090 | 35,431 | 223,028 | — | 430,549 | ||||||||||||||
Interest income | (117 | ) | (614 | ) | (1,545 | ) | — | (2,276 | ) | ||||||||||
Other (income) expense, net | — | (14 | ) | (10,512 | ) | — | (10,526 | ) | |||||||||||
Total expenses | 4,051,410 | 816,305 | 3,152,631 | (1,847,762 | ) | 6,172,584 | |||||||||||||
Income (loss) before income taxes | |||||||||||||||||||
and equity in earnings (losses) of subsidiaries | (818,856 | ) | 68,829 | 1,279,737 | — | 529,710 | |||||||||||||
(Provision) benefit for taxes | |||||||||||||||||||
on income | 295,601 | (25,718 | ) | (495,565 | ) | — | (225,682 | ) | |||||||||||
Equity in earnings (losses) of | |||||||||||||||||||
subsidiaries (net of tax) | 827,283 | 33,229 | — | (860,512 | ) | — | |||||||||||||
Net income (loss) | $ | 304,028 | $ | 76,340 | $ | 784,172 | $ | (860,512 | ) | $ | 304,028 |
32
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Three Months Ended September 30, 2011
(In Thousands of Dollars)
Parent (The Hertz Corporation) | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminations | The Hertz Corporation & Subsidiaries | |||||||||||||||
Total revenues | $ | 1,169,613 | $ | 271,193 | $ | 1,616,573 | $ | (625,113 | ) | $ | 2,432,266 | ||||||||
Expenses: | |||||||||||||||||||
Direct operating | 615,251 | 146,966 | 485,400 | — | 1,247,617 | ||||||||||||||
Depreciation of revenue earning | |||||||||||||||||||
equipment and lease charges | 535,840 | 54,139 | 558,417 | (625,113 | ) | 523,283 | |||||||||||||
Selling, general and administrative | 90,172 | 25,598 | 81,773 | — | 197,543 | ||||||||||||||
Interest expense | 61,401 | 9,081 | 86,313 | — | 156,795 | ||||||||||||||
Interest income | (24 | ) | (37 | ) | (1,188 | ) | — | (1,249 | ) | ||||||||||
Other (income) expense, net | — | (5 | ) | 34 | — | 29 | |||||||||||||
Total expenses | 1,302,640 | 235,742 | 1,210,749 | (625,113 | ) | 2,124,018 | |||||||||||||
Income (loss) before income taxes | |||||||||||||||||||
noncontrolling interest and equity in earnings (losses) of subsidiaries | (133,027 | ) | 35,451 | 405,824 | — | 308,248 | |||||||||||||
(Provision) benefit for taxes | |||||||||||||||||||
on income (loss) | 48,077 | (11,319 | ) | (126,673 | ) | — | (89,915 | ) | |||||||||||
Equity in earnings (losses) | |||||||||||||||||||
of subsidiaries (net of tax) | 297,512 | 1,556 | — | (299,068 | ) | — | |||||||||||||
Net income (loss) | 212,562 | 25,688 | 279,151 | (299,068 | ) | 218,333 | |||||||||||||
Less: Net income attributable | |||||||||||||||||||
to noncontrolling interest | — | — | (5,771 | ) | — | (5,771 | ) | ||||||||||||
Net income (loss) attributable to | |||||||||||||||||||
The Hertz Corporation and Subsidiaries' common stockholder | $ | 212,562 | $ | 25,688 | $ | 273,380 | $ | (299,068 | ) | $ | 212,562 |
33
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 2011
(In Thousands of Dollars)
Parent (The Hertz Corporation) | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminations | The Hertz Corporation & Subsidiaries | |||||||||||||||
Total revenues | $ | 3,122,111 | $ | 727,420 | $ | 4,242,151 | $ | (1,807,120 | ) | $ | 6,284,562 | ||||||||
Expenses: | |||||||||||||||||||
Direct operating | 1,748,070 | 459,842 | 1,300,676 | — | 3,508,588 | ||||||||||||||
Depreciation of revenue earning | |||||||||||||||||||
equipment and lease charges | 1,512,691 | 167,491 | 1,505,979 | (1,807,120 | ) | 1,379,041 | |||||||||||||
Selling, general and administrative | 269,934 | 68,538 | 236,759 | — | 575,231 | ||||||||||||||
Interest expense | 236,443 | 24,594 | 234,108 | — | 495,145 | ||||||||||||||
Interest income | (434 | ) | (45 | ) | (4,172 | ) | (4,651 | ) | |||||||||||
Other (income) expense, net | 62,396 | (13 | ) | 323 | — | 62,706 | |||||||||||||
Total expenses | 3,829,100 | 720,407 | 3,273,673 | (1,807,120 | ) | 6,016,060 | |||||||||||||
Income (loss) before income taxes, | |||||||||||||||||||
noncontrolling interest and equity in earnings (losses) of subsidiaries | (706,989 | ) | 7,013 | 968,478 | — | 268,502 | |||||||||||||
(Provision) benefit for taxes | |||||||||||||||||||
on income (loss) | 230,769 | (2,301 | ) | (330,748 | ) | — | (102,280 | ) | |||||||||||
Equity in earnings (losses) | |||||||||||||||||||
of subsidiaries (net of tax) | 627,911 | (1,748 | ) | — | (626,163 | ) | — | ||||||||||||
Net income (loss) | 151,691 | 2,964 | 637,730 | (626,163 | ) | 166,222 | |||||||||||||
Less: Net income attributable | |||||||||||||||||||
to noncontrolling interest | — | — | (14,531 | ) | — | (14,531 | ) | ||||||||||||
Net income (loss) attributable to | |||||||||||||||||||
The Hertz Corporation and Subsidiaries' common stockholder | $ | 151,691 | $ | 2,964 | $ | 623,199 | $ | (626,163 | ) | $ | 151,691 |
34
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
For the Three Months Ended September 30, 2012
(In Thousands of Dollars)
Parent (The Hertz Corporation) | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminations | The Hertz Corporation & Subsidiaries | |||||||||||||||
Net income (loss) | $ | 251,303 | $ | 89,867 | $ | 386,779 | $ | (476,646 | ) | $ | 251,303 | ||||||||
Other comprehensive income (net of tax) | 23,229 | — | 19,762 | (19,762 | ) | 23,229 | |||||||||||||
Comprehensive income (loss) | $ | 274,532 | $ | 89,867 | $ | 406,541 | $ | (496,408 | ) | $ | 274,532 |
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
For the Nine Months Ended September 30, 2012
(In Thousands of Dollars)
Parent (The Hertz Corporation) | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminations | The Hertz Corporation & Subsidiaries | |||||||||||||||
Net income (loss) | $ | 304,028 | $ | 76,340 | $ | 784,172 | $ | (860,512 | ) | $ | 304,028 | ||||||||
Other comprehensive income (net of tax) | 13,586 | — | 3,358 | (3,358 | ) | 13,586 | |||||||||||||
Comprehensive income (loss) | $ | 317,614 | $ | 76,340 | $ | 787,530 | $ | (863,870 | ) | $ | 317,614 |
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
For the Three Months Ended September 30, 2011
(In Thousands of Dollars)
Parent (The Hertz Corporation) | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminations | The Hertz Corporation & Subsidiaries | |||||||||||||||
Net income (loss) | $ | 212,562 | $ | 25,688 | $ | 279,151 | $ | (299,068 | ) | $ | 218,333 | ||||||||
Other comprehensive income, net of tax | (74,744 | ) | �� | — | (80,497 | ) | 80,497 | (74,744 | ) | ||||||||||
Comprehensive income (loss) | 137,818 | 25,688 | 198,654 | (218,571 | ) | 143,589 | |||||||||||||
Less: Comprehensive income attributable | |||||||||||||||||||
to noncontrolling interest | — | — | (5,771 | ) | — | (5,771 | ) | ||||||||||||
Comprehensive income (loss) attributable | |||||||||||||||||||
to The Hertz Corporation and Subsidiaries' common stockholder | $ | 137,818 | $ | 25,688 | $ | 192,883 | $ | (218,571 | ) | $ | 137,818 |
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
For the Nine Months Ended September 30, 2011
(In Thousands of Dollars)
Parent (The Hertz Corporation) | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminations | The Hertz Corporation & Subsidiaries | |||||||||||||||
Net income (loss) | $ | 151,691 | $ | 2,964 | $ | 637,730 | $ | (626,163 | ) | $ | 166,222 | ||||||||
Other comprehensive income, net of tax | (12,674 | ) | — | (4,707 | ) | 4,707 | (12,674 | ) | |||||||||||
Comprehensive income (loss) | 139,017 | 2,964 | 633,023 | (621,456 | ) | 153,548 | |||||||||||||
Less: Comprehensive income attributable | |||||||||||||||||||
to noncontrolling interest | — | — | (14,531 | ) | — | (14,531 | ) | ||||||||||||
Comprehensive income (loss) attributable | |||||||||||||||||||
to The Hertz Corporation and Subsidiaries' common stockholder | $ | 139,017 | $ | 2,964 | $ | 618,492 | $ | (621,456 | ) | $ | 139,017 |
35
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 2012
(In Thousands of Dollars)
Parent (The Hertz Corporation) | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminations | The Hertz Corporation & Subsidiaries | |||||||||||||||
Net cash provided by (used in) operating activities | $ | (321,255 | ) | $ | 588,556 | $ | 2,467,989 | $ | (592,864 | ) | $ | 2,142,426 | |||||||
Cash flows from investing activities: | |||||||||||||||||||
Net change in restricted cash and cash equivalents | 646 | 16,496 | (86,443 | ) | — | (69,301 | ) | ||||||||||||
Revenue earning equipment expenditures | (66,293 | ) | (574,426 | ) | (7,040,299 | ) | — | (7,681,018 | ) | ||||||||||
Proceeds from disposal of revenue earning | |||||||||||||||||||
equipment | 54,484 | 193,259 | 4,567,631 | — | 4,815,374 | ||||||||||||||
Property and equipment expenditures | (116,600 | ) | (30,029 | ) | (82,811 | ) | — | (229,440 | ) | ||||||||||
Proceeds from disposal of property and equipment | 53,204 | 6,095 | 35,345 | — | 94,644 | ||||||||||||||
Capital contributions to subsidiaries | (2,658,823 | ) | — | — | 2,658,823 | — | |||||||||||||
Return of capital from subsidiaries | 2,627,954 | — | — | (2,627,954 | ) | — | |||||||||||||
Loan to Parent From Non-Guarantor | — | — | 49,858 | (49,858 | ) | — | |||||||||||||
Acquisitions, net of cash acquired | — | (196,220 | ) | — | — | (196,220 | ) | ||||||||||||
Proceeds from disposal of business | — | — | 11,691 | — | 11,691 | ||||||||||||||
Other investing activities | — | — | (1,400 | ) | — | (1,400 | ) | ||||||||||||
Net cash used in investing activities | (105,428 | ) | (584,825 | ) | (2,546,428 | ) | (18,989 | ) | (3,255,670 | ) | |||||||||
Cash flows from financing activities: | |||||||||||||||||||
Proceeds from issuance of long-term debt | 260,000 | — | 22,382 | — | 282,382 | ||||||||||||||
Payment of long-term debt | (646,682 | ) | (13 | ) | (9,416 | ) | — | (656,111 | ) | ||||||||||
Short-term borrowings: | |||||||||||||||||||
Proceeds | — | — | 367,988 | — | 367,988 | ||||||||||||||
Payments | (26,775 | ) | — | (935,915 | ) | — | (962,690 | ) | |||||||||||
Proceeds (payments) under the revolving lines | |||||||||||||||||||
of credit, net | 425,000 | (242 | ) | 1,251,229 | — | 1,675,987 | |||||||||||||
Capital contributions received from parent | — | — | 2,658,823 | (2,658,823 | ) | — | |||||||||||||
Loan to Parent From Non-Guarantor | (49,858 | ) | — | — | 49,858 | — | |||||||||||||
Payment of dividends and return of capital | — | — | (3,220,818 | ) | 3,220,818 | — | |||||||||||||
Dividends paid to Parent | (12,500 | ) | — | — | — | (12,500 | ) | ||||||||||||
Proceeds from employee stock purchase plan | 3,186 | — | — | — | 3,186 | ||||||||||||||
Loan with Hertz Global Holdings, Inc. | (12,277 | ) | — | — | — | (12,277 | ) | ||||||||||||
Purchase of noncontrolling interest | (38,000 | ) | — | — | — | (38,000 | ) | ||||||||||||
Payment of financing costs | (6,320 | ) | (2,725 | ) | (4,634 | ) | — | (13,679 | ) | ||||||||||
Net cash provided by (used in) financing activities | (104,226 | ) | (2,980 | ) | 129,639 | 611,853 | 634,286 | ||||||||||||
Effect of foreign exchange rate changes on cash | |||||||||||||||||||
and cash equivalents | — | — | 1,044 | — | 1,044 | ||||||||||||||
Net change in cash and cash equivalents during | |||||||||||||||||||
the period | (530,909 | ) | 751 | 52,244 | — | (477,914 | ) | ||||||||||||
Cash and cash equivalents at beginning of period | 565,002 | 7,410 | 358,796 | — | 931,208 | ||||||||||||||
Cash and cash equivalents at end of period | $ | 34,093 | $ | 8,161 | $ | 411,040 | $ | — | $ | 453,294 |
36
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 2011
(In Thousands of Dollars)
Parent (The Hertz Corporation) | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminations | The Hertz Corporation & Subsidiaries | |||||||||||||||
Net cash provided by (used in) operating activities | $ | 787,422 | $ | 645,186 | $ | 643,231 | $ | (414,582 | ) | $ | 1,661,257 | ||||||||
Cash flows from investing activities: | |||||||||||||||||||
Net change in restricted cash and cash equivalents | (36,916 | ) | 20,843 | (107,438 | ) | — | (123,511 | ) | |||||||||||
Revenue earning equipment expenditures | (72,286 | ) | (489,314 | ) | (7,303,009 | ) | — | (7,864,609 | ) | ||||||||||
Proceeds from disposal of revenue earning | |||||||||||||||||||
equipment | 51,079 | 89,517 | 4,791,814 | — | 4,932,410 | ||||||||||||||
Property and equipment expenditures | (139,952 | ) | (17,447 | ) | (44,877 | ) | — | (202,276 | ) | ||||||||||
Proceeds from disposal of property and equipment | 27,139 | 4,256 | 16,738 | — | 48,133 | ||||||||||||||
Capital contributions to subsidiaries | (2,425,886 | ) | — | — | 2,425,886 | — | |||||||||||||
Return of capital from subsidiaries | 1,370,418 | — | — | (1,370,418 | ) | — | |||||||||||||
Acquisitions, net of cash acquired | (212,011 | ) | (501 | ) | (10,476 | ) | — | (222,988 | ) | ||||||||||
Purchase of short-term investments, net | (32,891 | ) | — | — | — | (32,891 | ) | ||||||||||||
Other investing activities | — | (13,602 | ) | 14,362 | — | 760 | |||||||||||||
Net cash provided by (used in) investing activities | (1,471,306 | ) | (406,248 | ) | (2,642,886 | ) | 1,055,468 | (3,464,972 | ) | ||||||||||
Cash flows from financing activities: | |||||||||||||||||||
Proceeds from issuance of long-term debt | 2,454,744 | — | 603,651 | — | 3,058,395 | ||||||||||||||
Payment of long-term debt | (3,591,349 | ) | (13 | ) | (49,919 | ) | — | (3,641,281 | ) | ||||||||||
Short-term borrowings: | |||||||||||||||||||
Proceeds | — | — | 371,994 | — | 371,994 | ||||||||||||||
Payments | (15,095 | ) | — | (799,799 | ) | — | (814,894 | ) | |||||||||||
Proceeds (payments) under the revolving lines | |||||||||||||||||||
of credit, net | 185,872 | (229,604 | ) | 978,096 | — | 934,364 | |||||||||||||
Distributions to noncontrolling interest | — | — | (10,500 | ) | — | (10,500 | ) | ||||||||||||
Capital contributions received from parent | — | — | 2,425,886 | (2,425,886 | ) | — | |||||||||||||
Payment of dividends and return of capital | (12,450 | ) | — | (1,785,000 | ) | 1,785,000 | (12,450 | ) | |||||||||||
Proceeds from employee stock purchase plan | 2,690 | — | — | — | 2,690 | ||||||||||||||
Loan from Hertz Global Holdings, Inc. | 317 | — | — | — | 317 | ||||||||||||||
Payment of financing costs | (78,309 | ) | (2,284 | ) | (7,047 | ) | — | (87,640 | ) | ||||||||||
Net cash provided by (used in) financing activities | (1,053,580 | ) | (231,901 | ) | 1,727,362 | (640,886 | ) | (199,005 | ) | ||||||||||
Effect of foreign exchange rate changes on cash | |||||||||||||||||||
and cash equivalents | — | — | (13,987 | ) | — | (13,987 | ) | ||||||||||||
Net decrease in cash and cash equivalents during | |||||||||||||||||||
the period | (1,737,464 | ) | 7,037 | (258,306 | ) | — | (1,988,733 | ) | |||||||||||
Cash and cash equivalents at beginning of period | 1,754,378 | 5,180 | 614,448 | — | 2,374,006 | ||||||||||||||
Cash and cash equivalents at end of period | $ | 16,914 | $ | 12,217 | $ | 356,142 | $ | — | $ | 385,273 |
37
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
Note 17—Subsequent Events
In October 2012, Hertz entered into an amendment to our Senior Term Facility providing for commitments for $750 million of loans under the Senior Term Facility. Hertz currently expects to incur incremental term loans, or the “Incremental Term Loans,” under such commitments in an aggregate principal amount of $750 million.
In October 2012, HDTFS, Inc., a newly-formed, wholly-owned subsidiary of Hertz issued and sold $700 million aggregate principal amount of 5.875% Senior Notes due 2020 and $500 million aggregate principal amount of 6.250% Senior Notes due 2022 in a private offering. The gross proceeds of the offering are being held in an escrow account until the date on which we successfully complete the acquisition of Dollar Thrifty.
In connection with the amendment to the Senior Term Facilities and the issuances of the Senior Notes, Hertz terminated $1.95 billion of the Bridge Commitments.
In October 2012, Hertz caused its wholly-owned subsidiary GN Funding II L.L.C. to extend the maturity date of the Donlen GN II Variable Funding Notes from December 2012 to December 2013.
In October 2012, Hertz caused its wholly-owned subsidiary HA Fleet Pty Limited to amend the Australian Securitization to extend the maturity from December 2012 to December 2014.
In October 2012, Hertz caused its wholly-owned subsidiary HVF to amend Series 2009-1 of its U.S. Fleet Variable Funding Notes to extend the maturity date from March 2013 to March 2014.
On October 29, 2012, Hertz Holdings announced that Gary Rappeport, the CEO of Donlen will be retiring at the end of 2012. Mr. Rappeport will be succeeded by Donlen's current President and COO, Tom Callahan, on January 1, 2013. Tom will become Vice President, Hertz Holdings and President, Donlen and he will report directly to Hertz Chairman and CEO Mark P. Frissora.
38
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion and analysis provides information that we believe to be relevant to an understanding of our consolidated financial condition and results of operations. Unless the context otherwise requires, in this Report on Form 10-Q, (i) ‘‘we,’’ ‘‘us’’ and ‘‘our’’ mean The Hertz Corporation and its consolidated subsidiaries, (ii) ‘‘Hertz,’’ the ‘‘Registrant,’’ or the ‘‘Company’’ means The Hertz Corporation, (iii) ‘‘HERC’’ means Hertz Equipment Rental Corporation, our wholly-owned equipment rental subsidiary, together with our various other wholly-owned international subsidiaries that conduct our industrial, construction and material handling equipment rental business, (iv) ‘‘Hertz Holdings’’ means Hertz Global Holdings, Inc., our ultimate parent company, (v) ‘‘cars’’ means cars, crossovers and light trucks (including sport utility vehicles and, outside North America, light commercial vehicles), (vi) ‘‘program cars’’ means cars purchased by car rental companies under repurchase or guaranteed depreciation programs with car manufacturers, (vii) ‘‘non-program cars’’ means cars not purchased under repurchase or guaranteed depreciation programs for which the car rental company is exposed to residual risk and (viii) ‘‘equipment’’ means industrial, construction and material handling equipment.
You should read the following discussion and analysis together with the section below entitled "Cautionary Note Regarding Forward-Looking Statements," with the financial statements and the related notes thereto contained elsewhere in this Form 10-Q, or this "Report."
Cautionary Note Regarding Forward-Looking Statements
Certain statements contained or incorporated by reference in this Report and in reports we subsequently file with the United States Securities and Exchange Commission, or 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 such as "believe," "expect," "project," "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 SEC Forms 10-K, 10-Q and 8-K.
Some important factors that could affect our actual results include, among others, those that may be disclosed from time to time in subsequent reports filed with the SEC, those described under "Item 1A—Risk Factors" included in The Hertz Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 2011, filed with the SEC, on February 27, 2012, or our "Form 10-K" and the following:
• | our ability to obtain regulatory approval for and to consummate an acquisition of Dollar Thrifty Automotive Group, or "Dollar Thrifty"; |
• | the risk that expected synergies, operational efficiencies and cost savings from an acquisition of Dollar Thrifty may not be fully realized or realized within the expected time frame; |
• | the operational and profitability impact of divestitures that may be required to be undertaken to secure regulatory approval for an acquisition of Dollar Thrifty; |
• | levels of travel demand, particularly with respect to airline passenger traffic in the United States and in global markets; |
• | significant changes in the competitive environment, including as a result of industry consolidation, and the effect of competition in our markets, including on our pricing policies or use of incentives; |
• | occurrences that disrupt rental activity during our peak periods; |
• | our ability to achieve cost savings and efficiencies and realize opportunities to increase productivity and profitability; |
• | an increase in our fleet costs as a result of an increase in the cost of new vehicles and/or a decrease in the price at which we dispose of used vehicles either in the used vehicle market or under repurchase or guaranteed depreciation programs; |
• | our ability to accurately estimate future levels of rental activity and adjust the size of our fleet accordingly; |
• | our ability to maintain sufficient liquidity and the availability to us of additional or continued sources of financing |
39
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
for our revenue earning equipment and to refinance our existing indebtedness;
• | safety recalls by the manufacturers of our vehicles and equipment; |
• | a major disruption in our communication or centralized information networks; |
• | financial instability of the manufacturers of our vehicles and equipment; |
• | any impact on us from the actions of our licensees, franchisees, dealers and independent contractors; |
• | our ability to maintain profitability 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 successfully integrate acquisitions and complete dispositions; |
• | our ability to maintain favorable brand recognition; |
• | costs and risks associated with litigation; |
• | risks related to our indebtedness, including our substantial amount of debt, our ability to incur substantially more debt and increases in interest rates or in our borrowing margins; |
• | our ability to meet the financial and other covenants contained in our Senior Credit Facilities, our outstanding unsecured Senior Notes and certain asset-backed and asset-based arrangements; |
• | changes in accounting principles, or their application or interpretation, and our ability to make accurate estimates and the assumptions underlying the estimates, which could have an effect on earnings; |
• | changes in existing or the adoption of new laws, regulations, policies or other activities of governments, agencies and similar organizations where such actions may affect our operations, the cost thereof or applicable tax rates; |
• | changes to our senior management team; |
• | the effect of tangible and intangible asset impairment charges; |
• | the impact of our derivative instruments, which can be affected by fluctuations in interest rates and commodity prices; |
• | our exposure to fluctuations in foreign exchange rates; and |
• | other risks described from time to time in periodic and current reports that we file with the SEC. |
You should not place undue reliance on forward-looking statements. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing cautionary statements. All such statements speak only as of the date made, and we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
Corporate History
We are a successor to corporations that have been engaged in the car and truck rental and leasing business since 1918 and the equipment rental business since 1965. Hertz was incorporated in Delaware in 1967. Ford Motor Company acquired an ownership interest in Hertz in 1987. Prior to this, Hertz was a subsidiary of United Continental Holdings, Inc. (formerly Allegis Corporation), which acquired Hertz’s outstanding capital stock from RCA Corporation in 1985.
On December 21, 2005, investment funds associated with or designated by:
• | Clayton, Dubilier & Rice, Inc., which was succeeded by Clayton, Dubilier & Rice, LLC, or "CD&R," |
• | The Carlyle Group, or "Carlyle," and |
• | Merrill Lynch Global Private Equity, Inc., or "MLGPE," |
acquired all of our common stock from Ford Holdings LLC. In January 2009, Bank of America Corporation, or "Bank of America," acquired Merrill Lynch & Co., Inc., the former parent company of MLGPE. Accordingly, Bank of America is now an indirect beneficial owner of Hertz Holdings' common stock held by the investment funds associated with MLGPE. We refer to CD&R, Carlyle and MLGPE collectively as the "Sponsors." We refer to the acquisition of all of our common stock by the Sponsors as the "Acquisition."
After giving effect to Hertz Holdings' initial public offering in November 2006 and subsequent offerings, the Sponsors' holdings represent approximately 38% of the outstanding shares of common stock of Hertz Holdings as of September
40
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
30, 2012.
Overview of Our Business
We are engaged principally in the business of renting and leasing of cars and equipment.
Our revenues primarily are derived from rental and related charges and consist of:
• | Car rental revenues (revenues from all company-operated car rental and fleet leasing operations and management services, including charges to customers for the reimbursement of costs incurred relating to airport concession fees and vehicle license fees, the fueling of vehicles and the sale of loss or collision damage waivers, liability insurance coverage and other products); |
• | Equipment rental revenues (revenues from all company-operated equipment rental operations, including amounts charged to customers for the fueling and delivery of equipment and sale of loss damage waivers, as well as revenues from the sale of new equipment and consumables); and |
• | Other revenues (primarily relating to fees and certain cost reimbursements from our licensees). |
Our expenses primarily consist of:
• | Direct operating expenses (primarily wages and related benefits; commissions and concession fees paid to airport authorities, travel agents and others; facility, self-insurance and reservation costs; the cost of new equipment and consumables purchased for resale; and other costs relating to the operation and rental of revenue earning equipment, such as damage, maintenance and fuel costs); |
• | Depreciation expense and lease charges relating to revenue earning equipment (including net gains or losses on the disposal of such equipment). Revenue earning equipment includes cars and rental equipment; |
• | Selling, general and administrative expenses (including advertising); and |
• | Interest expense. |
Our profitability is primarily a function of the volume, mix and pricing of rental transactions and the utilization of cars and equipment. Significant changes in the purchase price or residual values of cars and equipment or interest rates can have a significant effect on our profitability depending on our ability to adjust pricing for these changes. We continue to balance our mix of non-program and program vehicles based on market conditions. Our business requires significant expenditures for cars and equipment, and consequently we require substantial liquidity to finance such expenditures. See "Liquidity and Capital Resources" below.
Car Rental
In the U.S., as of September 30, 2012, the percentage of non-program cars was 86% as compared to 70% as of September 30, 2011. Internationally, as of September 30, 2012, the percentage of non-program cars was 65%, compared to 61% as of September 30, 2011. In the U.S., as of December 31, 2011, the percentage of non-program cars was 79% as compared to 72% as of December 31, 2010. Internationally, as of December 31, 2011, the percentage of non-program cars was 75%, compared to 70% as of December 31, 2010.
In recent periods we have decreased the percentage of program cars in our car rental fleet. Non-program cars typically have lower acquisition costs and lower depreciation rates than comparable program cars. With fewer program cars in our fleet, we have an increased risk that the market value of a car at the time of its disposition will be less than its estimated residual value. However, non-program cars allow us the opportunity for ancillary revenue, such as warranty and financing, during disposition. Program cars generally provide us with flexibility to reduce the size of our fleet by returning cars sooner than originally expected without risk of loss in the event of an economic downturn or to respond to changes in rental demand. This flexibility is reduced as the percentage of non-program cars in our car rental fleet increases. Furthermore, it is expected that the average age of our fleet will increase since the average holding period for non-program vehicles is longer than program vehicles. However, the longer holding period does not necessarily equate to higher costs due to the stringent turnback requirements imposed by vehicle manufacturers for program cars.
In the nine months ended September 30, 2012, our monthly per vehicle depreciation costs decreased as compared to the prior year period due to improved residual values in the U.S., a continued move towards a greater proportion of non-program vehicles, mix optimization and improved procurement and remarketing efforts.
41
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Depreciation rates are reviewed on a quarterly basis based on management's routine review of present and estimated future market conditions and their effect on residual values at the time of disposal. During the nine months ended September 30, 2012, depreciation rates being used to compute the provision for depreciation of revenue earning equipment were adjusted on certain vehicles in our car rental operations to reflect changes in the estimated residual values to be realized when revenue earning equipment is sold. These depreciation rate changes resulted in net decreases of $59.4 million and $96.7 million in depreciation expense for the three and nine months ended September 30, 2012, respectively.
For the three months ended September 30, 2012 and 2011, our worldwide car rental operations sold approximately 37,100 and 46,000 non-program cars, respectively, a 19.4% year over year decrease. The year over year decrease was primarily due to the stronger than normal car sales market in the third quarter of 2011 resulting from the shortage of new and used vehicles, caused primarily by the events in Japan. In addition, rental demand was stronger compared with the same prior year period, which reduced required defleeting non-program cars sales volume. For the nine months ended September 30, 2012 and 2011, our worldwide car rental operations sold approximately 123,000 and 121,700 non-program cars, respectively, a 1.1% year over year increase. This year over year increase was due to strong car sales during the first half of 2012, offset by a decrease in the third quarter for the reasons stated earlier. We believe the residual values have remained fairly strong primarily due to continued short supply of recent model year used vehicles and aided by strong new vehicle sales.
For the nine months ended September 30, 2012, we experienced an 8.5% increase in transaction days versus the prior period in the United States while rental rate revenue per transaction day, or "RPD," declined by 3.4%. During the nine months ended September 30, 2012, in our European operations, we experienced a 2.8% decline in transaction days and a 2.7% decline in RPD when compared to the nine months ended September 30, 2011.
Our U.S. off-airport operations represented $981.3 million and $908.9 million of our total car rental revenues in the nine months ended September 30, 2012 and 2011, respectively. As of September 30, 2012, we have approximately 2,430 off-airport locations. Our strategy includes selected openings of new off-airport locations, the disciplined evaluation of existing locations and the pursuit of same-store sales growth. Our strategy also includes increasing penetration in the off-airport market and growing the online leisure market, particularly in the longer length weekly sector, which is characterized by lower vehicle costs and lower transaction costs at a lower RPD. Increasing our penetration in these sectors is consistent with our long-term strategy to generate profitable growth. When we open a new off-airport location, we incur a number of costs, including those relating to site selection, lease negotiation, recruitment of employees, selection and development of managers, initial sales activities and integration of our systems with those of the companies who will reimburse the location's replacement renters for their rentals. A new off-airport location, once opened, takes time to generate its full potential revenues and, as a result, revenues at new locations do not initially cover their start-up costs and often do not, for some time, cover the costs of their ongoing operations.
On September 1, 2011, Hertz acquired 100% of the equity interest in Donlen, a leading provider of fleet leasing and management services for corporate fleets. For the three and nine months ended September 30, 2012, Donlen had an average of approximately 153,200 and 146,900 vehicles, respectively, under lease and management. Donlen provides Hertz an immediate leadership position in long-term car, truck and equipment leasing and fleet management. Donlen's fleet management programs provide outsourced solutions to reduce fleet operating costs and improve driver productivity. These programs include administration of preventive maintenance, advisory services, and fuel and accident management along with other complementary services. Additionally, Donlen brings to Hertz a specialized consulting and technology expertise that will enable us to model, measure and manage fleet performance more effectively and efficiently.
As of September 30, 2012, our worldwide car rental operations had a total of approximately 8,800 corporate and licensee locations in approximately 150 countries in North America, Europe, Latin America, Asia, Australia, Africa, the Middle East and New Zealand.
On August 26, 2012, Hertz Holdings, HDTMS, Inc., a wholly owned subsidiary of Hertz Holdings, and Dollar Thrifty Automotive Group, Inc., a Delaware corporation, or "Dollar Thrifty," entered into an Agreement and Plan of Merger, or the "Merger Agreement," pursuant to which Hertz Holdings would acquire Dollar Thrifty for $87.50 per share, net to the seller in cash, without any interest and less any required withholding taxes, in a transaction valued at a corporate enterprise value of approximately $2.3 billion. After taking into account our use of approximately $400 million of cash and cash equivalents available from Dollar Thrifty, we expect to use approximately $345 million of our cash and cash equivalents to consummate the acquisition of Dollar Thrifty and to finance the remaining $1.95 billion through a
42
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
combination of $750 million in incremental term loans under our Senior Term Facility and $1.2 billion in senior notes which was raised in October 2012. The boards of directors of both companies have unanimously approved the transaction. The transaction has been structured as a two-step acquisition including a cash tender offer for all outstanding shares of Dollar Thrifty common stock followed by a cash merger in which Hertz Holdings would acquire any remaining outstanding shares of Dollar Thrifty common stock. The transaction is subject to the tender of at least a majority of the shares of Dollar Thrifty common stock, as well as other customary closing conditions. The successful completion of the transaction is also subject to regulatory clearance by the Federal Trade Commission. Hertz Holdings has also reached a definitive agreement with Adreca Holdings Corp., a subsidiary of Macquarie Capital which is expected to be operated by Franchise Services of North America Inc., to sell the Advantage Rent A Car business, selected Dollar Thrifty airport concessions and certain other assets. The closing of that divestiture is conditioned upon, among other things, Hertz Holdings completing an acquisition of Dollar Thrifty. Hertz Holdings estimates that it would realize a loss before income taxes of approximately $30 million to $35 million as a result of this divestiture. We can offer no assurance that the Merger Agreement will be consummated.
As of September 30, 2012, the Advantage business was classified as held and used as the sale transaction was not probable and was contingent upon acquisition of Dollar Thrifty as of such date. Hertz's agreement to divest its Advantage business, which if consummated would result in a loss, triggered an interim impairment analysis. The assets were evaluated for impairment under a probability-weighted approach for developing estimates of future cash flows used to test a long-lived asset for recoverability. The sum of future undiscounted cash flows of the Advantage business exceeds the carrying value as of September 30, 2012. Accordingly, no impairment has been recognized at September 30, 2012.
Equipment Rental
HERC experienced higher rental volumes and pricing for the nine months ended September 30, 2012 compared to the prior year period as the industry continued its recovery in North America. We continued to see growth in our specialty services such as Pump & Power, Industrial Plant Services and Hertz Entertainment Services. Additionally, there continues to be opportunities for the remainder of 2012 as the uncertain economic outlook makes rental solutions attractive to customers.
On January 19, 2012, HERC acquired Cinelease Holdings, LLC, or "Cinelease," a U.S. market leader in lighting and grip rentals to the television industry.
As of September 30, 2012, HERC had a total of approximately 340 branches in the U.S., Canada, France, Spain, China and Saudi Arabia.
Seasonality
Our car rental and equipment rental operations are seasonal businesses, with decreased levels of business in the winter months and heightened activity during the spring and summer. We have the ability to dynamically manage fleet capacity, the most significant portion of our cost structure, to meet market demand. For instance, to accommodate increased demand, we increase our available fleet and staff during the second and third quarters of the year. As business demand declines, fleet and staff are decreased accordingly. A number of our other major operating costs, including airport concession fees, commissions and vehicle liability expenses, are directly related to revenues or transaction volumes. In addition, our management expects to utilize enhanced process improvements, including efficiency initiatives and the use of our information technology systems, to help manage our variable costs. Approximately two-thirds of our typical annual operating costs represent variable costs, while the remaining one-third is fixed or semi-fixed. We also maintain a flexible workforce, with a significant number of part time and seasonal workers. However, certain operating expenses, including rent, insurance, and administrative overhead, remain fixed and cannot be adjusted for seasonal demand. Revenues related to our fleet leasing and management services are generally not seasonal.
Restructuring
During the first, second and third quarters of 2012, we continued to streamline operations and reduce costs with the closure of several car rental and equipment rental locations globally as well as a reduction in our workforce by approximately 65 employees, 280 employees and 240 employees, respectively.
For the three and nine months ended September 30, 2012, our consolidated statement of operations includes
43
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
restructuring charges of $1.5 million and $27.0 million, respectively. For the three and nine months ended September 30, 2011, our consolidated statement of operations includes restructuring charges of $1.9 million and $40.4 million, respectively.
Additional efficiency and cost saving initiatives are being developed; however, we presently do not have firm plans or estimates of any related expenses. See Note 12 to the Notes to our condensed consolidated financial statements included in this Report.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2012 Compared with Three Months Ended September 30, 2011
Summary
The following table sets forth the percentage of total revenues represented by the various line items in our consolidated statements of operations for the three months ended September 30, 2012 and 2011 (in millions of dollars):
Percentage of Revenues | |||||||||||||
Three Months Ended September 30, | Three Months Ended September 30, | ||||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||||
Revenues: | |||||||||||||
Car rental | $ | 2,106.0 | $ | 2,062.5 | 83.7 | % | 84.8 | % | |||||
Equipment rental | 362.9 | 321.6 | 14.4 | 13.2 | |||||||||
Other | 47.3 | 48.2 | 1.9 | 2.0 | |||||||||
Total revenues | 2,516.2 | 2,432.3 | 100.0 | % | 100.0 | % | |||||||
Expenses: | |||||||||||||
Direct operating | 1,241.1 | 1,247.6 | 49.3 | 51.2 | |||||||||
Depreciation of revenue earning equipment and | |||||||||||||
lease charges | 560.5 | 523.3 | 22.3 | 21.5 | |||||||||
Selling, general and administrative | 201.0 | 197.5 | 8.0 | 8.1 | |||||||||
Interest expense | 141.7 | 156.8 | 5.6 | 6.5 | |||||||||
Interest income | (0.7 | ) | (1.2 | ) | — | — | |||||||
Other (income) expense, net | (9.5 | ) | — | (0.4 | ) | — | |||||||
Total expenses | 2,134.1 | 2,124.0 | 84.8 | 87.3 | |||||||||
Income before income taxes | 382.1 | 308.3 | 15.2 | 12.7 | |||||||||
Provision for taxes on income | (130.8 | ) | (89.9 | ) | (5.2 | ) | (3.7 | ) | |||||
Net income | 251.3 | 218.4 | 10.0 | 9.0 | |||||||||
Less: Net income attributable to noncontrolling interest | — | (5.8 | ) | — | (0.3 | ) | |||||||
Net income attributable to The Hertz Corporation and | |||||||||||||
Subsidiaries' common stockholder | $ | 251.3 | $ | 212.6 | 10.0 | % | 8.7 | % |
44
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
The following table sets forth certain of our selected car rental, equipment rental and other operating data for the three months ended or as of September 30, 2012 and 2011:
Three Months Ended or as of September 30, | |||||||
2012 | 2011 | ||||||
Selected Car Rental Operating Data: | |||||||
Worldwide number of transactions (in thousands) | 7,704 | 7,409 | |||||
Domestic (Hertz) | 5,675 | 5,368 | |||||
International (Hertz) | 2,029 | 2,041 | |||||
Worldwide transaction days (in thousands)(a) | 41,613 | 40,231 | |||||
Domestic (Hertz) | 28,077 | 26,452 | |||||
International (Hertz) | 13,536 | 13,779 | |||||
Worldwide rental rate revenue per transaction day(b) | $ | 41.09 | $ | 42.20 | |||
Domestic (Hertz) | $ | 40.27 | $ | 41.44 | |||
International (Hertz) | $ | 42.79 | $ | 43.66 | |||
Worldwide average number of cars during the period | 703,200 | 667,500 | |||||
Domestic (Hertz company-operated) | 368,400 | 352,700 | |||||
International (Hertz company-operated) | 181,600 | 185,700 | |||||
Donlen (under lease and maintenance) | 153,200 | 129,100 | |||||
Adjusted pre-tax income (in millions of dollars)(c) | $ | 428.7 | $ | 375.3 | |||
Worldwide revenue earning equipment, net (in millions of dollars) | $ | 10,036.4 | $ | 9,859.4 | |||
Selected Worldwide Equipment Rental Operating Data: | |||||||
Rental and rental related revenue (in millions of dollars)(d) | $ | 331.2 | $ | 290.5 | |||
Same store revenue growth, including growth initiatives(e) | 8.1 | % | 11.3 | % | |||
Average acquisition cost of rental equipment operated during the period (in millions | |||||||
of dollars) | $ | 3,141.0 | $ | 2,830.3 | |||
Adjusted pre-tax income (in millions of dollars)(c) | $ | 76.2 | $ | 55.9 | |||
Revenue earning equipment, net (in millions of dollars) | $ | 2,184.8 | $ | 1,779.1 |
_______________________________________________________________________________
(a) | Transaction days represent the total number of days that vehicles were on rent in a given period. |
(b) | Car rental rate revenue consists of all revenue, net of discounts, associated with the rental of cars including charges for optional insurance products, but excluding revenue derived from fueling and concession and other expense pass-throughs, NeverLost units in the U.S. and certain ancillary revenue. Rental rate revenue per transaction day is calculated as total rental rate revenue, divided by the total number of transaction days, with all periods adjusted to eliminate the effect of fluctuations in foreign currency. Our management believes eliminating the effect of fluctuations in foreign currency is appropriate so as not to affect the comparability of underlying trends. This statistic is important to our management and investors as it represents the best measurement of the changes in underlying pricing in the car rental business and encompasses the elements in car rental pricing that management has the ability to control. The optional insurance products are packaged within certain negotiated corporate, government and membership programs and within certain retail rates being charged. Based upon these existing programs and rate packages, management believes that these optional insurance products should be consistently included in the daily pricing of car rental transactions. On the other hand, non-rental rate revenue items such as refueling and concession pass-through expense items are driven by factors beyond the control of management (i.e. the price of fuel and the concession fees charged by airports). Additionally, NeverLost units are an optional revenue product which management does not consider to be part of their daily pricing of car rental transactions. The following table reconciles our car rental segment revenues to our rental rate revenue and rental rate revenue per transaction day (based on December 31, 2011 foreign exchange rates) for the three months ended September 30, 2012 and 2011 (in millions of dollars, except as noted): |
Three Months Ended September 30, | |||||||
2012 | 2011 | ||||||
Car rental segment revenues | $ | 2,152.6 | $ | 2,109.1 | |||
Non-rental rate revenue | (453.3 | ) | (351.8 | ) | |||
Foreign currency adjustment | 10.5 | (59.4 | ) | ||||
Rental rate revenue | $ | 1,709.8 | $ | 1,697.9 | |||
Transaction days (in thousands) | 41,613 | 40,231 | |||||
Rental rate revenue per transaction day (in whole dollars) | $ | 41.09 | $ | 42.20 |
45
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
(c) | Adjusted pre-tax income is calculated as income (loss) before income taxes plus non-cash purchase accounting charges, non-cash debt charges relating to the amortization and write-off of debt financing costs and debt discounts and certain one-time charges and non-operational items. Adjusted pre-tax income is important to management because it allows management to assess operational performance of our business, exclusive of the items mentioned above. It also allows management to assess the performance of the entire business on the same basis as the segment measure of profitability. Management believes that it is important to investors for the same reasons it is important to management and because it allows them to assess our operational performance on the same basis that management uses internally. The contribution of our reportable segments to adjusted pre-tax income and reconciliation to consolidated amounts are presented below (in millions of dollars): |
Three Months Ended September 30, | |||||||
2012 | 2011 | ||||||
Adjusted pre-tax income: | |||||||
Car rental | $ | 428.7 | $ | 375.3 | |||
Equipment rental | 76.2 | 55.9 | |||||
Total reportable segments | 504.9 | 431.2 | |||||
Adjustments: | |||||||
Other reconciling items(1) | (73.8 | ) | (77.9 | ) | |||
Purchase accounting(2) | (23.9 | ) | (19.1 | ) | |||
Non-cash debt charges(3) | (13.6 | ) | (14.8 | ) | |||
Restructuring charges | (1.5 | ) | (1.9 | ) | |||
Restructuring related charges(4) | (2.0 | ) | (3.2 | ) | |||
Derivative gains (losses)(5) | 0.1 | 0.1 | |||||
Management transition costs | — | (1.5 | ) | ||||
Acquisition related costs | (8.1 | ) | (4.6 | ) | |||
Income before income taxes | $ | 382.1 | $ | 308.3 |
_______________________________________________________________________________
(1) | Represents general corporate expenses, certain interest expense (including net interest on corporate debt), as well as other business activities. |
(2) | Represents the purchase accounting effects of the Acquisition on our results of operations relating to increased depreciation and amortization of tangible and intangible assets and accretion of revalued workers' compensation and public liability and property damage liabilities. Also represents the purchase accounting effects of subsequent acquisitions on our results of operations relating to increased depreciation and amortization of tangible and intangible assets. |
(3) | Represents non-cash debt charges relating to the amortization and write-off of deferred debt financing costs and debt discounts. |
(4) | Represents incremental costs incurred directly supporting our business transformation initiatives. Such costs include transition costs incurred in connection with our 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. |
(5) | Represents the mark-to-market adjustment on our interest rate cap. |
(d) | Equipment rental and rental related revenue consists of all revenue, net of discounts, associated with the rental of equipment including charges for delivery, loss damage waivers and fueling, but excluding revenue arising from the sale of equipment, parts and supplies and certain other ancillary revenue. Rental and rental related revenue is adjusted in all periods to eliminate the effect of fluctuations in foreign currency. Our management believes eliminating the effect of fluctuations in foreign currency is appropriate so as not to affect the comparability of underlying trends. This statistic is important to our management and investors as it is utilized in the measurement of rental revenue generated per dollar invested in fleet on an annualized basis and is comparable with the reporting of other industry participants. The following table reconciles our equipment rental segment revenues to our equipment rental and rental related revenue (based on December 31, 2011 foreign exchange rates) for the three months ended September 30, 2012 and 2011 (in millions of dollars): |
Three Months Ended September 30, | |||||||
2012 | 2011 | ||||||
Equipment rental segment revenues | $ | 363.0 | $ | 321.7 | |||
Equipment sales and other revenue | (30.7 | ) | (26.0 | ) | |||
Foreign currency adjustment | (1.1 | ) | (5.2 | ) | |||
Rental and rental related revenue | $ | 331.2 | $ | 290.5 |
(e) | Same store revenue growth is calculated as the year over year change in revenue for locations that are open at the end of the period reported and have been operating under our direction for more than twelve months. The same store revenue amounts are adjusted in all periods to eliminate the effect of fluctuations in foreign currency. Our management believes eliminating the effect of fluctuations in foreign |
46
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
currency is appropriate so as not to affect the comparability of underlying trends.
REVENUES
Three Months Ended September 30, | ||||||||||||||
(in millions of dollars) | 2012 | 2011 | $ Change | % Change | ||||||||||
Revenues by Segment | ||||||||||||||
Car rental | $ | 2,152.6 | $ | 2,109.1 | $ | 43.5 | 2.1 | % | ||||||
Equipment rental | 363.0 | 321.7 | 41.3 | 12.8 | % | |||||||||
Other reconciling items | 0.6 | 1.5 | (0.9 | ) | (56.7 | )% | ||||||||
Total revenues | $ | 2,516.2 | $ | 2,432.3 | $ | 83.9 | 3.4 | % |
Car Rental Segment
Revenues from our car rental segment increased 2.1%, primarily as a result of increases in car rental transaction days worldwide of 3.4% and refueling fees of $12.0 million. The increase also includes $86.0 million of higher revenues related to Donlen, which was acquired on September 1, 2011. These increases were partly offset by the effects of foreign currency translation of approximately $65.6 million and a decrease in worldwide RPD.
RPD for worldwide car rental for the three months ended September 30, 2012 decreased 2.6% from 2011, due to decreases in U.S. and International RPD of 2.8% and 2.0%, respectively, and a mix shift to the U.S. due to uncertain economic conditions in Europe. U.S. airport RPD decreased 3.1% and U.S. off-airport RPD declined by 2.2%. U.S. airport RPD was negatively impacted by a mix shift to longer life, lower RPD rentals (including mix shift towards off-airport and the Advantage brand). International RPD decreased primarily due to a decrease in Europe's airport RPD which was due to the competitive pricing environment and uncertain economic conditions.
Equipment Rental Segment
Revenues from our equipment rental segment increased 12.8%, primarily due to increases of 12.5% and 3.3% in equipment rental volumes and pricing, respectively, partly offset by the effects of foreign currency translation of approximately $4.5 million. The increase in volume was primarily due to strong industrial and improving construction performance. Our acquisition of Cinelease in January 2012 also contributed to the revenue increase.
Other
Revenues from all other sources decreased $0.9 million, primarily due to a decrease in revenues from our third-party claim management services.
47
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
EXPENSES
Three Months Ended September 30, | ||||||||||||||
(in millions of dollars) | 2012 | 2011 | $ Change | % Change | ||||||||||
Expenses: | ||||||||||||||
Fleet related expenses | $ | 300.0 | $ | 318.5 | $ | (18.5 | ) | (5.8 | )% | |||||
Personnel related expenses | 386.3 | 378.4 | 7.9 | 2.1 | % | |||||||||
Other direct operating expenses | 554.8 | 550.7 | 4.1 | 0.7 | % | |||||||||
Direct operating | 1,241.1 | �� | 1,247.6 | (6.5 | ) | (0.5 | )% | |||||||
Depreciation of revenue earning equipment and | ||||||||||||||
lease charges | 560.5 | 523.3 | 37.2 | 7.1 | % | |||||||||
Selling, general and administrative | 201.0 | 197.5 | 3.5 | 1.8 | % | |||||||||
Interest expense | 141.7 | 156.8 | (15.1 | ) | (9.6 | )% | ||||||||
Interest income | (0.7 | ) | (1.2 | ) | 0.5 | (42.7 | )% | |||||||
Other (income) expense, net | (9.5 | ) | — | (9.5 | ) | NM | ||||||||
Total expenses | $ | 2,134.1 | $ | 2,124.0 | $ | 10.1 | 0.5 | % |
Total expenses increased 0.5%, but total expenses as a percentage of revenues decreased from 87.3% for the three months ended September 30, 2011 to 84.8% for the three months ended September 30, 2012.
Direct Operating Expenses
Car Rental Segment
Direct operating expenses for our car rental segment of $1,053.6 million for the three months ended September 30, 2012 decreased 1.7% from $1,071.8 million for the three months ended September 30, 2011 as a result of decreases in fleet related expenses and other direct operating expenses, partly offset by an increase in personnel related expenses.
Fleet related expenses for our car rental segment of $248.3 million for the three months ended September 30, 2012 decreased 7.3% from the three months ended September 30, 2011. The decrease was primarily related to a decrease of $17.3 million in vehicle damage costs due to higher collections from customers on damaged or wrecked vehicles and the effects of foreign currency translation of approximately $12.1 million, partly offset by increases in maintenance expense of $4.7 million and insurance expense of $4.5 million primarily related to increased average fleet.
Other direct operating expenses for our car rental segment of $488.2 million for the three months ended September 30, 2012 decreased 0.5% from the three months ended September 30, 2011. The decrease was primarily related to decreases in field administration expenses of $3.0 million, guaranteed charge card of $2.9 million and computers of $2.8 million as well as by the effects of foreign currency translation of approximately $16.6 million, partly offset by increases in facilities expense of $8.0 million, commissions of $6.5 million, concessions of $4.0 million and field systems expenses of $2.6 million. These increases were primarily a result of improved worldwide rental volume demand and additional locations associated with off-airport expansion.
Personnel related expenses for our car rental segment of $317.1 million for the three months ended September 30, 2012 increased 1.2% from the three months ended September 30, 2011. The increase was primarily related to salaries and related expenses of $6.3 million and higher incentives of $5.1 million associated with improved volume and additional off-airport locations in 2012 and due to an increase of $2.4 million related to Donlen, which was acquired on September 1, 2011, partly offset by a decrease in outside services of $1.7 million and by the effects of foreign currency translation of approximately $8.2 million.
Equipment Rental Segment
Direct operating expenses for our equipment rental segment of $187.7 million for the three months ended September 30, 2012 increased 7.0% from $175.4 million for the three months ended September 30, 2011 as a result of increases
48
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
in other direct operating expenses, personnel related expenses and fleet related expenses.
Other direct operating expenses for our equipment rental segment of $75.8 million for the three months ended September 30, 2012 increased $7.1 million, or 10.3% from the three months ended September 30, 2011. The increase was primarily related to $4.0 million of other direct operating expenses associated with Cinelease, which was acquired in January 2012, restructuring and restructuring related charges of $2.1 million, increases of $1.8 million in cost of sales due to higher equipment sales and $1.4 million in re-rent expenses, partly offset by a decrease of $1.3 million in field administration costs primarily attributable to a legal settlement in the prior year in conjunction with a reduction in procurement costs resulting from bringing in certain outsourced services and by the effects of foreign currency translation of approximately $1.0 million.
Personnel related expenses for our equipment rental segment of $60.2 million for the three months ended September 30, 2012 increased $4.2 million, or 7.4%, from the three months ended September 30, 2011. The increase was related to $1.8 million of personnel related expenses associated with Cinelease, which was acquired in January 2012, as well as increases in salaries and related expenses of $2.8 million and higher incentives of $0.6 million due to increased volumes and new branch openings, partly offset by the effects of foreign currency translation of approximately $1.0 million.
Fleet related expenses for our equipment rental segment of $51.7 million for the three months ended September 30, 2012 increased $1.1 million, or 2.2% from the three months ended September 30, 2011. The increase was primarily related to increased rental volume resulting in increased freight and delivery costs of $1.7 million, increase of $1.0 million of fleet related expenses associated with Cinelease, which was acquired in January 2012 and increased insurance, license and tax expenses of $0.6 million, partly offset by a decrease in refueling costs of $2.2 million primarily driven by the increase in average fuel prices in conjunction with an increase in fleet from the prior year and by the effects of foreign currency translation of approximately $0.8 million.
Depreciation of Revenue Earning Equipment and Lease Charges
Car Rental Segment
Depreciation of revenue earning equipment and lease charges for our car rental segment of $490.5 million for the three months ended September 30, 2012 increased 6.3% from $461.3 million for the three months ended September 30, 2011. The increase was primarily due to a higher depreciation expense of $69.0 million related to the acquisition of Donlen in September 2011, as well as an increase in our average fleet size of 2.2% (exclusive of vehicles acquired through the Donlen acquisition), partly offset by lower net depreciation per vehicle and a higher mix of non-program cars.
Equipment Rental Segment
Depreciation of revenue earning equipment and lease charges in our equipment rental segment of $70.0 million for the three months ended September 30, 2012 increased 13.1% from $62.0 million for the three months ended September 30, 2011. The increase was primarily due to an 11.0% increase in the average acquisition cost of rental equipment operated during the period, partly offset by higher residual values on the disposal of used equipment and the effects of foreign currency translation of approximately $1.0 million.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $3.5 million or 1.8% from the prior year period, due to increases in administrative expenses and sales promotion expenses, partially offset by a decrease in advertising expenses.
Administrative expenses increased $3.2 million or 2.7%, primarily due to the acquisition of Donlen, which added $4.4 million in administrative expenses as well as increase in incentives of $1.9 million, outside services of $1.9 million, salaries and related expenses of $1.1 million, partially offset by decreases due to the effects of foreign currency translation of approximately $5.2 million and restructuring and restructuring related charges of $2.2 million.
49
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Sales promotion expenses increased $2.9 million or 8.1%, primarily related to increases in sales salaries and commissions due to improved results, partly offset by the effects of foreign currency translation of approximately $1.0 million.
Advertising expenses decreased $2.6 million or 5.6%, primarily due to elevated on-line advertising in 2011 as well as the effects of foreign currency translation of approximately $2.0 million.
Interest Expense
Car Rental Segment
Interest expense for our car rental segment of $82.6 million for the three months ended September 30, 2012 decreased 9.5% from $91.2 million for the three months ended September 30, 2011. The decrease was primarily lower fleet levels and interest rates in Europe, partly offset by an increase in the weighted average debt outstanding as result of an increased fleet size in the U.S., and by Donlen's additional interest expense.
Equipment Rental Segment
Interest expense for our equipment rental segment of $12.8 million for the three months ended September 30, 2012 increased 19.6% from $10.7 million for the three months ended September 30, 2011. The increase was primarily due to an increase in weighted average debt outstanding as a result of an increased fleet size.
Other
Other interest expense relating to interest on corporate debt of $59.5 million for the three months ended September 30, 2012 decreased 11.7% from $67.4 million for the three months ended September 30, 2011. The decrease was primarily due to the prior year's write-off of unamortized debt costs in connection with the redemption of a portion of our 8.875% Senior Notes, as well as a decrease in the average debt outstanding and interest rates in 2012, mainly due to the redemption of the remainder of our 8.875% Senior Notes and 7.875% Senior Notes in the first quarter of 2012.
Interest Income
Interest income decreased $0.5 million from the prior year period.
Other (Income) Expense, Net
Other income increased $9.5 million from the prior year period. The increase was principally due to a gain of $9.1 million from the sale of the business in Switzerland to a franchisee during the third quarter.
ADJUSTED PRE-TAX INCOME (LOSS)
Car Rental Segment
Adjusted pre-tax income for our car rental segment of $428.7 million increased 14.2% from $375.3 million for the three months ended September 30, 2011. The increase was primarily due to stronger volumes, lower net depreciation per vehicle and disciplined cost management, partly offset by decreased pricing. Adjustments to our car rental segment income before income taxes for the three months ended September 30, 2012 totaled $24.3 million (which consists of purchase accounting of $12.2 million, non-cash debt charges of $10.2 million and restructuring and restructuring related charges of $2.0 million, partly offset by a gain on derivatives of $0.1 million). Adjustments to our car rental segment income before income taxes for the three months ended September 30, 2011 totaled $23.3 million (which consists of non-cash debt charges of $11.1 million, purchase accounting of $8.0 million and restructuring and restructuring related charges of $4.3 million, partly offset by a gain on derivatives of $0.1 million). See footnote (c) to the table under "Results of Operations" for a summary and description of these adjustments.
50
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Equipment Rental Segment
Adjusted pre-tax income for our equipment rental segment of $76.2 million increased 36.3% from $55.9 million for the three months ended September 30, 2011. The increase was primarily due to stronger volumes and pricing, strong cost management performance and higher residual values on the disposal of used equipment. Adjustments to our equipment rental segment income before income taxes for the three months ended September 30, 2012 totaled $13.2 million (which consists of purchase accounting of $10.6 million, restructuring and restructuring related charges of $1.5 million, and non-cash debt charges of $1.1 million). Adjustments to our equipment rental income before income taxes for the three months ended September 30, 2011 totaled $10.7 million (which consists of purchase accounting of $10.2 million and non-cash debt charges of $0.6 million, partly offset by a reversal of restructuring and restructuring related charges of $0.1 million). See footnote (c) to the table under "Results of Operations" for a summary and description of these adjustments.
PROVISION FOR TAXES ON INCOME, NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST AND NET INCOME ATTRIBUTABLE TO THE HERTZ CORPORATION AND SUBSIDIARIES' COMMON STOCKHOLDER
Three Months Ended September 30, | ||||||||||||||
(in millions of dollars) | 2012 | 2011 | $ Change | % Change | ||||||||||
Income before income taxes | $ | 382.1 | $ | 308.3 | $ | 73.8 | 24.0 | % | ||||||
Provision for taxes on income | (130.8 | ) | (89.9 | ) | (40.9 | ) | 45.4 | % | ||||||
Net income | 251.3 | 218.4 | 32.9 | 15.1 | % | |||||||||
Less: Net income attributable to noncontrolling interest | — | (5.8 | ) | 5.8 | (100.0 | )% | ||||||||
Net income attributable to The Hertz Corporation and | ||||||||||||||
Subsidiaries' common stockholder | $ | 251.3 | $ | 212.6 | $ | 38.7 | 18.2 | % |
Provision for Taxes on Income
The effective tax rate for the three months ended September 30, 2012 was 34.2% as compared to 29.2% in the three months ended September 30, 2011. The provision for taxes on income increased $40.9 million, primarily due to higher income before income taxes, changes in geographic earnings mix and changes in losses in certain non-U.S. jurisdictions for which tax benefits are not realized.
Net Income Attributable to Noncontrolling Interest
Net income attributable to noncontrolling interest decreased $5.8 million due to Hertz's purchase of the noncontrolling interest of Navigation Solutions, L.L.C. on December 31, 2011, thereby increasing its ownership interest from 65% to 100%.
Net Income Attributable to The Hertz Corporation and Subsidiaries' Common Stockholder
The net income attributable to The Hertz Corporation and Subsidiaries' common stockholder increased 18.2% primarily due to higher rental volumes in our worldwide car and equipment rental operations, disciplined cost management, lower net depreciation per vehicle in our car rental operations, increased pricing in our equipment rental operations and improved residual values on the disposal of certain used equipment, partly offset by lower pricing in our worldwide car rental operations. The impact of changes in exchange rates on net income was mitigated by the fact that not only revenues but also most expenses outside of the United States were incurred in local currencies.
51
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Nine Months Ended September 30, 2012 Compared with Nine Months Ended September 30, 2011
Summary
The following table sets forth the percentage of total revenues represented by the various line items in our consolidated statements of operations for the nine months ended September 30, 2012 and 2011 (in millions of dollars):
Percentage of Revenues | |||||||||||||
Nine Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||||
Revenues: | |||||||||||||
Car rental | $ | 5,578.5 | $ | 5,272.6 | 83.2 | % | 83.9 | % | |||||
Equipment rental | 998.5 | 891.3 | 14.9 | 14.2 | |||||||||
Other | 125.3 | 120.7 | 1.9 | 1.9 | |||||||||
Total revenues | 6,702.3 | 6,284.6 | 100.0 | 100.0 | |||||||||
Expenses: | |||||||||||||
Direct operating | 3,545.2 | 3,508.6 | 52.9 | 55.8 | |||||||||
Depreciation of revenue earning equipment and | |||||||||||||
lease charges | 1,594.4 | 1,379.0 | 23.8 | 21.9 | |||||||||
Selling, general and administrative | 615.3 | 575.2 | 9.2 | 9.2 | |||||||||
Interest expense | 430.5 | 495.2 | 6.4 | 7.9 | |||||||||
Interest income | (2.3 | ) | (4.6 | ) | — | (0.1 | ) | ||||||
Other (income) expense, net | (10.5 | ) | 62.7 | (0.2 | ) | 1.0 | |||||||
Total expenses | 6,172.6 | 6,016.1 | 92.1 | 95.7 | |||||||||
Income before income taxes | 529.7 | 268.5 | 7.9 | 4.3 | |||||||||
Provision for taxes on income | (225.7 | ) | (102.3 | ) | (3.4 | ) | (1.6 | ) | |||||
Net income | 304.0 | 166.2 | 4.5 | 2.7 | |||||||||
Less: Net income attributable to noncontrolling interest | — | (14.5 | ) | — | % | (0.3 | )% | ||||||
Net income attributable to The Hertz Corporation | |||||||||||||
and Subsidiaries' common stockholder | $ | 304.0 | $ | 151.7 | 4.5 | % | 2.4 | % |
52
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
The following table sets forth certain of our selected car rental, equipment rental and other operating data for the nine months ended or as of September 30, 2012 and 2011:
Nine Months Ended or as of September 30, | |||||||
2012 | 2011 | ||||||
Selected Car Rental Operating Data: | |||||||
Worldwide number of transactions (in thousands) | 21,608 | 20,583 | |||||
Domestic (Hertz) | 16,131 | 15,101 | |||||
International (Hertz) | 5,477 | 5,482 | |||||
Worldwide transaction days (in thousands)(a) | 110,538 | 104,707 | |||||
Domestic (Hertz) | 77,214 | 71,162 | |||||
International (Hertz) | 33,324 | 33,545 | |||||
Worldwide rental rate revenue per transaction day(a)(b) | $ | 40.34 | $ | 41.70 | |||
Domestic (Hertz) | $ | 39.31 | $ | 40.70 | |||
International (Hertz) | $ | 42.73 | $ | 43.81 | |||
Worldwide average number of cars during the period | 651,400 | 613,500 | |||||
Domestic (Hertz company-operated) | 347,300 | 325,500 | |||||
International (Hertz company-operated) | 157,200 | 158,900 | |||||
Donlen (under lease and maintenance) | 146,900 | 129,100 | |||||
Adjusted pre-tax income (in millions of dollars)(a)(c) | $ | 797.8 | $ | 678.8 | |||
Worldwide revenue earning equipment, net (in millions of dollars) | $ | 10,036.4 | $ | 9,859.4 | |||
Selected Worldwide Equipment Rental Operating Data: | |||||||
Rental and rental related revenue (in millions of dollars)(a)(d) | $ | 908.5 | $ | 798.0 | |||
Same store revenue growth, including growth initiatives(a) | 8.1 | % | 10.1 | % | |||
Average acquisition cost of rental equipment operated during the period (in | |||||||
millions of dollars) | $ | 3,017.9 | $ | 2,791.7 | |||
Adjusted pre-tax income (in millions of dollars)(a)(c) | $ | 144.6 | $ | 99.5 | |||
Revenue earning equipment, net (in millions of dollars) | $ | 2,184.8 | $ | 1,779.1 |
_______________________________________________________________________________
(a) | For further details relating to car rental transaction days, car rental rate revenue per transaction day, adjusted pre-tax income, equipment rental and rental related revenue and equipment rental same store revenue growth including growth initiatives, see "Three Months Ended September 30, 2012 Compared with Three Months Ended September 30, 2011—Summary." |
(b) | The following table reconciles our car rental segment revenues to our rental rate revenue and rental rate revenue per transaction day (based on December 31, 2011 foreign exchange rates) for the nine months ended September 30, 2012 and 2011 (in millions of dollars, except as noted): |
Nine Months Ended September 30, | |||||||
2012 | 2011 | ||||||
Car rental segment revenues | $ | 5,700.4 | $ | 5,388.3 | |||
Non-rental rate revenue | (1,242.0 | ) | (887.8 | ) | |||
Foreign currency adjustment | 1.0 | (134.5 | ) | ||||
Rental rate revenue | $ | 4,459.4 | $ | 4,366.0 | |||
Transaction days (in thousands) | 110,538 | 104,707 | |||||
Rental rate revenue per transaction day (in whole dollars) | $ | 40.34 | $ | 41.70 |
53
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
(c) | The contribution of our reportable segments to adjusted pre-tax income and reconciliation to consolidated amounts are presented below (in millions of dollars): |
Nine Months Ended September 30, | |||||||
2012 | 2011 | ||||||
Adjusted pre-tax income: | |||||||
Car rental | $ | 797.8 | $ | 678.8 | |||
Equipment rental | 144.6 | 99.5 | |||||
Total reportable segments | 942.4 | 778.3 | |||||
Adjustments: | |||||||
Other reconciling items(1) | (235.6 | ) | (244.1 | ) | |||
Purchase accounting(2) | (76.9 | ) | (62.2 | ) | |||
Non-cash debt charges(3) | (46.1 | ) | (89.9 | ) | |||
Restructuring charges | (27.0 | ) | (40.4 | ) | |||
Restructuring related charges(4) | (7.6 | ) | (6.4 | ) | |||
Derivative gains (losses)(5) | 0.1 | 0.1 | |||||
Acquisition related costs | (19.6 | ) | (13.6 | ) | |||
Management transition costs | — | (4.0 | ) | ||||
Pension adjustment(6) | — | 13.1 | |||||
Premiums paid on debt(7) | — | (62.4 | ) | ||||
Income before income taxes | $ | 529.7 | $ | 268.5 |
_______________________________________
(1) | Represents general corporate expenses, certain interest expense (including net interest on corporate debt), as well as other business activities. |
(2) | Represents the purchase accounting effects of the Acquisition on our results of operations relating to increased depreciation and amortization of tangible and intangible assets and accretion of revalued workers' compensation and public liability and property damage liabilities. Also represents the purchase accounting effects of subsequent acquisitions on our results of operations relating to increased depreciation and amortization of tangible and intangible assets. |
(3) | Represents non-cash debt charges relating to the amortization and write-off of deferred debt financing costs and debt discounts. |
(4) | Represents incremental costs incurred directly supporting our business transformation initiatives. Such costs include transition costs incurred in connection with our 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. |
(5) | Represents the mark-to-market adjustment on our interest rate cap. |
(6) | Represents a gain for the U.K. pension plan relating to unamortized prior service cost from a 2010 amendment that eliminated discretionary pension increases related to pre-1997 service primarily pertaining to inactive employees. |
(7) | Represents premiums paid to redeem our 10.5% Senior Subordinated Notes and a portion of our 8.875% Senior Notes. |
(d) | The following table reconciles our equipment rental segment revenues to our equipment rental and rental related revenue (based on December 31, 2011 foreign exchange rates) for the nine months ended September 30, 2012 and 2011 (in millions of dollars): |
Nine Months Ended September 30, | |||||||
2012 | 2011 | ||||||
Equipment rental segment revenues | $ | 1,000.1 | $ | 891.6 | |||
Equipment sales and other revenue | (88.3 | ) | (78.8 | ) | |||
Foreign currency adjustment | (3.3 | ) | (14.8 | ) | |||
Rental and rental related revenue | $ | 908.5 | $ | 798.0 |
54
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
REVENUES
Nine Months Ended September 30, | ||||||||||||||
(in millions of dollars) | 2012 | 2011 | $ Change | % Change | ||||||||||
Revenues by Segment | ||||||||||||||
Car rental | $ | 5,700.4 | $ | 5,388.3 | $ | 312.1 | 5.8 | % | ||||||
Equipment rental | 1,000.1 | 891.6 | 108.5 | 12.2 | % | |||||||||
Other reconciling items | 1.8 | 4.7 | (2.9 | ) | (62.5 | )% | ||||||||
Total revenues | $ | 6,702.3 | $ | 6,284.6 | $ | 417.7 | 6.6 | % |
Car Rental Segment
Revenues from our car rental segment increased 5.8%, primarily as a result of increases in car rental transaction days worldwide of 5.6%, refueling fees of $25.6 million and airport concession recovery fees of $11.9 million. The increase also includes $312.0 million of higher revenues related to Donlen, which was acquired on September 1, 2011. These increases were partly offset by the effects of foreign currency translation of approximately $123.3 million and a decrease in worldwide RPD.
RPD for worldwide car rental for the nine months ended September 30, 2012 decreased 3.2% from 2011, due to decreases in U.S. and International RPD of 3.4% and 2.5%, respectively, and a mix shift to the U.S. due to uncertain economic conditions in Europe. U.S. airport RPD decreased 3.3% and U.S. off-airport RPD declined by 3.2%. U.S. airport RPD was negatively impacted by a mix shift to longer life, lower RPD rentals (including mix shift towards off-airport and the Advantage brand). International RPD decreased primarily due to a decrease in Europe's airport RPD which was due to the competitive pricing environment and uncertain economic conditions.
Equipment Rental Segment
Revenues from our equipment rental segment increased 12.2%, primarily due to increases of 11.5% and 3.5% in equipment rental volumes and pricing, respectively, partially offset by the effects of foreign currency translation of approximately $12.8 million. The increase in volume was primarily due to strong industrial and improving construction performance. Our acquisition of Cinelease in January 2012 also contributed to the revenue increase.
Other
Revenues from all other sources decreased $2.9 million, primarily due to a decrease in revenues from our third-party claim management services.
EXPENSES
Nine Months Ended September 30, | ||||||||||||||
(in millions of dollars) | 2012 | 2011 | $ Change | % Change | ||||||||||
Expenses: | ||||||||||||||
Fleet related expenses | $ | 838.3 | $ | 855.4 | $ | (17.1 | ) | (2.0 | )% | |||||
Personnel related expenses | 1,151.8 | 1,117.9 | 33.9 | 3.0 | % | |||||||||
Other direct operating expenses | 1,555.1 | 1,535.3 | 19.8 | 1.3 | % | |||||||||
Direct operating | 3,545.2 | 3,508.6 | 36.6 | 1.0 | % | |||||||||
Depreciation of revenue earning equipment | ||||||||||||||
and lease charges | 1,594.4 | 1,379.0 | 215.4 | 15.6 | % | |||||||||
Selling, general and administrative | 615.3 | 575.2 | 40.1 | 7.0 | % | |||||||||
Interest expense | 430.5 | 495.2 | (64.7 | ) | (13.0 | )% | ||||||||
Interest income | (2.3 | ) | (4.6 | ) | 2.3 | (51.1 | )% | |||||||
Other (income) expense, net | (10.5 | ) | 62.7 | (73.2 | ) | (116.8 | )% | |||||||
Total expenses | $ | 6,172.6 | $ | 6,016.1 | $ | 156.5 | 2.6 | % |
55
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Total expenses increased 2.6%, but total expenses as a percentage of revenues decreased from 95.7% for the nine months ended September 30, 2011 to 92.1% for the nine months ended September 30, 2012.
Direct Operating Expenses
Car Rental Segment
Direct operating expenses for our car rental segment of $2,979.1 million for the nine months ended September 30, 2012 increased 0.9% from $2,953.5 million for the nine months ended September 30, 2011 as a result of increases in personnel related expenses and other direct operating expenses, partially offset by a decrease in fleet related expenses.
Personnel related expenses for our car rental segment of $942.9 million for the nine months ended September 30, 2012 increased $22.8 million, or 2.5%, from the nine months ended September 30, 2011. The increase was primarily related to increases in salaries and related expenses associated with improved volume and compensation for employees at additional off-airport locations in 2012 and higher incentives as well as an increase related to Donlen, which was acquired in September 2011, partially offset by decreases in outside services and the effects of foreign currency translation of approximately $17.1 million.
Other direct operating expenses for our car rental segment of $1,355.5 million for the nine months ended September 30, 2012 increased $31.4 million, or 2.4% from the nine months ended September 30, 2011. The increase was primarily related to increases in facilities expenses of $19.7 million, commissions of $14.4 million, concession fees of $11.6 million, restructuring and restructuring related charges of $8.5 million and field systems of $6.0 million, partially offset by the effects of foreign currency translation of approximately $32.0 million. The increases were primarily a result of improved worldwide rental volume demand and additional locations associated with off-airport expansion.
Fleet related expenses for our car rental segment of $680.7 million for the nine months ended September 30, 2012 decreased $28.6 million, or 4.0% from the nine months ended September 30, 2011. The decrease was primarily related to lower vehicle damage costs of $26.6 million due to higher collections from customers on damaged or wrecked vehicles, the effects of foreign currency translation of $23.5 million and lower vehicle license taxes of $3.6 million. These decreases were partially offset by increases in gasoline costs of $17.3 million.
Equipment Rental Segment
Direct operating expenses for our equipment rental segment of $570.5 million for the nine months ended September 30, 2012 increased 2.8% from $554.9 million for the nine months ended September 30, 2011 as a result of increases in personnel related expenses and fleet related expenses, partially offset by a decrease in other direct operating expenses.
Personnel related expenses for our equipment rental segment of $181.5 million for the nine months ended September 30, 2012 increased $12.5 million, or 7.4% from the nine months ended September 30, 2011. The increase was primarily related to increases in salaries and related expenses of $9.0 million, due to increased volumes and new branch openings. Additionally, Cinelease added to the increase of personnel related expenses.
Fleet related expenses for our equipment rental segment of $157.6 million for the nine months ended September 30, 2012 increased $11.6 million, or 7.9% from the nine months ended September 30, 2011. The increase was primarily related to increased rental volume resulting in increased freight and delivery costs of $5.3 million, increased insurance, license and tax expenses of $2.5 million and higher maintenance costs of $2.3 million. Additionally, Cinelease added to the increase of fleet related expenses.
Other direct operating expenses for our equipment rental segment of $231.4 million for the nine months ended September 30, 2012 decreased $8.6 million, or 3.6% from the nine months ended September 30, 2011. The decrease was primarily related to a decrease in restructuring and restructuring related charges of $24.4 million resulting from the closure of several facilities in the first half of the prior year, partly offset by $9.9 million of other direct operating expenses associated with Cinelease, which was acquired in January 2012, and higher cost of sales of $3.9 million due to higher equipment sales and increased re-rent expenses of $3.0 million driven by an
56
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
increased rental demand.
Depreciation of Revenue Earning Equipment and Lease Charges
Car Rental Segment
Depreciation of revenue earning equipment and lease charges for our car rental segment of $1,396.2 million for the nine months ended September 30, 2012 increased 17.8% from $1,185.3 million for the nine months ended September 30, 2011. The increase was primarily due to a higher depreciation expense of $253.7 million related to the acquisition of Donlen in September 2011, as well as an increase in our average fleet size of 4.2% (exclusive of vehicles acquired through the Donlen acquisition), partly offset by lower net depreciation per vehicle, higher vehicle residual values, a higher mix of non-program cars and the effects of foreign currency translation of approximately $28.9 million.
Equipment Rental Segment
Depreciation of revenue earning equipment and lease charges in our equipment rental segment of $198.2 million for the nine months ended September 30, 2012 increased 2.3% from $193.7 million for the nine months ended September 30, 2011. The increase was primarily due to an 8.1% increase in the average acquisition cost of rental equipment operated during the period, partly offset by higher residual values on the disposal of used equipment and by the effects of foreign currency translation of approximately $2.6 million.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $40.1 million, or 7.0%, due to increases in administrative expenses, sales promotion expenses and advertising expenses.
Administrative expenses increased $34.9 million, or 10.0%. The increase was primarily due to $17.3 million of higher administrative expenses related to Donlen which was acquired in September 2011. Additionally, salaries and related expenses increased $12.5 million, legal expenses increased $10.0 million and restructuring and restructuring related charges increased by $5.6 million. These increases were partly offset by the effects of foreign currency translation of approximately $12.8 million.
Sales promotion expenses increased $3.8 million, or 3.5%, primarily related to increases in sales salaries and commissions due to improved results, partially offset by the effects of foreign currency translation of approximately $2.3 million.
Advertising expenses increased $1.4 million, or 1.2%, primarily due to increased media advertising, higher airline miles expense associated with increased volume, and costs related to our new customer loyalty program, partially offset by the effects of foreign currency translation of approximately $3.9 million.
Interest Expense
Car Rental Segment
Interest expense for our car rental segment of $240.3 million for the nine months ended September 30, 2012 decreased 2.2% from $245.7 million for the nine months ended September 30, 2011. The decrease was primarily due to the effects of foreign currency translation, partially offset by the acquisition of Donlen and an increase in the weighted-average debt outstanding.
Equipment Rental Segment
Interest expense for our equipment rental segment of $37.1 million for the nine months ended September 30, 2012 increased 9.0% from $34.1 million for the nine months ended September 30, 2011. The increase was primarily due to increases in the weighted-average debt outstanding as a result of an increase in average fleet size and in the Senior Term Facility and Senior ABL Facility interest rates.
57
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Other
Other interest expense relating to interest on corporate debt of $153.1 million for the nine months ended September 30, 2012 decreased 28.9% from $215.4 million for the nine months ended September 30, 2011. The decrease was primarily due to larger write-offs last year of unamortized debt costs in connection with refinancing activity, lower rates achieved with the refinancing of our Senior Notes and Senior Subordinated Notes, and a decrease in the weighted-average debt outstanding and interest rates.
Interest Income
Interest income decreased $2.3 million from the prior year period.
Other (Income) Expense, Net
Other (income) expense, net for the nine months ended September 30, 2012 and 2011, reflected income of $10.5 million and expense of $62.7 million, respectively. The increase in 2012 was principally due to a gain of $9.1 million from the sale of the business in Switzerland to a franchisee during the third quarter. The expense in 2011 was primarily due to $62.4 million in premiums paid in connection with the redemption of our 10.5% Senior Subordinated Notes and a portion of our 8.875% Senior Notes.
ADJUSTED PRE-TAX INCOME (LOSS)
Car Rental Segment
Adjusted pre-tax income for our car rental segment of $797.8 million increased 17.5% from $678.8 million for the nine months ended September 30, 2011. The increase was primarily due to stronger volumes, lower net depreciation per vehicle, improved residual values and disciplined cost management, partly offset by decreased pricing. Adjustments to our car rental segment income before income taxes for the nine months ended September 30, 2012 totaled $97.0 million (which consists of purchase accounting of $42.5 million, non-cash debt charges of $32.0 million, and restructuring and restructuring related charges of $22.6 million, partly offset by a gain on derivatives of $0.1 million). Adjustments to our car rental segment income before income taxes for the nine months ended September 30, 2011 totaled $53.7 million (which consists of non-cash debt charges of $31.9 million, purchase accounting of $24.6 million and restructuring and restructuring related charges of $9.7 million and derivative losses of $0.6 million, partly offset by pension adjustments of $13.1 million). See footnote (c) to the table under "Results of Operations" for a summary and description of these adjustments.
Equipment Rental Segment
Adjusted pre-tax income for our equipment rental segment of $144.6 million increased 45.3% from $99.5 million for the nine months ended September 30, 2011. The increase was primarily due to stronger volumes and pricing, strong cost management performance and higher residual values on the disposal of used equipment. Adjustments to our equipment rental segment income before income taxes for the nine months ended September 30, 2012 totaled $43.5 million (which consists of purchase accounting of $31.4 million, restructuring and restructuring related charges of $8.4 million, and non-cash debt charges of $3.7 million). Adjustments to our equipment rental loss before income taxes for the nine months ended September 30, 2011 totaled $75.3 million (which consists of restructuring and restructuring related charges of $35.8 million, purchase accounting of $35.0 million, and non-cash debt charges of $4.5 million). See footnote (c) to the table under "Results of Operations" for a summary and description of these adjustments.
58
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
PROVISION FOR TAXES ON INCOME, NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST AND NET INCOME ATTRIBUTABLE TO THE HERTZ CORPORATION AND SUBSIDIARIES' COMMON STOCKHOLDER
Nine Months Ended September 30, | ||||||||||||||
(in millions of dollars) | 2012 | 2011 | $ Change | % Change | ||||||||||
Income before income taxes | $ | 529.7 | $ | 268.5 | $ | 261.2 | 97.3 | % | ||||||
Provision for taxes on income | (225.7 | ) | (102.3 | ) | (123.4 | ) | 120.7 | % | ||||||
Net income | 304.0 | 166.2 | 137.8 | 82.9 | % | |||||||||
Less: Net income attributable to noncontrolling interest | — | (14.5 | ) | 14.5 | (100.0 | )% | ||||||||
Net income attributable to The Hertz Corporation | ||||||||||||||
and Subsidiaries' common stockholder | $ | 304.0 | $ | 151.7 | $ | 152.3 | 100.4 | % |
Provision for Taxes on Income
The effective tax rate for the nine months ended September 30, 2012 was 42.6% as compared to 38.1% in the nine months ended September 30, 2011. The provision for taxes on income increased $123.4 million, primarily due to higher income before income taxes, changes in geographic earnings mix and changes in losses in certain non-U.S. jurisdictions for which tax benefits are not realized.
Net Income Attributable to Noncontrolling Interest
Net income attributable to noncontrolling interest decreased $14.5 million due to Hertz's purchase of the noncontrolling interest of Navigation Solutions, L.L.C. on December 31, 2011, thereby increasing its ownership interest from 65% to 100%.
Net Income Attributable to The Hertz Corporation and Subsidiaries' Common Stockholder
The net income attributable to The Hertz Corporation and Subsidiaries' common stockholder increased $152.3 million primarily due to higher rental volumes in our worldwide car and equipment rental operations, improved residual values on the disposal of certain vehicles and used equipment, lower net depreciation per vehicle in our car rental operations, disciplined cost management and increased pricing in our equipment rental operations, partly offset by lower pricing in our worldwide car rental operations. The impact of changes in exchange rates on net income was mitigated by the fact that not only revenues but also most expenses outside of the United States were incurred in local currencies.
LIQUIDITY AND CAPITAL RESOURCES
Our domestic and international operations are funded by cash provided by operating activities and by extensive financing arrangements maintained by us in the United States and internationally.
Cash Flows
As of September 30, 2012, we had cash and cash equivalents of $453.3 million, a decrease of $477.9 million from $931.2 million as of December 31, 2011. The following table summarizes such decrease:
Nine Months Ended September 30, | |||||||||||
(in millions of dollars) | 2012 | 2011 | $ Change | ||||||||
Cash provided by (used in): | |||||||||||
Operating activities | $ | 2,142.4 | $ | 1,661.3 | 481.1 | ||||||
Investing activities | (3,255.6 | ) | (3,465.0 | ) | 209.4 | ||||||
Financing activities | 634.3 | (199.0 | ) | 833.3 | |||||||
Effect of exchange rate changes | 1.0 | 14.0 | (13.0 | ) | |||||||
Net change in cash and cash equivalents | $ | (477.9 | ) | $ | (1,988.7 | ) | $ | 1,510.8 |
During the nine months ended September 30, 2012, we generated $481.1 million more cash from operating activities
59
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
compared with the same period in 2011. The increase was primarily a result of higher earnings before interest, depreciation and amortization, improved working capital and reduced interest expense as well as due to the timing of our payments.
Our primary use of cash in investing activities is for the acquisition of revenue earning equipment, which consists of cars and equipment. During the nine months ended September 30, 2012, we used $209.4 million less cash for investing activities compared with the same period in 2011. The decrease in the use of funds was primarily due to decreases in revenue earning equipment expenditures, a decrease in the year-over-year change in restricted cash and cash equivalents and acquisitions during the period, partly offset by decrease in the proceeds from disposal of revenue earning equipment in our car rental operations. The decrease in revenue earning equipment expenditures in our car rental operations was primarily due to the shift from the purchase of program cars to more non-program cars which have longer holding periods as compared to program cars. This decrease was partly offset by an increase in revenue earning equipment expenditures in our equipment rental operations due to the timing of purchases and payments. As of September 30, 2012 and December 31, 2011, we had $376.8 million and $308.0 million, respectively, of restricted cash and cash equivalents to be used for the purchase of revenue earning vehicles and other specified uses under our fleet financing facilities, our Like Kind Exchange Program, or "LKE Program," and to satisfy certain of our self-insurance regulatory reserve requirements. The increase in restricted cash and cash equivalents of $68.7 million from December 31, 2011 to September 30, 2012, primarily related to the timing of purchases and sales of revenue earning vehicles.
During the nine months ended September 30, 2012, cash flows from financing activities increased by $833.3 million compared with the same period in 2011. The increase was primarily due to payment of a greater amount of pre-funded debt associated with our Senior Note redemptions in the prior year.
Capital Expenditures
The tables below set forth the revenue earning equipment and property and equipment capital expenditures and related disposal proceeds on a cash basis consistent with our consolidated statements of cash flows, by quarter for 2012 and 2011 (in millions of dollars).
Revenue Earning Equipment | Property and Equipment | ||||||||||||||||||||||
Capital Expenditures | Disposal Proceeds | Net Capital Expenditures | Capital Expenditures | Disposal Proceeds | Net Capital Expenditures | ||||||||||||||||||
2012 | |||||||||||||||||||||||
First Quarter | $ | 2,648.7 | $ | (2,009.3 | ) | $ | 639.4 | $ | 74.2 | $ | (47.6 | ) | $ | 26.6 | |||||||||
Second Quarter | 3,050.2 | (1,599.0 | ) | 1,451.2 | 63.0 | (8.8 | ) | 54.2 | |||||||||||||||
Third Quarter | 1,982.1 | (1,207.1 | ) | 775.0 | 92.2 | (38.2 | ) | 54.0 | |||||||||||||||
$ | 7,681.0 | $ | (4,815.4 | ) | $ | 2,865.6 | $ | 229.4 | $ | (94.6 | ) | $ | 134.8 | ||||||||||
2011 | |||||||||||||||||||||||
First Quarter | $ | 1,963.8 | $ | (1,690.2 | ) | $ | 273.6 | $ | 56.8 | $ | (14.5 | ) | $ | 42.3 | |||||||||
Second Quarter | 3,503.0 | (1,798.7 | ) | 1,704.3 | 68.6 | (13.9 | ) | 54.7 | |||||||||||||||
Third Quarter | 2,397.8 | (1,443.5 | ) | 954.3 | 76.9 | (19.7 | ) | 57.2 | |||||||||||||||
$ | 7,864.6 | $ | (4,932.4 | ) | $ | 2,932.2 | $ | 202.3 | $ | (48.1 | ) | $ | 154.2 |
Nine Months Ended September 30, | ||||||||||||||
2012 | 2011 | $ Change | % Change | |||||||||||
Revenue earning equipment expenditures | ||||||||||||||
Car rental | $ | 7,074.5 | $ | 7,452.1 | $ | (377.6 | ) | (5.1 | )% | |||||
Equipment rental | 606.5 | 412.5 | 194.0 | 47.0 | % | |||||||||
Total | $ | 7,681.0 | $ | 7,864.6 | $ | (183.6 | ) | (2.3 | )% |
The decrease in our car rental operations revenue earning equipment expenditures was primarily due to the shift from the purchase of program cars to more non-program cars which have longer holding periods as compared to program cars, resulting in a slower rotation of fleet during the nine months ended September 30, 2012 as compared to the nine
60
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
months ended September 30, 2011. The increase in our equipment rental operations revenue earning equipment expenditures was primarily due to the timing of purchases and payments during the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011.
Nine Months Ended September 30, | ||||||||||||||
2012 | 2011 | $ Change | % Change | |||||||||||
Property and equipment expenditures | ||||||||||||||
Car rental | $ | 170.9 | $ | 169.2 | $ | 1.7 | 1.0 | % | ||||||
Equipment rental | 29.8 | 19.7 | 10.1 | 51.1 | % | |||||||||
Other | 28.7 | 13.4 | 15.3 | 114.5 | % | |||||||||
Total | $ | 229.4 | $ | 202.3 | $ | 27.1 | 13.4 | % |
The increase in property and equipment expenditures was primarily due to increased locations in our operations, continued improvement in economic conditions and business performance during the nine months ended September 30, 2012.
Financing
Our primary liquidity needs include servicing of corporate and fleet related debt, the payment of operating expenses and purchases of rental vehicles and equipment to be used in our operations. Our primary sources of funding are operating cash flows, cash received on the disposal of vehicles and equipment, borrowings under our asset-backed securitizations and our asset-based revolving credit facilities and access to the credit markets generally.
As of September 30, 2012, we had $12,293.2 million of total indebtedness outstanding. Cash paid for interest during the nine months ended September 30, 2012, was $383.2 million, net of amounts capitalized. Accordingly, we are highly leveraged and a substantial portion of our liquidity needs arise from debt service on our indebtedness and from the funding of our costs of operations, capital expenditures and acquisitions.
Our liquidity as of September 30, 2012 consisted of cash and cash equivalents, unused commitments under our Senior ABL Facility and unused commitments under our fleet debt. For a description of these amounts, see Note 7 to the Notes to our condensed consolidated financial statements included in this Report as well as "Borrowing Capacity and Availability," below.
Maturities
The aggregate amounts of maturities of debt for each of the twelve-month periods ending September 30 (in millions of dollars) are as follows:
2013 | $ | 5,785.1 | (including $5,136.2 of other short-term borrowings*) | ||
2014 | $ | 254.0 | |||
2015 | $ | 1,769.6 | |||
2016 | $ | 329.2 | |||
2017 | $ | 266.0 | |||
After 2017 | $ | 3,893.0 |
_______________________________________________________________________________
* | Our short-term borrowings as of September 30, 2012 include, among other items, the amounts outstanding under the European Securitization, Australian Securitization, Senior ABL Facility, U.S. Fleet Financing Facility, U.S. Fleet Variable Funding Notes, Brazilian Fleet Financing Facility, Canadian Securitization, Capitalized Leases, European Revolving Credit Facility and the Donlen GN II Variable Funding Notes. These amounts are reflected as short-term borrowings, regardless of the facility maturity date, as these facilities are revolving in nature and/or the outstanding borrowings have maturities of three months or less. As of September 30, 2012, short-term borrowings had a weighted average interest rate of 2.1%. |
We believe that cash generated from operations and cash received on the disposal of vehicles and equipment, together with amounts available under various liquidity facilities will be adequate to permit us to meet our debt maturities over the next twelve months.
In February 2012, Hertz called the remainder of its outstanding 8.875% Senior Notes due 2014 and 7.875% Senior
61
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Notes due January 2014 for redemption. Hertz redeemed these notes in full during March 2012.
In February 2012, Hertz caused its wholly-owned subsidiary GN Funding II L.L.C. to increase the capacity of the Donlen GN II Variable Funding Notes from $850 million to $900 million. In July 2012 Hertz caused its wholly-owned subsidiary GN Funding II L.L.C. to further increase the capacity of the Donlen GN II Variable Funding Notes from $900 million to $1 billion and to extend the maturity date of the Donlen GN II Variable Funding Notes from August 2012 to December 2012. In October 2012, Hertz caused its wholly-owned subsidiary GN Funding II L.L.C. to extend the maturity date of the Donlen GN II Variable Funding Notes from December 2012 to December 2013.
In March 2012, Hertz issued an additional $250 million in aggregate principal amount of the 6.75% Senior Notes due 2019. The proceeds of this March 2012 offering were used to redeem all of the outstanding 8.875% Senior Notes due 2014 and together with cash on hand, all of the outstanding 7.875% Senior Notes due 2014 which resulted in the write-off of unamortized debt costs of $3.2 million.
In March 2012, Hertz caused its wholly-owned subsidiary HC Limited Partnership to amend the Canadian Securitization to extend the maturity date from March 2012 to May 2012. In the second quarter of 2012, the maturity date was extended to June 2013.
In April 2012, Hertz caused its wholly-owned subsidiary Hertz Vehicle Financing LLC, or "HVF," to pay off the remaining debt outstanding under the U.S. ABS Program Series 2011-2 U.S. Fleet Variable Funding Notes and terminated the facility.
In May 2012, Hertz caused its wholly-owned subsidiary HVF to increase the borrowing capacity of its Series 2009-1 U.S. Fleet Variable Funding Notes by $250 million.
In June 2012, Hertz amended the European Revolving Credit Facility to extend the maturity date from June 2013 to June 2015.
In June 2012, Hertz amended the Brazilian Fleet Financing Facility to extend the maturity date from June 2012 to February 2013.
In June 2012, Hertz amended the European Seasonal Revolving Credit Facility under the European Revolving Credit Facility to create a commitment period running from June 2012 to November 2012 that provides for aggregate maximum borrowings of €85.7 million (the equivalent of $110.3 million as of September 30, 2012), subject to borrowing base availability.
In July 2012, Hertz caused its subsidiary, International Fleet Financing No. 2 B.V. to amend the European Securitization to extend the maturity from July 2013 to July 2014.
In August 2012, Hertz obtained commitments to make unsecured bridge loans in an aggregate amount of $1.95 billion, or the “Bridge Commitments,” in connection with the offer to acquire Dollar Thrifty. The proceeds of the bridge loans, if any, would be used to, among other things, finance a portion of the consideration Dollar Thrifty stockholders would receive in connection with the acquisition of Dollar Thrifty.
For subsequent events relating to our indebtedness, see Note 17 to the Notes to our condensed consolidated financial statements included in this Report.
Registration Rights and Indentures for the Senior Notes
Pursuant to the terms of exchange and registration rights agreements entered into in connection with the issuance of $250 million in aggregate principal amount of the 6.75% Senior Notes due 2019 in March 2012, Hertz has agreed to file a registration statement under the Securities Act of 1933, as amended, to permit either the exchange of such notes for registered notes or, in the alternative, the registered resale of such notes. Hertz plans to enter into an exchange and registration rights agreements in connection with the release from escrow of $700 million aggregate principal amount of 5.875% Senior Notes due 2020 and $500 million aggregate principal amount of 6.250% Senior Notes due 2022 issued by its newly-formed, wholly-owned subsidiary, HDTFS, Inc. Hertz expects to agree to file a registration statement under the Securities Act of 1933, as amended, to permit either the exchange of such notes for registered notes or, in the alternative, the registered resale of such notes. Hertz's failure to meet its obligations under either exchange and registration rights agreement, including by failing to have the registration statement become effective by the date that is 365 days after the respective date of the exchange and registration rights agreement or failing to
62
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
complete the exchange offer by the date that is 395 days after the date of the exchange and registration rights agreement, will result in Hertz incurring special interest on such notes at a per annum rate of 0.25% for the first 90 days of any period where a default has occurred and is continuing, which rate will be increased by an additional 0.25% during each subsequent 90 day period, up to a maximum of 0.50%. We do not believe the special interest obligation is probable, and as such, we have not recorded any amounts with respect to this registration payment arrangement.
Hertz's obligations under the indentures for the Senior Notes are guaranteed by each of its direct and indirect domestic subsidiaries that is a guarantor under the Senior Term Facility. The guarantees of all of the subsidiary guarantors may be released to the extent such subsidiaries no longer guarantee our Senior Credit Facilities in the United States.
The indentures for the Senior 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.
Other Financing Risks
A significant number of cars that we purchase are subject to repurchase by car manufacturers under contractual repurchase or guaranteed depreciation programs. Under these programs, car manufacturers agree to repurchase cars at a specified price or guarantee the depreciation rate on the cars during a specified time period, typically subject to certain car condition and mileage requirements. We use book values derived from this specified price or guaranteed depreciation rate to calculate financing capacity under certain asset-backed and asset-based financing arrangements.
In the event of a bankruptcy of a car manufacturer, our liquidity would be impacted by several factors including reductions in fleet residual values and the risk that we would be unable to collect outstanding receivables due to us from such bankrupt manufacturer. In addition, the program cars manufactured by any such company would need to be removed from our financing facilities or re-designated as non-program vehicles, which would require us to furnish additional credit enhancement associated with these program vehicles. For a discussion of the risks associated with a manufacturer's bankruptcy or our reliance on asset-backed and asset-based financing, see "Item 1A—Risk Factors" included in our Form 10-K.
We rely significantly on asset-backed and asset-based financing arrangements to purchase cars for our domestic and international car rental fleet. The amount of financing available to us pursuant to these programs depends on a number of factors, many of which are outside our control, including recently adopted legislation, proposed SEC rules and regulations and other legislative and administrative developments. In this regard, there has been uncertainty regarding the potential impact of recently proposed SEC rules and regulations governing the issuance of asset-backed securities and additional requirements contained in the Dodd-Frank Wall Street Reform and Consumer Protection Act. While we will continue to monitor these developments and their impact on our ABS program, the SEC rules and regulations, once adopted and implemented, may impact our ability and/or desire to engage in asset-backed financings in the future. For further information concerning our asset-backed financing programs and our indebtedness, see Note 4 to the Notes to our audited annual consolidated financial statements included in our Form 10-K under the caption "Item 8—Financial Statements and Supplementary Data." For a discussion of the risks associated with our reliance on asset-backed and asset-based financing and the significant amount of indebtedness, see "Item 1A—Risk Factors" in our Form 10-K.
For further information on our indebtedness, see Note 7 to the Notes to our condensed consolidated financial statements included in this Report.
Covenants
Certain of our debt instruments and credit facilities contain a number of covenants that, among other things, limit or restrict the ability of the borrowers and the guarantors to dispose of assets, incur additional indebtedness, incur guarantee obligations, prepay certain indebtedness, make certain restricted payments (including paying dividends, redeeming stock 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.
63
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Under the terms of our Senior Term Facility and Senior ABL Facility, we are not subject to ongoing financial maintenance covenants; however, under the Senior ABL Facility, failure to maintain certain levels of liquidity will subject the Hertz credit group to a contractually specified fixed charge coverage ratio of not less than 1:1 for the four quarters most recently ended. As of September 30, 2012, we were not subject to such contractually specified fixed charge coverage ratio.
In addition to borrowings under our Senior Credit Facilities, we have a significant amount of additional debt outstanding. For further information on the terms of our Senior Credit Facilities as well as our significant amount of other debt outstanding, see Note 7 to the Notes to our condensed consolidated financial statements included in this Report and Note 4 to the Notes to our audited annual consolidated financial statements included in our Form 10-K under the caption "Item 8—Financial Statements and Supplementary Data." For a discussion of the risks associated with our significant indebtedness, see "Item 1A—Risk Factors" in our Form 10-K.
Borrowing Capacity and Availability
As of September 30, 2012, the following facilities were available for the use of Hertz and its subsidiaries (in millions of dollars):
Remaining Capacity | Availability Under Borrowing Base Limitation | ||||||
Corporate Debt | |||||||
Senior ABL Facility | $ | 1,037.3 | $ | 1,016.5 | |||
Total Corporate Debt | 1,037.3 | 1,016.5 | |||||
Fleet Debt | |||||||
U.S. Fleet Variable Funding Notes | 288.1 | — | |||||
Donlen GN II Variable Funding Notes | 105.8 | — | |||||
U.S. Fleet Financing Facility | 31.1 | — | |||||
European Revolving Credit Facility | — | — | |||||
European Securitization | 101.3 | — | |||||
Canadian Securitization | 55.8 | — | |||||
Australian Securitization | 97.0 | 1.2 | |||||
Capitalized Leases | 117.0 | — | |||||
Total Fleet Debt | 796.1 | 1.2 | |||||
Total | $ | 1,833.4 | $ | 1,017.7 |
Our borrowing capacity and availability primarily comes from our "revolving credit facilities," which are a combination of asset-backed securitization facilities and asset-based revolving credit facilities. Creditors under each of our revolving credit facilities have a claim on a specific pool of assets as collateral. Our ability to borrow under each revolving credit facility is a function of, among other things, the value of the assets in the relevant collateral pool. We refer to the amount of debt we can borrow given a certain pool of assets as the "borrowing base."
We refer to "Remaining Capacity" as the maximum principal amount of debt permitted to be outstanding under the respective facility (i.e., the amount of debt we could borrow assuming we possessed sufficient assets as collateral) less the principal amount of debt then-outstanding under such facility.
We refer to "Availability Under Borrowing Base Limitation" as the lower of Remaining Capacity or the borrowing base less the principal amount of debt then-outstanding under such facility (i.e., the amount of debt we could borrow given the collateral we possess at such time).
As of September 30, 2012, the Senior Term Facility had approximately $0.3 million available under the letter of credit facility and the Senior ABL Facility had $1,092.3 million available under the letter of credit facility sublimit, subject to borrowing base restrictions.
Substantially all of our revenue earning equipment and certain related assets are owned by special purpose entities, or are encumbered in favor of our lenders under our various credit facilities.
64
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Some of these special purpose entities are consolidated variable interest entities, of which we are the primary beneficiary, whose sole purpose is to provide commitments to lend in various currencies subject to borrowing bases comprised of rental vehicles and related assets of certain of Hertz International, Ltd.'s subsidiaries. As of September 30, 2012 and December 31, 2011, our International Fleet Financing No. 1 B.V., International Fleet Financing No. 2 B.V. and HA Funding Pty, Ltd. variable interest entities had total assets primarily comprised of loans receivable and revenue earning equipment of $658.5 million and $456.3 million, respectively, and total liabilities primarily comprised of debt of $658.0 million and $455.8 million, respectively.
Off-Balance Sheet Commitments and Arrangements
As of September 30, 2012 and December 31, 2011, the following guarantees (including indemnification commitments) were issued and outstanding:
Indemnification Obligations
In the ordinary course of business, we execute 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; and financial matters. Performance under these indemnification obligations would generally be triggered by a breach of terms of the contract or by a third party claim. We regularly evaluate the probability of having to incur costs associated with these indemnification obligations and have accrued for expected losses that are probable and estimable. The types of indemnification obligations for which payments are possible include the following:
Sponsors; Directors
We have entered into customary indemnification agreements with Hertz Holdings, the Sponsors and Hertz Holdings’ stockholders affiliated with the Sponsors, pursuant to which Hertz Holdings and we will indemnify the Sponsors, Hertz Holdings’ stockholders affiliated with the Sponsors 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 the Sponsors and certain other claims and liabilities, including liabilities arising out of financing arrangements or securities offerings. We do not believe that these indemnifications are reasonably likely to have a material impact on us. Hertz Holdings has entered into indemnification agreements with each of its directors.
Environmental
We have 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 we may be held responsible could be substantial. The probable expenses that we expect to incur for such matters have been accrued, and those expenses are reflected in our condensed consolidated financial statements. As of September 30, 2012 and December 31, 2011, the aggregate amounts accrued for environmental liabilities including liability for environmental indemnities, reflected in our condensed consolidated balance sheets in "Accrued liabilities" were $1.5 million and $1.5 million, respectively. The accrual generally represents the estimated cost to study potential environmental issues at sites deemed to require investigation or clean-up activities, and the estimated cost to implement remediation actions, including on-going maintenance, as required. Cost estimates are developed by site. Initial cost estimates are based on historical experience at similar sites and are refined over time on the basis of in-depth studies of the sites. For many sites, the remediation costs and other damages for which we ultimately may be responsible cannot be reasonably estimated because of uncertainties with respect to factors such as our connection to the site, the materials there, the involvement of other potentially responsible parties, the application of laws and other standards or regulations, site conditions, and the nature and scope of investigations, studies, and remediation to be undertaken (including the technologies to be required and the extent, duration, and success of remediation).
65
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Risk Management
For a discussion of additional risks arising from our operations, including vehicle liability, general liability and property damage insurable risks, see "Item 1—Business—Risk Management" in our Form 10-K.
Market Risks
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 gasoline 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. For more information on these exposures, see Note 13 to the Notes to our condensed consolidated financial statements included in this Report.
Interest Rate Risk
From time to time, we may enter into interest rate swap agreements and/or interest rate cap agreements to manage interest rate risk. See Notes 7 and 13 to the Notes to our condensed consolidated financial statements included in this Report and Notes 4 and 13 to the Notes to our audited annual consolidated financial statements included in our Form 10-K under the caption "Item 8—Financial Statements and Supplementary Data."
We have a significant amount of debt with variable rates of interest based generally on LIBOR, Euro inter-bank offered rate, or "EURIBOR," or their equivalents for local currencies or bank conduit commercial paper rates plus an applicable margin. Increases in interest rates could therefore significantly increase the associated interest payments that we are required to make on this debt.
We have assessed our exposure to changes in interest rates by analyzing the sensitivity to our earnings assuming various changes in market interest rates. Assuming a hypothetical increase of one percentage point in interest rates on our debt portfolio as of September 30, 2012, our net income would decrease by an estimated $32.3 million over a twelve-month period.
Consistent with the terms of the agreements governing the respective debt obligations, we may hedge a portion of the floating rate interest exposure under the various debt facilities to provide protection in respect of such exposure.
Foreign Currency Risk
We have foreign currency exposure to exchange rate fluctuations worldwide and primarily with respect to the Euro, Canadian dollar, Australian dollar and British pound.
We manage our foreign currency risk primarily by incurring, to the extent practicable, operating and financing expenses in the local currency in the countries in which we operate, including making fleet and equipment purchases and borrowing locally. Also, we have purchased foreign exchange options to manage exposure to fluctuations in foreign exchange rates for selected marketing programs. The effect of exchange rate changes on these financial instruments would not materially affect our consolidated financial position, results of operations or cash flows. Our risks with respect to foreign exchange options are limited to the premium paid for the right to exercise the option and the future performance of the option's counterparty.
We also manage exposure to fluctuations in currency risk on intercompany loans we make to certain of our subsidiaries by entering into foreign currency forward contracts at the time of the loans which are intended to offset the impact of foreign currency movements on the underlying intercompany loan obligations.
For the three and nine months ended September 30, 2012, our consolidated statement of operations contained realized and unrealized losses relating to the effects of foreign currency of $3.2 million and $8.6 million, respectively. For the three and nine months ended September 30, 2011, our consolidated statement of operations contained realized and unrealized losses relating to the effects of foreign currency of $9.2 million and $16.9 million, respectively.
See Note 13 to the Notes to our condensed consolidated financial statements included in this Report.
66
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Other Risks
We purchase unleaded gasoline and diesel fuel at prevailing market rates and maintain a program to manage our exposure to changes in fuel prices through the use of derivative commodity instruments. For the three-month and nine-month periods ended September 30, 2012, we recognized losses of $2.1 million and $0.6 million, respectively, in "Direct operating" on our consolidated statement of operations relating to our gasoline swaps. See Note 13 to the Notes to our condensed consolidated financial statements included in this Report.
Inflation
The increased cost of vehicles is the primary inflationary factor affecting us. Many of our other operating expenses are also expected to increase with inflation, including health care costs and gasoline. Management does not expect that the effect of inflation on our overall operating costs will be greater for us than for our competitors.
Income Taxes
In January 2006, we implemented a LKE Program for our U.S. car rental business. Pursuant to the program, we dispose of vehicles and acquire replacement vehicles in a form intended to allow such dispositions and replacements to qualify as tax-deferred "like-kind exchanges" pursuant to section 1031 of the Internal Revenue Code. The program has resulted in deferral of federal and state income taxes for fiscal years 2006, 2007, 2008 and 2009 and part of 2010 and 2012. A LKE Program for HERC has also been in place for several years. The program allows tax deferral if a qualified replacement asset is acquired within a specific time period after asset disposal. Accordingly, if a qualified replacement asset is not purchased within this limited time period, taxable gain is recognized. Over the last few years, for strategic purposes, such as cash management and fleet reduction, we have recognized some taxable gains in the program. In 2009, the bankruptcy filing of an original equipment manufacturer, or "OEM," also resulted in minimal gain recognition. We had sufficient net operating losses to fully offset the taxable gains recognized. We cannot offer assurance that the expected tax deferral will continue or that the relevant law concerning the programs will remain in its current form. An extended reduction in our car rental fleet could result in reduced deferrals in the future, which in turn could require us to make material cash payments for federal and state income tax liabilities. Our inability to obtain replacement financing as our fleet financing facilities mature would likely result in an extended reduction in the fleet. In the event of an extended fleet reduction, we believe the likelihood of making material cash tax payments in the near future is low because of our significant net operating losses. In August 2010, we elected to temporarily suspend the U.S. car rental LKE Program allowing cash proceeds from sales of vehicles to be utilized for various business purposes, including paying down existing debt obligations, future growth initiatives and for general operating purposes. From August 2010 through 2011, recognized tax gains on vehicle dispositions resulting from the LKE suspension were more than offset by 100% tax depreciation on newly acquired vehicles. During 2012 the allowable 50% bonus depreciation helped offset tax gains during the period of LKE suspension. The U.S. car rental LKE Program was reinstated on October 15, 2012.
On January 1, 2009, Bank of America acquired Merrill Lynch & Co., Inc., the parent company of MLGPE. Accordingly, Bank of America is now an indirect beneficial owner of Hertz Holdings' common stock held by MLGPE and certain of its affiliates. For U.S. income tax purposes the transaction, when combined with other unrelated transactions during the previous 36 months, resulted in a change in control as that term is defined in Section 382 of the Internal Revenue Code. Consequently, utilization of all pre-2009 U.S. net operating losses is subject to an annual limitation. The limitation is not expected to result in a loss of net operating losses or have a material adverse impact on taxes.
Employee Retirement Benefits
Pension
We sponsor defined benefit pension plans worldwide. Pension obligations give rise to significant expenses that are dependent on assumptions discussed in Note 5 of the Notes to our audited annual consolidated financial statements included in our Form 10-K under the caption "Item 8—Financial Statements and Supplementary Data." Our 2012 worldwide pre-tax pension expense is expected to be approximately $31.4 million, which would represent an increase of $10.1 million from 2011. The anticipated increase in expense compared to 2011 is primarily due to lower expected rates of return in 2012, lower discount rates at the end of 2011 compared to 2010 and a curtailment gain in the U.K. recorded in 2011.
We participate in various "multiemployer" pension plans. In the event that we withdraw from participation in one of these plans, then applicable law could require us to make an additional lump-sum contribution to the plan, and we
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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
would have to reflect that as an expense in our consolidated statement of operations and as a liability on our condensed consolidated balance sheet. Our withdrawal liability for any multiemployer plan would depend on the extent of the plan's funding of vested benefits. At least one multiemployer plan in which we participate is reported to have, and other of our multiemployer plans could have, significant underfunded liabilities. Such underfunding may increase in the event other employers become insolvent or withdraw from the applicable plan or upon the inability or failure of withdrawing employers to pay their withdrawal liability. In addition, such underfunding may increase as a result of lower than expected returns on pension fund assets or other funding deficiencies.
Recently Issued Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board, or "FASB," issued Accounting Standards Update No. 2011-05, "Presentation of Comprehensive Income," requiring companies to present items of net income and other comprehensive income either in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements of net income and other comprehensive income. The amendments in this update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. These provisions became effective for us beginning with the quarterly report for the period ended March 31, 2012. In December 2011, the FASB issued Accounting Standards Update No. 2011-12, "Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05," which defers the timing of implementing only those changes in Update 2011-05 that relate to the presentation of reclassification adjustments.
In July 2012, the FASB issued Accounting Standards Update No. 2012-02, "Intangibles--Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment", which states that that an entity has the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount.
This provision is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The Company is presently assessing whether to adopt in relation to its annual impairment test scheduled for the fourth quarter.
Other Financial Information
With respect to the unaudited interim financial information of The Hertz Corporation as of September 30, 2012 and for the three-month and nine-month periods ended September 30, 2012 and 2011 included in this Form 10-Q, PricewaterhouseCoopers LLP reported that they applied limited procedures in accordance with professional standards for reviews of such unaudited interim financial information. However, their separate report dated November 2, 2012 included in this Form 10-Q herein states that they did not audit and they do not express an opinion on such unaudited interim financial information. Accordingly, the degree of reliance on their report should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933 for their report on such unaudited interim financial information because that report is not a "report" or "part" of a registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Securities Act of 1933.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
There is no material change in the information reported under "Part II, Item 7A—Quantitative and Qualitative Disclosures About Market Risk," included in our Form 10-K for the fiscal year ended December 31, 2011. See "Item 2—Management's Discussion and Analysis of Financial Condition and Results of Operations—Market Risks," included in this Report.
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information
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required to be disclosed in company reports filed or submitted under the Securities Exchange Act of 1934, or the "Exchange Act," is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in company reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
An evaluation of the effectiveness of our disclosure controls and procedures was performed under the supervision of, and with the participation of, management, including our Chief Executive Officer and Chief Financial Officer, as of the end of the period covered by this Report. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.
Changes in Internal Control Over Financial Reporting
An evaluation of our internal controls over financial reporting was performed under the supervision of, and with the participation of, management, including our Chief Executive Officer and Chief Financial Officer, to determine whether any changes have occurred during the period covered by this Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that no changes in our internal control over financial reporting have occurred during the three months ended September 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II—OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a description of certain pending legal proceedings, see Note 11 to the Notes to our annual audited consolidated financial statements included in our Form 10-K.
There were no material changes in the legal proceedings described in our Form 10-K and in our subsequent quarterly reports on Form 10-Q.
As previously disclosed, on June 15, 2011 we received a subpoena from the staff of the Securities and Exchange Commission, or "SEC," seeking production of documents related to our proposed business combination with Dollar Thrifty Automotive Group, Inc. SEC staff later took the testimony of a Hertz executive and has indicated that they may or may not take further testimony. We are cooperating fully with the SEC's investigation. We do not expect this investigation to have any effect on a proposed business combination with Dollar Thrifty.
ITEM 1A. RISK FACTORS
There is no material change in the information reported under "Part I—Item 1A—Risk Factors" contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 with the exception of the following:
Our substantial level of indebtedness could materially adversely affect our results of operations, cash flows, liquidity and ability to compete in our industry.
As of September 30, 2012, we had debt outstanding of $12,293.2 million. We also expect to incur an additional $1.95 billion in indebtedness in connection with the acquisition of Dollar Thrifty, or the “Dollar Thrifty Acquisition.” As of June 30, 2012, Dollar Thrifty's indebtedness was approximately $1.56 billion, which we expect to assume in connection with the Dollar Thrifty acquisition. Our substantial indebtedness could materially adversely affect us. For example, it could: (i) make it more difficult for us to satisfy our obligations to the holders of our outstanding debt securities and to the lenders under our various credit facilities, resulting in possible defaults on, and acceleration of, such indebtedness; (ii) be difficult to refinance or borrow additional funds in the future; (iii) require us to dedicate a substantial portion of our cash flows from operations and investing activities to make payments on our debt, which would reduce our ability to fund working capital, capital expenditures or other general corporate purposes; (iv) increase our vulnerability to general adverse economic and industry conditions (such as credit‑related disruptions); including interest rate fluctuations, because a portion of our borrowings are at floating rates of interest and are not hedged against rising interest rates, and the risk that one or more of the financial institutions providing commitments under our revolving credit facilities fails to fund an extension of credit under any such facility, due to insolvency or otherwise, leaving us with less liquidity than expected; (v) place us at a competitive disadvantage to our competitors that have proportionately less debt or comparable debt at more favorable interest rates or on better terms; and (vi) limit our ability to react to competitive pressures, or make it difficult for us to carry out capital spending that is necessary or important to our growth strategy and our efforts to improve operating margins. While the terms of the agreements and instruments governing our outstanding indebtedness contain certain restrictions upon our ability to incur additional indebtedness, they do not fully prohibit us from incurring substantial additional indebtedness and do not prevent us from incurring obligations that do not constitute indebtedness. If new debt or other obligations are added to our current liability levels without a corresponding refinancing or redemption of our existing indebtedness and obligations, these risks would increase. For a description of the amounts we have available under certain of our debt facilities, see “Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Credit Facilities” included in our Annual Report on Form 10-K for the year ended December 31, 2011 and “Note 7-Debt” to the unaudited interim consolidated financial statements included in this report.
Our ability to manage these risks depends on financial market conditions as well as our financial and operating performance, which, in turn, is subject to a wide range of risks, including those described under “-Risks Related to Our Business” included in our Annual Report on Form 10-K for the year ended December 31, 2011.
If our capital resources (including borrowings under our revolving credit facilities and access to other refinancing indebtedness) and operating cash flows are not sufficient to pay our obligations as they mature or to fund our liquidity needs, we may be forced to do, among other things, one or more of the following: (i) sell certain of our assets; (ii) reduce the size of our rental fleet; (iii) reduce the percentage of program cars in our rental fleet; (iv) reduce or delay capital
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ITEM 1A. RISK FACTORS (Continued)
expenditures; (v) obtain additional equity capital; (vi) forgo business opportunities, including acquisitions and joint ventures; or (vii) restructure or refinance all or a portion of our debt on or before maturity.
We cannot assure you that we would be able to accomplish any of these alternatives on a timely basis or on satisfactory terms, if at all. Furthermore, we cannot assure you that we will maintain financing activities and cash flows sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness. If we cannot refinance or otherwise pay our obligations as they mature and fund our liquidity needs, our business, financial condition, results of operations, cash flows, liquidity, ability to obtain financing and ability to compete in our industry could be materially adversely affected.
Risks Related to Acquisition of Dollar Thrifty
Following the acquisition of Dollar Thrifty, in addition to the risks described above and the risks described in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2011, we may be subject to the risks and uncertainties associated with Dollar Thrifty's business. See "Item 1A-Risk Factors" in the Dollar Thrifty Form 10-K for the fiscal year ended December 31, 2011 for a discussion of these risks. This item is not incorporated by reference into this quarterly report on Form 10-Q and you should not consider the contents of this item to be a part of this quarterly report on Form 10-Q.
We may fail to realize all of the anticipated benefits of the Dollar Thrifty Acquisition.
Hertz Holdings entered into a Merger Agreement with Dollar Thrifty, or the “Merger Agreement,” because we believe that the Dollar Thrifty Acquisition will be beneficial to us and Hertz Holdings' stockholders. To realize these anticipated benefits, after the completion of the Dollar Thrifty Acquisition, we expect to achieve significant cost savings as we integrate our respective businesses. However, we have incurred and expect to continue to incur a number of non-recurring costs associated with combining the operations of Hertz and Dollar Thrifty and there is no assurance that we will be able to integrate the operations of Dollar Thrifty without encountering unexpected difficulties, including unanticipated costs, difficulty in retaining customers, challenges associated with information technology integration and failure to retain key employees. We may also incur substantial delays or costs in connection with the completion of the Dollar Thrifty Acquisition, including with respect to any legal proceedings instituted against us or Dollar Thrifty as a result of the Dollar Thrifty Acquisition. Class action lawsuits were filed seeking to block consummation of the 2010 proposed merger between Hertz Holdings and Dollar Thrifty. One of those lawsuits is still pending; however, the remaining lead plaintiff has moved for dismissal. Similar lawsuits may be filed with respect to the currently proposed Dollar Thrifty Acquisition. Additionally, as a condition to their approval of the Dollar Thrifty Acquisition, regulatory agencies may impose requirements, limitations or costs or require divestitures or place restrictions on the conduct of the combined company's business. Any or all of the preceding could materially adversely affect the synergies and other benefits that we expect to achieve in connection with the Dollar Thrifty Acquisition or increase the cost or time to complete the integration of Dollar Thrifty's business into our own, which could jeopardize our ability to obtain the anticipated benefits of the Dollar Thrifty Acquisition and could have a material adverse effect on our financial condition and results of operations.
Combining the businesses of Hertz and Dollar Thrifty may be more difficult, costly or time-consuming than expected, which may adversely affect our results following the Dollar Thrifty Acquisition.
Hertz Holdings and Dollar Thrifty have entered into the Merger Agreement because they believe that the Dollar Thrifty Acquisition will be beneficial to their respective companies and stockholders. The success of the Dollar Thrifty Acquisition will depend, in part, on our ability to realize the anticipated benefits and cost savings from combining the businesses of Hertz and Dollar Thrifty. To realize these anticipated benefits and cost savings, we must successfully combine the businesses of Hertz and Dollar Thrifty in an efficient and effective manner. In addition, we must obtain amendments or waivers to certain of Dollar Thrifty's debt agreements to permit us to use Dollar Thrifty's rental vehicles in order to maximize our sharing of Dollar Thrifty's fleet. Also, Dollar Thrifty must obtain the consent of certain of its counterparties from some of the Dollar Thrifty contracts that have provisions that require Dollar Thrifty to obtain the consent of Dollar Thrifty's counterparty in connection with the completion of the Dollar Thrifty Acquisition or give Dollar Thrifty's counterparty the right to terminate the contract in connection with the Dollar Thrifty Acquisition. If we and Dollar Thrifty are not able to achieve these objectives within the anticipated time frame, or at all, the anticipated benefits and cost savings of the Dollar Thrifty Acquisition may not be realized fully, or at all, or may take longer to realize than expected.
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ITEM 1A. RISK FACTORS (Continued)
Hertz and Dollar Thrifty have operated and, until completion of the Dollar Thrifty Acquisition, will continue to operate, independently. It is possible that the integration process could result in the loss of key employees, the disruption of each company's ongoing business or inconsistencies in standards, controls, procedures and policies that adversely affect our ability to maintain relationships with customers, employees, suppliers and franchisees or to achieve the anticipated benefits of the Dollar Thrifty Acquisition.
Specifically, issues that must be addressed in integrating the operations of Dollar Thrifty into our operations in order to realize the anticipated benefits of the Dollar Thrifty Acquisition include, among other things:
• | integrating and optimizing the utilization of the rental vehicle fleets and related financing of Hertz and Dollar Thrifty; |
• | integrating the marketing, promotion, reservation and information technology systems of Hertz and Dollar Thrifty; |
• | conforming standards, controls, procedures and policies, business cultures and compensation structures between the companies; |
• | consolidating the automotive purchasing, maintenance and resale operations; |
• | consolidating corporate and administrative functions; |
• | consolidating sales and marketing operations; and |
• | identifying and eliminating redundant and underperforming operations and assets. |
Integration efforts between the two companies will also divert management attention and resources. An inability to realize the full extent of the anticipated benefits of the Dollar Thrifty Acquisition, as well as any delays encountered in the integration process, could have an adverse effect upon the revenues, level of expenses and operating results of Hertz after the completion of the Dollar Thrifty Acquisition. Our ability to realize the full extent of the anticipated benefits of the Dollar Thrifty Acquisition will also be subject to its contractual obligations to Dollar Thrifty with respect to Dollar Thrifty's employees following the consummation of the Tender Offer.
In addition, the actual integration may result in additional and unforeseen expenses, and the anticipated benefits of the integration plan may not be realized. Actual synergies, if achieved at all, may be lower than what we expect and may take longer to achieve than anticipated. If we are not able to adequately address these challenges, we may be unable to successfully integrate Dollar Thrifty's operations into its own, or to realize the anticipated benefits of the integration of the two companies.
Because Dollar Thrifty will become a wholly‑owned subsidiary of Hertz upon completion of the Dollar Thrifty Acquisition, certain existing indebtedness of Dollar Thrifty and its subsidiaries, if not refinanced, amended or repaid, may decrease our business flexibility, reduce our ability to incur additional indebtedness, affect our existing debt covenants, increase our borrowing costs or result in repayment or collateralization obligations.
Certain of Dollar Thrifty's existing indebtedness is expected to be outstanding upon completion of the Dollar Thrifty Acquisition, including most of Dollar Thrifty's existing fleet financing. As of June 30, 2012, Dollar Thrifty's indebtedness was approximately $1.56 billion. The agreements governing Dollar Thrifty's indebtedness differ from those governing our indebtedness and in certain respects could require waivers, amendments or refinancing of the Dollar Thrifty indebtedness. In addition, certain existing or future fleet financing facilities of Dollar Thrifty's securitization subsidiaries contain or may contain at closing change in control and other provisions that could result in the commencement of rapid amortization periods under such agreements after or upon consummation of the Dollar Thrifty Acquisition. Also, in connection with any termination of Dollar Thrifty's senior secured credit facility, we will need to make other arrangements with respect to related outstanding letters of credit and hedging agreements. Although we and Dollar Thrifty will try to resolve any such conflicts prior to closing, there can be no assurance that such conflicts will be resolved by that time or at the anticipated cost or that any refinancing may be obtained on favorable terms. In addition, the failure to effect any such refinancing, if required, on favorable terms may, among other things, have the effect of reducing our liquidity or operational flexibility and have a material adverse effect on the combined company including the ability to obtain further financing, take advantage of certain growth opportunities and respond to comparatively better financed competitors. See “Risks Factors-Our substantial level of indebtedness could adversely affect our results of operations, cash flows, liquidity and ability to compete in our industry.”
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ITEM 1A. RISK FACTORS (Continued)
Satisfying the conditions under Dollar Thrifty's existing fleet financing arrangements to permit the sharing of rental vehicles and achieve optimal business sharing synergies may be more difficult, costly or time-consuming than expected, which may adversely affect our operations and financial results.
Some of the potential synergies from the Dollar Thrifty Acquisition that we have identified are expected to come from the sharing of rental vehicles. However, to permit such fleet sharing, certain conditions precedent specified under Dollar Thrifty's existing fleet financing would need to be satisfied. Such conditions include, among other things, obtaining certain confirmations from each of the rating agencies rating each series of rental car asset backed medium term notes, as well as Dollar Thrifty's conduit fleet financing. Although Dollar Thrifty has agreed to use its reasonable best efforts to assist and cooperate with us in satisfying these conditions, there can be no assurance that such conditions will be satisfied on the desired terms and timing, or at all. If some or all of these conditions are not satisfied in a timely fashion or at all, then some of these synergies and the anticipated benefit of these synergies to the combined company will be diminished or unavailable.
If Hertz Holdings is unable to complete the Dollar Thrifty Acquisition, then our expected financial results could be adversely affected.
Consummation of the Dollar Thrifty Acquisition is subject to the tender of at least a majority of the shares of Dollar Thrifty common stock, as well as other customary closing conditions. The successful completion of the transaction is also subject to regulatory clearance by the Federal Trade Commission. If any condition to the Dollar Thrifty Acquisition is not satisfied or waived, the Dollar Thrifty Acquisition will not be completed. Hertz Holdings and Dollar Thrifty also may terminate the Merger Agreement under certain circumstances. To the extent the transaction is not completed for any reason, we would have devoted substantial resources and management attention to the transaction without realizing the accompanying benefits expected by our management, and our financial condition and results of operations may be adversely affected.
In order to obtain the regulatory approvals required to complete the Dollar Thrifty Acquisition, we and Dollar Thrifty may be required to comply with material restrictions or conditions that may negatively affect the combined company after the Dollar Thrifty Acquisition is completed.
Completion of the Dollar Thrifty Acquisition is conditioned upon the receipt of certain governmental approvals, including the expiration or termination of the applicable waiting periods under the Hart-Scott Rodino Antitrust Improvements Act of 1976, as amended.
The governmental authorities from which the requisite governmental approvals are required may impose conditions on the completion of the Dollar Thrifty Acquisition or require changes to the terms of the Dollar Thrifty Acquisition. Under the terms of the Merger Agreement, consistent with the companies' exercise of reasonable best efforts to obtain the necessary regulatory approvals, Hertz Holdings is required to take any and all actions required pursuant to the proposed consent agreement currently under discussion between Hertz Holdings and the staff of the United States Federal Trade Commission; provided that each such action shall be conditioned upon the consummation of the merger. The proposed consent agreement would require Hertz Holdings to, among other actions, take steps to divest its Advantage business, selected Dollar Thrifty airport concessions and certain other assets, contingent on a successful completion of the Dollar Thrifty Acquisition. Hertz Holdings has reached a definitive agreement with Adreca Holdings Corp., a subsidiary of Macquarie Capital which is expected to be operated by Franchise Services of North America Inc., providing for such contingent divestitures. There is no guarantee that regulatory authorities will not impose additional conditions to the consummation of the Dollar Thrifty Acquisition, such as divestiture of additional assets. If Hertz Holdings becomes subject to any additional material conditions in order to obtain any approvals required to complete the Dollar Thrifty Acquisition, the business and results of operations of the combined company could be adversely affected, or the Dollar Thrifty Acquisition may not be completed.
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-Q and is incorporated herein by reference in response to this item.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: | November 2, 2012 | THE HERTZ CORPORATION (Registrant) | |
By: | /s/ ELYSE DOUGLAS | ||
Elyse Douglas Executive Vice President and Chief Financial Officer (principal financial officer and duly authorized officer) |
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EXHIBIT INDEX
Exhibit Number | Description | |
2.1.3 | Agreement and Plan of Merger, dated as of August 26, 2012, by and among Hertz Global Holdings, Inc., HDTMS, Inc. and Dollar Thrifty Automotive Group, Inc. (Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K of Hertz Global Holdings, Inc., as filed on August 27, 2012). | |
4.6.1 | Indenture, dated as of October 16, 2012, between HDTFS, Inc., as Issuer, and Wells Fargo Bank, National Association, as Trustee, providing for the issuance of notes in series.† | |
4.6.2 | First Supplemental Indenture, dated as of October 16, 2012, between HDTFS, Inc., as Issuer, and Wells Fargo Bank, National Association, as Trustee, relating to the 5.875% Senior Notes due 2020.† | |
4.6.3 | Second Supplemental Indenture, dated as of October 16, 2012, between HDTFS, Inc., as Issuer, and Wells Fargo Bank, National Association, as Trustee, relating to the 6.250% Senior Notes due 2022.† | |
10.1.3 | Incremental Commitment Amendment, dated as of October 9, 2012, to that certain Credit Agreement, dated as of March 11, 2011, among The Hertz Corporation, the several banks and financial institutions parties thereto that constitute Tranche B-1 Term Lenders, and Deutsche Bank AG New York Branch, as Administrative Agent (Incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K of Hertz Global Holdings, Inc., as filed on October 10, 2012). | |
10.31 | Commitment Letter, dated as of August 26, 2012, by and among The Hertz Corporation, Barclays Bank PLC, Deutsche Bank AG Cayman Islands Branch, Deutsche Bank Securities Inc., Bank of America, N.A. and Merrill Lynch, Pierce, Fenner & Smith Incorporated (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Hertz Global Holdings, Inc., as filed on August 27, 2012). | |
31.1–31.2 | Rule 13a-14(a)/15d-14(a) Certifications of Chief Executive Officer and Chief Financial Officer | |
32.1–32.2 | 18 U.S.C. Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer | |
101.INS | XBRL Instance Document* | |
101.SCH | XBRL Taxonomy Extension Schema Document* | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document* | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document* | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document* | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document* |
_______________________________________________________________________________
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. |
† | Incorporated by reference to the exhibit of the same number to the Quarterly Report on Form 10-Q of Hertz Global Holdings, Inc. as filed with the Securities and Exchange Commission on November 2, 2012. |
* | Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. |
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