<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 JUNE 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)
DELAWARE 13-1938568
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
225 BRAE BOULEVARD, PARK RIDGE, NEW JERSEY 07656-0713
(Address of principal executive offices)
(Zip Code)
(201) 307-2000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days Yes X No
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of June 30, 1999: Common Stock, $0.01 par value - Class A,
40,803,819 shares and Class B, 67,310,167 shares.
Page 1 of 25 pages
The Exhibit Index is on page 22
<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>
June 30, Dec. 31,
1999 1998
------------ ------------
<S> <C> <C>
Cash and equivalents $ 180,617 $ 188,466
Receivables, less allowance for
doubtful accounts of $18,561 (1998 - $16,040) 790,024 893,440
Due from affiliates 332,961 430,169
Inventories, at lower of cost or market 50,053 39,502
Prepaid expenses and other assets 103,642 85,823
Revenue earning equipment, at cost:
Cars 6,063,768 4,980,516
Less accumulated depreciation (496,037) (508,008)
Other equipment 1,909,454 1,653,941
Less accumulated depreciation (381,516) (344,416)
------------ ------------
Total revenue earning equipment 7,095,669 5,782,033
------------ ------------
Property and equipment, at cost:
Land, buildings and leasehold improvements 751,565 692,926
Service equipment 719,357 662,141
------------ ------------
1,470,922 1,355,067
Less accumulated depreciation (647,655) (623,259)
------------ ------------
Total property and equipment 823,267 731,808
------------ ------------
Franchises, concessions, contract costs and leaseholds,
net of amortization 11,742 13,107
Cost in excess of net assets of purchased
businesses, net of amortization (Note 3) 735,310 708,210
------------ ------------
Total assets $ 10,123,285 $ 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>
June 30, Dec. 31,
1999 1998
------------ ------------
<S> <C> <C>
Accounts payable $ 701,894 $ 510,441
Accrued liabilities 611,063 596,575
Accrued taxes 112,160 113,217
Debt (Note 6) 6,700,837 5,759,783
Public liability and property damage 292,050 307,219
Deferred taxes on income 202,500 191,500
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 983,814 982,564
Unamortized restricted stock grants (5,648) (7,845)
Retained earnings 577,972 452,110
Accumulated other comprehensive income (Note 9) (45,736) (20,776)
Treasury stock, at cost, 153,039 shares (8,704) (13,313)
------------ ------------
Total stockholders' equity 1,502,781 1,393,823
------------ ------------
Total liabilities and stockholders' equity $ 10,123,285 $ 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 June 30,
1999 1998
---------- ----------
Revenues:
<S> <C> <C>
Car rental $ 929,325 $ 883,283
Industrial and construction equipment rental 201,032 134,195
Car leasing 9,963 9,281
Franchise fees and other revenue 27,069 21,598
---------- ----------
Total revenues 1,167,389 1,048,357
---------- ----------
Expenses:
Direct operating 518,246 470,914
Depreciation of revenue earning equipment (Note 5) 308,136 266,835
Selling, general and administrative 114,731 109,933
Interest, net of interest income of $2,282 and $3,162 79,347 73,384
---------- ----------
Total expenses 1,020,460 921,066
---------- ----------
Income before income taxes 146,929 127,291
Provision for taxes on income (Note 4) 59,026 52,234
---------- ----------
Net income $ 87,903 $ 75,057
========== ==========
Earnings per share (Note 2):
Basic $ .81 $ .69
========== ==========
Diluted $ .81 $ .69
========== ==========
</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>
Six Months
Ended June 30,
---------------------------
1999 1998
---------- ----------
Revenues:
<S> <C> <C>
Car rental $1,756,578 $1,648,661
Industrial and construction equipment rental 376,565 240,763
Car leasing 19,149 18,402
Franchise fees and other revenue 48,052 39,327
---------- ----------
Total revenues 2,200,344 1,947,153
---------- ----------
Expenses:
Direct operating 1,006,534 912,215
Depreciation of revenue earning equipment (Note 5) 584,861 492,135
Selling, general and administrative 223,484 212,770
Interest, net of interest income of $4,786 and $5,832 156,497 142,016
---------- ----------
Total expenses 1,971,376 1,759,136
---------- ----------
Income before income taxes 228,968 188,017
Provision for taxes on income (Note 4) 92,304 77,553
---------- ----------
Net income $ 136,664 $ 110,464
========== ==========
Earnings per share (Note 2):
Basic $ 1.27 $ 1.02
========== ==========
Diluted $ 1.26 $ 1.02
========== ==========
</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>
Six Months
Ended June 30,
------------------------------
1999 1998
----------- -----------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 136,664 $ 110,464
Non-cash expenses:
Depreciation of revenue earning equipment 584,861 492,135
Depreciation of property and equipment 55,542 48,324
Amortization of intangibles 13,587 13,356
Amortization of restricted stock grants 2,197 2,226
Provision for public liability and property damage 57,590 51,686
Provision for losses for doubtful accounts 6,848 1,002
Deferred income taxes 11,000 22,400
Revenue earning equipment expenditures (5,259,442) (4,769,185)
Proceeds from sales of revenue earning equipment 3,356,882 2,912,691
Changes in assets and liabilities:
Receivables 53,579 122,017
Due from affiliates 97,208 128,491
Inventories and prepaid expenses and other assets (25,522) (18,156)
Accounts payable 194,675 185,850
Accrued liabilities 26,928 42,189
Accrued taxes (187) (13,918)
Payments of public liability and property damage
claims and expenses (73,043) (65,857)
----------- -----------
Net cash used in operating activities (760,633) (734,285)
----------- -----------
</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>
Six Months
Ended June 30,
------------------------------
1999 1998
----------- -----------
Cash flows from investing activities:
<S> <C> <C>
Property and equipment expenditures $ (165,510) $ (111,082)
Proceeds from sales of property and equipment 8,331 16,369
Available-for-sale securities:
Purchases (2,031) (827)
Sales 1,837 979
Sale of operations, net of cash -- 4,341
Acquisition of new businesses, net of cash (79,380) (117,021)
----------- -----------
Net cash used in investing activities (236,753) (207,241)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 549,663 449,216
Repayment of long-term debt (104,992) (356,920)
Short-term borrowings:
Proceeds 957,057 1,081,666
Repayments (998,049) (591,923)
Ninety-day term or less, net 592,986 385,223
Cash dividends paid on common stock (10,802) (10,812)
Purchases of treasury stock (14,502) (7,425)
Exercise of stock options 14,336 911
Other 6,026 522
----------- -----------
Net cash provided by financing activities 991,723 950,458
----------- -----------
Effect of foreign exchange rate changes on cash (2,186) (60)
----------- -----------
Net (decrease) increase in cash and equivalents during the period (7,849) 8,872
Cash and equivalents at beginning of year 188,466 152,620
----------- -----------
Cash and equivalents at end of period $ 180,617 $ 161,492
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of amounts capitalized) $ 173,165 $ 152,578
Income taxes 97,176 77,174
</TABLE>
In connection with acquisitions made in 1999 and 1998, liabilities assumed were
$46 million and $58 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. 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 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 Six Months
Ended June 30, Ended June 30,
------------------------------- -------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
Basic earnings per share:
<S> <C> <C> <C> <C>
Net income $ 87,903 $ 75,057 $ 136,664 $ 110,464
------------ ------------ ------------ ------------
Average common shares
outstanding 108,089,721 108,119,099 107,987,221 108,144,808
------------ ------------ ------------ ------------
Basic earnings per share $ 0.81 $ 0.69 $ 1.27 $ 1.02
============ ============ ============ ============
Diluted earnings per share:
Net income $ 87,903 $ 75,057 $ 136,664 $ 110,464
------------ ------------ ------------ ------------
Average common shares
outstanding 108,089,721 108,119,099 107,987,221 108,144,808
Dilutive effect of stock options 964,824 536,390 744,399 522,656
------------ ------------ ------------ ------------
Average diluted common shares
outstanding 109,054,545 108,655,489 108,731,620 108,667,464
------------ ------------ ------------ ------------
Diluted earnings per share $ 0.81 $ 0.69 $ 1.26 $ 1.02
============ ============ ============ ============
</TABLE>
At June 30, 1998, options to purchase 1,003,600 shares of common stock
were outstanding, but were not included in the computation of diluted earnings
per share because the options exercise price was greater than the average market
price of the common shares.
8
<PAGE> 9
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - ACQUISITIONS
During the six months ended June 30, 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 $79.4 million, net of cash
acquired, plus the assumption of $8.1 million of debt. The aggregate
consideration exceeded the fair value of the net assets acquired by
approximately $50.2 million, which has been recognized as goodwill and is being
amortized over periods from twenty-five to forty years. The acquisitions were
accounted for as purchases, and the results of operations have been included
since their respective dates of acquisition. 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
June 30,
--------------------------
1999 1998
--------- ---------
<S> <C> <C>
Depreciation of revenue earning equipment $ 310,001 $ 260,238
Adjustment of depreciation upon disposal of the equipment (5,948) 3,636
Rents paid for vehicles leased 4,083 2,961
--------- ---------
Total $ 308,136 $ 266,835
========= =========
</TABLE>
<TABLE>
<CAPTION>
Unaudited
Six Months Ended
June 30,
--------------------------
1999 1998
--------- ---------
<S> <C> <C>
Depreciation of revenue earning equipment $ 587,469 $ 480,346
Adjustment of depreciation upon disposal of the equipment (10,784) 5,074
Rents paid for vehicles leased 8,176 6,715
--------- ---------
Total $ 584,861 $ 492,135
========= =========
</TABLE>
The adjustment of depreciation upon disposal of revenue earning equipment
for the three months ended June 30, 1999 and 1998 included a net gain of $2.9
million and a net loss of $1.0 million, respectively, on the sale of equipment
in the industrial and construction equipment rental operations; and a net gain
of $3.0 million and a net loss of $2.6 million, respectively, in the car rental
and car leasing operations.
The adjustment of depreciation upon disposal of revenue earning equipment
for the six months ended June 30, 1999 and 1998 included a net gain of $4.5
million and a net loss of $1.4 million, respectively, on the sale of equipment
in the industrial and construction equipment rental operations; and a net gain
of $6.3 million and a net loss of $3.7 million, respectively, in the car rental
and car leasing operations.
During the six months ended June 30, 1999, the Company purchased Ford
vehicles at a cost of approximately $2.6 billion and sold Ford vehicles to Ford
or its affiliates under various repurchase programs for approximately $1.5
billion.
9
<PAGE> 10
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - DEBT
Debt at June 30, 1999 and December 31, 1998 consisted of the following
(in thousands of dollars):
<TABLE>
<CAPTION>
June 30, Dec. 31,
` 1999 1998
---------- ----------
<S> <C> <C>
Notes payable, including commercial paper, average
interest rate: 1999, 5.1%; 1998, 5.4% $2,320,186 $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, $6,459;
1998, $4,157; due 1999 to 2028 2,893,541 2,445,843
Junior subordinated promissory notes,
average interest rate 6.9%; net of
unamortized discount: 1999, $136;
1998, $158; due 2000 to 2003 399,864 399,842
Subsidiaries' short-term debt, in dollars and foreign
currencies, including commercial paper in millions (1999, $532.9; 1998,
$206.2); and other borrowings; average interest rate:
1999, 4.0%; 1998, 4.8% 1,087,246 762,306
---------- ----------
Total $6,700,837 $5,759,783
========== ==========
</TABLE>
The aggregate amounts of maturities of debt for the twelve-month periods
following June 30, 1999 are as follows (in millions): 2000, $3,849.8 (including
$3,364.4 of commercial paper and short-term borrowings); 2001, $551.0; 2002,
$300.2; 2003, $399.2; 2004, $249.9; after 2004, $1,350.7.
At June 30, 1999, approximately $850 million of the Company's
consolidated stockholders' equity was free of dividend limitations pursuant to
its existing debt agreements.
At June 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 June 30, 1999 of the swap agreements is to give the Company an overall
effective weighted-average rate on debt of 5.80%, with 49% of debt effectively
subject to variable interest rates, compared to a weighted-average interest rate
on debt of 5.78%, with 50% of debt subject to variable interest rates when not
considering the swap agreements. At June 30, 1999, these agreements expressed in
notional amounts aggregated $108.1 million. Notional amounts are not reflective
of the Company's obligations under these agreements because the Company is only
obligated to pay the net amount of interest rate differential between the fixed
and variable rates specified in the contracts. The Company's exposure to any
credit loss in the event of non-performance by the counterparties is further
mitigated by the fact that all of these financial instruments are with
significant financial institutions that are rated "A" or better by the major
credit rating agencies. At June 30, 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 $.4 million. The notional principal $108.1
million matures as follows: $29.6, $28.4, $27.9, $21.1 and $1.1 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 June 30,
1999, 4,222,977 shares were available for awards under the Plan.
During the six months ended June 30, 1999, the Company acquired 265,000
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 and related franchise fees ("industrial and construction
equipment rental"). The contributions of these segments, as well as "corporate
and other," to revenues and income before income taxes for the three months and
six months ended June 30, 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 June 30,
-----------------------------------------------------
Income (Loss)
Revenues Before Income Taxes
----------------------- -----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Car rental and leasing $ 951.9 $ 906.9 $ 140.3 $ 119.8
Industrial and construction equipment rental 201.1 134.3 16.5 13.2
Corporate and other 14.4 7.2 (9.9) (5.7)
-------- -------- -------- --------
Consolidated total $1,167.4 $1,048.4 $ 146.9 $ 127.3
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
-----------------------------------------------------
Income (Loss)
Revenues Before Income Taxes
----------------------- -----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Car rental and leasing $1,800.0 $1,691.9 $ 215.9 $ 177.6
Industrial and construction equipment rental 376.7 240.9 24.6 19.7
Corporate and other 23.6 14.4 (11.5) (9.3)
-------- -------- -------- --------
Consolidated total $2,200.3 $1,947.2 $ 229.0 $ 188.0
======== ======== ======== ========
</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 $45,633 and $20,906 at June 30,
1999 and December 31, 1998, respectively. Comprehensive income for the three
months and six months ended June 30, 1999 and 1998 was as follows (in thousands
of dollars):
<TABLE>
<CAPTION>
Three Months Ended
June 30,
------------------------
1999 1998
-------- --------
<S> <C> <C>
Net income $ 87,903 $ 75,057
-------- --------
Other comprehensive loss, net of tax:
Foreign currency translation adjustments (6,385) (378)
Unrealized (losses) gains on available-for-sale securities (162) 9
-------- --------
Other comprehensive loss (6,547) (369)
-------- --------
Comprehensive income $ 81,356 $ 74,688
======== ========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------
1999 1998
--------- ---------
<S> <C> <C>
Net income $ 136,664 $ 110,464
--------- ---------
Other comprehensive loss, net of tax:
Foreign currency translation adjustments (24,727) (5,195)
Unrealized (losses) gains on available-for-sale securities (233) 18
--------- ---------
Other comprehensive loss (24,960) (5,177)
--------- ---------
Comprehensive income $ 111,704 $ 105,287
========= =========
</TABLE>
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1998
SUMMARY
The following table sets forth for the three months ended June 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
June 30,
--------------------
1999 1998
------ ------
Revenues:
<S> <C> <C>
Car rental 79.6% 84.2%
Industrial and construction equipment rental 17.2 12.8
Car leasing .9 .9
Franchise fees and other revenue 2.3 2.1
------ ------
100.0 100.0
------ ------
Expenses:
Direct operating 44.4 44.9
Depreciation of revenue earning equipment 26.4 25.5
Selling, general and administrative 9.8 10.5
Interest, net of interest income 6.8 7.0
------ ------
87.4 87.9
------ ------
Income before income taxes 12.6 12.1
Provision for taxes on income 5.1 5.0
------ ------
Net income 7.5% 7.1%
====== ======
</TABLE>
The following table sets forth certain selected operating data of the
Company for the three months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Ended
June 30,
---------------------------
1999 1998
---------- ----------
<S> <C> <C>
Car rental and other operations:
Average number of owned cars operated
during period 332,000 309,000
Number of transactions of owned car
rental operations during period 6,055,000 5,775,000
Average revenue per transaction of owned
car rental operations during period (in whole dollars) $ 153.48 $ 152.96
Equipment rental operations:
Average cost of rental equipment operated during
period (in millions) $ 1,792 $ 1,236
</TABLE>
REVENUES
The Company achieved record revenues of $1,167.4 million in the second
quarter of 1999, which increased by 11.4% from $1,048.4 million in the second
quarter of 1998. Revenues from car rental operations of $929.3 million in the
second quarter of 1999 increased by $46.0 million, or 5.2% from $883.3 million
in the second quarter of 1998. The increase was primarily the result of a
worldwide increase in transactions of 4.9% that contributed $43.8 million in
increased revenue.
Revenues from industrial and construction equipment rental of $201.0
million in the second quarter of 1999 increased by 49.8% from $134.2 million in
the second quarter of 1998. Of this $66.8 million increase, approximately $43.3
million was due to an increase in volume resulting from the inclusion of 16
acquired businesses worldwide.
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Revenues from all other sources of $37.0 million in the second quarter of
1999 increased by 19.9% from $30.9 million in the second quarter of 1998,
primarily due to an increase in telecommunications and franchise revenue.
EXPENSES
Total expenses of $1,020.5 million in 1999 increased by 10.8% from $921.1
million in 1998; however, total expenses as a percentage of revenues decreased
to 87.4% in 1999 from 87.9% in 1998.
Direct operating expenses of $518.2 million in 1999 increased by 10.1%
from $470.9 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 $257.5 million in 1999 increased by 10.2% from $233.7
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 $50.6 million in 1999 increased by
52.9% from $33.1 million in 1998, primarily due to acquisitions of equipment
rental and sales companies.
Selling, general and administrative expenses of $114.7 million in 1999
increased by 4.4% from $109.9 million in 1998. This increase in 1999 was
primarily due to an increase in sales promotion expenses resulting from the
growth of industrial and construction equipment rental operations.
Interest expense of $79.3 million in 1999 increased 8.1% from $73.4
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 $59.0 million in 1999 increased 13% from $52.2
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 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 $87.9 million in the second
quarter of 1999, or $.81 per share on a diluted basis, representing an increase
of 17.1% from $75.1 million, or $.69 per share on a diluted basis, in the second
quarter of 1998. This increase was primarily due to higher revenues and improved
profit margins in the worldwide car rental operations 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)
SIX MONTHS ENDED JUNE 30, 1999 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1998
SUMMARY
The following table sets forth for the six months ended June 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
Six Months Ended
June 30,
--------------------
1999 1998
------ ------
Revenues:
<S> <C> <C>
Car rental 79.8% 84.7%
Industrial and construction equipment rental 17.1 12.4
Car leasing .9 .9
Franchise fees and other revenue 2.2 2.0
------ ------
100.0 100.0
------ ------
Expenses:
Direct operating 45.7 46.8
Depreciation of revenue earning equipment 26.6 25.3
Selling, general and administrative 10.2 10.9
Interest, net of interest income 7.1 7.3
------ ------
89.6 90.3
------ ------
Income before income taxes 10.4 9.7
Provision for taxes on income 4.2 4.0
------ ------
Net income 6.2% 5.7%
====== ======
</TABLE>
The following table sets forth certain selected operating data of the
Company for the six months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Car rental and other operations:
Average number of owned cars operated
during period 315,000 290,000
Number of transactions of owned car
rental operations during period 11,347,000 10,695,000
Average revenue per transaction of owned
car rental operations during period (in whole dollars) $ 154.80 $ 154.15
Equipment rental operations:
Average cost of rental equipment operated
during period (in millions) $ 1,741 $ 1,172
</TABLE>
REVENUES
The Company achieved record revenues of $2,200.3 million in the first
half of 1999, which increased by 13% from $1,947.2 million in the first half of
1998. Revenues from car rental operations of $1,756.6 million in the first half
of 1999 increased by $107.9 million, or 6.5% from $1,648.7 million in the first
half of 1998. The increase was primarily the result of a worldwide increase in
transactions of 6.1% that contributed $100.8 million in increased revenue.
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 $376.6
million in the first half of 1999 increased by 56.4% from $240.8 million in the
first half of 1998. Of this $135.8 million increase, approximately $89.2 million
was due to an increase in volume resulting from the inclusion of 18 acquired
businesses worldwide.
Revenues from all other sources of $67.2 million in the first half of
1999 increased by 16.4% from $57.7 million in the first half of 1998, primarily
due to an increase in telecommunications and franchise revenue.
EXPENSES
Total expenses of $1,971.4 million in 1999 increased by 12.1% from
$1,759.1 million in 1998; however, total expenses as a percentage of revenues
decreased to 89.6% in 1999 from 90.3% in 1998.
Direct operating expenses of $1,006.5 million in 1999 increased by 10.3%
from $912.2 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 $497.6 million in 1999 increased by 13.5% from $438.3
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 $87.3 million in 1999 increased by
62.2% from $53.8 million in 1998, primarily due to acquisitions of equipment
rental and sales companies.
Selling, general and administrative expenses of $223.5 million in 1999
increased by 5% from $212.8 million in 1998. The increase was primarily due to
an increase in sales promotion expenses resulting from the growth of industrial
and construction equipment rental operations.
Interest expense of $156.5 million in 1999 increased 10.2% from $142.0
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 $92.3 million in 1999 increased 18.7% from $77.6
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 41.2% in 1998. See Note
4 to the Notes to the Company's consolidated financial statements.
NET INCOME
The Company achieved record net income of $136.7 million in the first
half of 1999, or $1.26 per share on a diluted basis, representing an increase of
23.7% from $110.5 million, or $1.02 per share on a diluted basis, in the first
half 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 six months ended June
30, 1999, the Company's expenditures for revenue earning equipment were $5.3
billion (partially offset by proceeds from the sale of such equipment of $3.4
billion). These assets are purchased by the Company in accordance with the terms
of programs negotiated with automobile and equipment manufacturers. In 1999, the
Company expended $79.4 million, net of cash acquired, for new businesses and
assumed $8.1 million of related debt. For the six months ended June 30, 1999,
the Company's capital investments for property and non-revenue earning equipment
were $165.5 million.
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 June 30, 1999 was $3.3 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 June 30, 1999, the total debt
for the foreign operations was $1,077 million, of which $1,074 million was
short-term (original maturity of less than one year) and $3 million was
long-term. At June 30, 1999, the total amounts outstanding (in millions of U.S.
dollars) under the Canadian, Irish and Australian commercial paper programs were
$295, $145 and $93, respectively.
At June 30, 1999, the Company had committed credit facilities totaling
$2.8 billion. Of this amount, $2.1 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, $188 million expires on June 30, 2003, and $877 million expires on
June 30, 2004. The 364-day facilities totaling $984 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 $909 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 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 July 21, 1999 the Board of Directors declared a quarterly dividend of
$.05 per share on its Class A and Class B Common Stock, payable on September 10,
1999 to shareholders of record as of August 16, 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.
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. During the
remainder of the year, the Company will be conducting validation of the
compliance levels of internal systems, purchased products and business partners,
as well as implementing contingency plans.
17
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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 $21 million to $23 million. Software remediation is being expensed
as incurred. Approximately $6.2 million of the cost of conversion was incurred
during the first six months of 1999. The Company has expended approximately
$18.2 million from inception through June 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On May 21, 1999, the 1999 Annual Meeting of Stockholders of
the Company was held.
(b) The Company's stockholders elected Frank A. Olson, Craig R.
Koch, Louis C. Burnett, John M. Devine, Michael T. Monahan,
Peter J. Pestillo, John M. Rintamaki, John M. Thompson and
Joseph A. Walker as directors of the Company.
(c) The Company's stockholders voted for the election of directors
listed in paragraph (b) based on the number of votes set forth
opposite their respective names:
<TABLE>
<CAPTION>
Nominee Number of Votes
------- ----------------------------------
For Not For
----------- -------
<S> <C> <C>
Louis C. Burnett 373,846,311 245,477
John M. Devine 373,722,011 369,777
Craig R. Koch 373,721,961 369,827
Michael T. Monahan 373,842,066 249,722
Frank A. Olson 373,720,453 371,335
Peter J. Pestillo 373,721,028 370,760
John M. Rintamaki 373,720,911 370,877
John M. Thompson 373,718,049 373,739
Joseph A. Walker 373,846,260 245,528
</TABLE>
The Company's stockholders voted on the following proposals:
Proposal 1 - Ratification of Selection of Independent Public
Accountants. A proposal to ratify the selection of
PricewaterhouseCoopers LLP as independent public accountants to
audit the books of account and other corporate records of the
Company for 1999 was adopted, with 374,082,761 votes cast for,
3,967 votes cast against, 5,060 votes abstained and no broker
non-votes.
Proposal 2 - Approval of the Company's Employee Stock Purchase
Plan. A proposal relating to the approval of a plan to provide
employees with the opportunity to purchase shares of Class A
Common Stock through accumulated payroll deductions was adopted,
with 372,640,472 votes cast for, 59,317 votes against, 6,096 votes
abstained and 1,385,903 broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
4 Instruments defining the rights of security holders,
including indentures. During the quarter ended June
30, 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 six months ended June 30, 1999 and 1998.
27 Financial Data Schedule for the six months ended June
30, 1999.
19
<PAGE> 20
PART II - OTHER INFORMATION
(b) Reports on Form 8-K:
The Company filed a Form 8-K dated May 20, 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 April 28, 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 April 15, 1999 reporting
the issuance of a press release with respect to its first
quarter 1999 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: August 11, 1999 By: /s/ Paul J. Siracusa
Paul J. Siracusa
Executive Vice President
and Chief Financial Officer
(principal financial officer and duly
authorized officer)
20
<PAGE> 21
EXHIBIT INDEX
Exhibit
No. Description Page No.
--- ----------- --------
12 Computation of Ratio of Earnings 23
to Fixed Charges for the six months
ended June 30, 1999 and 1998.
27 Financial Data Schedule for the 24-25
six months ended June 30, 1999.
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>
Six Months
Ended June 30,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
Income before income taxes $228,968 $188,017
Interest expense 161,283 147,848
Portion of rent estimated to represent the
interest factor 41,930 37,850
-------- --------
Earnings before income taxes and fixed charges $432,181 $373,715
======== ========
Interest expense (including capitalized interest) 161,929 $148,306
Portion of rent estimated to represent the
interest factor 41,930 37,850
-------- --------
Fixed charges $203,859 $186,156
======== ========
Ratio of earnings to fixed charges 2.1 2.0
======== ========
</TABLE>
22
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 17,462
<SECURITIES> 163,155
<RECEIVABLES> 808,585
<ALLOWANCES> (18,561)
<INVENTORY> 50,053
<CURRENT-ASSETS> 0
<PP&E> 9,444,144
<DEPRECIATION> (1,525,208)
<TOTAL-ASSETS> 10,123,285
<CURRENT-LIABILITIES> 0
<BONDS> 6,700,837
0
0
<COMMON> 1,083
<OTHER-SE> 1,501,698
<TOTAL-LIABILITY-AND-EQUITY> 10,123,285
<SALES> 0
<TOTAL-REVENUES> 2,200,344
<CGS> 0
<TOTAL-COSTS> 1,808,031
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 6,848
<INTEREST-EXPENSE> 156,497
<INCOME-PRETAX> 228,968
<INCOME-TAX> 92,304
<INCOME-CONTINUING> 136,664
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 136,664
<EPS-BASIC> 1.27
<EPS-DILUTED> 1.26
</TABLE>
