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 June 30, 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 June 30, 1997: Common
Stock, $.01 par value - Class A, 40,956,858 shares; and Class B,
67,310,167 shares.
Page 1 of 34 pages
The Exhibit Index is on page 31
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
June 30, Dec. 31,
1997 1996
Cash and equivalents $ 186,698 $ 179,311
Receivables, less allowance for
doubtful accounts of $11,873
(1996 - $12,268) 642,214 798,686
Due from affiliates 320,926 456,025
Inventories, at lower of cost or market 17,306 20,220
Prepaid expenses and other assets
(Note 2) 102,055 80,530
Revenue earning equipment, at cost:
Cars 5,355,441 4,698,656
Less accumulated depreciation (366,715) (380,391)
Other equipment 1,039,354 908,106
Less accumulated depreciation (205,594) (190,677)
Total revenue earning equipment 5,822,486 5,035,694
Property and equipment, at cost:
Land, buildings and leasehold
improvements 562,731 515,063
Service equipment 553,826 554,134
1,116,557 1,069,197
Less accumulated depreciation (533,518) (526,466)
Total property and equipment 583,039 542,731
Franchises, concessions, contract costs
and leaseholds, net of amortization 9,257 10,117
Cost in excess of net assets of
purchased businesses, net of
amortization 516,166 525,853
Total assets $8,200,147 $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
June 30, Dec. 31,
1997 1996
Accounts payable $ 547,327 $ 468,817
Accrued liabilities 527,235 555,699
Accrued taxes 100,456 105,524
Debt (Note 5) 5,535,861 5,091,844
Public liability and property damage 312,492 321,118
Deferred taxes on income 143,800 116,800
Stockholders' equity (Note 1):
Class A Common Stock, $0.01 par value,
440,000,000 shares authorized,
40,956,858 shares issued and
outstanding 410 -
Class B Common Stock, $0.01 par value,
140,000,000 shares authorized,
67,310,167 shares issued and
outstanding 673 -
Common Stock, par value $1.00 per
share, shares issued -- 200
Class A, 51 Class B and 490 Class C - 1
Preferred Stock - 485,900
Additional capital paid-in 982,018 59,008
Unamortized restricted stock grants (15,946) -
Retained earnings 79,538 435,352
Translation adjustment (13,671) 9,129
Unrealized holding losses for
available-for-sale securities
(Note 2) (46) (25)
Total stockholders' equity 1,032,976 989,365
Total liabilities and
stockholders' equity $8,200,147 $7,649,167
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 June 30,
1997 1996
Revenues:
Car rental $844,067 $796,660
Industrial and construction equipment
rental 105,034 92,385
Car leasing 9,811 8,723
Other 17,404 13,633
Total revenues 976,316 911,401
Expenses:
Direct operating 452,759 437,214
Depreciation of revenue earning
equipment (Note 4) 245,292 221,539
Selling, general and administrative 106,876 108,388
Interest, net of interest income
of $2,982 and $2,359 78,284 74,976
Total expenses 883,211 842,117
Income before income taxes 93,105 69,284
Provision for taxes on income (Note 3) 39,204 29,739
Net income $ 53,901 $ 39,545
Net income per share
(in whole dollars - see Note 1) $ .50 $ .37
The accompanying notes are an integral part of this statement.
- 5 -
THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(In Thousands of Dollars)
Unaudited
Six Months
Ended June 30,
1997 1996
Revenues:
Car rental $1,602,603 $1,487,395
Industrial and construction equipment
rental 195,369 169,513
Car leasing 21,455 17,373
Other 35,241 40,262
Total revenues 1,854,668 1,714,543
Expenses:
Direct operating 896,822 861,033
Depreciation of revenue earning
equipment (Note 4) 463,792 413,926
Selling, general and administrative 215,443 212,837
Interest, net of interest income
of $7,549 and $5,117 151,595 142,291
Total expenses 1,727,652 1,630,087
Income before income taxes 127,016 84,456
Provision for taxes on income (Note 3) 53,396 36,123
Net income $ 73,620 $ 48,333
Net income per share
(in whole dollars - see Note 1) $ .68 $ .45
The accompanying notes are an integral part of this statement.
- 6 -
THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands of Dollars)
Unaudited
Six Months
Ended June 30,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 73,620 $ 48,333
Non-cash expenses:
Depreciation of revenue earning
equipment 463,792 413,926
Depreciation of property and
equipment 44,254 42,038
Amortization of intangibles 9,788 8,566
Amortization of restrictive
stock grants 879 -
Provision for public liability
and property damage 69,144 60,800
Provision for losses for doubtful
accounts 3,381 6,118
Deferred income taxes 27,000 16,200
Revenue earning equipment
expenditures (4,605,517) (4,792,476)
Proceeds from sales of revenue
earning equipment 3,276,317 2,846,534
Changes in assets and liabilities,
net of effects from sale in 1996
of certain claim administration
service operations -
Receivables 106,850 58,500
Due from affiliates 135,099 65,535
Inventories and prepaid expenses
and other assets (20,974) (12,363)
Accounts payable 94,971 65,877
Accrued liabilities (15,203) 68,751
Accrued taxes (1,245) 14,806
Payments of public liability and
property damage claims and expenses (77,723) (69,016)
Net cash flows used for
operating activities (415,567) (1,157,871)
The accompanying notes are an integral part of this statement.
- 7 -
THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousand of Dollars)
Unaudited
Six Months
Ended June 30,
1997 1996
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment expenditures $(114,931) $ (97,876)
Proceeds from sales of property and
equipment 20,312 15,641
Available-for-sale securities -
Purchases (609) (4,793)
Sales 451 4,821
Proceeds from sale of certain claim
administration service operations,
net of cash and equivalents - 15,346
Purchases of various operations - (6,054)
Net cash flows used for
investing activities (94,777) (72,915)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term
debt 150,196 149,841
Repayment of long-term debt (91,530) (97,711)
Short-term borrowings:
Proceeds 888,037 659,840
Repayments (804,007) (356,995)
Ninety day term or less, net 383,567 885,109
Cash dividend paid to Ford (460,000) -
Issuance of preferred stock to Ford 129,000 -
Redemption of preferred stock from
Ford (130,135) -
Sale of common stock 453,068 -
Net cash flows provided from
financing activities 518,196 1,240,084
EFFECT OF FOREIGN EXCHANGE RATE
CHANGES ON CASH (465) (135)
NET INCREASE IN CASH AND EQUIVALENTS
DURING THE PERIOD 7,387 9,163
CASH AND EQUIVALENTS AT BEGINNING OF
YEAR 179,311 137,257
CASH AND EQUIVALENTS AT END OF PERIOD $ 186,698 $ 146,420
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for -
Interest (net of amounts capitalized) $ 153,210 $ 137,911
Income taxes 39,774 16,582
In connection with an acquisition made in 1996, liabilities
assumed were $36 million.
The accompanying notes are an integral part of this statement.
- 8 -
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. On April 30, 1997 the
Company redeemed all the issued and outstanding shares of the
Series C Preferred 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 $453 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.
Net income per share was computed based on 108,267,025 shares
of Class A and Class B Common Stock outstanding. The net income
per share for the three and six month periods ended June 30, 1996
assumes that all shares outstanding during 1997 were outstanding
for the corresponding periods in 1996. Computation of the shares
outstanding does not include the impact of common stock
equivalents because they result in less than three percent
dilution.
- 9 -
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Changes in Stockholders' Equity - (continued)
Recent Pronouncement
In February 1997, the Financial Accounting Standard Board
("FASB") issued Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("SFAS 128"). SFAS 128 simplifies the
standards for computing earnings per share and is effective for
financial statements for both interim and annual periods ending
after December 15, 1997. Earlier application is not permitted.
For the Company, SFAS 128 will be effective for the year ending
December 31, 1997. The adoption of SFAS 128 is not expected to
impact the Company's earnings per share.
Note 2 - Available-for-Sale Securities
Available-for-sale securities are recorded at market value. The
Company includes available-for-sale securities in Prepaid
Expenses and Other Assets and includes in earnings realized gains
or losses on such securities. The estimated market value at
June 30, 1997 and December 31, 1996 was (in thousands) $5,512 and
$5,405, respectively. Historical cost at June 30, 1997 and
December 31, 1996 was $5,563 and $5,432, 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):
1997 1996
Three Months Ended June 30
Depreciation of revenue earning equipment $239,095 $218,847
Adjustment of depreciation upon disposal
of the equipment 3,133 181
Rents paid for vehicles leased 3,064 2,511
Total $245,292 $221,539
- 10 -
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Depreciation of Revenue Earning Equipment - (continued)
1997 1996
Six Months Ended June 30
Depreciation of revenue earning equipment $450,001 $415,453
Adjustment of depreciation upon disposal
of the equipment 7,212 (6,802)
Rents paid for vehicles leased 6,579 5,275
Total $463,792 $413,926
The adjustment of depreciation upon disposal of revenue
earning equipment for the three months ended June 30, 1997 and
1996 included net losses of $.5 million and $1.2 million,
respectively, on the sale of equipment in the industrial and
construction equipment rental operations in the United States;
and net losses of $2.6 million and net gains of $1.0 million,
respectively, in the car rental and car leasing operations.
The adjustment of depreciation upon disposal of revenue
earning equipment for the six months ended June 30, 1997 and 1996
included net losses of $1.1 million and net gains of $.5 million,
respectively, on the sale of equipment in the industrial and
construction equipment rental operations in the United States;
and net losses of $6.1 million and net gains of $6.3 million,
respectively, in the car rental and car leasing operations.
During the six months ended June 30, 1997, the Company
purchased Ford vehicles at a cost of approximately $2.5 billion,
and sold Ford vehicles to Ford or its affiliates under various
repurchase programs for approximately $1.7 billion.
- 11 -
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Debt
Debt at June 30, 1997 and December 31, 1996 consisted of the
following (in thousands of dollars):
June 30, Dec. 31,
1997 1996
Notes payable, including commercial
paper, average interest rate 5.6% $1,917,666 $1,498,002
Promissory notes, average interest
rate 7.3%; (effective average
interest rate 7.4%); net of
unamortized discount: 1997, $3,493;
1996, $3,602; due 1997 to 2005 2,071,507 1,941,398
Property and equipment lease obligations,
average interest rate: 1997, 7.0%;
1996, 7.5%; due 1998 1,836 2,554
Medium term notes, average interest
rate: 1997, 9.2%; 1996, 9.3%; due
1997 to 1998 55,300 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, $108; 1996, $172; due 1998 99,892 149,828
Junior subordinated promissory notes,
average interest rate 6.9%; net of
unamortized discount: 1997, $222;
1996, $244; due 2000 to 2003 399,778 399,756
Subsidiaries' short-term debt,
principally in foreign currencies,
including commercial paper in
millions (1997, $947.3; 1996,
$981.1) and other borrowings;
average interest rate: 1997,
4.6%; 1996, 5.2% 989,882 1,025,006
Total $5,535,861 $5,091,844
- 12 -
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Debt - (continued)
The aggregate amounts of maturities of debt for the twelve
month periods following June 30, 1997 are as follows (in
millions): 1998, $3,370.5 (including $2,865.0 of commercial paper
and short-term borrowings); 1999, $118.3; 2000, $449.8; 2001,
$549.0; 2002, $299.3; after 2002, $749.0.
At June 30, 1997, approximately $393 million of the
Company's consolidated stockholders' equity was free of dividend
limitations pursuant to its existing debt agreements.
At June 30, 1997, the Company and a subsidiary had
$269 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 June 30,
1997 of the swap and FRA agreements is to give the Company an
overall effective weighted-average rate on debt of 6.35%, with
49% of debt effectively subject to variable interest rates,
compared to a weighted-average interest rate on debt of 6.29%,
with 52% of debt subject to variable interest rates when not
considering the swap and FRA agreements. At June 30, 1997, these
agreements expressed in notional amounts aggregated (in millions)
$153.3 swaps, and FRAs in the amount of $13.7 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 June 30, 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 $4.0 million.
- 13 -
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Debt - (continued)
This relates to notional principal (in millions) of $153.3 swaps maturing
$21.8, $69.7, $45.0, $15.6, $1.1 and $0.1 in 1997, 1998, 1999, 2000, 2001,
and 2002, respectively.
Note 6 - Long-Term Equity Compensation Plan
The Company sponsors a stock-based incentive plan (the
"Plan") covering certain officers and other executives of the
Company. The Plan is administered by the Compensation Committee
(the "Committee")appointed by the Board of Directors. The
Company adopted the Plan in 1997 prior to the Offering. Awards
granted under the plan are based on shares of Class A Common
Stock. The Plan provides for the grant of incentive and
nonqualified stock options, stock appreciation rights, restricted
stock, performance shares and performance units ("Awards").
Officers and certain key salaried employees of the Company with
potential to contribute to the future success of the Company or
its subsidiaries are eligible to receive Awards under the Plan.
Each option granted shall expire at such time the Committee shall
determine at the time of grant; provided, that no option shall be
exercisable later than the tenth anniversary date of its grant.
The total number of shares of Class A Common Stock that may
be subject to Awards under the Plan is 8,120,026 shares. As part
of the Offering, the Company granted awards of 701,025 shares of
restricted stock and 1,423,470 nonqualified stock options. The
options were granted at the initial public offering price of
$24.00 per share. The Awards granted vest over various
anniversaries of the date of grant with all grants vesting by the
fifth anniversary of the date of grant.
Upon issuance of the restricted shares, the unamortized value
of restricted stock was charged to stockholders' equity and is
being amortized as compensation expense ratably over vesting
periods.
On August 1, 1997, the Company announced a program to
repurchase from time to time up to 1.15 million shares of its
Class A Common Stock for requirements under its incentive stock
plan. No significant repurchases will be made under this program
before May 1998.
- 14 -
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - 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 and six months ended June 30, 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 June 30
Income (Loss)
Before
Revenues Income Taxes
1997 1996 1997 1996
Car rental $ 864.5 $ 815.4 $ 81.4 $52.3
Industrial and construction
equipment rental 105.0 92.4 18.5 19.4
Corporate and other 6.8 3.6 (6.8) (2.4)
Consolidated total $ 976.3 $ 911.4 $ 93.1 $69.3
Six Months Ended June 30
Car rental $1,645.3 $1,524.7 $106.3 $53.5
Industrial and construction
equipment rental 195.4 169.5 28.1 31.7
Corporate and other 14.0 20.3 (7.4) (.7)
Consolidated total $1,854.7 $1,714.5 $127.0 $84.5
- 15 -
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Segment Information (continued)
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
- 16 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Three Months ended June 30, 1997 Compared with Three Months ended
June 30, 1996
Summary
The following table sets forth for the three months ended June
30, 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
June 30,
1997 1996
Revenues:
Car Rental 86.4% 87.4%
Industrial and construction equipment
rental 10.8 10.1
Car leasing 1.0 1.0
Other 1.8 1.5
100.0 100.0
Expenses:
Direct operating 46.4 48.0
Depreciation of revenue earning
equipment 25.1 24.3
Selling, general and administrative 11.0 11.9
Interest, net of interest income 8.0 8.2
90.5 92.4
Income before income taxes 9.5 7.6
Provision for taxes on income 4.0 3.3
Net income 5.5% 4.3%
- 17 -
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 June 30, 1997 and 1996.
Three Months Ended
June 30,
1997 1996
Car rental and other operations -
Average number of owned cars operated
during period 290,400 287,100
Number of transactions of owned car
rental operations during period 5,542,000 5,272,000
Average revenue per transaction of
owned car rental operations during
period (in whole dollars) $ 152.31 $ 151.10
Equipment rental operations -
Average cost of rental equipment
operated during period (in millions) $ 979 $ 785
Revenues
Revenues from car rental operations of $844.1 million in the
second quarter of 1997 increased by 6% from $796.7 million in the
second quarter of 1996. The increase of $47.4 million was the
result of a worldwide increase in transactions of 5.1% and an
increase in pricing in the United States of approximately 6.2%
that contributed $65.8 million in increased revenue. These
increases were partially offset by a decrease in average
transaction length in the United States as well as decreases of
$18.4 million from the effect of the strong U.S. dollar on
foreign currency translation and a decrease in revenue per
transaction in foreign operations, all of which moderated the
overall increase in revenue per transaction. The translation
impact of exchange rates on net income is not significant because
the majority of the Company's foreign expenses are also incurred
in local currencies.
Revenues from industrial and construction equipment rental of
$105.0 million in the second quarter of 1997 increased by 13.7%
from $92.4 million in the second quarter of 1996. Of this $12.6
million increase, approximately $9.3 million was due to an
increase in volume resulting from the opening of new locations
and approximately $3.3 million was due to increased activity from
existing locations.
- 18 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued).
Revenues from all other sources of $27.2 million in the second
quarter of 1997 increased by 21.7% from $22.4 million in the
second quarter of 1996, primarily due to increased revenues from
car leasing operations, partly due to an acquisition made in June
1996 of a foreign licensee operation.
Expenses
Total expenses of $883.2 million in 1997 increased by 4.9% from
$842.1 million in 1996, although total expenses as a percentage
of revenues decreased to 90.5% in 1997 from 92.4% in 1996.
Direct operating expenses of $452.8 million in 1997 increased by
3.6% from $437.2 million in 1996, but were lower in 1997 as a
percentage of revenues due to more efficient fixed cost coverage.
Wages and related benefits and reservation costs, decreased as a
percentage of revenues.
Depreciation of revenue earning equipment for the car rental and
car leasing operations of $222.3 million in 1997 increased by
9.7% from $202.6 million in 1996, primarily due to an increase in
the cost of cars acquired in both the United States and
international operations, an increase in the number of cars
operated and a reduction in the net proceeds received in excess
of book value on the disposal of the cars (which resulted in a
loss of $2.6 million in 1997 as compared to a gain of $1.0
million in 1996).
Depreciation of revenue earning equipment for the industrial and
construction equipment rental operations of $23.0 million in 1997
increased by 21.5% from $18.9 million in 1996, primarily due to
an increase in both the volume and cost of equipment operated.
These increases were partly offset by a reduction in depreciation
of $2.4 million, due to changes made effective January 1, 1997 to
increase certain estimated useful lives and changes in estimated
residual values of the equipment. In addition, the increase was
partially offset by the change in the net proceeds received in
excess of book value on the disposal of the equipment reflecting
a $.5 million loss in 1997 versus a $1.2 million loss in 1996.
Selling, general and administrative expenses of $106.9 million in
1997 decreased by 1.4% from $108.4 million in 1996, and were
lower in 1997 as a percentage of revenues due to more efficient
cost coverage. The decrease in 1997 resulted primarily from
foreign currency translation adjustments and lower advertising
costs, partly offset by increases in sales promotion and general
and administrative costs.
- 19 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued).
Interest expense of $78.3 million in 1997 increased 4.4% from
$75.0 million in 1996, primarily due to higher average debt
levels (which were required to finance growth and increases in
the cost of cars and industrial and construction equipment) and
interest expense of $2.1 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.
The tax provision of $39.2 million in 1997 increased 31.8% from
$29.7 million in 1996, primarily due to the higher income before
income taxes in 1997. The effective tax rate in 1997 was 42.1%
as compared to 42.9% in 1996. See Note 3 to the Notes to the
Company's consolidated financial statements.
Net Income
The Company achieved record net income of $53.9 million in the
second quarter of 1997, or $0.50 per share, representing an
increase of 36.3% from $39.5 million, or $0.37 per share, in the
second 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 $.7 million ($.006 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, (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.
- 20 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued).
Six Months ended June 30, 1997 Compared With Six Months ended
June 30, 1996
Summary
The following table sets forth for the six months ended June 30,
1997 and 1996 the percentage of operating revenues represented by
certain items in the Company's consolidated statement of income:
Percentage of Revenues
Six Months Ended
June 30,
1997 1996
Revenues:
Car Rental 86.4% 86.8%
Industrial and construction equipment
rental 10.5 9.9
Car leasing 1.2 1.0
Other 1.9 2.3
100.0 100.0
Expenses:
Direct operating 48.3 50.2
Depreciation of revenue earning
equipment 25.0 24.2
Selling, general and administrative 11.6 12.4
Interest, net of interest income 8.2 8.3
93.1 95.1
Income before income taxes 6.9 4.9
Provision for taxes on income 2.9 2.1
Net income 4.0% 2.8%
- 21 -
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 six months ended June 30, 1997 and 1996.
Six Months Ended
June 30,
1997 1996
Car rental and other operations -
Average number of owned cars operated
during period 282,80 0 271,500
Number of transactions of owned car
rental operations during period 10,452,000 9,819,000
Average revenue per transaction of
owned car rental operations during
period (in whole dollars) $ 153.33 $ 151.48
Equipment rental operations -
Average cost of rental equipment
operated during period (in millions) $ 949 $ 751
Revenues
Revenues from car rental operations of $1,602.6 million in the
first half of 1997 increased by 7.7% from $1,487.4 million in the
first half of 1996. The increase of $115.2 million was the
result of a worldwide increase in transactions of 6.4% and an
increase in pricing in the United States of approximately 5.8%
that contributed $143.4 million in increased revenue. These
increases were partially offset by a decrease in average
transaction length in the United States, as well as decreases of
$28.2 million from the effect of the strong U.S. dollar on
foreign currency translation and a decrease in revenue per
transaction in foreign operations, all of which moderated the
overall increase in revenue per transaction.
Revenues from industrial and construction equipment rental of
$195.4 million in the first half of 1997 increased by 15.3% from
$169.5 million in the first half of 1996. Of this $25.9 million
increase, approximately $16.5 million was due to an increase in
volume resulting from the opening of new locations and
approximately $9.4 million was due to increased activity from
existing locations.
- 22 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued).
Revenues from all other sources of $56.7 million in the first
half of 1997 decreased by 1.6% from $57.6 million in the first
half 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 $1,727.7 million in 1997 increased by 6% from
$1,630.1 million in 1996, although total expenses as a percentage
of revenues decreased to 93.1% in 1997 from 95.1% in 1996.
Direct operating expenses of $896.8 million in 1997 increased by
4.2% from $861.0 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 $428.3 million in 1997 increased by
10.5% from $387.7 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 excess
of book value on the disposal of the cars (which resulted in a
loss of $6.1 million in 1997 as compared to a gain of
$6.3 million in 1996), as well as 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 $35.5 million in 1997
increased by 35.5% from $26.2 million in 1996, primarily due to
an increase in both the volume and cost of equipment operated.
The increase was also due to lower net proceeds received in
excess of book value on the disposal of the equipment reflecting
a $1.1 million loss in 1997 versus a $.5 million gain in 1996, as
a result of changes made 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 $4.8 million, in 1997, due to changes made
effective January 1, 1997 to increase certain estimated useful
lives being used to compute depreciation of revenue earning
equipment to reflect changes in the estimated residual values of
the equipment.
- 23 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued).
Selling, general and administrative expenses of $215.4 million in
1997 increased by 1.2% from $212.8 million in 1996, but were
lower in 1997 as a percentage of revenues due to more efficient
cost coverage. The increase in 1997 resulted primarily from
increases in sales promotion and general and administrative costs
partly offset by a decrease due to foreign currency translation
adjustments.
Interest expense of $151.6 million in 1997 increased 6.5% from
$142.3 million in 1996, primarily due to higher average debt
levels (which were required to finance growth and increases in
the cost of cars and industrial and construction equipment) and
interest expense of $4.3 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 $53.4 million in 1997 increased 47.8% from
$36.1 million in 1996, primarily due to the higher income before
income taxes in 1997. The effective tax rate in 1997 was 42.0%
as compared to 42.7% in 1996. See Note 3 to the Notes to the
Company's consolidated financial statements.
Net Income
The Company achieved record net income of $73.6 million in the
first half of 1997, or $0.68 per share, representing an increase
of 52.3% from $48.3 million, or $0.45 per share, in the first
half of 1996. This increase was primarily due to higher
revenues in the U.S. car rental operations and a $2.9 million
($.027 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 $1.5 million ($.014 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, (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.
- 24 -
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 six months ended June 30, 1997,
the Company's expenditures for revenue earning equipment were
$4,606 million (partially offset by proceeds from the sale of
such equipment of $3,276 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 six months ended June 30, 1997,
the Company's capital investments for property and non-
revenue earning equipment, were $114.9 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. As the
need arises, it is the Company's intention to issue either
unsecured senior, senior subordinated or junior subordinated debt
securities 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 June 30, 1997 was $2.7 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 matured on July 1, 1997, and
has been repaid. Borrowing for the Company's international
operations consists mainly of loans obtained from local and
international banks. The Company guarantees only the borrowings
of its subsidiaries in Australia and Canada, which consist
principally of commercial paper. 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. At June 30, 1997, the total
debt for the foreign operations was $990 million, of which $947
million was short-term (original maturity of less than one year)
- 25 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued).
and $43 million was long-term. At June 30, 1997, the total
amounts outstanding (in millions of U.S. dollars) under the
Australian and Canadian commercial paper programs were $79 and
$99, respectively.
In an initial public offering on April 30, 1997, the Company
issued and sold 20,010,000 shares of its Class A Common Stock and
received net proceeds of $453 million from the sale, which were
used to pay down notes payable.
At June 30, 1997, the Company had committed bank credit
facilities totalling $2.3 billion. Of this amount, $2.1 billion
are represented by a combination of five-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 five-year
agreements, totalling $1,185 million, currently expire on
June 30, 2002, and the 364-day agreements, totalling $895 million,
expire on June 25, 1998. The five-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 four-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.
On July 28, 1997 the Board of Directors declared a quarterly
dividend of $.05 per share on its Class A and Class B Common
Stock payable on September 10, 1997 to shareholders of record as
of August 15, 1997.
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 accordingly. However,
certain operating expenses, including rent, insurance, and
- 26 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued).
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.
Recent Pronouncements
In February 1997, the FASB issued SFAS No. 128, "Earnings Per
Share" ("SFAS 128"). SFAS 128 simplifies the standards for
computing earnings per share and is effective for financial
statements for both interim and annual periods ending after
December 15, 1997. Earlier application is not permitted. For
the Company, SFAS 128 will be effective for the year ending
December 31, 1997. The adoption of SFAS 128 is not expected to
impact the Company's earnings per share.
In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income" ("SFAS 130"). SFAS 130 establishes
standards for reporting and display of comprehensive income and
its components and is effective for financial statements for
fiscal years beginning after December 15, 1997. For the Company,
SFAS 130 will be effective for the first quarter ending March 31,
1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131").
SFAS 131 requires that companies disclose segment data based on
how management makes decisions about allocating resources to
segments and measuring their performance. SFAS 131 will be
effective for fiscal years beginning after December 15, 1997.
For the Company, SFAS 131 will be effective for the year ending
December 31, 1998.
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.
- 27 -
PART II - OTHER INFORMATION (continued)
ITEM 2. CHANGES IN SECURITIES.
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. On April 30, 1997 the Company
redeemed the 5.11% Cumulative Series C Preferred Stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
4 Instruments defining the rights of security holders,
including indentures. During the quarter ended June 30,
1997, the registrant and its subsidiaries ("Hertz")
incurred various obligations which could be considered
as long-term debt, none of which exceeded 10% of the
total assets of Hertz on a consolidated basis. The
Company agrees to furnish to the Commission upon request
a copy of any instrument defining the rights of the
holders of such long-term debt.
12 Computation of Ratio of Earnings to Fixed Charges for
the six months ended June 30, 1997 and 1996.
27 Financial Data Schedule for the six months ended June
30, 1997.
(b) Reports on Form 8-K:
The Company filed a Form 8-K dated April 10, 1997
reporting the issuance of a press release with respect
to its first quarter 1997 earnings.
The Company filed a Form 8-K dated May 1, 1997 reporting
the adoption of new By-laws, the filing of a Restated
Certificate of Incorporation, a Corporate Agreement
between the Company and Ford, and the adoption of the
Company's Long-Term Equity Compensation Plan.
- 28 -
PART II - OTHER INFORMATION (continued)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (continued).
The Company filed a Form 8-K dated May 12, 1997
reporting under Item 5 thereof instruments defining the
rights of security holders, including indentures, in
connection with the Registration Statement on Form S-3
(File No. 33-54183) filed by the Company with the
Securities and Exchange Commission covering Senior Debt
Securities issuable under an Indenture dated as of
December 1, 1994.
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: August 7, 1997 By: /s/ Paul J. Siracusa
Paul J. Siracusa
Executive Vice President and
Chief Financial Officer
(principal financial officer
and duly authorized officer)
- 29 -
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS
filed with
FORM 10-Q
for the quarter ended
June 30, 1997
under
THE SECURITIES EXCHANGE ACT OF 1934
THE HERTZ CORPORATION
Commission file number 1-7541
- 30 -
EXHIBIT INDEX
Exhibit
No. Description Page No.
12 Computation of Ratio of Earnings
to Fixed Charges for the six
months ended June 30, 1997 and
1996. 32
27 Financial Data Schedule for the
six months ended June 30, 1997. 33 - 34
- 31 -
EXHIBIT 12
THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In Thousands of Dollars Except Ratios)
Unaudited
Six Months
Ended June 30,
1997 1996
Income before income taxes $127,016 $ 84,456
Interest expense 159,144 147,408
Portion of rent estimated to represent
the interest factor 34,689 34,667
Earnings before income taxes and fixed
charges $320,849 $266,531
Interest expense (including capitalized
interest) $159,359 $147,815
Portion of rent estimated to represent
the interest factor 34,689 34,667
Fixed charges $194,048 $182,482
Ratio of earnings to fixed charges 1.7 1.5
- 32 -