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, 2002
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 Identification No.)
incorporation or organization)
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.)
The Registrant meets the conditions set forth in General Instruction H(1)(a) and
(b) of Form 10-Q and is therefore filing this Form with the reduced disclosure
format as permitted.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No____
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of June 30, 2002: Common Stock, $0.01 par value - 100 shares.
Page 1 of 18 pages
THE HERTZ CORPORATION AND SUBSIDIARIES
INDEX
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
Consolidated Balance Sheet as of June 30, 2002
and December 31, 2001..................................... 3
Consolidated Statement of Operations for the
three months ended June 30, 2002 and 2001................. 4
Consolidated Statement of Operations for the
six months ended June 30, 2002 and 2001................... 5
Consolidated Statement of Cash Flows for the
six months ended June 30, 2002 and 2001................... 6
Notes to Condensed Consolidated Financial Statements........ 7 - 11
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 12 - 16
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K............................ 17
SIGNATURES............................................................. 17
EXHIBIT INDEX.......................................................... 18
2
PART I - FINANCIAL INFORMATION
ITEM l. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS)
UNAUDITED
ASSETS
June 30, Dec. 31,
2002 2001
----------- -----------
Cash and equivalents $ 647,785 $ 213,997
Receivables, less allowance for
doubtful accounts of $41,518 and $38,886 896,502 919,041
Due from affiliates 97,806 143,302
Inventories, at lower of cost or market 74,122 65,881
Prepaid expenses and other assets 137,231 103,727
Revenue earning equipment, at cost:
Cars 7,310,358 5,821,722
Less accumulated depreciation (607,677) (601,318)
Other equipment 2,320,072 2,396,295
Less accumulated depreciation (819,221) (764,975)
----------- -----------
Total revenue earning equipment 8,203,532 6,851,724
----------- -----------
Property and equipment, at cost:
Land, buildings and leasehold improvements 1,104,287 1,013,376
Service equipment 958,116 917,118
----------- -----------
2,062,403 1,930,494
Less accumulated depreciation (956,362) (874,593)
----------- -----------
Total property and equipment 1,106,041 1,055,901
----------- -----------
Goodwill and other intangible assets, net of amortization (Note 3) 518,216 804,840
----------- -----------
Total assets $11,681,235 $10,158,413
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable $ 827,364 $ 457,991
Accrued liabilities 748,150 655,288
Accrued taxes 78,872 72,077
Debt (Note 7) 7,549,326 6,314,032
Public liability and property damage 334,575 315,845
Deferred taxes on income 371,300 358,800
Stockholder's equity (Note 2):
Common Stock, $0.01 par value,
3,000 shares authorized, 100 shares issued - -
Additional capital paid-in 983,132 983,132
Retained earnings 828,507 1,105,083
Accumulated other comprehensive loss (Note 9) (39,991) (103,835)
----------- -----------
Total stockholder's equity 1,771,648 1,984,380
----------- -----------
Total liabilities and stockholder's equity $11,681,235 $10,158,413
=========== ===========
The accompanying notes are an integral part of this statement.
3
THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS)
UNAUDITED
Three Months
Ended June 30,
------------------------------------
2002 2001
---------- ----------
Revenues:
Car rental $1,021,767 $1,003,059
Industrial and construction equipment rental 223,338 256,515
Other 17,387 25,922
---------- ----------
Total revenues 1,262,492 1,285,496
---------- ----------
Expenses:
Direct operating 602,887 619,156
Depreciation of revenue earning equipment (Note 6) 364,460 359,734
Selling, general and administrative 121,896 117,932
Interest, net of interest income of $2,317 and $2,312 89,215 102,868
---------- ----------
Total expenses 1,178,458 1,199,690
---------- ----------
Income before income taxes 84,034 85,806
Provision for taxes on income (Note 5) 18,477 26,602
---------- ----------
Net income $ 65,557 $ 59,204
========== ==========
The accompanying notes are an integral part of this statement.
4
THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS)
UNAUDITED
Six Months
Ended June 30,
------------------------------------
2002 2001
---------- ----------
Revenues:
Car rental $1,899,291 $1,931,341
Industrial and construction equipment rental 419,509 485,244
Other 32,514 49,782
---------- ----------
Total revenues 2,351,314 2,466,367
---------- ----------
Expenses:
Direct operating 1,193,242 1,241,615
Depreciation of revenue earning equipment (Note 6) 717,388 692,862
Selling, general and administrative 241,568 247,184
Interest, net of interest income of $3,796 and $5,094 174,322 204,705
---------- ----------
Total expenses 2,326,520 2,386,366
---------- ----------
Income before income taxes 24,794 80,001
Provision for taxes on income (Note 5) 7,370 24,734
---------- ----------
Income before cumulative effect of change in accounting principle 17,424 55,267
Cumulative effect of change in accounting principle (Note 3) (294,000) -
---------- ----------
Net income (loss) $ (276,576) $ 55,267
========== ==========
The accompanying notes are an integral part of this statement.
5
THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
UNAUDITED
Six Months
Ended June 30,
----------------------------
2002 2001
---------- -----------
Cash flows from operating activities:
Net income (loss) $ (276,576) $ 55,267
Cumulative effect of change in accounting principle 294,000 -
Adjustments to reconcile net loss
to net cash used in operating activities (574,590) (918,762)
---------- -----------
Net cash used in operating activities (557,166) (863,495)
---------- -----------
Cash flows from investing activities:
Property and equipment expenditures (125,050) (134,857)
Proceeds from sales of property and equipment 15,556 12,994
Available-for-sale securities:
Purchases (2,542) (5,607)
Sales 2,263 5,062
Changes in investment in joint venture 1,280 480
Purchases of various operations, net of cash
(see supplemental disclosure below) - (2,661)
---------- -----------
Net cash used in investing activities (108,493) (124,589)
---------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 798,626 809,088
Repayment of long-term debt (308,363) (408,931)
Short-term borrowings:
Proceeds 350,329 566,915
Repayments (131,333) (369,356)
Ninety day term or less, net 374,025 332,877
Cash dividends paid on common stock - (5,385)
Proceeds from sale of treasury stock - 9,995
---------- -----------
Net cash provided by financing activities 1,083,284 935,203
---------- -----------
Effect of foreign exchange rate changes on cash 16,163 (3,694)
---------- -----------
Net increase (decrease) in cash and equivalents during the period 433,788 (56,575)
Cash and equivalents at beginning of year 213,997 206,477
---------- -----------
Cash and equivalents at end of period $ 647,785 $ 149,902
========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of amounts capitalized) $ 181,943 $ 211,934
Income taxes 10,461 28,507
In connection with acquisitions made in the first six months of 2001,
liabilities assumed were $13 million.
The accompanying notes are an integral part of this statement.
6
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
NOTE 1 - BASIS OF PRESENTATION
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, 2001, filed by the registrant (the "Company") with the
Securities and Exchange Commission on March 27, 2002, has been followed in
preparing the accompanying consolidated financial statements.
The condensed 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 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.
Certain prior year amounts have been reclassified to conform to the
current year presentation.
NOTE 2 - ACQUISITION OF SHARES OWNED BY PUBLIC STOCKHOLDERS
On March 9, 2001, Ford FSG, Inc., ("FSG"), an indirect wholly owned
subsidiary of Ford Motor Company ("Ford") that owned an approximate 81.5%
economic interest in the Company, completed its acquisition of all of the
Company's outstanding Class A Common Stock that FSG did not already own for
$35.50 per share, or approximately $735 million. The acquisition was
accomplished through a cash tender offer followed by a merger of a wholly owned
subsidiary of FSG with and into the Company, with the Company surviving the
merger (the "Merger").
The Company recognized $9.7 million of expenses associated with the
Merger in the first quarter of 2001. FSG's cost of acquiring the Company's
minority interest and the amortization expense related to acquired intangible
assets are not reflected in the accompanying condensed consolidated financial
statements. After the Merger, all outstanding shares of Class A Common Stock of
the Company were owned by FSG, and all shares of Class A Common Stock of the
Company previously held by the Company as treasury stock, along with all shares
of Class B Common Stock of the Company owned by a wholly owned subsidiary of
FSG, were cancelled. The Merger had no effect on the outstanding obligations
(including debt obligations, leases and guarantees) of the Company.
As a result of the Merger, the Company became an indirect wholly owned
subsidiary of Ford and the Company's Class A Common Stock was no longer traded
on the New York Stock Exchange. However, because certain of the Company's debt
securities were sold through public offerings, the Company continues to file
periodic reports under the Securities Exchange Act of 1934.
NOTE 3 - ACCOUNTING CHANGE
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 141 "Business
Combinations" and No. 142 "Goodwill and Other Intangible Assets". SFAS No. 141
addresses financial accounting and reporting for business combinations and
requires all business combinations initiated after June 30, 2001 to be accounted
for using one method, the purchase method. SFAS No. 142 addresses financial
accounting for acquired goodwill and other intangible assets and how such assets
should be accounted for in financial statements upon their acquisition and after
they have been initially recognized in the financial statements. Under SFAS No.
142, goodwill is no longer amortized, but instead will be tested for impairment
at least annually. Other intangible assets will continue to be amortized over
their useful lives. The Company adopted SFAS No. 141 and No. 142 beginning
January 1, 2002. Application of the non-amortization provision of SFAS No. 142
resulted in decreases of $7.2 million and $14.4 million in amortization and a
$6.9 million and $13.8 million increase in net income for the three and six
months ended June 30, 2002, respectively.
Under SFAS No. 142, goodwill impairment is deemed to exist if the net
book value of a reporting unit exceeds its estimated fair value. The Company's
reporting units are generally consistent with the operating segments identified
in Note 8, Segment Information. Upon adoption of SFAS No. 142, the Company
recorded a one-time, non-cash charge of $294 million to reduce the carrying
value of its goodwill. The Company has recognized this impairment charge
effective as of January 1, 2002 as a cumulative effect of change in accounting
principle. In calculating the impairment charge, the fair value of the reporting
units underlying the segments was estimated as of January 1, 2002 using a
discounted cash flow methodology.
The goodwill impairment charge represents a portion of the goodwill of
the industrial and construction equipment rental segment. The goodwill
write-off was the result of a reduction in projected cash flows used to
determine fair value due to the unfavorable economic conditions as of the date
of adoption, which reduced demand for industrial and construction equipment in
North America.
7
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
NOTE 3 - ACCOUNTING CHANGE (CONTINUED)
The following summarizes the changes in the Company's goodwill, by
segment, and other intangible assets during the first half of 2002 (in thousands
of dollars):
Transitional
January 1, 2002 (1) Other (2) Impairment Loss June 30, 2002
----------------- -------- --------------- -------------
Goodwill
Car rental $358,631 $1,814 - $360,445
Industrial and construction
equipment rental 443,040 6,189 (294,000) 155,229
-------- ------ --------- --------
Total Goodwill 801,671 8,003 (294,000) 515,674
Other intangible assets 3,169 (627) - 2,542
-------- ------ --------- --------
Total $804,840 $7,376 $(294,000) $518,216
======== ====== ========= ========
(1) Reflects the reallocation of goodwill to the Company's reporting units
under FAS 142.
(2) Comprised primarily of amortization of certain intangible assets and
changes in foreign currency exchange rates from December 31, 2001 to
June 30, 2002.
NOTE 4 - RECENT PRONOUNCEMENTS
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
for segments of a business to be disposed of. The Company adopted SFAS No. 144
effective January 1, 2002. The adoption of SFAS No. 144 did not have a material
effect on the Company's financial position, results of operations, or cash
flows.
NOTE 5 - INCOME TAXES
The provision for income taxes is based upon the expected effective tax
rate applicable to the full year. The effective tax rate in 2002 is lower than
the U.S. statutory rate of 35% primarily due to the mix of pretax operating
results between countries with different tax rates and the effect of foreign tax
credits expected to be utilized.
NOTE 6 - DEPRECIATION OF REVENUE EARNING EQUIPMENT
Depreciation of revenue earning equipment includes the following (in
thousands of dollars):
Three Months Ended
June 30,
-----------------------------------
2002 2001
-------- --------
Depreciation of revenue earning equipment $368,650 $360,466
Adjustment of depreciation upon disposal of the equipment (8,424) (4,745)
Rents paid for vehicles leased 4,234 4,013
-------- --------
Total $364,460 $359,734
======== ========
Six Months Ended
June 30,
-----------------------------------
2002 2001
-------- --------
Depreciation of revenue earning equipment $720,457 $698,153
Adjustment of depreciation upon disposal of the equipment (11,626) (12,772)
Rents paid for vehicles leased 8,557 7,481
-------- --------
Total $717,388 $692,862
======== ========
The adjustment of depreciation upon disposal of revenue earning
equipment for the three months ended June 30, 2002 and 2001 included net gains
of $2.7 million and $3.9 million, respectively, on the sale of equipment in the
Company's industrial and construction equipment rental operations; and net gains
of $5.7 million and $.8 million, respectively, in the car rental and car leasing
operations.
8
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
NOTE 6 - DEPRECIATION OF REVENUE EARNING EQUIPMENT (CONTINUED)
The adjustment of depreciation upon disposal of revenue earning
equipment for the six months ended June 30, 2002 and 2001 included net gains of
$4.5 million and $6.9 million, respectively, on the sale of equipment in the
industrial and construction equipment rental operations; and net gains of $7.1
million and $5.9 million, respectively, in the car rental and car leasing
operations.
During the six months ended June 30, 2002, the Company purchased Ford
vehicles at a cost of approximately $3.0 billion, and sold Ford vehicles to Ford
or its affiliates under various repurchase programs for approximately $1.7
billion.
NOTE 7 - DEBT
Debt at June 30, 2002 and December 31, 2001 consisted of the following (in
thousands of dollars):
June 30, Dec. 31,
2002 2001
----------- -----------
Notes payable, including commercial paper,
average interest rate: 2002, 2.2%; 2001, 2.9% $ 833,532 $ 452,497
Promissory notes, average interest rate: 2002, 6.4%;
2001, 6.2% (effective average interest rate:
2002, 6.4%; 2001, 6.3%); net of unamortized
discount: 2002, $14,762; 2001, $9,868; due 2002 to 2028 5,085,237 4,590,130
Junior subordinated promissory notes,
average interest rate 7.0%; net of unamortized
discount: 2002, $32; 2001, $47; due 2003 249,968 249,953
Subsidiaries' short-term debt, in dollars and foreign
currencies, including commercial paper
in millions (2002, $841.6; 2001, $571.6);
and other borrowings; average interest rate:
2002, 3.5%; 2001, 3.7% 1,380,589 1,021,452
----------- -----------
Total $ 7,549,326 $ 6,314,032
=========== ===========
The aggregate amounts of maturities of debt for the twelve-month periods
following June 30, 2002 are as follows (in millions): 2003, $2,898.5 (including
$2,197.0 of commercial paper and short-term borrowings); 2004, $252.5; 2005,
$1,399.7; 2006, $360.7; 2007, $0.2, after 2007, $2,637.7.
At June 30, 2002, approximately $951 million of the Company's
consolidated stockholder's equity was free of dividend limitations pursuant to
its existing debt agreements.
9
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
NOTE 8 - SEGMENT INFORMATION
The Company's business principally consists of two significant
segments: rental and leasing of cars ("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 (loss) before income taxes for the three
months and six months ended June 30, 2002 and 2001 are summarized below (in
millions of dollars). Corporate and other includes general corporate expenses,
principally amortization of certain goodwill prior to 2002 and certain interest,
as well as other business activities such as claim management services, and
telecommunication services prior to 2002 (in millions of dollars).
Three Months Ended June 30,
------------------------------------------------------------------
Income (Loss)
Revenues Before Income Taxes
---------------------------- ----------------------------
2002 2001 2002 2001 (a)
--------- --------- ------- --------
Car rental $1,037.1 $1,017.9 $92.9 $ 85.8
Industrial and construction equipment rental 223.4 256.5 (5.0) 7.4
Corporate and other 2.0 11.1 (3.9) (7.4)
-------- -------- ----- ------
Consolidated total $1,262.5 $1,285.5 $84.0 $ 85.8
======== ======== ===== ======
Six Months Ended June 30,
------------------------------------------------------------------
Income (Loss)
Revenues Before Income Taxes
---------------------------- ----------------------------
2002 2001 2002 2001 (a)
--------- --------- ------ --------
Car rental $1,927.3 $1,959.0 $69.1 $107.6
Industrial and construction equipment rental 419.6 485.3 (39.0) (3.7)
Corporate and other 4.4 22.1 (5.3) (23.9) (b)
-------- -------- ----- ------
Consolidated total $2,351.3 $2,466.4 $24.8 $ 80.0
======== ======== ===== ======
(a) For the three months and six months ended June 30, 2001, includes
$7.2 million and $14.4 million, respectively, of amortization of
goodwill prior to the adoption of SFAS No. 142 as described in Note
3 to the condensed consolidated financial statements.
(b) Includes $9.7 million of expenses associated with the Merger, as
described in Note 2 to the condensed consolidated financial
statements.
10
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
NOTE 9 - COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss) includes an accumulated
translation loss (in thousands of dollars) of $39,276 and $102,976 at June 30,
2002 and December 31, 2001, respectively. Comprehensive income (loss) for the
three and six months ended June 30, 2002 and 2001 was as follows (in thousands
of dollars):
Three Months Ended
June 30,
-------------------------------------
2002 2001
---------- --------
Net Income $ 65,557 $ 59,204
---------- --------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments 68,856 (10,676)
Unrealized gain (loss) on available-for-sale securities 242 (50)
---------- --------
Total other comprehensive income (loss) 69,098 (10,726)
---------- --------
Comprehensive income $ 134,655 $ 48,478
========== =========
Six Months Ended
June 30,
--------------------------------------
2002 2001
---------- ---------
Net Income (loss) $ (276,576) $ 55,267
---------- ---------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments 63,700 (36,664)
Unrealized gain (loss) on available-for-sale securities 144 (39)
---------- ---------
Total other comprehensive income (loss) 63,844 (36,703)
---------- ---------
Comprehensive income (loss) $ (212,732) $ 18,564
========== ========
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Certain statements appearing below, including, without limitation, those
concerning (i) the Company's outlook and (ii) the Company's liquidity and
capital expenditures contain certain forward-looking statements concerning the
Company's operations, economic performance and financial condition. Because such
statements involve risks and uncertainties, actual results may differ materially
from those expressed or implied by such forward-looking statements. Factors that
could cause such differences include, but are not limited to, economic downturn;
competition; the Company's dependence on air travel; terrorist attacks, acts of
war or measures taken by governments in response thereto that negatively affect
the travel industry; limitations upon the Company's liquidity and capital
raising ability; increases in the cost of cars and limitations on the supply of
competitively priced cars; Ford's continued control of the Company; and
seasonality in the Company's businesses.
THREE MONTHS ENDED JUNE 30, 2002 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2001
SUMMARY
The following table sets forth for the three months ended June 30, 2002
and 2001 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,
------------------------------------
2002 2001
-------- -------
Revenues:
Car rental 80.9% 78.0%
Industrial and construction equipment rental 17.7 20.0
Other 1.4 2.0
------ -------
100.0 100.0
------ -------
Expenses:
Direct operating 47.7 48.1
Depreciation of revenue earning equipment 28.9 28.0
Selling, general and administrative 9.6 9.2
Interest, net of interest income 7.1 8.0
------ -------
93.3 93.3
------ -------
Income before income taxes 6.7 6.7
Provision for income taxes 1.5 2.1
------ -------
Net income 5.2% 4.6%
------ -------
REVENUES
Total revenues in the second quarter of 2002 of $1,262.5 million
decreased by 1.8% from $1,285.5 million in the second quarter of 2001. Revenues
from car rental operations of $1,021.8 million in the second quarter of 2002
increased by $18.7 million, or 1.9% from $1,003.1 million in the second quarter
of 2001. The increase was primarily the result of an 8.3% increase in pricing
worldwide and an increase of approximately $13.0 million from the effects of
foreign currency translation. These increases were partly offset by a 7.4%
decrease in transactions in the United States.
Revenues from industrial and construction equipment rental operations
of $223.3 million in the second quarter of 2002 decreased by $33.2 million, or
12.9% from $256.5 million in the second quarter of 2001. The decrease was
principally due to a decrease in rental volume resulting from unfavorable
economic conditions in the equipment rental industry.
Revenues from all other sources of $17.4 million in the second quarter
of 2002 decreased by 32.9% from $25.9 million in the second quarter of 2001,
principally due to a decline in telecommunication revenues which resulted from
the Company's decision, in the fourth quarter of 2001, to leave the
telecommunications resale business.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
EXPENSES
Total expenses of $1,178.5 million in 2002 decreased by 1.8% from
$1,199.7 million in 2001, and total expenses as a percentage of revenues
remained constant at 93.3%.
Direct operating expenses of $602.9 million in 2002 decreased by 2.6%
from $619.2 million in 2001. The decrease was primarily the result of lower
variable costs, including wages, commissions and concession fees in car rental
operations and the elimination of costs associated with the former
telecommunications resale business. The decrease also included a reduction of
$7.2 million which resulted from the elimination of goodwill amortization upon
the Company's adoption of SFAS No. 142 "Goodwill and Other Intangible Assets"
("SFAS No. 142"), effective January 1, 2002. See Note 3 to the Notes to the
Company's condensed consolidated financial statements.
Depreciation of revenue earning equipment for the car rental operations
of $299.7 million in the second quarter of 2002 increased by 1.7% from $294.6
million in 2001, principally due to an increase in the cost of cars operated
worldwide, partly offset by higher net proceeds received in excess of book value
on the disposal of used vehicles. Depreciation of revenue earning equipment for
the industrial and construction equipment rental operations of $64.8 million in
2002 decreased by 0.5% from $65.1 million in 2001 due to a decrease in the size
of the equipment rental fleet, partly offset by lower net proceeds received in
excess of book value on the disposal of used equipment.
Selling, general and administrative expenses of $121.9 million in 2002
increased by 3.4% from $117.9 million in 2001. The increase was primarily due
to an increase in administrative expenses partly offset by a decrease in
advertising and sales promotion expenses.
Interest expense of $89.2 million in 2002 decreased 13.3% from $102.9
million in 2001, primarily due to a decrease in the weighted-average interest
rate and lower average debt levels in 2002.
The provision for income taxes of $18.5 million in 2002 decreased 30.5%
from $26.6 million in 2001, primarily due to a lower effective tax rate in 2002.
The effective tax rate in 2002 is 22.0% as compared to 31.0% in 2001. The
decrease in the effective tax rate is due primarily to the mix of pretax
operating results between countries with different tax rates and the expected
benefit of foreign tax credits in 2002.
NET INCOME
The Company had net income of $65.6 million in the second quarter of
2002, representing an increase of 10.7% from $59.2 million in 2001. The
increase was primarily due to an improved competitive pricing environment in the
Company's worldwide car rental business and the net effect of the other
contributing factors noted above.
The Company believes that vehicle and equipment rentals will remain at
diminished levels, primarily reflecting reduced corporate spending in the United
States throughout 2002. While full year 2002 pre-tax income is expected to
exceed 2001 levels, the Company's 2002 annual earnings performance is expected
to be substantially below recent historical levels.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2002 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2001
SUMMARY
The following table sets forth for the six months ended June 30, 2002
and 2001 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,
--------------------------------
2002 2001
------ --------
Revenues:
Car rental 80.8% 78.3%
Industrial and construction equipment rental 17.8 19.7
Other 1.4 2.0
----- -----
100.0 100.0
----- -----
Expenses:
Direct operating 50.7 50.4
Depreciation of revenue earning equipment 30.5 28.1
Selling, general and administrative 10.3 10.0
Interest, net of interest income 7.4 8.3
----- -----
98.9 96.8
----- -----
Income before income taxes 1.1 3.2
Provision for taxes on income .4 1.0
----- -----
Income before cumulative effect of change in accounting principle .7% 2.2%
===== =====
REVENUES
Total revenues in the first half of 2002 of $2,351.3 million decreased
by 4.7% from $2,466.4 million in the first half of 2001. Revenues from car
rental operations of $1,899.3 million in the first half of 2002 decreased by
$32.0 million, or 1.7% from $1,931.3 million in the first half of 2002. The
decrease was primarily the result of a 9.7% decrease in transactions in the
United States. This decrease was partly offset by a 6.0% increase in pricing
worldwide and an increase of approximately $4.2 million from the effects of
foreign currency translation.
Revenues from industrial and construction equipment rental operations
of $419.5 million in the first half of 2002 decreased by $65.7 million, or 13.5%
from $485.2 million in the first half of 2001. The decrease was principally due
to a decrease in rental volume resulting from unfavorable economic conditions in
the equipment rental industry.
Revenues from all other sources of $32.5 million in the first half of
2002 decreased by 34.7% from $49.8 million in the first half of 2001,
principally due to a decline in telecommunication revenues which resulted from
the Company's decision, in the fourth quarter of 2001, to leave the
telecommunications resale business.
EXPENSES
Total expenses of $2,326.5 million in 2002 decreased by 2.5% from
$2,386.4 million in 2001, and total expenses as a percentage of revenues
increased to 98.9% in 2002 from 96.8% in 2001.
Direct operating expenses of $1,193.2 million in 2002 decreased by 3.9%
from $1,241.6 million in 2001. The decrease was primarily the result of lower
variable costs in car rental and equipment rental operations, including wages,
commissions, concession fees, reservation costs, other equipment rental
operating costs and the elimination of costs associated with the former
telecommunications resale business. The decrease also included a reduction of
$14.4 million which resulted from the elimination of goodwill amortization upon
the Company's adoption of SFAS No. 142, effective January 1, 2002. See Note 3
to the Notes to the Company's condensed consolidated financial statements.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Depreciation of revenue earning equipment for the car rental operations
of $583.6 million in 2002 increased by 3.6% from $563.5 million in 2001,
principally due to an increase in the cost of cars operated in the United
States. Depreciation of revenue earning equipment for the industrial and
construction equipment rental operations of $133.8 million in 2002 increased by
3.4% from $129.4 million in 2001 primarily due to lower net proceeds received in
excess of book value on the disposal of used equipment.
Selling, general and administrative expenses of $241.6 million in 2002
decreased by 2.3% from $247.2 million in 2001. The decrease was principally due
to a decrease in sales promotion expenses. The decrease includes $9.7 million
of expenses recorded in the first quarter of 2001 related to the merger of the
Company with a wholly owned subsidiary of Ford. See Note 2 to the Notes to the
Company's condensed consolidated financial statements.
Interest expense of $174.3 million in 2002 decreased 14.8% from $204.7
million in 2001, primarily due to a decrease in the weighted-average interest
rate and lower average debt levels in 2002, partly offset by a decrease in
interest income.
The tax provision of $7.4 million in the first half of 2002 decreased
70.2% from $24.7 million in 2001, primarily due to lower income before income
taxes in 2002. The effective tax rate in 2002 is 29.7% as compared to 30.9% in
2001. The decrease in the effective tax rate is due primarily to the mix of
pretax operating results between countries with different tax rates.
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
The Company had income before cumulative effect of change in accounting
principle of $17.4 million in the first half of 2002, representing a decrease of
$37.9 million from $55.3 million in 2001. The decrease was primarily due to
continued lower rental volumes after the terrorist attacks of September 11,
2001, and overall economic conditions which have negatively impacted corporate
spending levels, partly offset by improved pricing worldwide and the net effect
of the other contributing factors noted above.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
The Company recorded a non-cash charge of $294 million upon the adoption
of SFAS No. 142 effective January 1, 2002. The charge related to the industrial
and construction equipment rental segment. The goodwill write-off was the
result of a reduction in projected cash flows used to determine fair value due
to the unfavorable economic conditions as of the date of adoption, which reduced
demand for industrial and construction equipment in North America.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2002, the Company had cash and cash equivalents of $647.8
million, up $433.8 million from December 31, 2001. The balance at June 30, 2002
included $412.0 million of related party investments, with $335.1 million of the
increase representing an investment in commercial paper issued by Ford Motor
Credit Company.
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 of cars and industrial and construction equipment.
Net cash used in operating activities during the first half of 2002 decreased
approximately $306 million from the first half of 2001 primarily due to the
decrease in the number of vehicles operated. For the six months ended June 30,
2002, the Company's expenditures for revenue earning equipment were $5.7 billion
(partially offset by proceeds from the sale of such equipment of $3.8 billion).
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, 2002, the Company's capital expenditures for property and
non-revenue earning equipment were $125.1 million.
To finance its domestic operations, the Company maintains an active
commercial paper program. The Company is also active in the 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, 2002 was $5.4 billion with maturities ranging
from 2002 to 2028. The Company is currently planning to launch an asset-backed
securitization program during the third quarter of 2002.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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, Ireland and the Netherlands. The Company
guarantees only the borrowings under these commercial paper programs and certain
credit facilities extended by local banks to the Company's subsidiaries in
Canada and Australia. Effective July 1, 2002, the Company's subsidiary in
Belgium established a commercial paper program which is also guaranteed. All
borrowings by international operations either are in the international
operations' local currency or, if in non-local currency, hedged to minimize
foreign exchange exposure. At June 30, 2002, the total debt for the foreign
operations was $1,381 million, of which $1,369 million was short-term (original
maturity of less than one year) and $12 million was long-term. At June 30,
2002, the total amounts outstanding (in millions of U.S. dollars) under the
Canadian, Irish, Netherlands and Australian commercial paper programs were $411,
$362, $52 and $17, respectively.
At June 30, 2002, the Company had committed credit facilities totaling
$3.1 billion. Currently, $2.4 billion of the committed credit facilities is
represented by a combination of multi-year and 364-day global committed credit
facilities provided by 27 participating banks. In addition to direct borrowings
by the Company, these facilities allow any subsidiary of the Company to borrow
on the basis of a guarantee by the Company. Effective July 1, 2002, the
multi-year facilities totaling $1,337 million were renegotiated and currently
expire as follows: $137 million on June 30, 2003, $43 million on June 30, 2004,
$69 million on June 30, 2005 and $1,088 million on June 30, 2007. Effective
June 20, 2002, the 364-day facilities totaling $1,023 million were renegotiated
and currently expire on June 19, 2003. The multi-year facilities that expire in
2007 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.
Under the terms of the 364-day facilities, the Company is permitted to convert
any amount outstanding prior to expiration into a two-year term loan.
Separately, the Company is developing an Asset-Backed Securitization ("ABS")
program, for its domestic car rental fleet. The Company, with the support of
certain participating banks, has agreed to transfer $856 million of the existing
364-day facilities to the ABS program effective upon closing. The Company has
agreed not to transfer these commitments back to the 364-day global facility
without the consent of the banks who have agreed to participate in the ABS
program. In addition, the Company obtained $215 million of incremental credit
support through an ABS letter of credit facility from its banks in exchange for
a 50% reduction ($107.5 million) in their commitment under the multi-year
facilities effective upon closing. In addition to these bank credit facilities,
in February 1997, Ford extended to the Company a line of credit of $500 million,
that currently expires June 30, 2004. 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. Obligations of the Company under
this agreement would rank pari passu with the Company's senior debt securities.
A commitment fee of .135% per annum is payable on the unused available credit.
By virtue of its indirect 100% ownership interest in the Company, Ford
has the right to make any changes that it deems appropriate in the Company's
assets, corporate structure, capitalization, operations, properties and policies
(including dividend policies).
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, remains 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.
16
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
12 Consolidated Computation of Ratio of Earnings to
Fixed Charges for the six months ended June 30,
2002 and 2001.
99.1 Certification of President and Chief Executive
Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
99.2 Certification of Executive Vice President and
Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
The Company filed a Form 8-K dated May 28, 2002,
reporting under Item 5 thereof, instruments
defining the rights of security holders, in
connection with the Registration Statement on
Form S- 3 (File No. 333-57138) filed by the
Company with the Securities and Exchange
Commission covering $800,000,000 principal amount
of 7 5/8% notes due June 1, 2012.
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 13, 2002 By: /s/ Paul J. Siracusa
---------------------------------
Paul J. Siracusa
Executive Vice President and
Chief Financial Officer
(principal financial officer and duly
authorized officer)
17
EXHIBIT INDEX
12 Consolidated Computation of Ratio of Earnings to Fixed Charges for the
six months ended June 30, 2002 and 2001.
99.1 Certification of President and Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Executive Vice President and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
18