<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, 1999
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, 1999: Common Stock, $0.01 par value - Class A,
40,571,855 shares and Class B, 67,310,167 shares.
Page 1 of 20 pages
The Exhibit Index is on page 17
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM l. FINANCIAL STATEMENTS
THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands of Dollars)
Unaudited
ASSETS
<TABLE>
<CAPTION>
March 31, Dec. 31,
1999 1998
----------- -----------
<S> <C> <C>
Cash and equivalents $ 194,116 $ 188,466
Receivables, less allowance for
doubtful accounts of $17,433 (1998 - $16,040) 805,478 893,440
Due from affiliates 354,380 430,169
Inventories, at lower of cost or market 48,195 39,502
Prepaid expenses and other assets 97,461 85,823
Revenue earning equipment, at cost:
Cars 5,408,143 4,980,516
Less accumulated depreciation (486,967) (508,008)
Other equipment 1,718,226 1,653,941
Less accumulated depreciation (357,905) (344,416)
----------- -----------
Total revenue earning equipment 6,281,497 5,782,033
----------- -----------
Property and equipment, at cost:
Land, buildings and leasehold improvements 710,349 692,926
Service equipment 693,969 662,141
----------- -----------
1,404,318 1,355,067
Less accumulated depreciation (641,497) (623,259)
----------- -----------
Total property and equipment 762,821 731,808
----------- -----------
Franchises, concessions, contract costs and
leaseholds, net of amortization 12,202 13,107
Cost in excess of net assets of purchased
businesses, net of amortization (Note 3) 736,836 708,210
----------- -----------
Total assets $ 9,292,986 $ 8,872,558
=========== ===========
</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,
1999 1998
----------- -----------
<S> <C> <C>
Accounts payable $ 573,204 $ 510,441
Accrued liabilities 593,019 596,575
Accrued taxes 148,946 113,217
Debt (Note 6) 6,069,145 5,759,783
Public liability and property damage 295,464 307,219
Deferred taxes on income 194,800 191,500
Stockholders' equity:
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 982,394 982,564
Unamortized restricted stock grants (6,746) (7,845)
Retained earnings 495,476 452,110
Accumulated other comprehensive income (Note 9) (39,189) (20,776)
Treasury stock, at cost, 385,003 shares (14,610) (13,313)
Total stockholders' equity 1,418,408 1,393,823
----------- -----------
Total liabilities and stockholders' equity $ 9,292,986 $ 8,872,558
</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,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Revenues:
Car rental $ 827,253 $ 765,378
Industrial and construction equipment rental 175,533 106,568
Car leasing 9,186 9,121
Franchise fees and other revenue 20,983 17,729
----------- -----------
Total revenues 1,032,955 898,796
----------- -----------
Expenses:
Direct operating 488,288 441,301
Depreciation of revenue earning equipment (Note 5) 276,725 225,300
Selling, general and administrative 108,753 102,837
Interest, net of interest income of $2,504 and
$2,670 77,150 68,632
----------- -----------
Total expenses 950,916 838,070
----------- -----------
Income before income taxes 82,039 60,726
Provision for taxes on income (Note 4) 33,278 25,319
----------- -----------
Net income $ 48,761 $ 35,407
=========== ===========
Earnings per share (Note 2):
Basic $ .45 $ .33
=========== ===========
Diluted $ .45 $ .33
=========== ===========
</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,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 48,761 $ 35,407
Non-cash expenses:
Depreciation of revenue earning equipment 276,725 225,300
Depreciation of property and equipment 30,970 22,092
Amortization of intangibles 6,678 7,267
Amortization of restricted stock grants 1,098 918
Provision for public liability and property
damage 25,934 28,636
Provision for losses for doubtful accounts 1,907 610
Deferred income taxes 3,300 (2,200)
Revenue earning equipment expenditures (2,652,135) (2,533,350)
Proceeds from sales of revenue earning equipment 1,884,077 1,921,744
Changes in assets and liabilities:
Receivables 61,069 87,525
Due from affiliates 75,789 173,294
Inventories and prepaid expenses and other assets (17,042) (10,168)
Accounts payable 56,328 74,528
Accrued liabilities 6,487 8,394
Accrued taxes 34,454 22,791
Payments of public liability and property damage
claims and expenses (37,797) (38,425)
----------- -----------
Net cash (used in) provided by operating activities (193,397) 24,363
----------- -----------
</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,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from investing activities:
Property and equipment expenditures $ (77,767) $ (61,104)
Proceeds from sales of property and equipment 10,165 10,897
Available-for-sale securities:
Purchases (1,294) (262)
Sales 1,470 257
Purchases of various operations, net of cash (76,239) (30,978)
Net cash used in investing activities (143,665) (81,190)
Cash flows from financing activities:
Proceeds from issuance of long-term debt 300,728 248,565
Repayment of long-term debt (100,502) (255,280)
Short-term borrowings:
Proceeds 453,890 632,824
Repayments (461,943) (181,646)
Ninety day term or less, net 158,809 (349,220)
Cash dividends paid on common stock (5,395) (5,408)
Purchases of treasury stock (2,518) (439)
Exercise of stock options 674 241
Other 378 201
----------- -----------
Net cash provided by financing activities 344,121 89,838
----------- -----------
Effect of foreign exchange rate changes on cash (1,409) (54)
----------- -----------
Net increase in cash and equivalents during the period 5,650 32,957
Cash and equivalents at beginning of year 188,466 152,620
----------- -----------
Cash and equivalents at end of period $ 194,116 $ 185,577
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of amounts capitalized) $ 90,347 $ 72,961
Income taxes 10,001 6,787
</TABLE>
In connection with acquisitions made in the first quarter of 1999 and 1998,
liabilities assumed were $39.4 million and $28 million, respectively.
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, 1998, filed by the registrant (the "Company") with the Securities
and Exchange Commission on March 19, 1999, 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.
Accounting Change
In the first quarter of 1999, the Company adopted 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
SOP requires capitalization of such costs after certain preliminary development
efforts have been made. Costs capitalized are direct costs and interest costs
related to development efforts. Prior to the adoption of this standard, the
Company expensed these costs as incurred. Adoption of this standard did not have
a material effect on the Company's first quarter financial position or results
of operations or cash flows.
Reclassifications
Certain prior year amounts have been reclassified to conform to the
current year presentation.
Recent Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("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
or cash flows.
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):
<TABLE>
<CAPTION>
Three Months
Ended March 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Basic earnings per share:
Net income $ 48,761 $ 35,407
------------ ------------
Average common shares
outstanding 107,889,681 108,173,721
------------ ------------
Basic earnings per share $ 0.45 $ 0.33
============ ============
Diluted earnings per share:
Net income $ 48,761 $ 35,407
------------ ------------
Average common shares
outstanding 107,889,681 108,173,721
Dilutive effect of stock options 507,258 510,489
------------ ------------
Average diluted common shares
outstanding 108,396,939 108,684,210
------------ ------------
Diluted earnings per share $ 0.45 $ 0.33
============ ============
</TABLE>
During the first quarter of 1999, certain options to purchase 997,345
shares of common stock 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.
7
<PAGE> 8
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Acquisitions
During the three months ended March 31, 1999, the Company acquired one
European and five North American equipment rental and sales companies. The
Company also acquired three European car and truck rental companies. The
aggregate purchase price of the acquisitions was $76.2 million, net of cash
acquired, plus the assumption of $7.6 million of debt. The aggregate
consideration exceeded the fair value of the net assets acquired by
approximately $47.5 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 in
the Company's consolidated financial statements since their respective dates of
acquisition. Had the acquisitions occurred as of the beginning of the year, the
effect of including their results would not be material to the results of
operations of the Company.
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):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1999 1998
--------- ---------
<S> <C> <C>
Depreciation of revenue earning equipment $ 277,468 $ 220,108
Adjustment of depreciation upon disposal of the
equipment (4,836) 1,438
Rents paid for vehicles leased 4,093 3,754
--------- ---------
Total $ 276,725 $ 225,300
========= =========
</TABLE>
The adjustment of depreciation upon disposal of revenue earning equipment
for the three months ended March 31, 1999 and 1998 included a net gain of $1.6
million and a net loss of $.4 million, respectively, on the sale of equipment in
the industrial and construction equipment rental operations in the United
States; and a net gain of $3.2 million and a net loss of $1.0 million,
respectively, in the car rental and car leasing operations.
During the three months ended March 31, 1999, the Company purchased Ford
vehicles at a cost of approximately $1.2 billion, and sold Ford vehicles to Ford
or its affiliates under various repurchase programs for approximately $.7
billion.
8
<PAGE> 9
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Debt
Debt at March 31, 1999 and December 31, 1998 consisted of the following
(in thousands of dollars):
<TABLE>
<CAPTION>
March 31, Dec. 31,
1999 1998
---------- ----------
<S> <C> <C>
Notes payable, including commercial paper,
average interest rate: 1999, 5.0%; 1998, 5.4% $2,136,839 $2,151,792
Promissory notes, average interest rate:
1999, 6.8%; 1998, 7.0% (effective average
interest rate: 1999, 6.9%; 1998, 7.0%);
net of unamortized discount: 1999, $6,307;
1998, $4,157; due 1999 to 2028 2,643,693 2,445,843
Junior subordinated promissory notes,
average interest rate 6.9%; net of unamortized
discount: 1999, $147; 1998, $158;
due 2000 to 2003 399,853 399,842
Subsidiaries' short-term debt, in dollars and foreign
currencies, including commercial paper in millions
(1999 $381.8; 1998, $206.2); and other borrowings;
average interest rate: 1999, 4.5%; 1998, 4.8% 888,760 762,306
---------- ----------
Total $6,069,145 $5,759,783
========== ==========
</TABLE>
The aggregate amounts of maturities of debt for the twelve-month periods
following March 31, 1999 are as follows (in millions): 2000, $3,365.0 (including
$2,984.4 of commercial paper and short-term borrowings); 2001, $402.8; 2002,
$251.3; 2003, $699.4; 2004, $250.0, after 2004, $1,100.6.
At March 31, 1999, approximately $774 million of the Company's
consolidated stockholders' equity was free of dividend limitations pursuant to
its existing debt agreements.
At March 31, 1999, 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, 1999 of the swap agreements is to give the Company an
overall effective weighted-average rate on debt of 5.89%, with 48% of debt
effectively subject to variable interest rates, compared to a weighted-average
interest rate on debt of 5.87%, with 49% of debt subject to variable interest
rates when not considering the swap agreements. At March 31, 1999, these
agreements expressed in notional amounts aggregated $85.2 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, 1999, 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 $1.0 million. The notional principal of $85.2
million matures as follows: $34.6, $34.5, $13.1, $2.8, and $.2 in 1999, 2000,
2001, 2002 and 2003, respectively.
9
<PAGE> 10
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Stock-Based Compensation
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 of the Board of Directors. The total number of
shares of Class A Common Stock that may be subject to Awards under the Plan is
8,120,026 shares. On February 3, 1999, the Company granted nonqualified stock
options for 1,117,000 shares of Class A Common Stock. The options were granted
at the closing market price on that day of $41.38 per share. As of March 31,
1999, stock options for 293,218 shares of Class A Common Stock had been
forfeited and 4,192,518 shares were available for awards under the Plan.
During the three months ended March 31, 1999, the Company acquired 61,000
shares of its Class A Common Stock for requirements under the 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 ("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, 1999 and
1998 are summarized below (in millions of dollars). Corporate and other includes
general corporate expenses, principally amortization of intangibles and certain
interest, 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
--------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Car rental and leasing $ 848.0 $ 785.0 $ 75.6 $ 57.8
Industrial and construction equipment rental 175.7 106.6 8.1 6.4
Corporate and other 9.3 7.2 (1.7) (3.5)
-------- -------- -------- --------
Consolidated total $1,033.0 $ 898.8 $ 82.0 $ 60.7
======== ======== ======== ========
</TABLE>
Note 9 - Comprehensive Income
Accumulated other comprehensive income includes an accumulated translation
loss (in thousands of dollars) of $39,248 and $20,906 at March 31, 1999 and
December 31, 1998, respectively. Comprehensive income for the three months ended
March 31, 1999 and 1998 was as follows (in thousands of dollars):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
Net income $ 48,761 $ 35,407
-------- --------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments (18,342) (4,817)
Unrealized (losses) gains on
available-for-sale securities (71) 9
-------- --------
Other comprehensive loss (18,413) (4,808)
-------- --------
Comprehensive income $ 30,348 $ 30,599
======== ========
</TABLE>
10
<PAGE> 11
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Three Months ended March 31, 1999 Compared with Three Months ended March 31,
1998
Summary
The following table sets forth for the three months ended March 31, 1999
and 1998 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,
----------------------
1999 1998
------- -------
<S> <C> <C>
Revenues:
Car rental 80.1% 85.1%
Industrial and construction equipment rental 17.0 11.9
Car leasing .9 1.0
Franchise fees and other revenue 2.0 2.0
----- -----
100.0 100.0
----- -----
Expenses:
Direct operating 47.3 49.1
Depreciation of revenue earning equipment 26.8 25.1
Selling, general and administrative 10.5 11.4
Interest, net of interest income 7.5 7.6
----- -----
92.1 93.2
----- -----
Income before income taxes 7.9 6.8
Provision for taxes on income 3.2 2.9
----- -----
Net income 4.7% 3.9%
===== =====
</TABLE>
The following table sets forth certain selected operating data of the
Company for the three months ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
1999 1998
---------- ----------
<S> <C> <C>
Car rental and other operations:
Average number of owned cars operated
during period 297,000 271,000
Number of transactions of owned car rental
operations during period 5,292,000 4,920,000
Average revenue per transaction of owned car
rental operations during period (in whole dollars) $ 156.31 $ 155.55
Equipment rental operations:
Average cost of rental equipment operated during
period (in millions) $ 1,685 $ 1,096
</TABLE>
Revenues
The Company achieved record revenues of $1,033.0 million in the first
quarter of 1999, which increased by 14.9% from $898.8 million in the first
quarter of 1998. Revenues from car rental operations of $827.3 million in the
first quarter of 1999 increased by $61.9 million, or 8.1% from $765.4 million in
the first quarter of 1998. The increase was primarily the result of a worldwide
increase in transactions of 7.6% that contributed $57.7 million in increased
revenue.
Revenues from industrial and construction equipment rental of $175.5
million in the first quarter of 1999 increased by 64.7% from $106.6 million in
the first quarter of 1998. Of this $69.0 million increase, approximately $48.9
million was due to an increase in volume resulting from the inclusion of 17
acquired businesses and the opening of 23 new locations worldwide within the
last 12 months, and approximately $20.1 million was due to increased activity
from existing locations which grew 19%.
11
<PAGE> 12
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Revenues from all other sources of $30.2 million in the first quarter of
1999 increased by 12.4% from $26.9 million in the first quarter of 1998,
primarily due to an increase in telecommunications and franchise revenue.
Expenses
Total expenses of $950.9 million in 1999 increased by 13.5% from $838.1
million in 1998; however, total expenses as a percentage of revenues decreased
to 92.1% in 1999 from 93.2% in 1998.
Direct operating expenses of $488.3 million in 1999 increased by 10.6%
from $441.3 million in 1998. The increase was primarily the result of increases
in wages and benefits, other equipment rental operating costs and facility
costs.
Depreciation of revenue earning equipment for the car rental and car
leasing operations of $240.1 million in 1999 increased by 17.4% from $204.6
million in 1998, primarily due to an increase in the number of cars operated
worldwide. Depreciation of revenue earning equipment for the industrial and
construction equipment rental operations of $36.6 million in 1999 increased by
76.8% from $20.7 million in 1998, primarily due to acquisitions of equipment
rental and sales companies.
Selling, general and administrative expenses of $108.8 million in 1999
increased by 5.8% from $102.8 million in 1998. The increase was primarily due to
an increase in sales promotion expenses resulting from the growth of industrial
and equipment rental operations.
Interest expense of $77.2 million in 1999 increased 12.4% from $68.6
million in 1998, primarily due to higher average debt levels. This increase was
partly offset by a lower weighted-average interest rate in 1999.
The tax provision of $33.3 million in 1999 increased 31.4% from $25.3
million in 1998, primarily due to the higher income before income taxes in 1999.
The effective tax rate in 1999 is 40.6% as compared to 41.7% in 1998. See Note 4
to the Notes to the Company's consolidated financial statements.
Net Income
The Company achieved record first quarter net income of $48.8 million in
1999, or $.45 per share on a diluted basis, representing an increase of 37.7%
from $35.4 million, or $.33 per share on a diluted basis, in the first quarter
of 1998. This increase was primarily due to higher revenues and improved profit
margins in worldwide car rental operations and the net effect of other
contributing factors noted 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 three months ended
March 31, 1999, the Company's expenditures for revenue earning equipment were
$2.7 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. In the
first quarter, the Company expended $76.2 million for new businesses acquired
and assumed $7.6 million of related debt. For the three months ended March 31,
1999, the Company's capital investments for property and non-revenue earning
equipment were $77.8 million.
12
<PAGE> 13
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
To finance its domestic requirements, the Company maintains an active
commercial paper program. The Company is also active in the 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, 1999 was $3.1 billion with maturities ranging from 1999 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, 1999, the total debt for the foreign operations
was $880 million, of which $877 million was short-term (original maturity of
less than one year) and $3 million was long-term. At March 31, 1999, the total
amounts outstanding (in millions of U.S. dollars) under the Canadian, Australian
and Irish commercial paper programs were $230, $84 and $68, respectively.
At March 31, 1999, the Company had committed credit facilities totaling
$2.7 billion. Of this amount, $2.1 billion is represented by a combination of
multi-year and 364-day global committed credit facilities provided by 31
relationship banks. In addition to direct borrowings by the Company, these
facilities allow any subsidiary of the Company to borrow on the basis of a
guarantee by the Company. Effective July 1, 1998, the multi-year facilities
totaling $1,196 million were renegotiated. Currently, $63 million expires on
June 30, 2002 and $1,133 million expires on June 30, 2003. The 364-day
facilities totaling $857 million expire on June 23, 1999. The multi-year
facilities that expire in 2003 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 facilities 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,
2000. 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, 1999, 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
15, 1999.
On April 26, 1999, 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, 1999
to shareholders of record as of May 14, 1999.
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 expense, including rent, insurance, and administrative
overhead, remains fixed and cannot be adjusted for seasonal demand. In certain
geographic markets, the impact of seasonality has been reduced by emphasizing
leisure or business travel in the off-seasons.
Year 2000
The Company initiated a comprehensive year 2000 date conversion project
plan in early 1997. The Company's year 2000 effort includes worldwide
computer-based applications, operating software, computer hardware,
telecommunications systems, external data exchanges, electronic equipment and
facilities systems.
13
<PAGE> 14
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
State of Readiness: The plan is structured into five primary phases:
inventory, assessment, correction, testing and implementation. The inventory is
an investigation of all information technology ("IT") and non-IT hardware and
software components used by the Company. The assessment is an analysis of each
component to determine date sensitivity to the year 2000. The correction phase
is the effort to fix, replace, upgrade or eliminate non-compliant hardware and
software. The testing phase involves verifying the results of the correction
effort, and implementation is the effort to deploy the fixes into a production
environment. The Company has completed the inventory and assessment of all
critical components and is 90% complete with correction of known non-compliant
components, 85% complete with testing and 65% complete with implementation. The
Company expects its year 2000 date conversion project to be completed on a
timely basis. Project completion is planned for the middle of 1999 with ongoing
validation of systems integration scheduled through the remainder of the year.
The Company has initiated ongoing communications with its significant
vendors and service providers to determine the extent to which the Company is
vulnerable to those third-parties' failures to remediate their own year 2000
issue. To date, none of the Company's vendors or service providers has disclosed
that they anticipate a business interruption. There can be no assurance that the
systems of other companies on which the Company's systems rely will be converted
in a timely manner or that any such failure to convert by another company would
not have a material adverse effect on the Company.
Costs to Address Year 2000 Issues: The total estimated cost of the
conversion is $21 million to $23 million. Software remediation is being expensed
as incurred. Approximately $2.6 million of the cost of conversion was incurred
in the first quarter of 1999. The Company has expended approximately $14.6
million from inception through March 31, 1999. The costs are being funded
through operating cash flows. These costs represent 9% of the Company's annual
information technology budget. The Company has contracted with outside vendors
to perform remediations. In addition, the Company has invested in technologies
that allow concurrent application development. As a result, the Company has not
deferred any significant information technology projects to address the year
2000 issue.
The Risks: The worst case scenarios for the Company with respect to year
2000 problems involve: (1) a temporary disruption due to service providers'
system failures or localized power failures which could result in longer
transaction times and problems with reservations; (2) an interruption in airline
operations affecting the level of airport rental activity; or (3) a temporary
inability to obtain rental vehicles or equipment to meet rental demand due to
the failure of one or more suppliers which could be mitigated by retaining
vehicles or equipment longer than planned. The occurrence of any of these events
could have a material impact on the Company's business and results of
operations.
Contingency Plans: Contingency measures are included within the structure
of the year 2000 project. Such plans include the identification of preemptive
strategies and the development and distribution of business continuity
procedures in the event computer systems, local energy sources or
telecommunications systems are temporarily not available.
14
<PAGE> 15
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, 1999, 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, 1999 and 1998.
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 March 24, 1999 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 February 5, 1999 reporting
the issuance of a press release with respect to the declaration
of a quarterly dividend.
The Company filed a Form 8-K dated January 21, 1999 reporting
the issuance of a press release with respect to its fourth
quarter and full year 1998 earnings.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE HERTZ CORPORATION
(Registrant)
Date: May 12, 1999 By: /s/ Paul J. Siracusa
--------------------------------
Paul J. Siracusa
Executive Vice President and
Chief Financial Officer
(principal financial officer and
duly authorized officer)
15
<PAGE> 16
EXHIBIT INDEX
Exhibit
No. Description
--- -----------
12 Computation of Ratio of Earnings
to Fixed Charges for the three months
ended March 31, 1999 and 1998.
27 Financial Data Schedule for the
three months ended March 31, 1999.
16
<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,
---------------------
1999 1998
-------- --------
<S> <C> <C>
Income before income taxes $ 82,039 $ 60,726
Interest expense 79,654 71,302
Portion of rent estimated to represent
the interest factor 20,622 18,374
-------- --------
Earnings before income taxes and fixed charges $182,315 $150,402
======== ========
Interest expense (including capitalized interest) $ 79,866 $ 71,487
Portion of rent estimated to represent
the interest factor 20,622 18,374
-------- --------
Fixed charges $100,488 $ 89,861
======== ========
Ratio of earnings to fixed charges 1.8 1.7
======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 6,586
<SECURITIES> 187,530
<RECEIVABLES> 822,911
<ALLOWANCES> (17,433)
<INVENTORY> 48,195
<CURRENT-ASSETS> 0
<PP&E> 8,530,687
<DEPRECIATION> (1,486,369)
<TOTAL-ASSETS> 9,292,986
<CURRENT-LIABILITIES> 0
<BONDS> 6,069,145
0
0
<COMMON> 1,083
<OTHER-SE> 1,417,325
<TOTAL-LIABILITY-AND-EQUITY> 9,292,986
<SALES> 0
<TOTAL-REVENUES> 1,032,955
<CGS> 0
<TOTAL-COSTS> 871,859
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,907
<INTEREST-EXPENSE> 77,150
<INCOME-PRETAX> 82,039
<INCOME-TAX> 33,278
<INCOME-CONTINUING> 48,761
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 48,761
<EPS-PRIMARY> .45
<EPS-DILUTED> .45
</TABLE>
