FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-7541
THE HERTZ CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-1938568
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
225 Brae Boulevard, Park Ridge, New Jersey 07656-0713
(Address of principal executive offices)
(Zip Code)
(201) 307-2000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the
registrant's classes of common stock as of March 31, 1997:
Common Stock, $1 par value - Class A, 200 shares; Class B, 51
shares; and Class C, 490 shares.
Page 1 of 25 pages
The Exhibit Index is on page 22
PART I - FINANCIAL INFORMATION
ITEM l. FINANCIAL STATEMENTS.
INTRODUCTORY STATEMENT
The summary of accounting policies set forth in Note 1 to the
consolidated financial statements contained in the Form 10-K for
the fiscal year ended December 31, 1996, filed by the registrant
(the "Company") with the Securities and Exchange Commission on
March 25, 1997, has been followed in preparing the accompanying
consolidated financial statements.
The consolidated financial statements for interim periods
included herein have not been audited by independent public
accountants. In the Company's opinion, all adjustments (which
include only normal recurring 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.
In April 1997, the Company reclassified all of its
outstanding common stock, par value $1.00 per share, owned by
Ford Motor Company ("Ford") into 67,310,167 shares of Class B
Common Stock, par value $.01 per share, (the "Class B Common
Stock"), and reclassified all of its outstanding 10% cumulative
Series A Preferred Stock and variable rate cumulative Series B
Preferred Stock beneficially owned by Ford into 20,245,833 shares
of its Class A Common Stock, par value $.01 per share, (the
"Class A Common Stock").
On April 30, 1997, the Company issued and sold 20,010,000
shares of its Class A Common Stock, in an initial public offering
("Offering"). After the Offering, Ford beneficially owns (i)
49.4% of the outstanding Class A Common Stock (which has one vote
per share) and (ii) 100% of the outstanding Class B Common Stock
of the Company (which has five votes per share). The common
stock beneficially owned by Ford represents in the aggregate
94.5% of the combined voting power of all of the Company's
outstanding common stock. Accordingly, Ford is able to direct
the election of all of the members of the Company's Board of
Directors and exercise a controlling influence over the business
and affairs of the Company. See Note 1 to the Notes to the
Company's consolidated financial statements included in this
report.
- 2 -
THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands of Dollars)
Unaudited
A S S E T S
March 31, Dec. 31,
1997 1996
Cash and equivalents $ 312,833 $ 179,311
Receivables, less allowance for
doubtful accounts of $13,194
(1996 - $12,268) 765,775 798,686
Due from affiliates 257,104 456,025
Inventories, at lower of cost or market 21,522 20,220
Prepaid expenses and other assets
(Note 2) 87,971 80,530
Revenue earning equipment, at cost:
Cars 4,900,345 4,698,656
Less accumulated depreciation (338,183) (380,391)
Other equipment 930,589 908,106
Less accumulated depreciation (197,211) (190,677)
Total revenue earning equipment 5,295,540 5,035,694
Property and equipment, at cost:
Land, buildings and leasehold
improvements 552,238 515,063
Service equipment 556,117 554,134
1,108,355 1,069,197
Less accumulated depreciation (530,848) (526,466)
Total property and equipment 577,507 542,731
Franchises, concessions, contract costs
and leaseholds, net of amortization 9,519 10,117
Cost in excess of net assets of
purchased businesses, net of
amortization 520,904 525,853
Total assets $7,848,67 $7,649,167
The accompanying notes are an integral part of this statement.
- 3 -
THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands of Dollars)
Unaudited
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, Dec. 31,
1997 1996
Accounts payable $ 507,127 $ 468,817
Accrued liabilities 515,384 555,699
Accrued taxes 109,135 105,524
Debt (Note 5) 5,615,934 5,091,844
Public liability and property damage 314,648 321,118
Deferred taxes on income 123,600 116,800
Stockholders' equity (Note 1):
Preferred stock -
Series A, 10% cumulative 236,000 236,000
Series B, various rates cumulative 249,900 249,900
Series C, 5.11% cumulative (a) -
Common stock, par value $1 per share,
shares issued - 200 Class A, 51
Class B and 490 Class C 1 1
Additional capital paid-in 157,442 59,008
Retained earnings 25,637 435,352
Translation adjustment (6,042) 9,129
Unrealized holding losses for
available-for-sale securities
(Note 2) (91) (25)
Total stockholders' equity 662,847 989,365
Total liabilities and
stockholders' equity $7,848,675 $7,649,167
___________________
(a) Less than $100.
The accompanying notes are an integral part of this statement.
- 4 -
THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(In Thousands of Dollars)
Unaudited
Three Months
Ended March 31,
1997 1996
Revenues:
Car rental $758,536 $690,735
Industrial and construction equipment
rental 90,335 77,128
Car leasing 11,644 8,650
Other 17,837 26,629
Total revenues 878,352 803,142
Expenses:
Direct operating 444,063 423,819
Depreciation of revenue earning
equipment (Note 4) 218,500 192,387
Selling, general and administrative 108,567 104,449
Interest, net of interest income
of $4,567 and $2,758 73,311 67,315
Total expenses 844,441 787,970
Income before income taxes 33,911 15,172
Provision for taxes on income (Note 3) 14,192 6,384
Net income $ 19,719 $ 8,788
Pro forma net income per share
(in whole dollars - see Note 1) $ .18 $ .08
The accompanying notes are an integral part of this statement.
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THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands of Dollars)
Unaudited
Three Months
Ended March 31,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 19,719 $ 8,788
Non-cash expenses:
Depreciation of revenue earning
equipment 218,500 192,387
Depreciation of property and
equipment 22,183 20,373
Amortization of intangibles 5,043 4,789
Provision for public liability
and property damage 34,222 26,494
Provision for losses for doubtful
accounts 2,444 3,663
Deferred income taxes 6,800 (600)
Revenue earning equipment
expenditures (2,301,277) (2,435,557)
Proceeds from sales of revenue
earning equipment 1,772,794 1,446,966
Changes in assets and liabilities -
Receivables 1,937 53,123
Due from affiliates 198,921 131,262
Inventories and prepaid expenses
and other assets (10,146) (7,467)
Accounts payable 48,517 (13,683)
Accrued liabilities (32,211) (191)
Accrued taxes 5,995 12,252
Payments of public liability and
property damage claims and expenses (40,632) (32,712)
Net cash flows used for
operating activities (47,191) (590,113)
The accompanying notes are an integral part of this statement.
- 6 -
THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousand of Dollars)
Unaudited
Three Months
Ended March 31,
1997 1996
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment expenditures $ (72,505) $ (41,944)
Proceeds from sales of property and
equipment 9,615 2,483
Available-for-sale securities -
Purchases (609) (2,619)
Sales 451 2,687
Purchases of various operations - (2,546)
Net cash flows used for
investing activities (63,048) (41,939)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term
debt - 149,401
Repayment of long-term debt (71,076) (32,651)
Short-term borrowings:
Proceeds 570,017 225,704
Repayments (276,235) (114,248)
Ninety day term or less, net 352,331 406,821
Cash dividend on common stock paid to
Ford Motor Company (460,000) -
Proceeds from the issuance of preferred
stock to Ford Motor Company 129,000 -
Net cash flows provided from
financing activities 244,037 635,027
EFFECT OF FOREIGN EXCHANGE RATE
CHANGES ON CASH (276) (75)
NET INCREASE IN CASH AND EQUIVALENTS
DURING THE PERIOD 133,522 2,900
CASH AND EQUIVALENTS AT BEGINNING OF
YEAR 179,311 137,257
CASH AND EQUIVALENTS AT END OF PERIOD $ 312,833 $ 140,157
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for -
Interest (net of amounts capitalized) $ 76,298 $ 71,737
Income taxes 4,377 3,024
The accompanying notes are an integral part of this statement.
- 7 -
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Changes in Stockholders' Equity
On February 27, 1997, the Company issued to Ford 1,290 shares
of its 5.11% Cumulative Series C Preferred Stock, par value $.01
per share, (the "Series C Preferred Stock"), in exchange for U.S.
treasury securities having an aggregate fair market value at that
time of $129 million. On February 27, 1997, the Company paid a
dividend of $460 million on its common stock to Ford in the form
of a 5.475% promissory note, which was fully repaid by March 10,
1997. In connection with these transactions, cash and
equivalents were increased by $129 million, notes payable were
increased by $460 million, additional capital paid-in was
increased by $129 million relating to the issuance of the Series
C Preferred Stock and decreased by $30.6 million relating to the
payment of the dividend on the common stock, and retained
earnings was decreased by $429.4 million relating to the payment
of the dividend on the common stock.
In April 1997, the Company reclassified all of its
outstanding common stock, par value $1.00 per share, owned by
Ford into 67,310,167 shares of Class B Common Stock, par value
$.01 per share, and reclassified all of its outstanding 10%
cumulative Series A Preferred Stock and variable rate cumulative
Series B Preferred Stock beneficially owned by Ford into
20,245,833 shares of its Class A Common Stock, par value $.01 per
share. The Company also issued 701,025 shares of its Class A
Common Stock pursuant to an employee benefit plan.
On April 30, 1997, the Company issued and sold 20,010,000
shares of its Class A Common Stock in an initial public offering
and received net proceeds of $454 million from the sale, and
redeemed its 1,290 shares of Series C Preferred Stock for $130
million. The net proceeds received from the initial public
offering were used to pay down notes payable.
Pro forma net income per share was computed based on
108,267,025 shares outstanding after the initial public offering.
Note 2 - Available-for-Sale Securities
As of March 31, 1997, Prepaid Expenses and Other Assets in
the consolidated balance sheet include available-for-sale
securities at fair value (in thousands) of $5,467 (cost $5,568).
The fair value is calculated using information provided by
outside quotation services. These securities include various
governmental and corporate debt obligations, with the following
maturity dates for the twelve month period following March 31,
1997 (in thousands): fair value $103 (cost $107) in 1998; fair
value $3,941 (cost $3,996) 1999 through 2003; fair value $1,423
(cost $1,465) 2004 through 2015. For the three months ended
March 31, 1997, proceeds of $451,300 from the sale of
- 8 -
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Available-for-Sale Securities - (continued)
available-for-sale securities were received, and a gross realized
gain of $1,226 and gross realized loss of $2,993 were included in
earnings. Actual cost was used in computing the realized gain
and loss on the sale. For the three months ended March 31, 1997,
unrealized holding losses and unrealized holding gains, net of
taxes, included in stockholders' equity were $112,000 and
$21,000, respectively.
Note 3 - Taxes on Income
The income tax provision is based upon the expected effective
tax rate applicable to the full year. The effective tax rate is
higher than the U.S. statutory rate of 35% due to higher tax
rates relating to foreign operations and adjustment for state
taxes net of federal benefit.
Note 4 - Depreciation of Revenue Earning Equipment
Depreciation of revenue earning equipment includes the
following (in thousands of dollars):
Unaudited
Three Months Ended
March 31,
1997 1996
Depreciation of revenue earning equipment $210,906 $196,606
Adjustment of depreciation upon disposal
of the equipment 4,079 (6,983)
Rents paid for vehicles leased 3,515 2,764
Total $218,500 $192,387
The adjustment of depreciation upon disposal of revenue
earning equipment for the three months ended March 31, 1997 and
1996 included net losses of $.6 million and net gains of $1.6
million, respectively, on the sale of equipment in the industrial
and construction equipment rental operations in the United
States; and net losses of $3.5 million and net gains of $5.4
million, respectively, in the car rental and car leasing
operations.
During the three months ended March 31, 1997, the Company
purchased Ford vehicles at a cost of approximately $1.3 billion,
and sold Ford vehicles to Ford or its affiliates under various
repurchase programs for approximately $.9 billion.
- 9 -
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Debt
Debt at March 31, 1997 and December 31, 1996 consisted of the
following (in thousands of dollars):
Unaudited
March 31, Dec. 31,
1997 1996
Notes payable, including commercial paper,
average interest rate: 1997, 5.5%;
1996, 5.6% $2,248,735 $1,498,002
Promissory notes, average interest rate
7.3%; (effective average interest
rate 7.4%); net of unamortized
discount: 1997, $3,388; 1996, $3,602;
due 1997 to 2005 1,921,612 1,941,398
Property and equipment lease obligations,
average interest rate: 1997, 7.0%; 1996,
7.5%; due 1998 1,828 2,554
Medium term notes, average interest rate
9.3%; due 1997 75,300 75,300
Senior subordinated promissory notes,
average interest rate: 1997, 9.5%;
1996, 9.7%; (effective average
interest rate: 1997, 9.7%; 1996,
9.8%); net of unamortized discount:
1997, $140; 1996, $172; due 1998 99,860 149,828
Junior subordinated promissory notes,
average interest rate 6.9%; net of
unamortized discount: 1997, $233;
1996, $244; due 2000 to 2003 399,767 399,756
Subsidiaries' short-term debt, including
commercial paper in millions (1997,
$826.1; 1996, $981.1) and other
borrowings; average interest rate in
foreign currencies: 1997, 5.0%; 1996,
5.2% 868,832 1,025,006
Total $5,615,934 $5,091,844
The aggregate amounts of maturities of debt for the twelve
month periods following March 31, 1997 are as follows (in
millions): 1998, $3,500.4 (including $3,074.7 of commercial paper
and short-term borrowings); 1999, $218.1; 2000, $350.0; 2001,
$399.1; 2002, $249.7; after 2002, $898.6.
- 10 -
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Debt (continued)
At March 31, 1997, approximately $25 million of the
Company's consolidated stockholders' equity was free of dividend
limitations pursuant to its existing debt agreements.
Immediately following the initial public offering, the Company
will be permitted to pay approximately $349 million in dividends
under its existing debt agreements.
At March 31, 1997, the Company and a subsidiary had $268.9
million of outstanding loans from Ford.
The Company and its subsidiaries have entered into
arrangements to manage exposure to fluctuations in interest
rates. These arrangements consist of interest-rate swap
agreements ("swaps") and forward rate agreements ("FRAs"). The
differential paid or received on these agreements is recognized
as an adjustment to interest expense. These agreements are not
entered into for trading purposes. The effect of these
agreements is to make the Company less susceptible to changes in
interest rates by effectively converting certain variable rate
debt to fixed rate debt. Because of the relationship of current
market rates to historical fixed rates, the effect at March 31,
1997 of the swap and FRA agreements is to give the Company an
overall effective weighted-average rate on debt of 6.33%, with
48% of debt effectively subject to variable interest rates,
compared to a weighted-average interest rate on debt of 6.28%,
with 55% of debt subject to variable interest rates when not
considering the swap and FRA agreements. At March 31, 1997,
these agreements expressed in notional amounts aggregated (in
millions) $361.3 swaps, and FRAs in the amount of $30.2 which
were settled in 1997. Notional amounts are not reflective of the
Company's obligations under these agreements because the Company
is only obligated to pay the net amount of interest rate
differential between the fixed and variable rates specified in
the contracts. The Company's exposure to any credit loss in the
event of non-performance by the counterparties is further
mitigated by the fact that all of these financial instruments are
with significant financial institutions that are rated "A" or
better by the major credit rating agencies. At March 31, 1997,
the fair value of all outstanding contracts, which is
representative of the Company's obligations under these
contracts, assuming the contracts were terminated at that date,
was approximately a net payable of $2.3 million. This relates to
notional principal (in millions) of $361.3 swaps maturing $233.2,
$70.4, $45.1, $11.9, $0.6, and $0.1 in 1997, 1998, 1999, 2000,
2001, and 2002, respectively.
- 11 -
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Segment Information
The Company's business principally consists of two segments:
rental and leasing of cars and light trucks ("car rental"); and
rental of industrial, construction and materials handling
equipment ("industrial and construction equipment rental"). The
contributions of these segments, as well as "corporate and
other", to revenues and income before income taxes for the three
months ended March 31, 1997 and 1996 are summarized below (in
millions of dollars). Corporate and other includes general
corporate expenses, principally amortization of intangibles and
certain interest expense incurred in connection with the
acquisition of the Company by Park Ridge Corporation in December
1987 and UAL, Inc. in August 1985, and inter-period allocations,
as well as other business activities, such as claim management
and telecommunication services.
Three Months Ended March 31
Income (Loss)
Before
Revenues Income Taxes
1997 1996 1997 1996
Car rental $780.8 $709.3 $24.8 $ 1.4
Industrial and construction
equipment rental 90.3 77.1 9.6 12.2
Corporate and other 7.3 16.7 (.5) 1.6
Consolidated total $878.4 $803.1 $33.9 $15.2
The contributions of these segments, as well as "corporate and
other", to revenues and income before income taxes for each of
the two years ended December 31, 1996 and 1995 are set forth
below (in millions of dollars) to conform with the classification
being used in 1997.
Years Ended December 31
Income (Loss)
Before
Revenues Income Taxes
1996 1995 1996 1995
Car rental $3,239.4 $2,991.3 $188.7 $116.0
Industrial and construction
equipment rental 392.3 332.3 91.0 85.2
Corporate and other 36.6 77.0 (23.2) (28.9)
Consolidated total $3,668.3 $3,400.6 $256.5 $172.3
- 12 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Three Months Ended March 31, 1997 Compared with Three Months
Ended March 31, 1996
Summary
The following table sets forth for the three months ended March
31, 1997 and 1996 the percentage of operating revenues
represented by certain items in the Company's consolidated
statement of income:
Percentage of Revenues
Three Months Ended
March 31,
1997 1996
Revenues:
Car Rental 86.4% 86.0%
Industrial and construction equipment
rental 10.3 9.6
Car leasing 1.3 1.1
Other 2.0 3.3
100.0 100.0
Expenses:
Direct operating 50.6 52.8
Depreciation of revenue earning
equipment 24.9 23.9
Selling, general and administrative 12.3 13.0
Interest, net of interest income 8.3 8.4
96.1 98.1
Income before income taxes 3.9 1.9
Provision for taxes on income 1.6 .8
Net income 2.3% 1.1%
- 13 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued).
The following table sets forth certain selected operating data
of the Company for the three months ended March 31, 1997 and
1996.
Three Months Ended
March 31,
1997 1996
Car rental and other operations -
Average number of owned cars operated
during period 273,300 250,200
Number of transactions of owned car
rental operations during period 4,910,000 4,547,000
Average revenue per transaction of
owned car rental operations during
period (in whole dollars) $ 154.48 $ 151.92
Equipment rental operations -
Average cost of rental equipment
operated during period (in millions) $ 914 $ 713
Revenues
Revenues from car rental operations of $758.5 million in the
first quarter of 1997 increased by 9.8% from $690.7 million in
the first quarter of 1996. Of this $67.8 million increase,
approximately $55.2 million resulted primarily from an increase
in the number of transactions both in the United States and
international operations and approximately $12.6 million resulted
from an increase in revenue per transaction principally due to an
increase in pricing of approximately 5.5% in the United States,
partly offset by a lower transaction length in the United States,
and a decrease in the foreign operations due to changes in
exchange rates, both of which moderated the increase in revenue
per transaction.
Revenues from industrial and construction equipment rental of
$90.3 million in the first quarter of 1997 increased by 17.1%
from $77.1 million in the first quarter of 1996. Of this $13.2
million increase, approximately $7.7 million was due to an
increase in volume resulting from the opening of new locations
and an acquisition on February 29, 1996 and approximately $5.5
million was due to increased activity in industrial related
markets, both from new and existing customers.
- 14 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued).
Revenues from all other sources of $29.5 million in the first
quarter of 1997 decreased by 16.4% from $35.3 million in the
first quarter of 1996, primarily due to lower revenues in claim
administration service operations, a large part of which was sold
as of February 29, 1996. This decrease was partly offset by
increased revenues from car leasing operations, primarily due to
an acquisition made in June 1996 of a foreign licensee operation.
Expenses
Total expenses of $844.4 million in 1997 increased by 7.2% from
$788.0 million in 1996, although total expenses as a percentage
of revenues decreased to 96.1% in 1997 from 98.1% in 1996.
Direct operating expenses of $444.1 million in 1997 increased by
4.8% from $423.8 million in 1996, but were lower in 1997 as a
percentage of revenues due to more efficient fixed cost coverage.
Wages and related benefits, concessions and commissions and
reservation costs, decreased as a percentage of revenues.
Depreciation of revenue earning equipment for the car rental and
car leasing operations of $198.3 million in 1997 increased by
11.6% from $177.7 million in 1996, primarily due to an increase
in the number of cars operated and an increase in the cost of
cars acquired in both the United States and international
operations, and decreases in the net proceeds received in 1997 in
excess of book value on the disposal of the cars (which resulted
in a loss of $3.5 million in 1997 as compared to a gain of $5.4
million in 1996) primarily due to a decrease in the number of
used vehicles sold in the international operations.
Depreciation of revenue earning equipment for the industrial and
construction equipment rental operations of $20.2 million in 1997
increased by 37.4% from $14.7 million in 1996, primarily due to
an increase in both the volume and cost of equipment operated,
and a decrease in the net proceeds received in 1997 in excess of
book value on the disposal of the equipment to $.6 million loss
in 1997 from $1.6 million gain in 1996, primarily due to changes
made effective January 1, 1997 to the estimated depreciable lives
being used to compute the provision for depreciation as explained
below. These increases were partly offset by a reduction in
depreciation of $2.4 million, net of equipment sold in 1997, due
to changes made effective January 1, 1997 to the increase in
certain estimated useful lives being used to compute the
provision for depreciation of revenue earning equipment to
reflect changes in the estimated residual values of the
equipment.
- 15 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued).
Selling, general and administrative expenses of $108.5 million in
1997 increased by 3.9% from $104.5 million in 1996, but were
lower in 1997 as a percentage of revenues due to more efficient
cost coverage. The increase in 1997 resulted from increases in
advertising costs, sales expenses and general and administrative
costs.
Interest expense of $73.3 million in 1997 increased 8.9% from
$67.3 million in 1996, primarily due to higher debt levels (which
were required to finance growth and increases in the cost of cars
and industrial and construction equipment) and interest expense
of $2.3 million incurred relating to funding the $460 million
dividend paid by the Company on its common stock to Ford in 1997,
partially offset by higher interest income received and lower
interest rates in 1997 as compared to 1996.
The tax provision of $14.2 million in 1997 increased 122.3% from
$6.4 million in 1996, primarily due to the higher income before
income taxes in 1997. The effective tax rate in 1997 was 41.9%
as compared to 42.1% in 1996. See Note 3 to the Notes to the
Company's consolidated financial statements.
Net Income
The Company achieved record net income of $19.7 million in the
first quarter of 1997 representing an increase of 124.4% from
$8.8 million in the first quarter of 1996. This increase was
primarily due to higher revenues in the U.S. car rental
operations and a $1.5 million ($0.014 per share) decrease in
depreciation expense, net of taxes, for the industrial and
construction equipment rental business for changes made effective
January 1, 1997 to the estimated useful lives being used to
compute depreciation of revenue earning equipment. This increase
in net income was partly offset by (i) a charge of $0.8 million
($0.007 per share) for the interest expense incurred, net of
taxes, relating to funding the $460 million dividend paid by the
Company on its common stock to Ford in the first quarter of 1997
and other items relating to the Offering, (ii) increased costs in
the industrial and construction equipment rental business
relating to the additional depreciation for equipment purchased
and other expenses incurred to service new industrial customers
and (iii) losses incurred in a foreign car rental and leasing
operation which was acquired from a licensee in June 1996.
- 16 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued).
Liquidity and Capital Resources
The Company's domestic and foreign operations are funded by cash
provided by operating activities, and by extensive financing
arrangements maintained by the Company in the United States,
Europe, Australia, New Zealand, Canada and Brazil. The Company's
investment grade credit ratings provide it with access to global
capital markets to meet its borrowing needs. The Company's
primary use of funds is for the acquisition of revenue earning
equipment which consists mainly of cars and industrial and
construction equipment. For the three months ended March 31,
1997, the Company's expenditures for revenue earning equipment
were $2,301 million (partially offset by proceeds from the sale
of such equipment of $1,773 million). For 1997, the Company
expects its expenditures for revenue earning equipment (net of
proceeds from the sale of such equipment) to be higher than they
were in 1996. These assets are purchased by the Company in
accordance with the terms of programs negotiated with automobile
and equipment manufacturers. For the three months ended March
31, 1997, the Company's capital investments for property and non-
revenue earning equipment, were $72.5 million, which includes the
purchase by the Company of the 50% equity interest not previously
owned by the Company in the joint venture that owns the Company's
executive offices in Park Ridge, New Jersey. The Company's
customer receivables are also liquid with approximately 30 days
of total annual sales outstanding.
To finance its domestic requirements, the Company maintains an
active commercial paper program. The Company is also active in
the U.S. domestic medium-term and long-term debt markets. At
March 31, 1997, the Company had available $400 million for
issuance of unsecured senior, senior subordinated and junior
subordinated debt securities under an effective registration
statement on terms to be determined at the time the securities
are offered for sale. The total amount of medium-term and long-
term debt outstanding as of March 31, 1997 was $2.5 billion with
maturities ranging from 1997 to 2009. This includes $269 million
in term loans from Ford, of which $250 million matures on
November 15, 1999 and $19 million matures on July 1, 1997.
Borrowing for the Company's international operations consists
mainly of loans obtained from local and international banks. All
borrowings by international operations either are in the
international operations' local currency or, if in non-local
currency, are fully hedged to minimize foreign exchange exposure.
The Company guarantees only the borrowings of its subsidiaries in
Australia and Canada, which consist principally of commercial
paper denominated in local currency. At March 31, 1997, the
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued).
total debt for the foreign operations was $869 million, of which
$826 million was short-term (original maturity of less than one
year) and $43 million was long-term. At March 31, 1997, the
total amounts outstanding (in millions of U.S. dollars) under the
Australian and Canadian commercial paper programs were $111 and
$41, respectively.
At March 31, 1997, the Company had committed bank credit
facilities totalling $2.3 billion. Of this amount, $2.1 billion
are represented by a combination of 5-year and 364-day global
committed credit facilities provided by 31 relationship banks.
In addition to direct borrowings by the Company, these agreements
allow any subsidiary of the Company to borrow under the
facilities on the basis of a guarantee by the Company. The 5
- - -year agreements, totalling $1,185 million, currently expire on
June 30, 2001, and the 364-day agreements, totalling $895
million, expire on June 25, 1997. The 5-year agreements have an
evergreen feature which provides for the automatic extension of
the expiration date one year forward unless timely notice is
provided by the bank. The 364-day agreements permit the Company
to convert any amount outstanding prior to expiration into a two-
year term loan.
In addition to these bank credit facilities, in February 1997
Ford extended to the Company a line of credit of $500 million,
expiring June 30, 1999, and the revolving loan agreement between
the Company and Ford dated June 8, 1994 was terminated. This
line of credit has an evergreen feature that provides on an
annual basis for automatic one-year extensions of the expiration
date, unless timely notice is provided by Ford at least one year
prior to the then scheduled expiration date.
Car rental is a seasonal business, with decreased travel in both
the business and leisure segments in the winter months and
heightened activity during the spring and summer. To accommodate
increased demand, the Company increases its available fleet and
staff during the second and third quarters. As business demand
declines, fleet and staff are decreased as well. However,
certain operating expenses, including rent, insurance, and
administrative overhead, remain fixed and cannot be adjusted for
seasonal demand. In certain geographic markets, the impact of
seasonality has been reduced by emphasizing leisure or business
travel in the off-seasons.
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PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
In March 1997, the Company, pursuant to requisite consent
of the holders, amended its 7 3/8% Senior Notes due June
15, 2001 (the "Notes") issued under an indenture dated as
of April 1, 1986, as amended, between the Company and The
Chase Manhattan Bank to eliminate as an event of default
under the Notes Ford's failure to own, directly or
indirectly, 100% of the outstanding voting stock of the
Company.
On February 27, 1997, the Company issued 1,290 shares of
its 5.11% Cumulative Series C Preferred Stock, par value
$.01 per share, to Ford in exchange for U.S. treasury
securities having an aggregate fair market value at that
time of $129 million. The Company believes that this
transaction was exempt from registration under Section
4(2) of the Securities Act of 1933 because the subject
securities were sold to a single sophisticated investor
who was purchasing for investment without a view to
further distribution.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
3(a) Restated Certificate of Incorporation of the Company,
effective April 30, 1997, incorporated by reference to
Exhibit 3(a) to the Company's report on Form 8-K dated
May 1, 1997 (File No. 1-7541).
3(b) By-laws of the Company, effective April 22,1997,
incorporated by reference to Exhibit 3(b) to the
Company's report on Form 8-K dated May 1, 1997 (File
No. 1-7541).
4 Instruments defining the rights of security holders,
including indentures. During the quarter ended March
31, 1997, the Company and its subsidiaries did not
issue any long-term debt.
10(a) Corporate Agreement between the Company and Ford,
dated April 25, 1997, incorporated by reference to
Exhibit 10(a) to the Company's report on Form 8-K
dated May 1, 1997 (File No. 1-7541).
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PART II - OTHER INFORMATION (continued)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (continued).
10(b) The Hertz Corporation Long-Term Equity Compensation
Plan, incorporated by reference to Exhibit 10(b) to
the Company's report on Form 8-K dated May 1, 1997
(File No. 1-7541).
12 Computation of Ratio of Earnings to Fixed Charges for
the three months ended March 31, 1997 and 1996.
27 Financial Data Schedule for the three months ended
March 31, 1997.
(b) Reports on Form 8-K:
The Company filed a Form 8-K dated February 28, 1997
reporting under Items 5 and 7 thereof, (i) announcing
that the Company had filed a registration statement with
the Securities and Exchange Commission for a potential
initial public offering of less than 20% of the Company's
common stock, (ii) reporting that the Company issued
1,290 shares of its Series C Preferred Stock to Ford,
and (iii) filing audited consolidated financial
statements of the Company for each of the years in the
three-year period ended December 31, 1996 and as of
December 31, 1996 and 1995.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
THE HERTZ CORPORATION
(Registrant)
Date: May 6, 1997 By: /s/ William Sider
William Sider
Executive Vice President and
Chief Financial Officer
(principal financial officer
and duly authorized officer)
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS
filed with
FORM 10-Q
for the quarter ended
March 31, 1997
under
THE SECURITIES EXCHANGE ACT OF 1934
THE HERTZ CORPORATION
Commission file number 1-7541
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EXHIBIT INDEX
Exhibit
No. Description Page No.
12 Computation of Ratio of Earnings
to Fixed Charges for the three
months ended March 31, 1997 and
1996. 23
27 Financial Data Schedule for the
three months ended March 31, 1997. 24 - 25
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EXHIBIT 12
THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In Thousands of Dollars Except Ratios)
Unaudited
Three Months
Ended March 31,
1997 1996
Income before income taxes $ 33,911 $ 15,172
Interest expense 77,878 70,073
Portion of rent estimated to represent
the interest factor 18,123 16,889
Earnings before income taxes and fixed
charges $129,912 $102,134
Interest expense (including capitalized
interest) $ 77,950 $ 70,279
Portion of rent estimated to represent
the interest factor 18,123 16,889
Fixed charges $ 96,073 $ 87,168
Ratio of earnings to fixed charges 1.4 1.2
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