<PAGE> 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 March 31, 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 March 31, 1998: Common Stock, $0.01 par value - Class A,
40,846,186 shares and Class B, 67,310,167 shares.
Page 1 of 21 pages
The Exhibit Index is on page 19
<PAGE> 2
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
<TABLE>
<CAPTION>
March 31, Dec. 31,
1998 1997
---- ----
<S> <C> <C>
Cash and equivalents $ 185,577 $ 152,620
Receivables, less allowance for
doubtful accounts of $12,919 (1997 - $13,927) 675,098 763,145
Due from affiliates 250,140 423,434
Inventories, at lower of cost or market 23,964 17,941
Prepaid expenses and other assets 94,852 86,297
Revenue earning equipment, at cost:
Cars 4,834,083 4,435,546
Less accumulated depreciation (401,711) (395,728)
Other equipment 1,097,666 1,089,888
Less accumulated depreciation (238,836) (237,840)
----------- -----------
Total revenue earning equipment 5,291,202 4,891,866
----------- -----------
Property and equipment, at cost:
Land, buildings and leasehold improvements 611,550 583,796
Service equipment 558,179 538,723
----------- -----------
1,169,729 1,122,519
Less accumulated depreciation (556,447) (537,753)
----------- -----------
Total property and equipment 613,282 584,766
----------- -----------
Franchises, concessions, contract costs and
leaseholds, net of amortization 9,681 8,781
Cost in excess of net assets of purchased
businesses, net of amortization (Note 2) 521,277 506,671
----------- -----------
Total assets $ 7,665,073 $ 7,435,521
=========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
- 2 -
<PAGE> 3
THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands of Dollars)
Unaudited
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, Dec. 31,
1998 1997
---- ----
<S> <C> <C>
Accounts payable $ 560,305 $ 482,119
Accrued liabilities 534,896 528,396
Accrued taxes 120,156 96,666
Debt (Note 5) 4,822,861 4,715,668
Public liability and property damage 300,746 310,475
Deferred taxes on income 163,800 166,000
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 980,269 980,581
Unamortized restricted stock grants (10,126) (11,763)
Retained earnings 226,714 196,715
Accumulated other comprehensive income (Note 8) (35,227) (30,419)
Treasury stock, at cost (404) --
----------- -----------
Total stockholders' equity 1,162,309 1,136,197
----------- -----------
Total liabilities and stockholders' equity $ 7,665,073 $ 7,435,521
=========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
- 3 -
<PAGE> 4
THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(In Thousands of Dollars)
Unaudited
<TABLE>
<CAPTION>
Three Months
Ended March 31,
---------------
1998 1997
---- ----
<S> <C> <C>
Revenues:
Car rental $765,378 $758,536
Industrial and construction equipment rental 106,568 90,335
Car leasing 9,121 11,644
Franchise fees and other revenue 17,729 17,837
-------- --------
Total revenues 898,796 878,352
-------- --------
Expenses:
Direct operating 435,201 444,063
Depreciation of revenue earning equipment (Note 4) 225,300 218,500
Selling, general and administrative 108,937 108,567
Interest, net of interest income of $2,670 and $4,567 68,632 73,311
-------- --------
Total expenses 838,070 844,441
-------- --------
Income before income taxes 60,726 33,911
Provision for taxes on income (Note 3) 25,319 14,192
-------- --------
Net income $ 35,407 $ 19,719
======== ========
Earnings per share (Note 1):
Basic $ .33 $ .18
======== ========
Diluted $ .33 $ .18
======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
- 4 -
<PAGE> 5
THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands of Dollars)
Unaudited
<TABLE>
<CAPTION>
Three Months
Ended March 31,
---------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 35,407 $ 19,719
Non-cash expenses:
Depreciation of revenue earning equipment 225,300 218,500
Depreciation of property and equipment 22,092 22,183
Amortization of intangibles 7,267 5,043
Amortization of restricted stock grants 918 --
Provision for public liability and
property damage 28,636 34,222
Provision for losses for doubtful accounts 610 2,444
Deferred income taxes (2,200) 6,800
Revenue earning equipment expenditures (2,533,350) (2,301,277)
Proceeds from sales of revenue earning equipment 1,921,744 1,772,794
Changes in assets and liabilities:
Receivables 87,525 1,937
Due from affiliates 173,294 198,921
Inventories and prepaid expenses
and other assets (10,168) (10,146)
Accounts payable 74,528 48,517
Accrued liabilities 8,394 (32,211)
Accrued taxes 22,791 5,995
Payments of public liability and property
damage claims and expenses (38,425) (40,632)
----------- -----------
Net cash provided by (used in)
operating activities 24,363 (47,191)
----------- -----------
</TABLE>
The accompanying notes are an integral part of this statement.
- 5 -
<PAGE> 6
THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousand of Dollars)
Unaudited
<TABLE>
<CAPTION>
Three Months
Ended March 31,
---------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from investing activities:
Property and equipment expenditures $ (61,772) $ (72,505)
Proceeds from sales of property and equipment 11,565 9,615
Available-for-sale securities:
Purchases (262) (609)
Sales 257 451
Acquisition of new businesses (30,978) --
--------- ---------
Net cash used in investing activities (81,190) (63,048)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 248,565 --
Repayment of long-term debt (255,280) (71,076)
Short-term borrowings:
Proceeds 632,824 570,017
Repayments (181,646) (276,235)
Ninety day term or less, net (349,220) 352,331
Cash dividend paid to Ford -- (460,000)
Issuance of preferred stock to Ford -- 129,000
Purchases of treasury stock (439) --
Exercise of stock options 241 --
Other 201 --
Cash dividends paid on common stock (5,408) --
--------- ---------
Net cash provided by financing activities 89,838 244,037
--------- ---------
Effect of foreign exchange rate changes on cash (54) (276)
--------- ---------
Net increase in cash and equivalents
during the period 32,957 133,522
Cash and equivalents at beginning of year 152,620 179,311
--------- ---------
Cash and equivalents at end of period $ 185,577 $ 312,833
========= =========
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest (net of amounts capitalized) $ 72,961 $ 76,298
Income taxes 6,787 4,377
</TABLE>
In connection with an acquisition made in 1998, liabilities assumed were $28
million.
The accompanying notes are an integral part of this statement.
- 6 -
<PAGE> 7
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 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 and continues to own (i) 49.4% of the outstanding Class
A Common Stock of the Corporation (which has one vote per share) and (ii) 100%
of the outstanding Class B Common Stock of the Corporation (which has five votes
per share). The common stock beneficially owned by Ford represents in the
aggregate 94.5% of the combined voting power of all of the Corporation's
outstanding common stock. Accordingly, Ford is able to direct the election of
all of the members of the Corporation's Board of Directors and to exercise a
controlling influence over the business and affairs of the Corporation.
Earnings Per Share
Basic and diluted earnings per share were computed based on 108,173,721
and 108,684,210 weighted average shares of Class A and Class B Common Stock
outstanding during the quarter, respectively. The basic and diluted earnings per
share for the quarter ended March 31, 1997 assumes that the weighted average
shares outstanding during 1998 were outstanding for the corresponding period in
1997.
Reclassifications
Certain prior year amounts have been reclassified to conform to the
current year presentation.
- 7 -
<PAGE> 8
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation (continued)
Recent Pronouncements
In February 1998, the Financial Accounting Standards Board issued 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.
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.
Note 2 - Acquisitions
In March 1998, the Company acquired, through its subsidiary, Hertz
Canada Limited, all of the stock of a Canadian equipment rental and sales
company, for $31 million plus the assumption of $21 million of debt. The
acquisition was accounted for as a purchase, and the results of operations have
been included since the date of acquisition.
Note 3 - Taxes on Income
The income tax provision is based upon the expected effective tax rate
applicable to the full year. The effective tax rate is higher than the U.S.
statutory rate of 35% due to higher tax rates relating to foreign operations and
adjustment for state taxes net of federal benefit.
Note 4 - Depreciation of Revenue Earning Equipment
Depreciation of revenue earning equipment includes the following (in
thousands of dollars):
<TABLE>
<CAPTION>
Unaudited
Three Months Ended
March 31,
1998 1997
---- ----
<S> <C> <C>
Depreciation of revenue earning equipment $220,108 $214,845
Adjustment of depreciation upon disposal
of the equipment 1,438 140
Rents paid for vehicles leased 3,754 3,515
-------- --------
Total $225,300 $218,500
======== ========
</TABLE>
- 8 -
<PAGE> 9
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Depreciation of Revenue Earning Equipment (continued)
The adjustment of depreciation upon disposal of revenue earning equipment
for the three months ended March 31, 1998 and 1997 included a net loss of $.4
million and a net gain of $.4 million, respectively, on the sale of equipment in
the industrial and construction equipment rental operations in the United
States; and net losses of $1.0 million and $.5 million, respectively, in the car
rental and car leasing operations.
During the three months ended March 31, 1998, the Company purchased Ford
vehicles at a cost of approximately $1.1 billion, and sold Ford vehicles to Ford
or its affiliates under various repurchase programs for approximately $.8
billion.
Note 5 - Debt
Debt at March 31, 1998 and December 31, 1997 consisted of the following (in
thousands of dollars):
<TABLE>
<CAPTION>
March 31, Dec. 31,
` 1998 1997
---------- ----------
<S> <C> <C>
Notes payable, including commercial
paper, average interest rate: 1998, 5.6%;
1997, 6.1% $1,358,823 $1,277,294
Promissory notes, average interest rate:
1998, 7.0%; 1997, 7.2%
(effective average interest rate:
1998, 7.1%; 1997, 7.3%)
net of unamortized discount: 1998, $4,507;
1997, $3,030; due 1999 to 2028 2,245,492 2,246,970
Property and equipment lease obligations,
average interest rate 7.0% -- 1,836
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:
1998 $11; 1997, $43; due 1998 99,989 99,957
Junior subordinated promissory notes,
average interest rate 6.9%; net of
unamortized discount: 1998, $190;
1997, $201; due 2000 to 2003 399,810 399,799
Subsidiaries' short-term debt, in foreign
currencies, including commercial paper
in millions (1998, $670.1; 1997, $637.7);
and other borrowings; average interest rate:
1998, 5.3%; 1997, 5.2% 688,747 659,812
---------- ----------
Total $4,822,861 $4,715,668
========== ==========
</TABLE>
- 9 -
<PAGE> 10
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Debt - (continued)
The aggregate amounts of maturities of debt for the twelve-month periods
following March 31, 1998 are as follows (in millions): 1999, $2,276.9 (including
$2,028.9 of commercial paper and short-term borrowings); 2000, $350.0; 2001,
$399.3; 2002, $249.8; 2003, $698.3; after 2002, $848.6.
At March 31, 1998, approximately $528 million of the Company's
consolidated stockholders' equity was free of dividend limitations pursuant to
its existing debt agreements.
At March 31, 1998, the Company had $250 million of outstanding loans from
Ford.
The Company and its subsidiaries have entered into arrangements to manage
exposure to fluctuations in interest rates. These arrangements consist of
interest-rate swap agreements ("swaps"). The differential paid or received on
these agreements is recognized as an adjustment to interest expense. These
agreements are not entered into for trading purposes. The effect of these
agreements is to make the Company less susceptible to changes in interest rates
by effectively converting certain variable rate debt to fixed rate debt. Because
of the relationship of current market rates to historical fixed rates, the
effect at March 31, 1998 of the swap agreements is to give the Company an
overall effective weighted-average rate on debt of 6.49%, with 39% of debt
effectively subject to variable interest rates, compared to a weighted-average
interest rate on debt of 6.43%, with 42% of debt subject to variable interest
rates when not considering the swap agreements. At March 31, 1998, these
agreements expressed in notional amounts aggregated $125.9 million. Notional
amounts are not reflective of the Company's obligations under these agreements
because the Company is only obligated to pay the net amount of interest rate
differential between the fixed and variable rates specified in the contracts.
The Company's exposure to any credit loss in the event of non-performance by the
counterparties is further mitigated by the fact that all of these financial
instruments are with significant financial institutions that are rated "A" or
better by the major credit rating agencies. At March 31, 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 $2.1 million. The notional principal $125.9
million matures as follows: $55.7, $45.0, $21.3, $3.6 and $.3 in 1998, 1999,
2000, 2001 and 2002, respectively.
Note 6 - Long-Term Equity Compensation Plan
The Company sponsors a stock-based incentive plan (the "Plan") covering
certain officers and other executives of the Company. The Plan is administered
by the Compensation Committee (the "Committee") appointed by the Board of
Directors. The Company adopted the Plan as of April 25, 1997, subject to
stockholder approval. 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.
- 10 -
<PAGE> 11
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - 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 March 31, 1998, 219,340 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.
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.
Note 7 - 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 ("industrial and construction equipment rental"). The
contributions of these segments, as well as "corporate and other", to revenues
and income before income taxes for the three months ended March 31, 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 (in millions of dollars).
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
Income (Loss)
Revenues Before Income Taxes
-------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Car rental and leasing $ 785.0 $ 780.8 $ 57.8 $ 24.8
Industrial and construction equipment
equipment rental 106.6 90.3 6.4 9.6
Corporate and other 7.2 7.3 (3.5) (.5)
------- ------- ------- -------
Consolidated total $ 898.8 $ 878.4 $ 60.7 $ 33.9
======= ======= ======= =======
</TABLE>
-11 -
<PAGE> 12
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Statement of Financial Accounting Standards No. 130 ("SFAS 130")
The Company adopted SFAS 130, "Reporting Comprehensive Income" for 1998.
Accumulated other comprehensive income includes an accumulated translation loss
(in thousands of dollars) of $35,275 and $30,458 at March 31, 1998 and December
31, 1997, respectively. Comprehensive income for the three months ended March
31, 1998 and 1997 was as follows (in thousands of dollars):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------
1998 1997
-------- --------
<S> <C> <C>
Net income $ 35,407 $ 19,719
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustments (4,817) (15,171)
Unrealized gains (losses) on
available-for-sale securities 9 (66)
-------- --------
Other comprehensive loss (4,808) (15,237)
-------- --------
Comprehensive income $ 30,599 $ 4,482
======== ========
</TABLE>
- 12 -
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Three Months ended March 31, 1998 Compared with Three Months ended March 31,
1997
Summary
The following table sets forth for the three months ended March 31, 1998
and 1997 the percentage of operating revenues represented by certain items in
the Company's consolidated statement of income:
<TABLE>
<CAPTION>
Percentage of Revenues
Three Months Ended
March 31,
---------
1998 1997
----- -----
<S> <C> <C>
Revenues:
Car rental 85.1% 86.4%
Industrial and construction equipment rental 11.9 10.3
Car leasing 1.0 1.3
Franchise fees and other revenue 2.0 2.0
----- -----
100.0 100.0
----- -----
Expenses:
Direct operating 48.4 50.6
Depreciation of revenue earning equipment 25.1 24.9
Selling, general and administrative 12.1 12.3
Interest, net of interest income 7.6 8.3
----- -----
93.2 96.1
----- -----
Income before income taxes 6.8 3.9
Provision for taxes on income 2.9 1.6
----- -----
Net income 3.9% 2.3%
===== =====
</TABLE>
The following table sets forth certain selected operating data of the
Company for the three months ended March 31, 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------
1998 1997
---- ----
<S> <C> <C>
Car rental and other operations:
Average number of owned cars operated
during period 271,000 273,000
Number of transactions of owned car
rental operations during period 4,920,000 4,910,000
Average revenue per transaction of owned
car rental operations during period
(in whole dollars) $ 155.55 $ 154.48
Equipment rental operations:
Average cost of rental equipment operated
during period (in millions) $ 1,096 $ 914
</TABLE>
- 13 -
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(Continued)
Revenues
The Company achieved record revenues of $898.8 million in the first
quarter of 1998, which increased by 2.3% from $878.4 million in the first
quarter of 1997. Revenues from car rental operations of $765.4 million in the
first quarter of 1998 increased by $6.9 million, or .9% from $758.5 million in
the first quarter of 1997. The increase was primarily the result of continued
pricing improvement, principally in the United States, that contributed $20.3
million in increased revenue. This increase was partially offset by a decrease
of $15.0 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 $106.6
million in the first quarter of 1998 increased by 18.1% from $90.3 million in
the first quarter of 1997. Of this $16.3 million increase, approximately $9.3
million was due to an increase in volume resulting from the opening of 41 new
locations worldwide within the last 12 months and approximately $7.0 million was
due to increased activity from existing locations.
Revenues from all other sources of $26.9 million in the first quarter of
1998 decreased by 8.8% from $29.5 million in the first quarter of 1997,
primarily due to the decrease in leasing revenues from the franchising of the
Norway car rental operation in June 1997, which had been corporately owned, and
the effect of foreign currency translation.
Expenses
Total expenses of $838.1 million in 1998 decreased by .7% from $844.4
million in 1997, and total expenses as a percentage of revenues decreased to
93.2% in 1998 from 96.1% in 1997.
Direct operating expenses of $435.2 million in 1998 decreased by 2.0%
from $444.1 million in 1997. The decrease was primarily the result of foreign
currency translation, lower vehicle damage costs, lower self-insurance costs and
decreases in other vehicle operating expenses. These decreases were partly
offset by increases in wages and facility costs and a valuation adjustment made
relating to a foreign car rental operation.
Depreciation of revenue earning equipment for the car rental and car
leasing operations of $204.6 million in 1998 decreased by .7% from $206.0
million in 1997, primarily due to foreign currency translation. These decreases
were partly offset by an increase in the number of cars operated by foreign
operations. Depreciation of revenue earning equipment for the industrial and
construction equipment rental operations of $20.7 million in 1998 increased by
65.6% from $12.5 million in 1997, primarily due to an increase in both the
volume and cost of equipment operated.
Selling, general and administrative expenses of $108.9 million in 1998
increased by .3% from $108.6 million in 1997. Expenses were approximately the
same in 1998 as compared to 1997 as a result of increases in advertising costs,
which were offset by the effects of foreign currency translation.
Interest expense of $68.6 million in 1998 decreased 6.4% from $73.3
million in 1997, primarily due to lower average debt levels and interest expense
of $2.3 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.
- 14 -
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--(Continued)
Expenses (continued)
The tax provision of $25.3 million in 1998 increased 78.2% from $14.2
million in 1997, primarily due to the higher income before income taxes in 1998.
The effective tax rate in 1998 was 41.7% as compared to 41.9% in 1997.
See Note 3 to the Notes to the Company's consolidated financial statements.
Net Income
The Company achieved record net income of $35.4 million in the first
quarter of 1998, or $.33 per share on a diluted basis, representing an increase
of 79.7% from $19.7 million, or $.18 per share on a diluted basis, in the first
quarter of 1997. This increase was primarily due to higher revenues in the U.S.
car rental operations. This increase in net income was partly offset by
increased costs in the industrial and construction equipment rental business
relating to the additional depreciation for equipment purchased and other
expenses incurred to service new industrial customers.
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 three months ended
March 31, 1998, the Company's expenditures for revenue earning equipment were
$2.5 billion (partially offset by proceeds from the sale of such equipment of
$1.9 billion). These assets are purchased by the Company in accordance with the
terms of programs negotiated with automobile and equipment manufacturers. For
the three months ended March 31, 1998, the Company's capital investments for
property and non-revenue earning equipment, were $62 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 March 31, 1998 was $2.8 billion with maturities ranging
from 1998 to 2028. This includes $250 million in term loans from Ford, which
mature on November 15, 1999. Borrowing for the Company's international
operations consists mainly of loans obtained from local and international banks
and commercial paper programs established in Australia, Canada and Ireland. The
Company guarantees only the borrowings of its subsidiaries in Australia, Canada
and Ireland, which consist principally of commercial paper and short-term bank
loans. All borrowings by international operations either are in the
international operations' local currency or, if in non-local currency, are fully
hedged to minimize foreign exchange exposure. At March 31, 1998, the total debt
for the foreign operations was $689 million, of which $670 million was
short-term (original maturity of less than one year) and $19 million was
long-term. At March 31, 1998, the total amounts outstanding (in millions of U.S.
dollars) under the Australian and Canadian commercial paper programs were $89
and $75, respectively. The Irish commercial paper program had no amounts
outstanding at March 31, 1998.
- 15 -
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Liquidity and Capital Resources (continued)
At March 31, 1998, the Company had committed bank credit facilities
totaling $2.2 billion. Of this amount, $2.1 billion are represented by a
combination of five-year and 364-day global committed credit facilities provided
by 31 relationship banks. In addition to direct borrowings by the Company, these
agreements allow any subsidiary of the Company to borrow under the facilities on
the basis of a guarantee by the Company. The five-year agreements, totaling
$1,185 million, currently expire on June 30, 2002, and the 364-day agreements,
totaling $895 million, expire on June 25, 1998. The five-year agreements have an
evergreen feature which provides for the automatic extension of the expiration
date one year forward unless timely notice is provided by the bank. The 364-day
agreements permit the Company to convert any amount outstanding prior to
expiration into a four-year term loan.
In addition to these bank credit facilities, in February 1997, Ford
extended to the Company a line of credit of $500 million, expiring June 30,
1999. 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 April 27, 1998 the Board of Directors declared a quarterly dividend of
$.05 per share on its Class A and Class B Common Stock, payable on June 10, 1998
to shareholders of record as of May 15, 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.
- 16 -
<PAGE> 17
PART II - OTHER INFORMATION
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 March
31, 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 three months ended March 31, 1998 and 1997.
27 Financial Data Schedule for the three months ended
March 31, 1998.
(b) Reports on Form 8-K:
The Company filed a Form 8-K dated January 22, 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 January 28, 1998
reporting the issuance of a press release with respect
to its fourth quarter and full year 1997 earnings.
The Company filed a Form 8-K dated February 10, 1998
reporting the issuance of a press release with respect
to the declaration of a quarterly dividend.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE HERTZ CORPORATION
(Registrant)
Date: May 12, 1998 By: /s/ Paul J. Siracusa
-----------------------------------
Paul J. Siracusa
Executive Vice President and
Chief Financial Officer
(principal financial officer
and duly authorized officer)
- 17 -
<PAGE> 18
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
EXHIBITS
filed with
FORM 10-Q
for the quarter ended
March 31, 1998
under
THE SECURITIES EXCHANGE ACT OF 1934
---------------------------
THE HERTZ CORPORATION
Commission file number 1-7541
- 18 -
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description Page No.
--- ----------- --------
<S> <C> <C>
12 Computation of Ratio of Earnings 20
to Fixed Charges for the three months
ended March 31, 1998 and 1997.
27 Financial Data Schedule for the 21
three months ended March 31, 1998.
</TABLE>
- 19 -
<PAGE> 1
EXHIBIT 12
THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In Thousands of Dollars Except Ratios)
Unaudited
<TABLE>
<CAPTION>
Three Months
Ended March 31,
---------------
1998 1997
---- ----
<S> <C> <C>
Income before income taxes $ 60,726 $ 33,911
Interest expense 71,302 77,878
Portion of rent estimated to represent
the interest factor 18,374 18,123
-------- --------
Earnings before income taxes and fixed charges $150,402 $129,912
======== ========
Interest expense (including capitalized interest) $ 71,487 $ 77,950
Portion of rent estimated to represent
the interest factor 18,374 18,123
-------- --------
Fixed charges $ 89,861 $ 96,073
======== ========
Ratio of earnings to fixed charges 1.7 1.4
======== ========
</TABLE>
- 20 -
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 6,686
<SECURITIES> 178,891
<RECEIVABLES> 688,017
<ALLOWANCES> (12,919)
<INVENTORY> 23,964
<CURRENT-ASSETS> 0
<PP&E> 7,101,478
<DEPRECIATION> (1,196,994)
<TOTAL-ASSETS> 7,665,073
<CURRENT-LIABILITIES> 0
<BONDS> 4,822,861
0
0
<COMMON> 1,083
<OTHER-SE> 1,161,226
<TOTAL-LIABILITY-AND-EQUITY> 7,665,073
<SALES> 0
<TOTAL-REVENUES> 898,796
<CGS> 0
<TOTAL-COSTS> 768,828
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 610
<INTEREST-EXPENSE> 68,632
<INCOME-PRETAX> 60,726
<INCOME-TAX> 25,319
<INCOME-CONTINUING> 35,407
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35,407
<EPS-PRIMARY> .33
<EPS-DILUTED> .33
</TABLE>
