1
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, 1998
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.)
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, 1998: Common Stock, $0.01 par value - Class A,
40,751,640 shares and Class B, 67,310,167 shares.
Page 1 of 29 pages
The Exhibit Index is on page 26
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PART I - FINANCIAL INFORMATION
ITEM l. FINANCIAL STATEMENTS
THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands of Dollars)
Unaudited
A S S E T S
June 30, Dec. 31,
1998 1997
----------- -----------
Cash and equivalents $ 161,492 $ 152,620
Receivables, less allowance for
doubtful accounts of $13,254 (1997 - $13,927) 654,839 763,145
Due from affiliates 294,943 423,434
Inventories, at lower of cost or market 29,280 17,941
Prepaid expenses and other assets 104,714 86,297
Revenue earning equipment, at cost:
Cars 5,788,453 4,435,546
Less accumulated depreciation (485,841) (395,728)
Other equipment 1,273,053 1,089,888
Less accumulated depreciation (280,855) (237,840)
----------- -----------
Total revenue earning equipment 6,294,810 4,891,866
----------- -----------
Property and equipment, at cost:
Land, buildings and leasehold improvements 628,936 583,796
Service equipment 584,415 538,723
----------- -----------
1,213,351 1,122,519
Less accumulated depreciation (577,616) (537,753)
----------- -----------
Total property and equipment 635,735 584,766
----------- -----------
Franchises, concessions, contract costs and leaseholds,
net of amortization (Note 3) 12,568 8,781
Cost in excess of net assets of purchased
businesses, net of amortization (Note 3) 552,361 506,671
----------- -----------
Total assets $ 8,740,742 $ 7,435,521
=========== ===========
The accompanying notes are an integral part of this statement.
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THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands of Dollars)
Unaudited
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, Dec. 31,
1998 1997
----------- -----------
Accounts payable $ 674,277 $ 482,119
Accrued liabilities 571,083 528,396
Accrued taxes 84,044 96,666
Debt (Note 6) 5,699,928 4,715,668
Public liability and property damage 296,104 310,475
Deferred taxes on income 188,400 166,000
Stockholders' equity (Note 1):
Class A Common Stock, $0.01 par value,
440,000,000 shares authorized,
40,956,858 shares issued 410 410
Class B Common Stock, $0.01 par value,
140,000,000 shares authorized,
67,310,167 shares issued 673 673
Additional capital paid-in 982,122 980,581
Unamortized restricted stock grants (9,680) (11,763)
Retained earnings 296,367 196,715
Accumulated other comprehensive income (Note 9) (35,596) (30,419)
Treasury stock, at cost (Note 7) (7,390) --
----------- -----------
Total stockholders' equity 1,226,906 1,136,197
----------- -----------
Total liabilities and stockholders' equity $ 8,740,742 $ 7,435,521
=========== ===========
The accompanying notes are an integral part of this statement.
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THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(In Thousands of Dollars, Except Per Share Amounts)
Unaudited
Three Months
Ended June 30,
1998 1997
---------- --------
Revenues:
Car rental $ 883,283 $844,067
Industrial and construction equipment rental 134,195 105,034
Car leasing 9,281 9,811
Franchise fees and other revenue 21,598 17,404
---------- --------
Total revenues 1,048,357 976,316
---------- --------
Expenses:
Direct operating 465,314 452,759
Depreciation of revenue earning equipment (Note 5) 266,835 245,292
Selling, general and administrative 115,533 106,876
Interest, net of interest income of $3,162 and $2,982 73,384 78,284
---------- --------
Total expenses 921,066 883,211
---------- --------
Income before income taxes 127,291 93,105
Provision for taxes on income (Note 4) 52,234 39,204
---------- --------
Net income $ 75,057 $ 53,901
========== ========
Earnings per share (Note 2):
Basic $ .69 $ .50
========== ========
Diluted $ .69 $ .50
========== ========
The accompanying notes are an integral part of this statement.
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THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(In Thousands of Dollars, Except Per Share Amounts)
Unaudited
Six Months
Ended June 30,
1998 1997
---------- ----------
Revenues:
Car rental $1,648,661 $1,602,603
Industrial and construction equipment rental 240,763 195,369
Car leasing 18,402 21,455
Franchise fees and other revenue 39,327 35,241
---------- ----------
Total revenues 1,947,153 1,854,668
---------- ----------
Expenses:
Direct operating 900,515 896,822
Depreciation of revenue earning equipment (Note 5) 492,135 463,792
Selling, general and administrative 224,470 215,443
Interest, net of interest income of $5,832 and $7,549 142,016 151,595
---------- ----------
Total expenses 1,759,136 1,727,652
---------- ----------
Income before income taxes 188,017 127,016
Provision for taxes on income (Note 4) 77,553 53,396
---------- ----------
Net income $ 110,464 $ 73,620
========== ==========
Earnings per share (Note 2):
Basic $ 1.02 $ .68
========== ==========
Diluted $ 1.02 $ .68
========== ==========
The accompanying notes are an integral part of this statement.
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THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands of Dollars)
Unaudited
Six Months
Ended June 30,
1998 1997
----------- -----------
Cash flows from operating activities:
Net income $ 110,464 $ 73,620
Non-cash expenses:
Depreciation of revenue earning equipment 492,135 463,792
Depreciation of property and equipment 48,324 44,254
Amortization of intangibles 13,356 9,788
Amortization of restricted stock grants 2,226 879
Provision for public liability and property damage 51,686 69,144
Provision for losses for doubtful accounts 1,002 3,381
Deferred income taxes 22,400 27,000
Revenue earning equipment expenditures (4,769,185) (4,605,517)
Proceeds from sales of revenue earning equipment 2,912,691 3,276,317
Changes in assets and liabilities:
Receivables 122,017 106,850
Due from affiliates 128,491 135,099
Inventories and prepaid expenses and
other assets (18,156) (20,974)
Accounts payable 185,850 94,971
Accrued liabilities 42,189 (15,203)
Accrued taxes (13,918) (1,245)
Payments of public liability and property
damage claims and expenses (65,857) (77,723)
----------- -----------
Net cash used in operating activities (734,285) (415,567)
----------- -----------
The accompanying notes are an integral part of this statement.
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THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousand of Dollars)
Unaudited
Six Months
Ended June 30,
1998 1997
----------- ---------
Cash flows from investing activities:
Property and equipment expenditures $ (116,586) $(114,931)
Proceeds from sales of property and equipment 21,873 20,312
Available-for-sale securities:
Purchases (827) (609)
Sales 979 451
Sale of operations, net of cash 4,341 --
Acquisition of new businesses, net of cash (117,021) --
----------- ---------
Net cash used in investing activities (207,241) (94,777)
----------- ---------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 449,216 150,196
Repayment of long-term debt (356,920) (91,530)
Short-term borrowings:
Proceeds 1,081,666 888,037
Repayments (591,923) (804,007)
Ninety-day term or less, net 385,223 383,567
Cash dividend paid to Ford -- (460,000)
Issuance of preferred stock to Ford -- 129,000
Redemption of preferred stock from Ford -- (130,135)
Sale of common stock -- 453,068
Cash dividends paid on common stock (10,812) --
Purchases of treasury stock (7,425) --
Exercise of stock options 911 --
Other 522 --
----------- ---------
Net cash provided by financing activities 950,458 518,196
----------- ---------
Effect of foreign exchange rate changes on cash (60) (465)
----------- ---------
Net increase in cash and equivalents during
the period 8,872 7,387
Cash and equivalents at beginning of year 152,620 179,311
----------- ---------
Cash and equivalents at end of period $ 161,492 $ 186,698
=========== =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of amounts capitalized) $ 152,578 $ 153,210
Income taxes 77,174 39,774
In connection with acquisitions made in 1998, liabilities assumed were $58
million.
The accompanying notes are an integral part of this statement.
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THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1997, filed by the registrant (the "Company") with the
Securities and Exchange Commission on March 23, 1998, has been followed in
preparing the accompanying consolidated financial statements.
The consolidated financial statements and notes thereto 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 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 (the "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. After the Offering,
Ford beneficially owned 49.4% of the outstanding Class A Common Stock of the
Company (which has one vote per share) and 100% of the outstanding Class B
Common Stock of the Company (which has five votes per share). At June 30, 1998,
the common stock beneficially owned by Ford represents in the aggregate 94.6% of
the combined voting power of all of the Company's outstanding common stock and
81.0% of the economic interest in the Company. Accordingly, Ford is able to
direct the election of all of the members of the Company's Board of Directors
and to exercise a controlling influence over the business and affairs of the
Company.
Reclassifications
Certain prior year amounts have been reclassified to conform to the
current year presentation.
Recent Pronouncements
In February 1998, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards ("SFAS") No. 132, "Employers'
Disclosures about Pensions and Other Post Retirement Benefits." SFAS No. 132
revises employers' disclosures about pension and other post retirement benefit
plans but does not change the measurement or recognition of those plans. The
Statement standardizes the disclosure requirements to the extent practicable,
requires additional information on changes in the benefit obligations and fair
values of plan assets that will facilitate financial analysis, and eliminates
certain disclosures. SFAS No. 132 is effective for fiscal years beginning after
December 15, 1997. The Company will adopt this standard in its 1998 year-end
financial statements.
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THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation (continued)
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"), dealing with the
costs of internal use software. The treatment accorded such costs in the past
has been very diverse in practice. The SOP will require capitalization of such
costs after certain preliminary development efforts have been made. Costs to be
capitalized are direct costs and interest costs related to development efforts.
The SOP is effective for fiscal years after December 15, 1998. Earlier
application is permitted for years which financial statements have not been
issued. Management is evaluating the impact that the SOP may have on the
Company's financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes a new model for accounting for derivatives and hedging
activities and is effective for fiscal years beginning after June 15, 1999. The
Company will adopt SFAS No. 133 beginning January 1, 2000. The adoption of SFAS
No. 133 is not expected to have a material effect on the Company's financial
position or results of operations.
Note 2 - Earnings Per Share
The following table sets forth the computations of basic earnings per
share and diluted earnings per share (in thousands of dollars, except per share
amounts):
Three Months Six Months
Ended June 30, Ended June 30,
----------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
Basic earnings per share:
Net income $ 75,057 $ 53,901 $ 110,464 $ 73,620
------------ ------------ ------------ ------------
Average common shares
outstanding 108,119,099 108,267,000 108,144,808 108,267,000
------------ ------------ ------------ ------------
Basic earnings per share $ 0.69 $ 0.50 $ 1.02 $ 0.68
============ ============ ============ ============
Diluted earnings per share:
Net income $ 75,057 $ 53,901 $ 110,464 $ 73,620
------------ ------------ ------------ ------------
Average common shares
outstanding 108,119,099 108,267,000 108,144,808 108,267,000
Dilutive effect of stock
options 536,390 348,520 522,656 348,520
------------ ------------ ------------ ------------
Average diluted common shares
outstanding 108,655,489 108,615,520 108,667,464 108,615,520
------------ ------------ ------------ ------------
Diluted earnings per share $ 0.69 $ 0.50 $ 1.02 $ 0.68
============ ============ ============ ============
At June 30, 1998, options to purchase 1,003,600 shares of common stock
were outstanding, but were not included in the computation of diluted earnings
per share because the options exercise price was greater than the average market
price of the common shares.
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THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Purchases and Sales of Operations
During the six months ended June 30, 1998, the Company acquired one
European and four North American equipment rental and sales companies. The
aggregate purchase price of the acquisitions was $117 million, net of cash
acquired, plus the assumption of $42 million of debt. The aggregate
consideration exceeded the fair value of the net assets acquired by
approximately $58 million, which has been recognized as goodwill and is being
amortized over periods from twenty-five to forty years. The acquisitions were
accounted for as purchases, and the results of operations have been included
since their respective dates of acquisition. The aggregate purchase price
included $5.4 million paid to shareholders of two of the acquired companies in
exchange for covenants not to compete, which are being amortized over the
contractual terms of the individual covenants.
In May 1998, the Company sold its corporate owned operations in
Portugal to a licensee. The net proceeds from the sale were approximately $4.6
million, which exceeded book value by approximately $.3 million. In conjunction
with the sale, the Company received an initial license fee of $2.5 million. The
total assets of these operations at May 31, 1998 were $19.6 million, and
revenues and net income for the year ended December 31, 1997 were $14.9 million
and .8 million, respectively. The Company believes that this transaction will
not have a material effect on its financial position or results of operations.
Note 4 - 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 5 - Depreciation of Revenue Earning Equipment
Depreciation of revenue earning equipment includes the following (in
thousands of dollars):
Unaudited
Three Months Ended
June 30,
1998 1997
-------- ---------
Depreciation of revenue earning equipment $260,238 $ 242,771
Adjustment of depreciation upon disposal
of the equipment 3,636 (543)
Rents paid for vehicles leased 2,961 3,064
-------- ---------
Total $266,835 $ 245,292
======== =========
Unaudited
Six Months Ended
June 30,
1998 1997
-------- ---------
Depreciation of revenue earning equipment $480,346 $ 457,616
Adjustment of depreciation upon disposal
of the equipment 5,074 (403)
Rents paid for vehicles leased 6,715 6,579
-------- ---------
Total $492,135 $ 463,792
======== =========
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THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Depreciation of Revenue Earning Equipment (continued)
The adjustment of depreciation upon disposal of revenue earning
equipment for the three months ended June 30, 1998 and 1997 included a net loss
of $1.0 million and a net gain of $.5 million, respectively, on the sale of
equipment in the industrial and construction equipment rental operations; and a
net loss of $2.6 million and a negligible gain, respectively, in the car rental
and car leasing operations.
The adjustment of depreciation upon disposal of revenue earning equipment for
the six months ended June 30, 1998 and 1997 included a net loss of $1.4 million
and a net gain of $.9 million, respectively, on the sale of equipment in the
industrial and construction equipment rental operations; and net losses of $3.7
million and $.5 million, respectively, in the car rental and car leasing
operations.
During the six months ended June 30, 1998, the Company purchased Ford
vehicles at a cost of approximately $2.1 billion and sold Ford vehicles to Ford
or its affiliates under various repurchase programs for approximately $1.1
billion.
Note 6 - Debt
Debt at June 30, 1998 and December 31, 1997 consisted of the following
(in thousands of dollars):
June 30, Dec. 31,
1998 1997
---------- ----------
Notes payable, including commercial
paper, average interest rate: 1998, 5.6%;
1997, 6.1% $1,970,646 $1,279,130
Promissory notes, average interest rate:
1998, 7.0%; 1997, 7.2%
(effective average interest rate: 1998, 7.0%; 1997,
7.3%) net of unamortized discount: 1998, $4,608;
1997, $3,030; due 1999 to 2028 2,445,392 2,246,970
Medium-term notes, average interest rate
9.1%; due 1998 to 2005 30,000 30,000
Senior subordinated promissory notes,
average interest rate 9.5%;
(effective average interest rate 9.7%);
net of unamortized discount of $43 in 1997 -- 99,957
Junior subordinated promissory notes,
average interest rate 6.9%; net of
unamortized discount: 1998, $179;
1997, $201; due 2000 to 2003 399,821 399,799
Subsidiaries' short-term debt, in foreign
currencies, including commercial paper
in millions (1998, $822.5; 1997, $637.7);
and other borrowings; average interest rate:
1998, 5.0%; 1997, 5.2% 854,069 659,812
---------- ----------
Total $5,699,928 $4,715,668
========== ==========
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THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Debt (continued)
The aggregate amounts of maturities of debt for the twelve-month
periods following June 30, 1998 are as follows (in millions): 1999, $2,942.2
(including $2,793.1 of commercial paper and short-term borrowings); 2000,
$455.1; 2001, $552.2; 2002, $453.1; 2003, $249.3; after 2003, $1,048.0.
At June 30, 1998, approximately $591 million of the Company's
consolidated stockholders' equity was free of dividend limitations pursuant to
its existing debt agreements.
At June 30, 1998, the Company had a $250 million loan outstanding 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 June 30, 1998 of the swap agreements is to give the Company an overall
effective weighted-average rate on debt of 6.26%, with 47% of debt effectively
subject to variable interest rates, compared to a weighted-average interest rate
on debt of 6.24%, with 49% of debt subject to variable interest rates when not
considering the swap agreements. At June 30, 1998, these agreements expressed in
notional amounts aggregated $88.0 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 June 30, 1998, 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 $1.4 million. The notional principal $88.0
million matures as follows: $15.3, $44.4, $21.7, $6.0 and $.6 in 1998, 1999,
2000, 2001 and 2002, respectively.
Note 7 - 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, which has been
approved by the stockholders, is administered by the Compensation Committee (the
"Committee") appointed by the Board of Directors. 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.
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THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Long-Term Equity Compensation Plan (continued)
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. At June 30, 1998, 229,094 stock options and
89,975 shares of restricted stock had been forfeited. 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.
On April 2, 1998, the Company granted 1,012,900 non-qualified stock
options. The options were granted at the closing market price on that day of
$48.69 per share.
On May 21, 1998, the Company granted additional awards of 20,000 shares
of restricted stock. Upon issuance of the restricted shares, the unamortized
value of restricted stock is charged to stockholders' equity and is amortized as
compensation expense ratably over vesting periods.
During the six months ended June 30, 1998, the Company acquired 202,307
shares of its Class A Common Stock for requirements under its incentive stock
plan.
Note 8 - Segment Information
The Company's business principally consists of two significant
segments: rental and leasing of cars and light trucks and related franchise fees
("car rental and leasing"); and rental of industrial, construction and materials
handling equipment and related franchise fees ("industrial and construction
equipment rental"). The contributions of these segments, as well as "corporate
and other," to revenues and income before income taxes for the three months and
six months ended June 30, 1998 and 1997 are summarized below (in millions of
dollars). Corporate and other includes general corporate expenses, principally
amortization of certain intangibles and interest expense incurred in connection
with the acquisition of the Company by Park Ridge Corporation in December 1987
and UAL, Inc. in August 1985, as well as other business activities, such as
claim management and telecommunication services.
Three Months Ended June 30,
Income (Loss)
Revenues Before Income Taxes
--------------------- ----------------------
1998 1997 1998 1997
-------- -------- -------- --------
Car rental and leasing $ 906.9 $ 864.5 $ 119.8 $ 81.4
Industrial and construction equipment rental 134.3 105.0 13.2 18.5
Corporate and other 7.2 6.8 (5.7) (6.8)
-------- -------- -------- --------
Consolidated total $1,048.4 $ 976.3 $ 127.3 $ 93.1
======== ======== ======== ========
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THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Segment Information (continued)
Six Months Ended June 30,
Income (Loss)
Revenues Before Income Taxes
1998 1997 1998 1997
-------- -------- -------- --------
Car rental and leasing $1,691.9 $1,645.3 $ 177.6 $ 106.3
Industrial and construction equipment rental 240.9 195.4 19.7 28.1
Corporate and other 14.4 14.0 (9.3) (7.4)
-------- -------- -------- --------
Consolidated total $1,947.2 $1,854.7 $ 188.0 $ 127.0
======== ======== ======== ========
Note 9 - Comprehensive Income
The Company adopted SFAS 130, "Reporting Comprehensive Income" for
1998. Accumulated other comprehensive income includes an accumulated translation
loss (in thousands of dollars) of $35,653 and $30,458 at June 30, 1998 and
December 31, 1997, respectively. Comprehensive income for the three months and
six months ended June 30, 1998 and 1997 was as follows (in thousands of
dollars):
Three Months Ended
June 30,
----------------------
1998 1997
-------- --------
Net income $ 75,057 $ 53,901
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustments (378) (7,629)
Unrealized gains on available-for-sale
securities 9 45
-------- --------
Other comprehensive loss (369) (7,584)
-------- --------
Comprehensive income $ 74,688 $ 46,317
======== ========
Six Months Ended
June 30,
1998 1997
--------- --------
Net income $ 110,464 $ 73,620
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustments (5,195) (22,800)
Unrealized gains (losses) on
available-for-sale securities 18 (21)
--------- --------
Other comprehensive loss (5,177) (22,821)
--------- --------
Comprehensive income $ 105,287 $ 50,799
========= ========
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Three Months ended June 30, 1998 Compared with Three Months ended June 30, 1997
Summary
The following table sets forth for the three months ended June 30, 1998
and 1997 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,
1998 1997
----- -----
Revenues:
Car rental 84.2% 86.4%
Industrial and construction equipment rental 12.8 10.8
Car leasing .9 1.0
Franchise fees and other revenue 2.1 1.8
----- -----
100.0 100.0
----- -----
Expenses:
Direct operating 44.4 46.4
Depreciation of revenue earning equipment 25.5 25.1
Selling, general and administrative 11.0 11.0
Interest, net of interest income 7.0 8.0
----- -----
87.9 90.5
----- -----
Income before income taxes 12.1 9.5
Provision for taxes on income 5.0 4.0
----- -----
Net income 7.1% 5.5%
===== =====
The following table sets forth certain selected operating data of the
Company for the three months ended June 30, 1998 and 1997:
Three Months Ended
June 30,
1998 1997
---------- ----------
Car rental and other operations:
Average number of owned cars operated
during period 309,000 290,000
Number of transactions of owned car
rental operations during period 5,775,000 5,542,000
Average revenue per transaction of owned
car rental operations during period
(in whole dollars) $ 152.96 $ 152.31
Equipment rental operations:
Average cost of rental equipment operated
during period (in millions) $ 1,236 $ 979
- 15 -
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Revenues
The Company achieved record revenues of $1,048.4 million in the second
quarter of 1998, which increased by 7.4% from $976.3 million in the second
quarter of 1997. Revenues from car rental operations of $883.3 million in the
second quarter of 1998 increased by $39.2 million, or 4.6% from $844.1 million
in the second quarter of 1997. The increase was primarily the result of an
increase in the number of transactions in the United States that contributed
$34.9 million in increased revenue and continued pricing improvement worldwide
that contributed $16.2 million. This increase was partially offset by a decrease
of $11.2 million from the effect of the strong U.S. dollar on foreign currency
translation. 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 $134.2
million in the second quarter of 1998 increased by 27.8% from $105.0 million in
the second quarter of 1997. Of this $29.2 million increase, approximately $22.2
million was due to an increase in volume resulting from the inclusion of five
acquired businesses and 34 new locations opened worldwide in the last 12 months,
and approximately $7.0 million was due to increased activity from existing
locations.
Revenues from all other sources of $30.9 million in the second quarter
of 1998 increased by 13.6% from $27.2 million in the second quarter of 1997,
primarily due to the recognition of the initial fee from the franchising of the
Portugal car rental operation, which had been corporately owned prior to June
1998.
Expenses
Total expenses of $921.0 million in 1998 increased by 4.3% from $883.2
million in 1997; however, total expenses as a percentage of revenues decreased
to 87.9% in 1998 from 90.5% in 1997.
Direct operating expenses of $465.3 million in 1998 increased by 2.8%
from $452.8 million in 1997, but were lower in 1998 as a percentage of revenues.
The increase was primarily the result of increases in wages, commissions and
facility costs, partly offset by the effects of foreign currency translation,
higher recoveries of concession fees and refueling costs, and lower
self-insurance costs.
Depreciation of revenue earning equipment for the car rental and car
leasing operations of $233.7 million in 1998 increased by 5.1% from $222.3
million in 1997, primarily due to an increase in the number of cars operated
worldwide and decreases in the net proceeds received in excess of book value on
the disposal of the cars resulting in a $2.7 million loss in 1998 versus a
negligible gain in 1997. Depreciation of revenue earning equipment for the
industrial and construction equipment rental operations of $33.1 million in 1998
increased by 43.9% from $23.0 million in 1997, 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
$1.0 million loss in 1998 versus a $.5 million gain in 1997.
Selling, general and administrative expenses of $115.5 million in 1998
increased by 8.1% from $106.9 million in 1997, but remained constant as a
percentage of revenues. The increase in 1998 was primarily the result of
increases in advertising costs and sales promotion, which were partly offset by
the effects of foreign currency translation.
- 16 -
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Expenses (continued)
Interest expense of $73.4 million in 1998 decreased 6.3% from $78.3
million in 1997, primarily due to lower average debt levels and interest expense
of $2.1 million incurred in 1997, relating to funding a $460 million dividend
paid by the Company on its common stock to Ford in the first quarter of 1997.
The tax provision of $52.2 million in 1998 increased 33.2% from $39.2
million in 1997, primarily due to the higher income before income taxes in 1998.
The effective tax rate in 1998 was 41.0% as compared to 42.1% in 1997. See Note
4 to the Notes to the Company's consolidated financial statements.
Net Income
The Company achieved record net income of $75.1 million in the second
quarter of 1998, or $.69 per share on a diluted basis, representing an increase
of 39.2% from $53.9 million, or $.50 per share on a diluted basis, in the second
quarter of 1997. 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.
- 17 -
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Six Months ended June 30, 1998 Compared with Six Months ended June 30, 1997
Summary
The following table sets forth for the six months ended June 30, 1998
and 1997 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,
1998 1997
----- -----
Revenues:
Car rental 84.7% 86.4%
Industrial and construction equipment rental 12.4 10.5
Car leasing .9 1.2
Franchise fees and other revenue 2.0 1.9
----- -----
100.0 100.0
----- -----
Expenses:
Direct operating 46.2 48.3
Depreciation of revenue earning equipment 25.3 25.0
Selling, general and administrative 11.5 11.6
Interest, net of interest income 7.3 8.2
----- -----
90.3 93.1
----- -----
Income before income taxes 9.7 6.9
Provision for taxes on income 4.0 2.9
----- -----
Net income 5.7% 4.0%
===== =====
The following table sets forth certain selected operating data of the
Company for the six months ended June 30, 1998 and 1997:
Six Months Ended
June 30,
---------------------------
1998 1997
----------- -----------
Car rental and other operations:
Average number of owned cars operated
during period 290,000 283,000
Number of transactions of owned car
rental operations during period 10,695,000 10,452,000
Average revenue per transaction of owned
car rental operations during period
(in whole dollars) $ 154.15 $ 153.33
Equipment rental operations:
Average cost of rental equipment operated
during period (in millions) $ 1,172 $ 949
- 18 -
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Revenues
The Company achieved record revenues of $1,947.2 million in the first
half of 1998, which increased by 5.0% from $1,854.7 million in the first half of
1997. Revenues from car rental operations of $1,648.7 million in the first half
of 1998 increased by $46.1 million, or 2.9% from $1,602.6 million in the first
half of 1997. The increase was primarily the result of an increase in
transactions in the United States that contributed $36.6 million in increased
revenue and an increase in rates worldwide that contributed $36.2 million. This
increase was partially offset by a decrease of $26.2 million from the effect of
the strong U.S. dollar on foreign currency translation. 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 $240.8
million in the first half of 1998 increased by 23.2% from $195.4 million in the
first half of 1997. Of this $45.4 million increase, approximately $28.5 million
was due to an increase in volume resulting from the inclusion of five acquired
businesses and 34 new locations opened worldwide in the last 12 months, and
approximately $16.9 million was due to increased activity from existing
locations.
Revenues from all other sources of $57.7 million in the first half of
1998 increased by 1.8% from $56.7 million in the first half of 1997, primarily
due to an increase in franchise revenues, including the recognition of the
initial fee from the franchising of the Portugal car rental operation, which had
been corporately owned, prior to June 1998. This increase was partially offset
by the effect of foreign currency translation.
Expenses
Total expenses of $1,759.1 million in 1998 increased by 1.8% from
$1,727.7 million in 1997; however, total expenses as a percentage of revenues
decreased to 90.3% in 1998 from 93.1% in 1997.
Direct operating expenses of $900.5 million in 1998 increased by .4%
from $896.8 million in 1997, but were lower in 1998 as a percentage of revenues.
The increase was primarily the result of increases in wages and facility costs
and a valuation adjustment made relating to a foreign car rental operation.
These increases were partly offset by the effects of foreign currency
translation, recoveries of concession fees and refueling costs, and lower
self-insurance costs.
Depreciation of revenue earning equipment for the car rental and car
leasing operations of $438.3 million in 1998 increased by 2.3% from $428.3
million in 1997, primarily due to an increase in the number of cars operated
worldwide and decreases in the net proceeds received in excess of book value on
the disposal of the cars resulting in a $3.7 million loss in 1998 versus a $.5
million loss in 1997. Depreciation of revenue earning equipment for the
industrial and construction equipment rental operations of $53.8 million in 1998
increased by 51.5% from $35.5 million in 1997, 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
$1.4 million loss in 1998 versus a $.9 million gain in 1997.
- 19 -
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Expenses (continued)
Selling, general and administrative expenses of $224.5 million in 1998
increased by 4.2% from $215.4 million in 1997. Expenses as a percent of revenue
were approximately the same in 1998 as compared to 1997. The increase was a
result of increases in advertising costs and sales promotion, which was
partially offset by the effects of foreign currency translation.
Interest expense of $142.0 million in 1998 decreased 6.3% from $151.6
million in 1997, primarily due to lower average debt levels and interest expense
of $4.3 million incurred in 1997, relating to funding a $460 million dividend
paid by the Company on its common stock to Ford in the first quarter of 1997.
These decreases were partly offset by lower interest income in 1998.
The tax provision of $77.6 million in 1998 increased 45.2% from $53.4
million in 1997, primarily due to the higher income before income taxes in 1998.
The effective tax rate in 1998 was 41.2% as compared to 42.0% in 1997. See Note
4 to the Notes to the Company's consolidated financial statements.
Net Income
The Company achieved record net income of $110.5 million in the first
half of 1998, or $1.02 per share on a diluted basis, representing an increase of
50% from $73.6 million, or $.68 per share on a diluted basis, in the first half
of 1997. 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.
Liquidity and Capital Resources
The Company's domestic and foreign operations are funded by cash
provided by operating activities, and by extensive financing arrangements
maintained by the Company in the United States, Europe, Australia, New Zealand,
Canada and Brazil. The Company's investment grade credit ratings provide it with
access to global capital markets to meet its borrowing needs. The Company's
primary use of funds is for the acquisition of revenue earning equipment, which
consists of cars, and industrial and construction equipment. For the six months
ended June 30, 1998, the Company's expenditures for revenue earning equipment
were $4.8 billion (partially offset by proceeds from the sale of such equipment
of $2.9 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, 1998, the Company's capital investments for
property and non-revenue earning equipment were $117 million. The Company's
customer receivables are also liquid with approximately 31 days of total annual
sales outstanding.
To finance its domestic requirements, the Company maintains an active
commercial paper program. The Company is also active in the U.S. domestic
medium-term and long-term debt markets. As the need arises, it is the Company's
intention to issue either unsecured senior, senior subordinated or junior
subordinated debt securities on terms to be determined at the time the
securities are offered for sale. The total amount of medium-term and long-term
debt outstanding as of June 30, 1998 was $2.9 billion with maturities ranging
from 1998 to 2028. This includes a $250 million term loan from Ford, which
matures 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 and short-
- 20 -
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Liquidity and Capital Resources (continued)
term bank loans. All borrowings by international operations either are in the
international operation's local currency or, if in non-local currency, are fully
hedged to minimize foreign exchange exposure. At June 30, 1998, the total debt
for the foreign operations was $854 million, of which $822 million was
short-term (original maturity of less than one year) and $32 million was
long-term. At June 30, 1998, the total amounts outstanding (in millions of U.S.
dollars) under the Australian and Canadian commercial paper programs were $62
and $152, respectively. The Irish commercial paper program had no amounts
outstanding at June 30, 1998.
At June 30, 1998, the Company had committed bank credit facilities
totaling $2.1 billion, which are primarily 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. Effective July 1, 1998, the five-year
agreements, with facilities totaling $1,196 million, were renegotiated and
currently $63 million expires on June 30, 2002 and $1,133 million expires on
June 30, 2003. The 364-day agreements, totaling $857 million, expire on June 23,
1999. The five-year agreements have an evergreen feature which provides for the
automatic extension of the expiration date one year forward unless timely notice
is provided by the bank. The 364-day agreements permit the Company to convert
any amount outstanding prior to expiration into a four-year term loan.
In addition to these bank credit facilities, in February 1997, Ford
extended to the Company a line of credit of $500 million, with an original
expiration date of June 30, 1999. 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 March 10, 1998 the Company paid a quarterly dividend of $.05 per
share on its Class A and Class B Common Stock to shareholders of record as of
February 13, 1998.
On June 10, 1998 the Company paid a quarterly dividend of $.05 per
share on its Class A and Class B Common Stock to shareholders of record as of
May 15, 1998.
On July 24, 1998 the Board of Directors declared a quarterly dividend
of $.05 per share on its Class A and Class B Common Stock, payable on September
10, 1998 to shareholders of record as of August 14, 1998.
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.
- 21 -
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Year 2000
Year 2000 remediation costs incurred for all of the Company's systems
were approximately $5.5 million for the first six months of 1998. The Company
has expended a total of approximately $7.6 million from inception through June
30, 1998. The cost and date of completion estimates regarding its year 2000 date
conversion project remain unchanged from the estimates stated in the Company's
Report on Form 10-K for the year ended December 31, 1997.
--------------
Pursuant to the Private Securities Litigation Reform Act of 1995,
certain statements contained in this Report under "Management's Discussion and
Analysis of Financial Condition and Results of Operations," including, without
limitation, those concerning the Company's year 2000 date conversion project,
may contain 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.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On May 21, 1998, the 1998 Annual Meeting of Stockholders of
the Company was held.
(b) The Company's stockholders elected Frank A. Olson, Craig R.
Koch, Louis C. Burnett, John M. Devine, Edward E. Hagenlocker,
Michael T. Monahan, Peter J. Pestillo, John M. Thompson and
Joseph A. Walker as directors of the Company.
(c) The Company's stockholders voted for the election of directors
listed in paragraph (b) based on the number of votes set forth
opposite their respective names:
Nominee Number of Votes
For Not For
Louis C. Burnett 375,221,027 48,752
John M. Devine 375,222,327 47,452
Edward E. Hagenlocker 375,222,327 47,452
Craig R. Koch 375,221,977 47,802
Michael T. Monahan 375,222,027 47,752
Frank A. Olson 375,221,690 48,089
Peter J. Pestillo 375,221,927 47,852
John M. Thompson 375,221,427 48,352
Joseph A. Walker 375,222,427 47,352
- 22 -
23
PART II - OTHER INFORMATION (continued)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (continued)
The Company's stockholders voted on the following proposals:
Proposal 1 - Ratification of Selection of Independent Public
Accountants. A proposal to ratify the selection of
PricewaterhouseCoopers LLP (successor to Coopers & Lybrand L.L.P.) as
independent public accountants to audit the books of account and other
corporate records of the Company for 1998 was adopted, with 375,022,233
votes cast for, 244,610 votes cast against, 2,936 votes abstained and
no broker non-votes.
Proposal 2 - Relating to the Company's Long-Term Equity Compensation
Plan. A proposal relating to the approval of a plan to grant stock
options and stock awards to certain executives under the Company's
Long-Term Equity Compensation Plan was adopted, with 364,457,526 votes
cast for, 9,016,232 votes cast against, 16,410 votes abstained and
1,779,611 broker non-votes.
Proposal 3 - Relating to the Company's Nonemployee Director Stock
Option Plan. A proposal relating to the approval of a plan to grant
stock options to nonemployee directors was adopted, with 371,484,623
votes cast for, 1,986,077 votes cast against, 19,468 votes abstained
and 1,779,611 broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
4 Instruments defining the rights of security holders,
including indentures. During the quarter ended June
30, 1998, the registrant and its subsidiaries
("Hertz") incurred various obligations which could be
considered as long-term debt, none of which exceeded
10% of the total assets of Hertz on a consolidated
basis. The Company agrees to furnish to the
Commission upon request a copy of any instrument
defining the rights of the holders of such long-term
debt.
12 Computation of Ratio of Earnings to Fixed Charges for
the six months ended June 30, 1998 and 1997.
27 Financial Data Schedule for the six months ended June
30, 1998.
(b) Reports on Form 8-K:
The Company filed a Form 8-K dated May 13, 1998
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. 333-34501) 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 April 16, 1998
reporting the issuance of a press release with
respect to its first quarter 1998 earnings.
- 23 -
24
PART II - OTHER INFORMATION (continued)
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 11, 1998 By: /s/ Paul J. Siracusa
--------------------
Paul J. Siracusa
Executive Vice President and
Chief Financial Officer
(principal financial officer and duly authorized
officer)
- 24 -
25
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
EXHIBITS
filed with
FORM 10-Q
for the quarter ended
June 30, 1998
under
THE SECURITIES EXCHANGE ACT OF 1934
---------------------------
THE HERTZ CORPORATION
Commission file number 1-7541
- 25 -
26
EXHIBIT INDEX
Exhibit
No. Description Page No.
12 Computation of Ratio of Earnings 27
to Fixed Charges for the six months
ended June 30, 1998 and 1997.
27 Financial Data Schedule for the 28-29
six months ended June 30, 1998.
- 26 -