<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 SEPTEMBER 30, 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)
<TABLE>
<S> <C>
DELAWARE 13-1938568
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
225 BRAE BOULEVARD, PARK RIDGE, NEW JERSEY 07656-0713
(Address of principal executive offices)
(Zip Code)
(201) 307-2000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal
year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days
Yes X No
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of September 30, 1999: Common Stock, $0.01 par value - Class A,
40,612,885 shares and Class B, 67,310,167 shares.
Page 1 of 24 pages
The Exhibit Index is on page 21
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS)
UNAUDITED
ASSETS
<TABLE>
<CAPTION>
Sept. 30, Dec. 31,
1999 1998
------------ ------------
<S> <C> <C>
Cash and equivalents $ 202,987 $ 188,466
Receivables, less allowance for
doubtful accounts of $18,973 and $16,040 988,011 893,440
Due from affiliates 244,023 430,169
Inventories, at lower of cost or market 56,910 39,502
Prepaid expenses and other assets 115,992 85,823
Revenue earning equipment, at cost:
Cars 5,904,735 4,980,516
Less accumulated depreciation (560,225) (508,008)
Industrial and construction equipment 1,994,609 1,653,941
Less accumulated depreciation (421,718) (344,416)
------------ ------------
Total revenue earning equipment 6,917,401 5,782,033
------------ ------------
Property and equipment, at cost:
Land, buildings and leasehold improvements 777,054 692,926
Service equipment 756,611 662,141
------------ ------------
1,533,665 1,355,067
Less accumulated depreciation (656,698) (623,259)
------------ ------------
Total property and equipment 876,967 731,808
------------ ------------
Franchises, concessions, contract costs and leaseholds,
net of amortization 13,436 13,107
Cost in excess of net assets of purchased
businesses, net of amortization (Note 3) 743,646 708,210
------------ ------------
Total assets $ 10,159,373 $ 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>
Sept. 30, Dec. 31,
1999 1998
------------ ------------
<S> <C> <C>
Accounts payable $ 618,975 $ 510,441
Accrued liabilities 626,951 596,575
Accrued taxes 167,027 113,217
Debt (Note 6) 6,566,201 5,759,783
Public liability and property damage 300,314 307,219
Deferred taxes on income 243,200 191,500
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 982,986 982,564
Unamortized restricted stock grants (4,550) (7,845)
Retained earnings 711,605 452,110
Accumulated other comprehensive income (Note 9) (37,296) (20,776)
Treasury stock, at cost, 343,973 shares (17,123) (13,313)
------------ ------------
Total stockholders' equity 1,636,705 1,393,823
------------ ------------
Total liabilities and stockholders' equity $ 10,159,373 $ 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 September 30,
----------------------------
1999 1998
---------- ----------
<S> <C> <C>
Revenues:
Car rental $1,071,683 $1,003,963
Industrial and construction equipment rental 233,013 189,480
Car leasing 10,125 9,433
Franchise fees and other revenue 29,987 22,269
---------- ----------
Total revenues 1,344,808 1,225,145
---------- ----------
Expenses:
Direct operating 564,976 520,418
Depreciation of revenue earning equipment (Note 5) 336,773 304,453
Selling, general and administrative 116,650 114,062
Interest, net of interest income of $3,311 and $2,909 93,714 85,894
---------- ----------
Total expenses 1,112,113 1,024,827
---------- ----------
Income before income taxes 232,695 200,318
Provision for taxes on income (Note 4) 93,659 81,640
---------- ----------
Net income $ 139,036 $ 118,678
========== ==========
Earnings per share (Note 2):
Basic $ 1.29 $ 1.10
========== ==========
Diluted $ 1.28 $ 1.09
========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
4
<PAGE> 5
THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS OF DOLLARS)
UNAUDITED
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
----------------------------
1999 1998
---------- ----------
<S> <C> <C>
Revenues:
Car rental $2,828,261 $2,652,624
Industrial and construction equipment rental 609,578 430,243
Car leasing 29,274 27,835
Franchise fees and other revenue 78,039 61,596
---------- ----------
Total revenues 3,545,152 3,172,298
---------- ----------
Expenses:
Direct operating 1,571,510 1,432,633
Depreciation of revenue earning equipment (Note 5) 921,634 796,588
Selling, general and administrative 340,134 326,832
Interest, net of interest income of $8,097 and $8,741 250,211 227,910
---------- ----------
Total expenses 3,083,489 2,783,963
---------- ----------
Income before income taxes 461,663 388,335
Provision for taxes on income (Note 4) 185,963 159,193
---------- ----------
Net income $ 275,700 $ 229,142
========== ==========
Earnings per share (Note 2):
Basic $ 2.55 $ 2.12
========== ==========
Diluted $ 2.54 $ 2.11
========== ==========
</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 THOUSANDS OF DOLLARS)
UNAUDITED
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
-------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 275,700 $ 229,142
Non-cash expenses:
Depreciation of revenue earning equipment 921,634 796,588
Depreciation of property and equipment 81,715 84,589
Amortization of intangibles 20,339 19,530
Amortization of restricted stock grants 3,294 3,303
Provision for public liability and property damage 95,393 85,380
Provision for losses for doubtful accounts 9,785 2,449
Tax benefit from exercise of stock options 6,103 1,529
Deferred income taxes 51,700 23,200
Revenue earning equipment expenditures (6,684,599) (6,417,217)
Proceeds from sales of revenue earning equipment 4,659,855 4,561,997
Changes in assets and liabilities:
Receivables (125,520) (40,855)
Due from affiliates 186,146 199,971
Inventories and prepaid expenses and other assets (39,689) (512)
Accounts payable 99,793 24,074
Accrued liabilities 36,461 56,554
Accrued taxes 52,434 49,088
Payments of public liability and property damage
claims and expenses (102,631) (87,228)
----------- -----------
Net cash used in operating activities (452,087) (408,418)
----------- -----------
</TABLE>
The accompanying notes are an integral part of this statement.
6
<PAGE> 7
THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSAND OF DOLLARS)
UNAUDITED
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
-------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from investing activities:
Property and equipment expenditures $ (257,843) $ (190,213)
Proceeds from sales of property and equipment 24,468 30,844
Available-for-sale securities:
Purchases (3,136) (2,304)
Sales 2,694 2,049
Sale of operations, net of cash -- 4,341
Acquisition of new businesses, net of cash (104,066) (315,651)
----------- -----------
Net cash used in investing activities (337,883) (470,934)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 1,046,376 449,453
Repayment of long-term debt (108,726) (373,920)
Short-term borrowings:
Proceeds 1,698,915 1,621,172
Repayments (1,706,303) (1,083,810)
Ninety-day term or less, net (98,620) 379,694
Cash dividends paid on common stock (16,205) (16,218)
Purchases of treasury stock (25,058) (13,477)
Proceeds from sale of stock under benefit plans 15,568 3,046
----------- -----------
Net cash provided by financing activities 805,947 965,940
----------- -----------
Effect of foreign exchange rate changes on cash (1,456) 268
----------- -----------
Net increase in cash and equivalents during the period 14,521 86,856
Cash and equivalents at beginning of year 188,466 152,620
----------- -----------
Cash and equivalents at end of period $ 202,987 $ 239,476
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of amounts capitalized) $ 264,343 $ 240,694
Income taxes 106,748 103,868
</TABLE>
In connection with acquisitions made in 1999 and 1998, liabilities assumed
were $53 million and $117 million, respectively.
The accompanying notes are an integral part of this statement.
7
<PAGE> 8
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 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.
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. SOP
98-1 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 financial position, results of operations or
cash flows.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
current year presentation.
RECENT PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") 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. In July 1999, the
FASB delayed the effective date to fiscal years beginning after June 15, 2000.
The Company will adopt SFAS No. 133 beginning January 1, 2001. The adoption of
SFAS No. 133 is not expected to have a material effect on the Company's
financial position, 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 Nine Months
Ended September 30, Ended September 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Basic earnings per share:
Net income $ 139,036 $ 118,678 $ 275,700 $ 229,142
------------ ------------ ------------ ------------
Average common shares
outstanding 108,032,375 108,070,628 108,005,161 108,119,193
------------ ------------ ------------ ------------
Basic earnings per share $ 1.29 $ 1.10 $ 2.55 $ 2.12
============ ============ ============ ============
Diluted earnings per share:
Net income $ 139,036 $ 118,678 $ 275,700 $ 229,142
------------ ------------ ------------ ------------
Average common shares
outstanding 108,032,375 108,070,628 108,005,161 108,119,193
Dilutive effect of stock options 518,789 486,581 680,444 478,065
------------ ------------ ------------ ------------
Average diluted common shares
outstanding 108,551,164 108,557,209 108,685,605 108,597,258
------------ ------------ ------------ ------------
Diluted earnings per share $ 1.28 $ 1.09 $ 2.54 $ 2.11
============ ============ ============ ============
</TABLE>
For the three months ended September 30, 1999, and the three and nine
months ended September 30, 1998, options to purchase 826,936 shares and
1,008,100 shares, respectively, of common stock were outstanding, but were not
included in the computation of diluted earnings per share because the option
exercise price was greater than the average market price of the common shares.
8
<PAGE> 9
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - ACQUISITIONS
During the nine months ended September 30, 1999, the Company acquired
seven North American and two European equipment rental and sales companies. The
Company also acquired five European car and truck rental companies. The
aggregate purchase price of the acquisitions was $104.1 million, net of cash
acquired, plus the assumption of $17.3 million of debt. The aggregate
consideration exceeded the fair value of the net assets acquired by
approximately $55.1 million, which has been recognized as goodwill and is being
amortized over periods from 15 to 40 years. The acquisitions were accounted for
as purchases, and the results of operations have been included 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%, primarily 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>
Unaudited
Three Months Ended
September 30,
---------------------------
1999 1998
--------- ---------
<S> <C> <C>
Depreciation of revenue earning equipment $ 343,056 $ 299,087
Adjustment of depreciation upon disposal of the equipment (11,048) 1,733
Rents paid for vehicles leased 4,765 3,633
--------- ---------
Total $ 336,773 $ 304,453
========= =========
</TABLE>
<TABLE>
<CAPTION>
Unaudited
Nine Months Ended
September 30,
---------------------------
1999 1998
--------- ---------
<S> <C> <C>
Depreciation of revenue earning equipment $ 930,525 $ 779,433
Adjustment of depreciation upon disposal of the equipment (21,832) 6,807
Rents paid for vehicles leased 12,941 10,348
--------- ---------
Total $ 921,634 $ 796,588
========= =========
</TABLE>
The adjustment of depreciation upon disposal of revenue earning equipment
for the three months ended September 30, 1999 and 1998 included a net gain of
$3.2 million and $.3 million, respectively, on the sale of equipment in the
industrial and construction equipment rental operations; and a net gain of $7.8
million and a net loss of $2.0 million, respectively, in the car rental and car
leasing operations.
The adjustment of depreciation upon disposal of revenue earning equipment
for the nine months ended September 30, 1999 and 1998 included a net gain of
$7.7 million and a net loss of $1.1 million, respectively, on the sale of
equipment in the industrial and construction equipment rental operations; and a
net gain of $14.1 million and a net loss of $5.7 million, respectively, in the
car rental and car leasing operations.
During the nine months ended September 30, 1999, the Company purchased
Ford vehicles at a cost of approximately $3.4 billion and sold Ford vehicles to
Ford or its affiliates under various repurchase programs for approximately $2.1
billion.
9
<PAGE> 10
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - DEBT
Debt at September 30, 1999 and December 31, 1998 consisted of the
following (in thousands of dollars):
<TABLE>
<CAPTION>
Sept. 30, Dec. 31,
1999 1998
--------- ----------
<S> <C> <C>
Notes payable, including commercial
paper, average interest rate: 5.4% $1,537,781 $2,151,792
Promissory notes, average interest rate:
1999, 6.9%; 1998, 7.0% (effective average interest rate 7.0%); net of
unamortized discount: 1999, $9,737;
1998, $4,157; due 1999 to 2028 3,390,262 2,445,843
Junior subordinated promissory notes,
average interest rate 6.9%; net of
unamortized discount: 1999, $126;
1998, $158; due 2000 to 2003 399,874 399,842
Subsidiaries' short-term debt, in dollars and foreign
currencies, including commercial paper in millions (1999, $581.3; 1998,
$206.2); and other borrowings; average interest rate:
1999, 3.8%; 1998, 4.8% 1,238,284 762,306
--------- ----------
Total $6,566,201 $5,759,783
========= =========
</TABLE>
The aggregate amounts of maturities of debt for the twelve-month periods
following September 30, 1999 are as follows (in millions): 2000, $3,364.8
(including $2,734.3 of commercial paper and short-term borrowings); 2001,
$402.0; 2002, $401.4; 2003, $550.2; 2004, $250.3; after 2004, $1,597.5.
At September 30, 1999, approximately $946 million of the Company's
consolidated stockholders' equity was free of dividend limitations pursuant to
its existing debt agreements.
At September 30, 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 September 30, 1999 of the swap agreements is to give the Company an
overall effective weighted-average rate on debt of 6.04%, with 40% of debt
effectively subject to variable interest rates, compared to a weighted-average
interest rate on debt of 6.02%, with 42% of debt subject to variable interest
rates when not considering the swap agreements. At September 30, 1999, these
agreements expressed in notional amounts aggregated $98.6 million. Notional
amounts are not reflective of the Company's obligations under these agreements
because the Company is only obligated to pay the net amount of interest rate
differential between the fixed and variable rates specified in the contracts.
The Company's exposure to any credit loss in the event of non-performance by the
counterparties is further mitigated by the fact that all of these financial
instruments are with significant financial institutions that are rated "A" or
better by the major credit rating agencies. At September 30, 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 receivable of $.4 million. The notional
principal $98.6 million matures as follows: $14.8, $30.0, $29.2, $23.1 and $1.5
in 1999, 2000, 2001, 2002 and 2003, respectively.
10
<PAGE> 11
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 1,116,700 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 September 30,
1999, 4,247,054 shares were available for awards under the Plan.
On May 21, 1999, the shareholders approved The Hertz Corporation
Employee Stock Purchase Plan (the "ESPP"). The ESPP became effective on July 1,
1999. The ESPP allows eligible employees an opportunity to purchase shares of
Class A Common Stock through accumulated payroll deductions at 85% of the
closing price at the end of each quarterly offering period.
During the nine months ended September 30, 1999, the Company acquired
490,800 shares of its Class A Common Stock for requirements under the above
Plans.
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
nine months ended September 30, 1999 and 1998 are summarized below (in millions
of dollars). Corporate and other includes general corporate expenses,
principally amortization of certain 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 September 30,
-------------------------------------------------------
Income (Loss)
Revenues Before Income Taxes
------------------------ -----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Car rental and leasing $1,097.4 $1,026.7 $ 207.7 $ 181.1
Industrial and construction equipment rental 233.1 189.5 32.5 28.0
Corporate and other 14.3 8.9 (7.5) (8.8)
-------- -------- -------- --------
Consolidated total $1,344.8 $1,225.1 $ 232.7 $ 200.3
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------------------------------
Income (Loss)
Revenues Before Income Taxes
------------------------ -----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Car rental and leasing $2,897.4 $2,718.6 $ 423.7 $ 358.7
Industrial and construction equipment rental 609.9 430.4 57.0 47.7
Corporate and other 37.9 23.3 (19.0) (18.1)
-------- -------- -------- --------
Consolidated total $3,545.2 $3,172.3 $ 461.7 $ 388.3
======== ======== ======== ========
</TABLE>
11
<PAGE> 12
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - COMPREHENSIVE INCOME
Accumulated other comprehensive income includes an accumulated
translation loss (in thousands of dollars) of $37,227 and $20,906 at September
30, 1999 and December 31, 1998, respectively. Comprehensive income for the three
months and nine months ended September 30, 1999 and 1998 was as follows (in
thousands of dollars):
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------------
1999 1998
-------- --------
<S> <C> <C>
Net income $139,036 $118,678
-------- --------
Other comprehensive income, net of tax:
Foreign currency translation adjustments 8,406 14,153
Unrealized gains on available-for-sale securities 34 148
-------- --------
Other comprehensive income 8,440 14,301
-------- --------
Comprehensive income $147,476 $132,979
======== ========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------
1999 1998
--------- ---------
<S> <C> <C>
Net income $ 275,700 $ 229,142
--------- ---------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments (16,321) 8,958
Unrealized (losses) gains on available-for-sale securities (199) 166
--------- ---------
Other comprehensive (loss) income (16,520) 9,124
--------- ---------
Comprehensive income $ 259,180 $ 238,266
========= =========
</TABLE>
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1998
SUMMARY
The following table sets forth for the three months ended September 30,
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
September 30,
---------------------
1999 1998
------ ------
<S> <C> <C>
Revenues:
Car rental 79.7% 81.9%
Industrial and construction equipment rental 17.3 15.5
Car leasing .8 .8
Franchise fees and other revenue 2.2 1.8
------ ------
100.0 100.0
------ ------
Expenses:
Direct operating 42.0 42.5
Depreciation of revenue earning equipment 25.0 24.8
Selling, general and administrative 8.7 9.3
Interest, net of interest income 7.0 7.0
------ ------
82.7 83.6
------ ------
Income before income taxes 17.3 16.4
Provision for taxes on income 7.0 6.7
------ ------
Net income 10.3% 9.7%
====== ======
</TABLE>
The following table sets forth certain selected operating data of the
Company for the three months ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1999 1998
---------- ----------
<S> <C> <C>
Car rental and other operations:
Average number of owned cars operated
during period 367,000 335,000
Number of transactions of owned car
rental operations during period 6,287,000 5,801,000
Average revenue per transaction of owned
car rental operations during period (in whole dollars) $ 170.47 $ 173.07
Equipment rental operations:
Average cost of rental equipment operated during
period (in millions) $ 1,963 $ 1,480
</TABLE>
REVENUES
The Company achieved record revenues of $1,344.8 million in the third
quarter of 1999, which increased by 9.8% from $1,225.1 million in the third
quarter of 1998. Revenues from car rental operations of $1,071.7 million in the
third quarter of 1999 increased by $67.7 million, or 6.7% from $1,004.0 million
in the third quarter of 1998. The increase was primarily the result of a
worldwide increase in transactions of 8.4% that contributed $85.1 million in
increased revenue. This increase was partly offset by a decrease in pricing
worldwide and the effects of foreign currency translation.
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Revenues from industrial and construction equipment rental of $233.0
million in the third quarter of 1999 increased by 23.0% from $189.5 million in
the third quarter of 1998. Of this $43.5 million increase, approximately $26.8
million was due to an increase in volume resulting from the inclusion of 17
acquired businesses worldwide.
Revenues from all other sources of $40.1 million in the third quarter of
1999 increased by 26.5% from $31.7 million in the third quarter of 1998,
primarily due to an increase in telecommunications and franchise revenue.
EXPENSES
Total expenses of $1,112.1 million in 1999 increased by 8.5% from
$1,024.8 million in 1998; however, total expenses as a percentage of revenues
decreased to 82.7% in 1999 from 83.6% in 1998.
Direct operating expenses of $565.0 million in 1999 increased by 8.6%
from $520.4 million in 1998. The increase was primarily the result of the
expansion of the industrial and construction equipment rental business and
higher wages and benefits.
Depreciation of revenue earning equipment for the car rental and car
leasing operations of $275.1 million in 1999 increased by 9.6% from $250.9
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 $61.7 million in 1999 increased by
15.1% from $53.6 million in 1998, primarily due to acquisitions of equipment
rental and sales companies. These increases were partly offset by increases in
the net proceeds received in excess of book value on the disposal of vehicles
and equipment.
Selling, general and administrative expenses of $116.7 million in 1999
increased by 2.3% from $114.1 million in 1998. This increase in 1999 was
primarily due to an increase in administrative and sales promotion expenses
mainly resulting from the growth of industrial and construction equipment rental
operations.
Interest expense of $93.7 million in 1999 increased 9.1% from $85.9
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 $93.7 million in 1999 increased 14.7% from $81.6
million in 1998, primarily due to the higher income before income taxes in 1999.
The effective tax rate in 1999 was 40.2% as compared to 40.8% in 1998. See Note
4 to the Notes to the Company's consolidated financial statements.
NET INCOME
The Company achieved record net income of $139.0 million in the third
quarter of 1999, or $1.28 per share on a diluted basis, representing an increase
of 17.2% from $118.7 million, or $1.09 per share on a diluted basis, in the
third quarter of 1998. This increase was primarily due to higher worldwide
revenues, improved profit margin and the net effect of the other contributing
factors noted above.
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1998
SUMMARY
The following table sets forth for the nine months ended September 30,
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
Nine Months Ended
September 30,
-------------------
1999 1998
----- -----
<S> <C> <C>
Revenues:
Car rental 79.8% 83.6%
Industrial and construction equipment rental 17.2 13.6
Car leasing .8 .9
Franchise fees and other revenue 2.2 1.9
----- -----
100.0 100.0
----- -----
Expenses:
Direct operating 44.3 45.2
Depreciation of revenue earning equipment 26.0 25.1
Selling, general and administrative 9.6 10.3
Interest, net of interest income 7.1 7.2
----- -----
87.0 87.8
----- -----
Income before income taxes 13.0 12.2
Provision for taxes on income 5.2 5.0
----- -----
Net income 7.8% 7.2%
===== =====
</TABLE>
The following table sets forth certain selected operating data of the
Company for the nine months ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Car rental and other operations:
Average number of owned cars operated
during period 332,000 305,000
Number of transactions of owned car
rental operations during period 17,634,000 16,496,000
Average revenue per transaction of owned
car rental operations during period (in whole dollars) $ 160.39 $ 160.80
Equipment rental operations:
Average cost of rental equipment operated
during period (in millions) $ 1,813 $ 1,268
</TABLE>
REVENUES
The Company achieved record revenues of $3,545.2 million in the first
nine months of 1999, which increased by 11.8% from $3,172.3 million in the first
nine months of 1998. Revenues from car rental operations of $2,828.3 million in
the first nine months of 1999 increased by $175.7 million, or 6.6% from $2,652.6
million in the first nine months of 1998. The increase was primarily the result
of a worldwide increase in transactions of 6.9% that contributed $184.2 million
in increased revenue. This increase was partly offset by a decrease in
international pricing and the effects of foreign currency translation.
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Revenues from industrial and construction equipment rental of $609.6
million in the first nine months of 1999 increased by 41.7% from $430.2 million
in the first nine months of 1998. Of this $179.4 million increase, approximately
$117.2 million was due to an increase in volume resulting from the inclusion of
22 acquired businesses worldwide.
Revenues from all other sources of $107.3 million in the first nine
months of 1999 increased by 20.0% from $89.4 million in the first nine months of
1998, primarily due to an increase in telecommunications and franchise revenue.
EXPENSES
Total expenses of $3,083.5 million in 1999 increased by 10.8% from
$2,784.0 million in 1998; however, total expenses as a percentage of revenues
decreased to 87.0% in 1999 from 87.8% in 1998.
Direct operating expenses of $1,571.5 million in 1999 increased by 9.7%
from $1,432.6 million in 1998. The increase was primarily the result of the
expansion of the industrial and construction equipment rental business and
higher wages and benefits.
Depreciation of revenue earning equipment for the car rental and car
leasing operations of $772.6 million in 1999 increased by 12.5% from $686.7
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 $149.0 million in 1999 increased by
35.6% from $109.9 million in 1998, primarily due to acquisitions of equipment
rental and sales companies. These increases were partly offset by increases in
the net proceeds received in excess of book value on the disposal of vehicles
and equipment.
Selling, general and administrative expenses of $340.1 million in 1999
increased by 4.1% from $326.8 million in 1998. The increase was primarily due to
an increase in administrative and sales promotion expenses mainly resulting from
the growth of industrial and construction equipment rental operations.
Interest expense of $250.2 million in 1999 increased 9.8% from $227.9
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 $186.0 million in 1999 increased 16.8% from $159.2
million in 1998, primarily due to the higher income before income taxes in 1999.
The effective tax rate in 1999 was 40.3% as compared to 41.0% in 1998. See Note
4 to the Notes to the Company's consolidated financial statements.
NET INCOME
The Company achieved record net income of $275.7 million in the first
nine months of 1999, or $2.54 per share on a diluted basis, representing an
increase of 20.3% from $229.1 million, or $2.11 per share on a diluted basis, in
the first nine months of 1998. This increase was primarily due to higher
worldwide revenues, improved profit margin 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 nine months ended
September 30, 1999, the Company's expenditures for revenue earning equipment
were $6.7 billion (partially offset by proceeds from the sale of such equipment
of $4.7 billion). These assets are purchased by the Company in accordance with
the terms of programs negotiated with automobile and equipment manufacturers.
For the nine months ended September 30, 1999, the Company's capital investments
for property and non-revenue earning equipment were $258 million. In 1999, the
Company expended $104.1 million, net of cash acquired, for new businesses and
assumed $17.3 million of related debt.
16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
To finance its domestic operations, the Company maintains an active
commercial paper program. The Company is also active in the U.S. domestic
medium-term and long-term debt markets. As the need arises, it is the Company's
intention to issue either unsecured senior, senior subordinated or junior
subordinated debt securities on terms to be determined at the time the
securities are offered for sale. The total amount of medium-term and long-term
debt outstanding as of September 30, 1999 was $3.8 billion with maturities
ranging from 1999 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 Canada, Ireland and Australia. The
Company guarantees only the borrowings of its subsidiaries in Canada, Ireland
and Australia, which consist principally of commercial paper and short-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 September 30, 1999, the total
debt for the foreign operations was $1,231 million, of which $1,226 million was
short-term (original maturity of less than one year) and $5 million was
long-term. At September 30, 1999, the total amounts outstanding (in millions of
U.S. dollars) under the Canadian, Irish and Australian commercial paper programs
were $307, $163 and $112, respectively.
At September 30, 1999, the Company had committed credit facilities
totaling $3.2 billion. Of this amount, $2.2 billion is represented by a
combination of multi-year and 364-day global committed credit facilities
provided by 30 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, 1999, the multi-year
facilities totaling $1,128 million were renegotiated. Currently, $63 million
expires on June 30, 2002, $137 million expires on June 30, 2003 and $928 million
expires on June 30, 2004. The 364-day facilities totaling $1,038 million expire
on June 21, 2000. The multi-year facilities that expire in 2004 have an
evergreen feature which provides for the automatic extension of the expiration
date one year forward unless timely notice is provided by the bank. Under the
terms of 364-day facilities totaling $963 million, the Company is permitted 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,
2001. 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 June 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 May 14,
1999.
On September 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
August 16, 1999.
On October 19, 1999 the Board of Directors declared a quarterly dividend
of $.05 per share on its Class A and Class B Common Stock, payable on December
10, 1999 to shareholders of record as of November 15, 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 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.
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.
17
<PAGE> 18
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 completed all five phases of the plan and the
remediation project was completed as planned on June 30, 1999. The Company
continues to conduct validation of the compliance levels of internal systems,
purchased products and business partners, as well as implementing contingency
plans.
The Company has established 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 approximately $21 million. Software remediation is being expensed
as incurred. Approximately $6.6 million of the cost of conversion was incurred
during the first nine months of 1999. The Company has expended approximately
$19.6 million from inception through September 30, 1999. The remaining costs are
expected to be incurred for contingency planning and assessing compliance of
newly acquired companies. 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 did not defer 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.
18
<PAGE> 19
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
September 30, 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 nine months ended September 30, 1999 and 1998.
27 Financial Data Schedule for the nine months ended
September 30, 1999.
(b) Reports on Form 8-K:
The Company filed a Form 8-K dated July 16, 1999 reporting
the issuance of a press release with respect to its second
quarter 1999 earnings.
The Company filed a Form 8-K dated July 23, 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 July 30, 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. 333-80545)
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 August 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. 333-80545)
filed by the Company with the Securities and Exchange
Commission covering Senior Debt Securities issuable under an
Indenture dated as of December 1, 1994.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE HERTZ CORPORATION
(Registrant)
Date: November 10, 1999 By: /s/ Paul J. Siracusa
--------------------------------
Paul J. Siracusa
Executive Vice President and
Chief Financial Officer
(principal financial officer and
duly authorized officer)
19
<PAGE> 20
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
EXHIBITS
FILED WITH
FORM 10-Q
FOR THE QUARTER ENDED
SEPTEMBER 30, 1999
UNDER
THE SECURITIES EXCHANGE ACT OF 1934
---------------------------
THE HERTZ CORPORATION
COMMISSION FILE NUMBER 1-7541
20
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description Page No.
- ------- ----------- --------
<S> <C> <C>
12 Computation of Ratio of Earnings 22
to Fixed Charges for the nine months
ended September 30, 1999 and 1998.
27 Financial Data Schedule for the 23-24
nine months ended September 30, 1999.
</TABLE>
21
<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>
Nine Months
Ended September 30,
------------------------
1999 1998
-------- --------
<S> <C> <C>
Income before income taxes $461,663 $388,335
Interest expense 258,308 236,651
Portion of rent estimated to represent the
interest factor 65,821 58,168
-------- --------
Earnings before income taxes and fixed charges $785,792 $683,154
======== ========
Interest expense (including capitalized interest) $259,587 $237,522
Portion of rent estimated to represent the
interest factor 65,821 58,168
-------- --------
Fixed charges $325,408 $295,690
======== ========
Ratio of earnings to fixed charges 2.4 2.3
======== ========
</TABLE>
22
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 20,729
<SECURITIES> 182,258
<RECEIVABLES> 1,006,984
<ALLOWANCES> (18,973)
<INVENTORY> 56,910
<CURRENT-ASSETS> 0
<PP&E> 9,433,009
<DEPRECIATION> (1,638,641)
<TOTAL-ASSETS> 10,159,373
<CURRENT-LIABILITIES> 0
<BONDS> 6,566,201
0
0
<COMMON> 1,083
<OTHER-SE> 1,635,622
<TOTAL-LIABILITY-AND-EQUITY> 10,159,373
<SALES> 0
<TOTAL-REVENUES> 3,545,152
<CGS> 0
<TOTAL-COSTS> 2,823,493
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 9,785
<INTEREST-EXPENSE> 250,211
<INCOME-PRETAX> 461,663
<INCOME-TAX> 185,963
<INCOME-CONTINUING> 275,700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 275,700
<EPS-BASIC> 2.55
<EPS-DILUTED> 2.54
</TABLE>
