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 September 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 September 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 of 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
Sept. 30, Dec. 31,
1997 1996
Cash and equivalents $ 171,514 $ 179,311
Receivables, less allowance for
doubtful accounts of $11,636
(1996 - $12,268) 691,860 798,686
Due from affiliates 310,740 456,025
Inventories, at lower of cost or market 16,335 20,220
Prepaid expenses and other assets
(Note 2) 101,634 80,530
Revenue earning equipment, at cost:
Cars 4,926,725 4,698,656
Less accumulated depreciation (408,029) (380,391)
Other equipment 1,099,768 908,106
Less accumulated depreciation (223,154) (190,677)
Total revenue earning equipment 5,395,310 5,035,694
Property and equipment, at cost:
Land, buildings and leasehold
improvements 545,341 515,063
Service equipment 570,073 554,134
1,115,414 1,069,197
Less accumulated depreciation (534,971) (526,466)
Total property and equipment 580,443 542,731
Franchises, concessions, contract costs
and leaseholds, net of amortization 8,959 10,117
Cost in excess of net assets of
purchased businesses, net of
amortization 511,567 525,853
Total assets $7,788,362 $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
Sept. 30, Dec. 31,
1997 1996
Accounts payable $ 429,331 $ 468,817
Accrued liabilities 536,909 555,699
Accrued taxes 123,196 105,524
Debt (Note 5) 5,103,762 5,091,844
Public liability and property damage 323,568 321,118
Deferred taxes on income 155,500 116,800
Stockholders' equity (Note 1):
Class A Common Stock, $0.01 par value,
440,000,000 shares authorized,
40,956,858 shares issued 410 -
Class B Common Stock, $0.01 par value,
140,000,000 shares authorized,
67,310,167 shares issued 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 980,581 59,008
Unamortized restricted stock grants (13,122) -
Retained earnings 167,562 435,352
Translation adjustment (20,007) 9,129
Unrealized holding losses for
available-for-sale securities
(Note 2) (1) (25)
Total stockholders' equity 1,116,096 989,365
Total liabilities and
stockholders' equity $7,788,362 $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 Sept. 30,
1997 1996
Revenues:
Car rental $ 946,903 $ 919,961
Industrial and construction equipment
rental 122,789 109,672
Car leasing 9,205 9,019
Other 23,245 21,376
Total revenues 1,102,142 1,060,028
Expenses:
Direct operating 479,426 485,968
Depreciation of revenue earning
equipment (Note 4) 266,947 246,006
Selling, general and administrative 113,244 108,111
Interest, net of interest income
of $2,779 and $2,595 80,829 81,694
Total expenses 940,446 921,779
Income before income taxes 161,696 138,249
Provision for taxes on income (Note 3) 68,262 64,041
Net income $ 93,434 $ 74,208
Net income per share
(in whole dollars - see Note 1) $ .86 $ .69
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
Nine Months
Ended Sept. 30,
1997 1996
Revenues:
Car rental $2,549,506 $2,407,356
Industrial and construction equipment
rental 318,158 279,185
Car leasing 30,660 26,392
Other 58,486 61,638
Total revenues 2,956,810 2,774,571
Expenses:
Direct operating 1,376,248 1,347,001
Depreciation of revenue earning
equipment (Note 4) 730,739 659,932
Selling, general and administrative 328,687 320,948
Interest, net of interest income
of $10,328 and $7,712 232,424 223,985
Total expenses 2,668,098 2,551,866
Income before income taxes 288,712 222,705
Provision for taxes on income (Note 3) 121,658 100,164
Net income $ 167,054 $ 122,541
Net income per share
(in whole dollars - see Note 1) $ 1.54 $ 1.13
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
Nine Months
Ended Sept. 30,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 167,054 $ 122,541
Non-cash expenses:
Depreciation of revenue earning
equipment 730,739 659,932
Depreciation of property and
equipment 67,000 63,537
Amortization of intangibles 14,665 13,652
Amortization of restrictive
stock grants 2,266 -
Provision for public liability
and property damage 105,810 101,407
Provision for losses for doubtful
accounts 5,041 9,152
Deferred income taxes 38,700 33,400
Revenue earning equipment
expenditures (5,966,470) (6,571,460)
Proceeds from sales of revenue
earning equipment 4,735,027 4,576,450
Changes in assets and liabilities,
net of effects from sale of
operations -
Receivables 59,512 (76,646)
Due from affiliates 145,285 197,952
Inventories and prepaid expenses
and other assets (20,131) (5,933)
Accounts payable 47,503 2,149
Accrued liabilities (7,611) 90,443
Accrued taxes 19,977 57,230
Payments of public liability and
property damage claims and expenses (103,290) (95,481)
Net cash provided by (used in)
operating activities 41,077 (821,675)
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
Nine Months
Ended Sept. 30,
1997 1996
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment expenditures $ (153,246) $ (126,248)
Proceeds from sales of property and
equipment 36,373 25,968
Available-for-sale securities -
Purchases (1,692) (5,443)
Sales 1,574 5,462
Proceeds from sale of operations,
net of cash and equivalents 2,214 15,346
Purchases of various operations - (6,054)
Net cash used in investing
activities (114,777) (90,969)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term
debt 402,955 153,489
Repayment of long-term debt (210,987) (197,696)
Short-term borrowings:
Proceeds 1,476,590 1,146,723
Repayments (1,167,105) (652,710)
Ninety day term or less, net (421,803) 496,453
Cash dividends 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 -
Cash dividends paid on common stock (5,410) -
Net cash provided by financing
activities 66,173 946,259
EFFECT OF FOREIGN EXCHANGE RATE
CHANGES ON CASH (270) (117)
NET (DECREASE) INCREASE IN CASH AND
EQUIVALENTS DURING THE PERIOD (7,797) 33,498
CASH AND EQUIVALENTS AT BEGINNING OF
YEAR 179,311 137,257
CASH AND EQUIVALENTS AT END OF PERIOD $ 171,514 $ 170,755
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for -
Interest (net of amounts capitalized) $ 230,677 $ 227,874
Income taxes 80,673 22,329
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 108,230,984 and
108,245,786 weighted average shares of Class A and Class B Common
Stock outstanding during the quarter and nine months, respectively.
The net income per share for the three and nine month periods ended
September 30, 1996 assumes that the weighted average shares
outstanding during 1997 were outstanding for the corresponding periods
in 1996. The 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. The adoption of SFAS 128 for
periods ending after December 15, 1997 is not expected to have a
material effect on reported 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 September 30, 1997 and
December 31, 1996 was (in thousands) $5,533 and $5,405, respectively.
Historical cost at September 30, 1997 and December 31, 1996 was $5,534
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 September 30
Depreciation of revenue earning equipment $256,513 $243,244
Adjustment of depreciation upon disposal
of the equipment 6,826 1,143
Rents paid for vehicles leased 3,608 1,619
Total $266,947 $246,006
- 10 -
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Depreciation of Revenue Earning Equipment - (continued)
1997 1996
Nine Months Ended September 30
Depreciation of revenue earning equipment $706,514 $658,697
Adjustment of depreciation upon disposal
of the equipment 14,038 (5,659)
Rents paid for vehicles leased 10,187 6,894
Total $730,739 $659,932
The adjustment of depreciation upon disposal of revenue earning
equipment for the three months ended September 30, 1997 and 1996
included net losses of $2.0 million and $1.0 million, respectively, on
the sale of equipment in the industrial and construction equipment
rental operations in the United States; and net losses of $4.8 million
and $.1 million, respectively, in the car rental and car leasing
operations.
The adjustment of depreciation upon disposal of revenue earning
equipment for the nine months ended September 30, 1997 and 1996
included net losses of $3.1 million and $.5 million, respectively, on
the sale of equipment in the industrial and construction equipment
rental operations in the United States; and net losses of $10.9
million and net gains of $6.2 million, respectively, in the car rental
and car leasing operations.
During the nine months ended September 30, 1997, the Company
purchased Ford vehicles at a cost of approximately $3.2 billion, and
sold Ford vehicles to Ford or its affiliates under various repurchase
programs for approximately $2.5 billion.
- 11 -
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Debt
Debt at September 30, 1997 and December 31, 1996 consisted of the
following (in thousands of dollars):
Sept. 30, Dec. 31,
1997 1996
Notes payable, including commercial
paper, average interest rate 5.6% $1,441,446 $1,498,002
Promissory notes, average interest
rate: 1997, 7.2%; 1996, 7.3%;
(effective average interest rate:
1997, 7.3%; 1996, 7.4%); net of
unamortized discount: 1997, $3,262;
1996, $3,602; due 1998 to 2005 2,246,738 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, 9.1%; 1996, 9.3%; due
1998 30,000 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, $75; 1996, $172; due 1998 99,925 149,828
Junior subordinated promissory notes,
average interest rate 6.9%; net of
unamortized discount: 1997, $211;
1996, $244; due 2000 to 2003 399,789 399,756
Subsidiaries' short-term debt,
principally in foreign currencies,
including commercial paper in
millions (1997, $858.1; 1996,
$981.1) and other borrowings;
average interest rate: 1997,
5.1%; 1996, 5.2% 884,028 1,025,006
Total $5,103,762 $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 September 30, 1997 are as follows (in millions):
1998, $2,706.3 (including $2,299.5 of commercial paper and short-term
borrowings); 1999, $100.1; 2000, $599.8; 2001, $399.1; 2002, $399.2;
after 2002, $899.3.
At September 30, 1997, approximately $459 million of the
Company's consolidated stockholders' equity was free of dividend
limitations pursuant to its existing debt agreements.
At September 30, 1997, the Company had $250 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"). 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 September 30, 1997 of the swap agreements is to give the
Company an overall effective weighted-average rate on debt of 6.49%,
with 42% of debt effectively subject to variable interest rates,
compared to a weighted-average interest rate on debt of 6.44%, with
45% of debt subject to variable interest rates when not considering
the swap agreements. At September 30, 1997, these agreements
expressed in notional amounts aggregated $137.9 million. 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 September 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 $3.7
million. The notional principal ($137.9 million) matures as follows:
- 13 -
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Debt - (continued)
$7.2, $65.2, $45.5, $18.2, $1.7 and $.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 awards 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 nine months ended
September 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 September 30
Income (Loss)
Before
Revenues Income Taxes
1997 1996 1997 1996
Car rental $ 972.4 $ 941.3 $150.7 $118.9
Industrial and construction
equipment rental 122.8 109.7 23.6 27.2
Corporate and other 6.9 9.0 (12.6) (7.9)
Consolidated total $1,102.1 $1,060.0 $161.7 $138.2
Nine Months Ended September 30
Car rental $2,617.7 $2,466.1 $256.9 $172.4
Industrial and construction
equipment rental 318.2 279.2 51.7 59.0
Corporate and other 20.9 29.3 (19.9) (8.7)
Consolidated total $2,956.8 $2,774.6 $288.7 $222.7
- 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 September 30, 1997 Compared with Three Months ended
September 30, 1996
Summary
The following table sets forth for the three months ended September
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
September 30,
1997 1996
Revenues:
Car Rental 85.9% 86.8%
Industrial and construction equipment
rental 11.1 10.3
Car leasing .9 .9
Other 2.1 2.0
100.0 100.0
Expenses:
Direct operating 43.5 45.9
Depreciation of revenue earning
equipment 24.2 23.2
Selling, general and administrative 10.3 10.2
Interest, net of interest income 7.3 7.7
85.3 87.0
Income before income taxes 14.7 13.0
Provision for taxes on income 6.2 6.0
Net income 8.5% 7.0%
- 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 September 30, 1997 and 1996.
Three Months Ended
September 30,
1997 1996
Car rental and other operations -
Average number of owned cars operated
during period 316,700 315,000
Number of transactions of owned car
rental operations during period 5,549,000 5,259,000
Average revenue per transaction of
owned car rental operations during
period (in whole dollars) $ 170.63 $ 174.92
Equipment rental operations -
Average cost of rental equipment
operated during period (in millions) $ 1,079 $ 884
Revenues
Revenues from car rental operations of $946.9 million in the third
quarter of 1997 increased by 2.9% from $920.0 million in the third
quarter of 1996. The increase of $26.9 million was the result of a
worldwide increase in transactions of 5.5% and an increase in pricing
in the United States of approximately 5.9% that contributed $61.5
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 $34.6 million from the effect of the strong U.S.
dollar on foreign currency translation and a decrease in pricing in
foreign operations, all of which resulted in an overall decrease in
average 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 $122.8
million in the third quarter of 1997 increased by 11.9% from $109.7
million in the third quarter of 1996. Of this $13.1 million increase,
approximately $8 million was due to an increase in volume resulting
from the opening of 21 new locations within the last 12 months and
approximately $5.1 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 $32.4 million in the third quarter
of 1997 increased by 6.6% from $30.4 million in the third quarter of
1996, primarily due to the recognition of the initial fee from the
franchising of Denmark and Norway car rental operations, which had
been corporately owned.
Expenses
Total expenses of $940.4 million in 1997 increased by 2.0% from $921.8
million in 1996, although total expenses as a percentage of revenues
decreased to 85.3% in 1997 from 87.0% in 1996.
Direct operating expenses of $479.4 million in 1997 decreased by 1.4%
from $486.0 million in 1996. The decrease was primarily the result of
foreign currency translation, lower vehicle damage costs and a
decrease in other vehicle operating expenses. Commissions and
concessions decreased as a percentage of revenues.
Depreciation of revenue earning equipment for the car rental and car
leasing operations of $236.9 million in 1997 increased by 7.2% from
$220.9 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 $4.8 million in 1997 as compared to a
loss of $.1 million in 1996).
Depreciation of revenue earning equipment for the industrial and
construction equipment rental operations of $30.1 million in 1997
increased by 19.7% from $25.1 million in 1996, primarily due to an
increase in both the volume and cost of equipment operated and
decreases in the net proceeds received in excess of book value on the
disposal of the equipment resulting in a $2.0 million loss in 1997
versus a $1.0 million loss in 1996. 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.
Selling, general and administrative expenses of $113.2 million in 1997
increased by 4.7 % from $108.1 million in 1996. The increase in 1997
resulted primarily from higher general and administrative costs partly
offset by decreases in sales promotion, advertising costs, and the
effects of changes in exchange rates on foreign currency translation.
- 19 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued).
Interest expense of $80.8 million in 1997 decreased 1.1% from $81.7
million in 1996, primarily due to lower average debt levels.
The tax provision of $68.3 million in 1997 increased 6.7% from $64.0
million in 1996, primarily due to the higher income before income
taxes in 1997. The effective tax rate in 1997 was 42.2% as compared
to 46.3% in 1996. The decrease in the effective tax rate is due
primarily to a change in the mix of domestic and international
earnings. See Note 3 to the Notes to the Company's consolidated
financial statements.
Net Income
The Company achieved record net income of $93.4 million in the third
quarter of 1997, or $.86 per share, representing an increase of 25.9%
from $74.2 million, or $0.69 per share, in the third quarter of 1996.
This increase was primarily due to higher revenues in the U.S. car
rental operations and the net effect of the other contributing factors
mentioned above.
- 20 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued).
Nine Months ended September 30, 1997 Compared With Nine Months ended
September 30, 1996
Summary
The following table sets forth for the nine months ended September 30,
1997 and 1996 the percentage of operating revenues represented by
certain items in the Company's consolidated statement of income:
Percentage of Revenues
Nine Months Ended
September 30,
1997 1996
Revenues:
Car Rental 86.2% 86.7%
Industrial and construction equipment
rental 10.8 10.1
Car leasing 1.0 1.0
Other 2.0 2.2
100.0 100.0
Expenses:
Direct operating 46.5 48.5
Depreciation of revenue earning
equipment 24.7 23.8
Selling, general and administrative 11.1 11.6
Interest, net of interest income 7.9 8.1
90.2 92.0
Income before income taxes 9.8 8.0
Provision for taxes on income 4.1 3.6
Net income 5.7% 4.4%
- 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 nine months ended September 30, 1997 and 1996.
Nine Months Ended
September 30,
1997 1996
Car rental and other operations -
Average number of owned cars operated
during period 293,600 285,300
Number of transactions of owned car
rental operations during period 16,001,000 15,078,000
Average revenue per transaction of
owned car rental operations during
period (in whole dollars) $ 159.33 $ 159.66
Equipment rental operations -
Average cost of rental equipment
operated during period (in millions) $ 992 $ 795
Revenues
Revenues from car rental operations of $2,549.5 million in the first
nine months of 1997 increased by 5.9% from $2,407.4 million in the
first nine months of 1996. The increase of $142.1 million was the
result of a worldwide increase in transactions of 6.1% and an increase
in pricing in the United States of approximately 5.8% that contributed
$206.6 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 $64.5 million from the effect of the
strong U.S. dollar on foreign currency translation and a decrease in
pricing in foreign operations, all of which resulted in a small
decrease in average revenue per transaction.
Revenues from industrial and construction equipment rental of $318.2
million in the first nine months of 1997 increased by 14.0% from
$279.2 million in the first nine months of 1996. Of this $39 million
increase, approximately $13.9 million was due to an increase in volume
resulting from the opening of 21 new locations within the last 12
months and approximately $25.1 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 $89.1 million in the first nine
months of 1997 increased by 1.3% from $88.0 million in the first nine
months of 1996, primarily due to increased revenues from car leasing
operations, as a result of an acquisition made in June 1996 of a
foreign licensee operation, and the recognition of the initial fee
from the franchising of Denmark and Norway car rental operations,
which had been corporately owned. This increase was partly offset by
lower revenues in claim administration service operations, a large
part of which was sold as of February 29, 1996.
Expenses
Total expenses of $2,668.1 million in 1997 increased by 4.6% from
$2,551.9 million in 1996, although total expenses as a percentage of
revenues decreased to 90.2% in 1997 from 92.0% in 1996.
Direct operating expenses of $1,376.2 million in 1997 increased by
2.2% from $1,347.0 million in 1996, but were lower in 1997 as a
percentage of revenues due to more efficient fixed cost coverage. The
increase was primarily due to increased costs in car rental
operations, which corresponds with the increase in transaction volume,
and in industrial and construction equipment rental operations, which
opened 19 new domestic locations in 1997. The overall increase was
moderated by foreign currency translation changes and decreases in
vehicle damage and other vehicle operating costs in car rental
operations. Concessions, commissions and reservation costs decreased
as a percentage of revenues.
Depreciation of revenue earning equipment for the car rental and car
leasing operations of $665.2 million in 1997 increased by 9.3% from
$608.6 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 $10.9 million in 1997 as compared to a
gain of $6.2 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 $65.6 million in 1997
increased by 27.7% from $51.4 million in 1996, primarily due to an
- 23 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued).
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 $3.1 million loss
in 1997 versus a $.5 million loss 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 $7.2 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.
Selling, general and administrative expenses of $328.7 million in 1997
increased by 2.4% from $320.9 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 in
advertising expenses and the effects of changes in exchange rates on
foreign currency translation.
Interest expense of $232.4 million in 1997 increased 3.8% from $224.0
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), 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. This increase was
partially offset by a lower weighted average interest rate in 1997 as
compared to 1996 and higher interest income received.
The tax provision of $121.7 million in 1997 increased 21.5% from
$100.2 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 45% in 1996. The decrease in the effective tax rate is
due primarily to a change in the mix of domestic and international
earnings. See Note 3 to the Notes to the Company's consolidated
financial statements.
Net Income
The Company achieved record net income of $167.1 million in the first
nine months of 1997, or $1.54 per share, representing an increase of
36.4% from $122.5 million, or $1.13 per share, in the first nine
months of 1996. This increase was primarily due to higher revenues
- 24 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued).
in the U.S. car rental operations and a $4.4 million ($.04 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) 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 (ii) losses incurred in a foreign
car rental and leasing operation which was acquired from a licensee in
June 1996.
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. On October 8, 1997,
Standard and Poor's Corporation ("S&P") lowered the credit ratings of
Ford Motor Company and certain subsidiaries including the Company.
The Company's short-term credit rating was reduced from A-1 to A-2 and
its long-term credit rating was reduced from A- to BBB+. S&P reported
that its reduction of the Company's credit rating reflected the
October 1997 announcement by Ford that it plans to distribute to
shareholders its ownership stake in Associates First Capital
Corporation. The Company does not believe that the reduced ratings
will have a material adverse effect on the Company's liquidity or
consolidated financial position. 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 of cars
and industrial and construction equipment. For the nine months ended
September 30, 1997, the Company's expenditures for revenue earning
equipment were $5,966 million (partially offset by proceeds from the
sale of such equipment of $4,735 million). These assets are purchased
by the Company in accordance with the terms of programs negotiated
with automobile and equipment manufacturers. For the nine months
ended September 30, 1997, the Company's capital investments for
property and non-revenue earning equipment, were $153 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 31 days of
total annual sales outstanding.
- 25 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued).
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 September
30, 1997 was $2.8 billion with maturities ranging from 1997 to 2009.
This includes $250 million in term loans from Ford, which mature on
November 15, 1999. Borrowing for the Company's international
operations consists mainly of loans obtained from local and
international banks and commercial paper programs established in
Australia, Canada and Ireland. The Company guarantees only the
borrowings of its subsidiaries in Australia, Canada and Ireland, 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 September 30, 1997, the total
debt for the foreign operations was $884 million, of which $858
million was short-term (original maturity of less than one year) and
$26 million was long-term. At September 30, 1997, the total amounts
outstanding (in millions of U.S. dollars) under the Irish, Australian
and Canadian commercial paper programs were $194, $101 and $106,
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 September 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.
- 26 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued).
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 September 10, 1997 the Company paid a quarterly dividend of $.05
per share on its Class A and Class B Common Stock.
On October 31, 1997 the Board of Directors declared a quarterly
dividend of $.05 per share on its Class A and Class B Common Stock
payable on December 10, 1997 to shareholders of record as of
November 14, 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 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. The adoption of SFAS 128 for periods
ending after December 15, 1997 is not expected to have a material
effect on reported 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. The Company will adopt SFAS 130 beginning January
1, 1998. The effect of adopting this standard is not expected to be
material.
- 27 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued).
Recent Pronouncements (continued)
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. The Company will adopt SFAS
131 beginning January 1, 1998. The effect of adopting this standard
is not expected to be material.
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. 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 September 30, 1997,
the registrant and its subsidiaries ("Hertz")
- 28 -
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (continued).
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
nine months ended September 30, 1997 and 1996.
27 Financial Data Schedule for the nine months ended September 30,
1997.
(b) Reports on Form 8-K:
The Company filed a Form 8-K dated July 3, 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.
The Company filed a Form 8-K dated July 16, 1997 reporting the
issuance of a press release with respect to its second quarter
1997 earnings.
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: November 12, 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
September 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 nine
months ended September 30, 1997
and 1996. 32
27 Financial Data Schedule for the
nine months ended September 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
Nine Months
Ended Sept. 30,
1997 1996
Income before income taxes $288,712 $222,705
Interest expense 242,752 231,697
Portion of rent estimated to represent
the interest factor 53,344 53,581
Earnings before income taxes and fixed
charges $584,808 $507,983
Interest expense (including capitalized
interest) $243,164 $232,236
Portion of rent estimated to represent
the interest factor 53,344 53,581
Fixed charges $296,508 $285,817
Ratio of earnings to fixed charges 2.0 1.8
- 32 -