UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended June 30, 2011 |
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OR |
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o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 001-07541
THE HERTZ CORPORATION
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
13-1938568 (I.R.S. Employer Identification Number) |
225 Brae Boulevard
Park Ridge, New Jersey 07656-0713
(201) 307-2000
(Address, including Zip Code, and telephone number,
including area code, of registrant's principal executive offices)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report.)
The registrant meets the conditions as set forth in General Instructions H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format as permitted.
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 ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer ý (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
As of August 5, 2011, all of the common stock of the registrant was owned by its affiliate, Hertz Investors, Inc. As of August 5, 2011, 100 shares of the registrant's common stock (par value $0.01) were issued and outstanding.
THE HERTZ CORPORATION AND SUBSIDIARIES
INDEX
ITEM l. Condensed Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and
Shareholder of The Hertz Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of The Hertz Corporation and its subsidiaries as of June 30, 2011, and the related consolidated statements of operations for the three-month and six-month periods ended June 30, 2011 and June 30, 2010 and the consolidated statements of cash flows for the six-month periods ended June 30, 2011 and June 30, 2010. These interim financial statements are the responsibility of the Company's management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2010, and the related consolidated statements of operations, of changes in equity and of cash flows for the year then ended (not presented herein), and in our report dated February 28, 2011, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2010, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.
/s/
PricewaterhouseCoopers LLP
Florham Park, New Jersey
August 5, 2011
1
THE HERTZ CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars)
Unaudited
|
June 30, 2011 |
December 31, 2010 |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
ASSETS |
||||||||||
Cash and cash equivalents |
$ | 747,580 | $ | 2,374,006 | ||||||
Restricted cash and cash equivalents |
274,289 | 207,576 | ||||||||
Receivables, less allowance for doubtful accounts of $19,099 and $19,708 |
1,447,170 | 1,356,553 | ||||||||
Inventories, at lower of cost or market |
99,999 | 87,429 | ||||||||
Prepaid expenses and other assets |
458,193 | 344,926 | ||||||||
Revenue earning equipment, at cost: |
||||||||||
Cars |
10,787,553 | 8,435,077 | ||||||||
Less accumulated depreciation |
(1,264,859 | ) | (1,199,355 | ) | ||||||
Other equipment |
2,790,005 | 2,756,101 | ||||||||
Less accumulated depreciation |
(1,087,346 | ) | (1,052,414 | ) | ||||||
Total revenue earning equipment |
11,225,353 | 8,939,409 | ||||||||
Property and equipment, at cost: |
||||||||||
Land, buildings and leasehold improvements |
1,119,172 | 1,071,987 | ||||||||
Service equipment and other |
1,001,807 | 900,271 | ||||||||
|
2,120,979 | 1,972,258 | ||||||||
Less accumulated depreciation |
(902,437 | ) | (808,689 | ) | ||||||
Total property and equipment |
1,218,542 | 1,163,569 | ||||||||
Other intangible assets, net |
2,522,540 | 2,550,559 | ||||||||
Goodwill |
307,212 | 300,174 | ||||||||
Total assets |
$ | 18,300,878 | $ | 17,324,201 | ||||||
LIABILITIES AND EQUITY |
||||||||||
Accounts payable |
$ | 1,560,856 | $ | 944,973 | ||||||
Due to Hertz Global Holdings, Inc. |
1,578 | 1,396 | ||||||||
Accrued liabilities |
1,041,929 | 1,068,002 | ||||||||
Accrued taxes |
161,854 | 136,397 | ||||||||
Debt |
11,295,754 | 10,919,345 | ||||||||
Public liability and property damage |
286,018 | 278,685 | ||||||||
Deferred taxes on income |
1,433,333 | 1,460,212 | ||||||||
Total liabilities |
15,781,322 | 14,809,010 | ||||||||
Commitments and contingencies |
||||||||||
Equity: |
||||||||||
The Hertz Corporation and Subsidiaries stockholder's equity |
||||||||||
Common Stock, $0.01 par value, 3,000 shares authorized, 100 shares issued and outstanding |
| | ||||||||
Additional paid-in capital |
3,472,029 | 3,452,019 | ||||||||
Accumulated deficit |
(1,064,472 | ) | (991,153 | ) | ||||||
Accumulated other comprehensive income |
97,262 | 37,823 | ||||||||
Total The Hertz Corporation and Subsidiaries stockholder's equity |
2,504,819 | 2,498,689 | ||||||||
Noncontrolling interest |
14,737 | 16,502 | ||||||||
Total equity |
2,519,556 | 2,515,191 | ||||||||
Total liabilities and equity |
$ | 18,300,878 | $ | 17,324,201 | ||||||
The accompanying notes are an integral part of these financial statements.
2
THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands of Dollars)
Unaudited
|
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2010 | 2011 | 2010 | |||||||||||
Revenues: |
|||||||||||||||
Car rental |
$ | 1,731,200 | $ | 1,582,983 | $ | 3,210,138 | $ | 2,979,554 | |||||||
Equipment rental |
301,641 | 265,706 | 569,727 | 502,677 | |||||||||||
Other |
39,452 | 30,897 | 72,431 | 58,243 | |||||||||||
Total revenues |
2,072,293 | 1,879,586 | 3,852,296 | 3,540,474 | |||||||||||
Expenses: |
|||||||||||||||
Direct operating |
1,187,306 | 1,075,037 | 2,260,971 | 2,088,036 | |||||||||||
Depreciation of revenue earning equipment and lease charges |
419,669 | 456,720 | 855,758 | 915,893 | |||||||||||
Selling, general and administrative |
195,498 | 172,003 | 377,688 | 339,720 | |||||||||||
Interest expense |
153,589 | 177,221 | 338,350 | 346,810 | |||||||||||
Interest income |
(1,546 | ) | (6,791 | ) | (3,402 | ) | (9,069 | ) | |||||||
Other (income) expense, net |
10,801 | | 62,677 | | |||||||||||
Total expenses |
1,965,317 | 1,874,190 | 3,892,042 | 3,681,390 | |||||||||||
Income (loss) before income taxes |
106,976 | 5,396 | (39,746 | ) | (140,916 | ) | |||||||||
(Provision) benefit for taxes on income |
(39,793 | ) | (8,245 | ) | (12,365 | ) | 5,968 | ||||||||
Net income (loss) |
67,183 | (2,849 | ) | (52,111 | ) | (134,948 | ) | ||||||||
Less: Net income attributable to noncontrolling interest |
(5,087 | ) | (4,673 | ) | (8,760 | ) | (8,251 | ) | |||||||
Net income (loss) attributable to The Hertz Corporation and Subsidiaries' common stockholder |
$ | 62,096 | $ | (7,522 | ) | $ | (60,871 | ) | $ | (143,199 | ) | ||||
The accompanying notes are an integral part of these financial statements.
3
THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
Unaudited
|
Six Months Ended June 30, |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2010 | ||||||||
Cash flows from operating activities: |
||||||||||
Net loss |
$ | (52,111 | ) | $ | (134,948 | ) | ||||
Adjustments to reconcile net loss to net cash provided by operating activities: |
||||||||||
Depreciation of revenue earning equipment |
809,433 | 881,540 | ||||||||
Depreciation of property and equipment |
77,140 | 78,571 | ||||||||
Amortization of other intangible assets |
33,679 | 32,700 | ||||||||
Amortization and write-off of deferred financing costs |
63,102 | 37,361 | ||||||||
Amortization and write-off of debt discount |
11,914 | 11,526 | ||||||||
Stock-based compensation charges |
16,630 | 19,308 | ||||||||
(Gain) loss on derivatives |
(2,203 | ) | 5,047 | |||||||
Amortization of cash flow hedges |
| 38,868 | ||||||||
Provision for losses on doubtful accounts |
14,313 | 10,295 | ||||||||
Asset writedowns |
23,311 | 14,215 | ||||||||
Deferred taxes on income |
(21,441 | ) | (12,976 | ) | ||||||
Gain on sale of property and equipment |
(4,748 | ) | (2,176 | ) | ||||||
Changes in assets and liabilities, net of effects of acquisition: |
||||||||||
Receivables |
(187,818 | ) | (101,157 | ) | ||||||
Inventories, prepaid expenses and other assets |
(57,831 | ) | (25,495 | ) | ||||||
Accounts payable |
138,214 | 254,809 | ||||||||
Accrued liabilities |
(179,257 | ) | (69,493 | ) | ||||||
Accrued taxes |
21,667 | (7,116 | ) | |||||||
Public liability and property damage |
(4,393 | ) | 252 | |||||||
Net cash provided by operating activities |
699,601 | 1,031,131 | ||||||||
Cash flows from investing activities: |
||||||||||
Net change in restricted cash and cash equivalents |
(60,233 | ) | (389,242 | ) | ||||||
Revenue earning equipment expenditures |
(5,466,856 | ) | (5,317,298 | ) | ||||||
Proceeds from disposal of revenue earning equipment |
3,488,890 | 3,443,510 | ||||||||
Property and equipment expenditures |
(125,370 | ) | (92,018 | ) | ||||||
Proceeds from disposal of property and equipment |
28,388 | 15,194 | ||||||||
Acquisitions, net of cash acquired |
(10,976 | ) | (157 | ) | ||||||
(Purchase) sale of short-term investments, net |
(32,891 | ) | 3,171 | |||||||
Other investing activities |
1,303 | 817 | ||||||||
Net cash used in investing activities |
$ | (2,177,745 | ) | $ | (2,336,023 | ) | ||||
The accompanying notes are an integral part of these financial statements.
4
THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In Thousands of Dollars)
Unaudited
|
Six Months Ended June 30, |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2010 | ||||||||
Cash flows from financing activities: |
||||||||||
Proceeds from issuance of long-term debt |
$ | 3,028,591 | $ | 681,370 | ||||||
Payment of long-term debt |
(3,631,472 | ) | (756,964 | ) | ||||||
Short-term borrowings: |
||||||||||
Proceeds |
285,803 | 274,730 | ||||||||
Payments |
(489,217 | ) | (281,009 | ) | ||||||
Proceeds (payments) under the revolving lines of credit, net |
728,855 | 1,423,403 | ||||||||
Distributions to noncontrolling interest |
(10,500 | ) | (7,630 | ) | ||||||
Proceeds from employee stock purchase plan |
1,716 | 1,222 | ||||||||
Loan with Hertz Global Holdings, Inc. |
182 | (5,607 | ) | |||||||
Dividends paid |
(12,450 | ) | (12,500 | ) | ||||||
Payment of financing costs |
(81,392 | ) | (24,972 | ) | ||||||
Net cash provided by (used in) financing activities |
(179,884 | ) | 1,292,043 | |||||||
Effect of foreign exchange rate changes on cash and cash equivalents |
31,602 | (75,836 | ) | |||||||
Net change in cash and cash equivalents during the period |
(1,626,426 | ) | (88,685 | ) | ||||||
Cash and cash equivalents at beginning of period |
2,374,006 | 985,467 | ||||||||
Cash and cash equivalents at end of period |
$ | 747,580 | $ | 896,782 | ||||||
Supplemental disclosures of cash flow information: |
||||||||||
Cash paid during the period for: |
||||||||||
Interest (net of amounts capitalized) |
$ | 330,930 | $ | 252,129 | ||||||
Income taxes |
25,338 | 30,694 | ||||||||
Supplemental disclosures of non-cash flow information: |
||||||||||
Purchases of revenue earning equipment included in accounts payable and accrued liabilities |
$ | 628,695 | $ | 828,881 | ||||||
Sales of revenue earning equipment included in receivables |
263,954 | 530,856 | ||||||||
Purchases of property and equipment included in accounts payable |
59,633 | 29,125 | ||||||||
Sales of property and equipment included in receivables |
14,356 | 5,259 |
The accompanying notes are an integral part of these financial statements.
5
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
Note 1Background
The Hertz Corporation, together with its subsidiaries, is referred to herein as "we," "our" and "us." The Hertz Corporation is also referred to herein as "Hertz." Hertz Global Holdings, Inc., our ultimate parent company, is referred to herein as "Hertz Holdings."
We are a successor to corporations that have been engaged in the car and truck rental and leasing business since 1918 and the equipment rental business since 1965. Hertz was incorporated in Delaware in 1967. Ford Motor Company, or "Ford," acquired an ownership interest in Hertz in 1987. Prior to this, we were a subsidiary of United Continental Holdings, Inc. (formerly Allegis Corporation), which acquired our outstanding capital stock from RCA Corporation in 1985.
On December 21, 2005, investment funds associated with or designated by:
or collectively the "Sponsors," acquired all of our common stock from Ford Holdings LLC. We refer to the acquisition of all of our common stock by the Sponsors as the "Acquisition."
In March 2011, the Sponsors sold 50,000,000 shares of their Hertz Holdings common stock to Goldman, Sachs & Co. as the sole underwriter in the registered public offering of those shares.
As a result of Hertz Holdings' initial public offering in November 2006 and subsequent offerings in June 2007, May 2009, June 2009 and March 2011, the Sponsors reduced their holdings to approximately 39% of the outstanding shares of common stock of Hertz Holdings.
In January 2009, Bank of America Corporation, or "Bank of America," acquired Merrill Lynch & Co., Inc., the parent company of BAMLCP. Accordingly, Bank of America is now an indirect beneficial owner of Hertz Holdings' common stock held by BAMLCP and certain of its affiliates.
Note 2Basis of Presentation
The significant accounting policies summarized in Note 2 to our audited consolidated financial statements contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, filed with the United States Securities and Exchange Commission, or "SEC," on February 28, 2011, or the "Form 10-K," have been followed in preparing the accompanying condensed consolidated financial statements.
The December 31, 2010 condensed consolidated balance sheet data was derived from our audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America, or "GAAP."
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and footnotes. Actual results could differ materially from those estimates.
6
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
In our opinion, all adjustments necessary for a fair statement 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.
Certain prior period amounts have been reclassified to conform with current reporting.
For the six months ended June 30, 2010, we have revised net cash provided by operating activities and net cash used in investing activities within our consolidated statement of cash flows due to a gross-up of cash lease payments relating to our revenue earning equipment in the non-cash add back previously included in depreciation of revenue earning equipment and proceeds from disposal of revenue earning equipment.
For the six months ended June 30, 2010, we have also revised net cash used in investing activities and net cash provided by financing activities within our consolidated statement of cash flows to classify certain payments to a third party finance company for purchases of revenue earning equipment as cash outflows from financing activities as opposed to investing activities.
In June 2011, the Financial Accounting Standards Board issued Accounting Standards Update No. 2011-05, "Presentation of Comprehensive Income," requiring companies to present items of net income and other comprehensive income either in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements of net income and other comprehensive income. The amendments in this update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. These provisions will become effective for us beginning with our quarterly report for the period ended March 31, 2012.
Note 3Cash and Cash Equivalents and Restricted Cash and Cash Equivalents
We consider all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.
In our Consolidated Statements of Cash Flows, we net cash flows from revolving borrowings in the line item "Proceeds (payments) under the revolving lines of credit, net." The contractual maturities of such borrowings may exceed 90 days in certain cases.
Restricted cash and cash equivalents includes cash and cash equivalents that are not readily available for our normal disbursements. Restricted cash and cash equivalents are restricted for the purchase of revenue earning vehicles and other specified uses under our Fleet Debt facilities, for our Like-Kind Exchange Program, or "LKE Program," and to satisfy certain of our self-insurance regulatory reserve requirements. As of June 30, 2011 and December 31, 2010, the portion of total restricted cash and cash equivalents that was associated with our Fleet Debt facilities was $183.2 million and $115.6 million, respectively. The increase in restricted cash and cash equivalents associated with our fleet debt of $67.6 million from December 31, 2010 to June 30, 2011 was primarily related to the timing of purchases and sales of revenue earning vehicles.
7
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
Note 4Goodwill and Other Intangible Assets
The following summarizes the changes in our goodwill, by segment (in millions of dollars):
|
Car Rental | Equipment Rental |
Total | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Balance as of January 1, 2011 |
|||||||||||
Goodwill |
$ | 336.4 | $ | 658.7 | $ | 995.1 | |||||
Accumulated impairment losses |
(43.0 | ) | (651.9 | ) | (694.9 | ) | |||||
|
293.4 | 6.8 | 300.2 | ||||||||
Goodwill acquired during the period |
1.8 |
0.2 |
2.0 |
||||||||
Adjustments to previously recorded purchase price allocation |
(0.9 | ) | 1.4 | 0.5 | |||||||
Other changes during the period(1) |
4.3 | 0.2 | 4.5 | ||||||||
|
5.2 | 1.8 | 7.0 | ||||||||
Balance as of June 30, 2011 |
|||||||||||
Goodwill |
341.6 | 660.5 | 1,002.1 | ||||||||
Accumulated impairment losses |
(43.0 | ) | (651.9 | ) | (694.9 | ) | |||||
|
$ | 298.6 | $ | 8.6 | $ | 307.2 | |||||
|
Car Rental | Equipment Rental |
Total | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Balance as of January 1, 2010 |
|||||||||||
Goodwill |
$ | 335.8 | $ | 654.5 | $ | 990.3 | |||||
Accumulated impairment losses |
(43.0 | ) | (651.9 | ) | (694.9 | ) | |||||
|
292.8 | 2.6 | 295.4 | ||||||||
Goodwill acquired during the year |
2.7 |
4.3 |
7.0 |
||||||||
Other changes during the year(1) |
(2.1 | ) | (0.1 | ) | (2.2 | ) | |||||
|
0.6 | 4.2 | 4.8 | ||||||||
Balance as of December 31, 2010 |
|||||||||||
Goodwill |
336.4 | 658.7 | 995.1 | ||||||||
Accumulated impairment losses |
(43.0 | ) | (651.9 | ) | (694.9 | ) | |||||
|
$ | 293.4 | $ | 6.8 | $ | 300.2 | |||||
8
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
Other intangible assets, net, consisted of the following major classes (in millions of dollars):
|
June 30, 2011 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Value |
||||||||||
Amortizable intangible assets: |
|||||||||||||
Customer-related |
$ | 606.6 | $ | (334.0 | ) | $ | 272.6 | ||||||
Other(1) |
64.6 | (22.9 | ) | 41.7 | |||||||||
Total |
671.2 | (356.9 | ) | 314.3 | |||||||||
Indefinite-lived intangible assets: |
|||||||||||||
Trade name |
2,190.0 | | 2,190.0 | ||||||||||
Other(2) |
18.2 | | 18.2 | ||||||||||
Total |
2,208.2 | | 2,208.2 | ||||||||||
Total other intangible assets, net |
$ | 2,879.4 | $ | (356.9 | ) | $ | 2,522.5 | ||||||
|
December 31, 2010 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Value |
||||||||||
Amortizable intangible assets: |
|||||||||||||
Customer-related |
$ | 606.5 | $ | (304.6 | ) | $ | 301.9 | ||||||
Other(1) |
59.1 | (18.6 | ) | 40.5 | |||||||||
Total |
665.6 | (323.2 | ) | 342.4 | |||||||||
Indefinite-lived intangible assets: |
|||||||||||||
Trade name |
2,190.0 | | 2,190.0 | ||||||||||
Other(2) |
18.2 | | 18.2 | ||||||||||
Total |
2,208.2 | | 2,208.2 | ||||||||||
Total other intangible assets, net |
$ | 2,873.8 | $ | (323.2 | ) | $ | 2,550.6 | ||||||
Amortization of other intangible assets for the three months ended June 30, 2011 and 2010, was approximately $16.9 million and $16.3 million, respectively, and for the six months ended June 30, 2011 and 2010, was approximately $33.7 million and $32.7 million, respectively. Based on our amortizable intangible assets as of June 30, 2011, we expect amortization expense to be approximately $32.8 million for the remainder of 2011, $65.3 million in 2012, $64.0 million in 2013, $61.0 million in 2014, $59.8 million in 2015 and $13.4 million in 2016.
During the six months ended June 30, 2011, we added eight international car rental locations and one domestic equipment rental location through external acquisitions. These transactions have been accounted for using the acquisition method of accounting in accordance with GAAP and operating results of the acquired locations from the date of acquisition are included in our consolidated statement
9
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
of operations. The allocation of the purchase price to the tangible and intangible net assets acquired is preliminary and subject to finalization. These acquisitions are not material to the consolidated amounts presented within our statement of operations for the three-month and six-month periods ended June 30, 2011.
Note 5Taxes on Income
The effective tax rate for the three and six months ended June 30, 2011 was 37.2% and (31.1)%, respectively. The provision for taxes on income of $39.8 million in the three months ended June 30, 2011 increased from $8.2 million in the three months ended June 30, 2010, primarily due to higher income before income taxes, changes in geographic earnings mix and changes in losses in certain non-U.S. jurisdictions for which tax benefits cannot be realized. The provision for taxes on income was $12.4 million in the six months ended June 30, 2011 versus a benefit of $6.0 million in the six months ended June 30, 2010. The change was primarily due to lower loss before income taxes, changes in geographic earnings mix and changes in losses in certain non-U.S. jurisdictions for which tax benefits cannot be realized.
Note 6Depreciation of Revenue Earning Equipment and Lease Charges
Depreciation of revenue earning equipment and lease charges includes the following (in millions of dollars):
|
Three Months Ended June 30, |
|||||||
---|---|---|---|---|---|---|---|---|
|
2011 | 2010 | ||||||
Depreciation of revenue earning equipment |
$ | 453.3 | $ | 426.1 | ||||
Adjustment of depreciation upon disposal of revenue earning equipment |
(56.3 | ) | 12.7 | |||||
Rents paid for vehicles leased |
22.7 | 17.9 | ||||||
Total |
$ | 419.7 | $ | 456.7 | ||||
|
Six Months Ended June 30, |
|||||||
---|---|---|---|---|---|---|---|---|
|
2011 | 2010 | ||||||
Depreciation of revenue earning equipment |
$ | 871.8 | $ | 854.0 | ||||
Adjustment of depreciation upon disposal of revenue earning equipment |
(62.4 | ) | 27.5 | |||||
Rents paid for vehicles leased |
46.3 | 34.4 | ||||||
Total |
$ | 855.7 | $ | 915.9 | ||||
The adjustment of depreciation upon disposal of revenue earning equipment for the three months ended June 30, 2011 and 2010, included a net gain of $53.6 million and a net loss of $9.4 million, respectively, on the disposal of vehicles used in our car rental operations and a net gain of $2.7 million and a net loss of $3.3 million, respectively, on the disposal of industrial and construction equipment used in our equipment rental operations. The adjustment of depreciation upon disposal of revenue earning equipment for the six months ended June 30, 2011 and 2010, included a net gain of $59.7 million and a net loss of $20.6 million, respectively, on the disposal of vehicles used in our car rental operations and a net gain of $2.7 million and a net loss of $6.9 million, respectively, on the disposal of industrial and construction equipment used in our equipment rental operations.
10
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
Depreciation rates are reviewed on a quarterly basis based on management's routine review of present and estimated future market conditions and their effect on residual values at the time of disposal. During the six months ended June 30, 2011, depreciation rates being used to compute the provision for depreciation of revenue earning equipment were adjusted on certain vehicles in our car rental operations to reflect changes in the estimated residual values to be realized when revenue earning equipment is sold. These depreciation rate changes resulted in net decreases of $8.0 million and $8.6 million in depreciation expense for the three and six months ended June 30, 2011, respectively. During the three and six months ended June 30, 2011, depreciation rate changes in certain of our equipment rental operations resulted in net decreases of $1.3 million and $2.3 million in depreciation expense.
For the three months ended June 30, 2011 and 2010, our worldwide car rental operations sold approximately 42,800 and 42,000 non-program cars, respectively, a 1.9% year over year increase. For the six months ended June 30, 2011 and 2010, our worldwide car rental operations sold approximately 74,900 and 84,000 non-program cars, respectively, a 10.8% year over year decrease primarily due to an increase in car rental demand.
11
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
Note 7Debt
Our debt consists of the following (in millions of dollars):
Facility
|
Average Interest Rate at June 30, 2011(1) |
Fixed or Floating Interest Rate |
Maturity | June 30, 2011 |
December 31, 2010 |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Corporate Debt |
|||||||||||||||||
Senior Term Facility(2) |
3.75 | % | Floating | 3/2018 | $ | 1,396.5 | $ | 1,345.0 | |||||||||
Senior ABL Facility(2) |
2.26 | % | Floating | 3/2016 | 125.0 | | |||||||||||
Senior Notes(3) |
7.32 | % | Fixed | 1/20141/2021 | 2,669.1 | 3,229.6 | |||||||||||
Senior Subordinated Notes |
10.50 | % | Fixed | 1/2016 | | 518.5 | |||||||||||
Promissory Notes |
7.48 | % | Fixed | 6/20121/2028 | 224.8 | 345.6 | |||||||||||
Other Corporate Debt |
4.45 | % | Floating | Various | 34.3 | 22.0 | |||||||||||
Unamortized Net (Discount) Premium (Corporate) |
(0.8 | ) | (17.1 | ) | |||||||||||||
Total Corporate Debt |
4,448.9 | 5,443.6 | |||||||||||||||
Fleet Debt |
|||||||||||||||||
U.S. ABS Program |
|||||||||||||||||
U.S. Fleet Variable Funding Notes: |
|||||||||||||||||
Series 2009-1(4) |
1.13 | % | Floating | 3/2013 | 1,713.0 | 1,488.0 | |||||||||||
Series 2010-2(4) |
1.22 | % | Floating | 3/2013 | 127.0 | 35.0 | |||||||||||
U.S. Fleet Medium Term Notes |
|||||||||||||||||
Series 2009-2 Notes(4) |
4.95 | % | Fixed | 3/20133/2015 | 1,384.3 | 1,384.3 | |||||||||||
Series 2010-1 Notes(4) |
3.77 | % | Fixed | 2/20142/2018 | 749.8 | 749.8 | |||||||||||
Series 2011-1 Notes(4) |
2.86 | % | Fixed | 3/20153/2017 | 598.0 | | |||||||||||
Other Fleet Debt |
|||||||||||||||||
U.S. Fleet Financing Facility |
1.44 | % | Floating | 12/2011 | 165.0 | 163.0 | |||||||||||
European Revolving Credit Facility |
5.05 | % | Floating | 6/2013 | 315.3 | 168.6 | |||||||||||
European Seasonal Revolving Credit Facility |
3.81 | % | Floating | 11/2011 | 100.6 | | |||||||||||
European Fleet Notes |
8.50 | % | Fixed | 7/2015 | 574.8 | 529.0 | |||||||||||
European Securitization(4) |
4.51 | % | Floating | 7/2012 | 332.4 | 236.9 | |||||||||||
Canadian Securitization(4) |
1.16 | % | Floating | 11/2011 | 127.9 | 80.4 | |||||||||||
Australian Securitization(4) |
6.44 | % | Floating | 12/2012 | 142.3 | 183.2 | |||||||||||
Brazilian Fleet Financing Facility |
13.34 | % | Floating | 12/2011 | 19.4 | 77.8 | |||||||||||
Capitalized Leases |
4.64 | % | Floating | Various | 511.9 | 398.1 | |||||||||||
Unamortized Discount (Fleet) |
(14.9 | ) | (18.4 | ) | |||||||||||||
Total Fleet Debt |
6,846.8 | 5,475.7 | |||||||||||||||
Total Debt |
$ | 11,295.7 | $ | 10,919.3 | |||||||||||||
12
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
Senior Notes
|
Outstanding Principal | |
---|---|---|
8.875% Senior Notes due January 2014 |
$162.3 million | |
7.875% Senior Notes due January 2014 |
$306.8 million (€213.5 million) | |
7.50% Senior Notes due October 2018 |
$700 million | |
7.375% Senior Notes due January 2021 |
$500 million | |
6.75% Senior Notes due April 2019 |
$1,000 million |
Maturities
The aggregate amounts of maturities of debt for each of the twelve-month periods ending June 30 (in millions of dollars) are as follows:
2012 |
$ | 3,889.4 | (including $3,693.0 of other short-term borrowings) | ||
2013 |
$ | 597.8 | |||
2014 |
$ | 743.1 | |||
2015 |
$ | 1,210.7 | |||
2016 |
$ | 963.9 | |||
After 2016 |
$ | 3,906.5 |
We are highly leveraged and a substantial portion of our liquidity needs arise from debt service on our indebtedness and from the funding of our costs of operations and capital expenditures. We believe that cash generated from operations and cash received on the disposal of vehicles and equipment, together with amounts available under various liquidity facilities, will be adequate to permit us to meet our debt maturities over the next twelve months.
Our short-term borrowings as of June 30, 2011 include, among other items, the amounts outstanding under the European Securitization, Australian Securitization, U.S. Fleet Financing Facility, U.S. Variable Funding Notes, Brazilian Fleet Financing Facility, Canadian Securitization, Capitalized Leases and European Revolving Credit Facility. These amounts are reflected as short-term borrowings, regardless of the facility maturity date, as these facilities are revolving in nature and/or the outstanding borrowings have maturities of three months or less. As of June 30, 2011, short-term borrowings had a weighted average interest rate of 2.7%.
Letters of Credit
As of June 30, 2011, there were outstanding standby letters of credit totaling $580.3 million. Of this amount, $532.8 million was issued under the Senior Credit Facilities ($288.6 million of which was issued for the benefit of the ABS Program) and the remainder is primarily to support self-insurance programs (including insurance policies with respect to which we have agreed to indemnify the policy issuers for any losses) as well as airport concession obligations in the United States, Canada and Europe. As of June 30, 2011, none of these letters of credit have been drawn upon.
13
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
2011 Events
In January 2011, Hertz redeemed in full its outstanding ($518.5 million principal amount) 10.50% Senior Subordinated Notes due 2016 which resulted in premiums paid of $27.2 million and the write-off of unamortized debt costs of $8.6 million. In January and February 2011, Hertz redeemed $1,105 million principal amount of its outstanding 8.875% Senior Notes due 2014 which resulted in premiums paid of $24.5 million and the write-off of unamortized debt costs of $14.4 million. Hertz used the proceeds from the September 2010 issuance of $700 million aggregate principal amount of 7.50% Senior Notes, the December 2010 issuance of $500 million aggregate principal amount of 7.375% Senior Notes and the February 2011 issuance of $500 million aggregate principal amount of 6.75% Senior Notes (see below) for these redemptions. Premiums paid during the six months ended June 30, 2011 of $51.7 million are recorded in "Other (income) expense, net" on our consolidated statement of operations.
In February 2011, Hertz issued $500 million aggregate principal amount of 6.75% Senior Notes due 2019. The 6.75% Senior Notes are guaranteed on a senior unsecured basis by the domestic subsidiaries of Hertz that guarantee its Senior Credit Facilities.
In February 2011, Hertz used existing corporate liquidity to pay off the maturing amount of the Brazilian Fleet Financing Facility.
In March 2011, Hertz issued an additional $500 million aggregate principal of the 6.75% Senior Notes due 2019 in a private offering. The proceeds of which were used in April 2011 to redeem $480 million principal amount of Hertz's outstanding 8.875% Senior Notes due 2014 which resulted in premiums paid during the three months ended June 30, 2011, of $10.7 million recorded in "Other (income) expense, net" on our consolidated statement of operations and the write-off of unamortized debt costs of $5.8 million.
In March 2011, Hertz refinanced its 2005 Senior Term Facility and 2005 Senior ABL Facility. A description of the new Senior Term Facility and Senior ABL Facility is set forth below. During the three months ended March 31, 2011, we recorded an expense of $9.3 million in "Interest expense" on our consolidated statement of operations associated with the write-off of unamortized debt costs in connection with the refinancing of our 2005 Senior Term Facility and 2005 Senior ABL Facility. Additionally, a portion of the unamortized debt costs associated with the 2005 Senior Term Facility and 2005 Senior ABL Facility are continuing to be amortized over the terms of the new Senior Term Facility and Senior ABL Facility. The determination of whether these costs were expensed or further deferred was dependent upon whether the terms of the old and new instruments were considered to be substantially different. In regards to the Senior Term Facility, the determination as to whether the 2005 Senior Term Facility and the new Senior Term Facility were considered to be substantially different was made on a lender by lender basis using the "net method" which compares the cash flows related to the lowest common principal balance between the old and new instruments.
In March 2011, Hertz entered into a credit agreement that provides a $1,400.0 million secured term loan facility (as amended, the "Senior Term Facility"). In addition, the Senior Term Facility includes a pre-funded synthetic letter of credit facility in an aggregate principal amount of $200.0 million. Subject to the satisfaction of certain conditions and limitations, the Senior Term Facility allows for the addition of incremental term and/or revolving loans. Hertz used approximately $1,345.0 million of borrowings under the Senior Term Facility to refinance indebtedness under the 2005 Senior Term Facility. We reflected this transaction on a gross basis in our Consolidated Statement of Cash Flows in "Proceeds from issuance of long-term debt" and "Payment of long-term debt." During the six months ended June 30, 2011, we
14
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
recorded financing costs of $6.6 million in "Interest expense" on our consolidated statement of operations associated with the new Senior Term Facility.
In March 2011, Hertz, Hertz Equipment Rental Corporation and certain other of our subsidiaries entered into a credit agreement that provides for aggregate maximum borrowings of $1,800.0 million (subject to borrowing base availability) on a revolving basis under an asset-based revolving credit facility (as amended, the "Senior ABL Facility"). Up to $1,500.0 million of the Senior ABL Facility is available for the issuance of letters of credit subject to certain conditions including issuing lender participation. Subject to the satisfaction of certain conditions and limitations, the Senior ABL Facility allows for the addition of incremental revolving and/or term loan commitments. In addition, the Senior ABL Facility permits Hertz to increase the amount of commitments under the Senior ABL with the consent of each lender providing an additional commitment, subject to satisfaction of certain conditions.
In March 2011, Hertz amended the Canadian Securitization to extend the maturity date from May 2011 to November 2011.
In June 2011, Hertz Vehicle Financing LLC, or "HVF," a special purpose bankruptcy remote limited liability company of which Hertz is the sole member, closed on $598 million in aggregate principal amount of 3.5 year and 5.5 year weighted average life Series 2011-1 Rental Car Asset Backed Notes, Class A and Class B.
In June 2011, Hertz Holdings Netherlands B.V., an indirect wholly-owned subsidiary of Hertz organized under the laws of The Netherlands, entered into an accordion facility, or the "European Seasonal Revolving Credit Facility," under the European Revolving Credit Facility that provides for aggregate maximum borrowings of €100 million (the equivalent of $143.7 million as of June 30, 2011), subject to borrowing base availability.
Registration Rights
Pursuant to the terms of exchange and registration rights agreements entered into in connection with the separate issuances of the 7.5% Senior Notes due 2018, the 7.375% Senior Notes due 2021 and the 6.75% Senior Notes due 2019, Hertz has agreed to file a registration statement under the Securities Act of 1933, as amended, to permit either the exchange of such notes for registered notes or, in the alternative, the registered resale of such notes. Hertz's failure to meet its obligations under the exchange and registration rights agreements, including by failing to have the respective registration statement become effective by a specified date or failing to complete the respective exchange offer by a specified date, will result in Hertz incurring special interest on such notes at a per annum rate of 0.25% for the first 90 days of any period where a default has occurred and is continuing, which rate will be increased by an additional 0.25% during each subsequent 90 day period, up to a maximum of 0.50%. On March 23, 2011, Hertz filed a registration statement for such notes and on May 25, 2011, Hertz filed an amended registration statement. We do not believe the special interest obligation is probable, and as such, we have not recorded any amounts with respect to this registration payment arrangement.
Guarantees and Security
There have been no material changes to the guarantees and security provisions of the debt instruments and credit facilities under which our indebtedness as of June 30, 2011 has been issued from the terms as disclosed in our Form 10-K.
15
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
Financial Covenant Compliance
Under the new terms of our amended Senior Term Facility and Senior ABL Facility, we are not subject to ongoing financial maintenance covenants; however, under the Senior ABL Facility we are subject to a springing financial maintenance covenant upon the occurrence of certain triggering events. As of June 30, 2011, no triggering event had occurred requiring testing of the springing financial maintenance covenant.
Borrowing Capacity and Availability
As of June 30, 2011, the following facilities were available for the use of Hertz and its subsidiaries (in millions of dollars):
|
Remaining Capacity |
Availability Under Borrowing Base Limitation |
||||||
---|---|---|---|---|---|---|---|---|
Corporate Debt |
||||||||
Senior ABL Facility |
$ | 1,340.8 | $ | 828.9 | ||||
Total Corporate Debt |
1,340.8 | 828.9 | ||||||
Fleet Debt |
||||||||
U.S. Fleet Variable Funding Notes |
298.1 | 29.6 | ||||||
European Seasonal Revolving Credit Facility |
43.1 | 43.1 | ||||||
European Securitization |
174.3 | 34.6 | ||||||
Canadian Securitization |
101.4 | 20.3 | ||||||
Australian Securitization |
121.2 | 2.6 | ||||||
Brazilian Fleet Financing Facility |
0.9 | | ||||||
Capitalized Leases |
15.0 | | ||||||
Total Fleet Debt |
754.0 | 130.2 | ||||||
Total |
$ | 2,094.8 | $ | 959.1 | ||||
Our borrowing capacity and availability primarily comes from our "revolving credit facilities," which are a combination of asset-backed securitization facilities and asset-based revolving credit facilities. Creditors under each of our revolving credit facilities have a claim on a specific pool of assets as collateral. Our ability to borrow under each revolving credit facility is a function of, among other things, the value of the assets in the relevant collateral pool. We refer to the amount of debt we can borrow given a certain pool of assets as the "borrowing base."
We refer to "Remaining Capacity" as the maximum principal amount of debt permitted to be outstanding under the respective facility (i.e., the amount of debt we could borrow assuming we possessed sufficient assets as collateral) less the principal amount of debt then-outstanding under such facility.
We refer to "Availability Under Borrowing Base Limitation" and "borrowing base availability" as the lower of Remaining Capacity or the borrowing base less the principal amount of debt then-outstanding under such facility (i.e., the amount of debt we could borrow given the collateral we possess at such time).
16
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
As of June 30, 2011, the Senior Term Facility had approximately $0.5 million available under the letter of credit facility and the Senior ABL Facility had $1,111.7 million available under the letter of credit facility sublimit, subject to borrowing base restrictions.
Substantially all of our revenue earning equipment and certain related assets are owned by special purpose entities, or are encumbered in favor of our lenders under our various credit facilities.
Some of these special purpose entities are consolidated variable interest entities, of which we are the primary beneficiary, whose sole purpose is to provide commitments to lend in various currencies subject to borrowing bases comprised of rental vehicles and related assets of certain of Hertz International, Ltd.'s subsidiaries. As of June 30, 2011 and December 31, 2010, our International Fleet Financing No. 1 B.V., International Fleet Financing No. 2 B.V. and HA Funding Pty, Ltd. variable interest entities had total assets primarily comprised of loans receivable and revenue earning equipment of $651.4 million and $652.1 million, respectively, and total liabilities primarily comprised of debt of $650.8 million and $651.6 million, respectively.
Note 8Employee Retirement Benefits
The following table sets forth the net periodic pension and postretirement (including health care, life insurance and auto) expense (in millions of dollars):
|
Pension Benefits | |
|
|||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Postretirement Benefits (U.S.) |
|||||||||||||||||||
|
U.S. | Non-U.S. | ||||||||||||||||||
|
Three Months Ended June 30, | |||||||||||||||||||
|
2011 | 2010 | 2011 | 2010 | 2011 | 2010 | ||||||||||||||
Components of Net Periodic Benefit Cost: |
||||||||||||||||||||
Service cost |
$ | 6.9 | $ | 6.7 | $ | 1.8 | $ | 1.2 | $ | | $ | | ||||||||
Interest cost |
7.5 | 6.8 | 2.8 | 2.5 | 0.3 | 0.2 | ||||||||||||||
Expected return on plan assets |
(8.1 | ) | (6.7 | ) | (3.1 | ) | (2.4 | ) | | | ||||||||||
Net amortization |
2.3 | 1.6 | (0.3 | ) | | 0.1 | (0.1 | ) | ||||||||||||
Settlement loss |
0.4 | 0.1 | | | | | ||||||||||||||
Curtailment gain |
| | (13.1 | ) | | | | |||||||||||||
Net pension/postretirement expense |
$ | 9.0 | $ | 8.5 | $ | (11.9 | ) | $ | 1.3 | $ | 0.4 | $ | 0.1 | |||||||
|
Pension Benefits | |
|
|||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Postretirement Benefits (U.S.) | |||||||||||||||||||
|
U.S. | Non-U.S. | ||||||||||||||||||
|
Six Months Ended June 30, | |||||||||||||||||||
|
2011 | 2010 | 2011 | 2010 | 2011 | 2010 | ||||||||||||||
Components of Net Periodic Benefit Cost: |
||||||||||||||||||||
Service cost |
$ | 13.1 | $ | 13.4 | $ | 3.5 | $ | 2.5 | $ | 0.1 | $ | 0.1 | ||||||||
Interest cost |
14.0 | 13.6 | 5.6 | 5.1 | 0.5 | 0.4 | ||||||||||||||
Expected return on plan assets |
(15.2 | ) | (13.4 | ) | (6.2 | ) | (4.9 | ) | | | ||||||||||
Net amortization |
4.3 | 3.3 | (0.6 | ) | (0.1 | ) | 0.1 | (0.2 | ) | |||||||||||
Settlement loss |
0.7 | 0.4 | | | | | ||||||||||||||
Curtailment gain |
| | (13.1 | ) | | | | |||||||||||||
Net pension/postretirement expense |
$ | 16.9 | $ | 17.3 | $ | (10.8 | ) | $ | 2.6 | $ | 0.7 | $ | 0.3 | |||||||
17
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
Our policy for funded plans is to contribute annually, at a minimum, amounts required by applicable laws, regulations and union agreements. From time to time we make contributions beyond those legally required. For the three and six months ended June 30, 2011, we contributed $12.3 million and $57.1 million, respectively, to our worldwide pension plans, including discretionary contributions of $0.8 million and $13.2 million, respectively, to our United Kingdom, or "U.K.," defined benefit pension plan and benefit payments made through unfunded plans. For the three and six months ended June 30, 2010, we contributed $10.6 million and $46.6 million, respectively, to our worldwide pension plans, including discretionary contributions of $1.4 million and $3.2 million, respectively, to our U.K. defined benefit pension plan and benefit payments made through unfunded plans. Based upon the significant decline in asset values in 2008, which were in line with the overall market declines, it is likely we will continue to make cash contributions in 2011 and possibly in future years.
We sponsor a defined benefit pension plan in the U.K. On June 30, 2011, we approved an agreement with the trustees of that plan to cease all future benefit accruals to existing members and to close the plan to new members. We will introduce a defined contribution plan with company matching contributions to replace the defined benefit pension plan. The company matching contributions will generally be 100% of the employee contributions, up to 8% of pay, except that current members of the defined benefit plan will receive an enhanced match for five years. On scheme closure this will result in somewhat lower contributions this year into the defined benefit plan, which will be offset by matching contributions to the new defined contribution plan. We have recognized a gain of $13.1 million for the U.K. plan that represents unamortized prior service cost from a 2010 amendment that eliminated discretionary pension increases related to pre-1997 service primarily related to inactive employees.
We participate in various "multiemployer" pension plans. In the event that we withdraw from participation in one of these plans, then applicable law could require us to make an additional lump-sum contribution to the plan, and we would have to reflect that as an expense in our consolidated statement of operations and as a liability on our condensed consolidated balance sheet. Our withdrawal liability for any multiemployer plan would depend on the extent of the plan's funding of vested benefits. At least one multiemployer plan in which we participate is reported to have, and other of our multiemployer plans could have, significant underfunded liabilities. Such underfunding may increase in the event other employers become insolvent or withdraw from the applicable plan or upon the inability or failure of withdrawing employers to pay their withdrawal liability. In addition, such underfunding may increase as a result of lower than expected returns on pension fund assets or other funding deficiencies.
Note 9Stock-Based Compensation
In March 2011, Hertz Holdings granted 371,505 Restricted Stock Units, or "RSUs," to certain executives and employees at fair values ranging from $14.60 to $15.02, 499,515 Performance Stock Units, or "PSUs," at a fair value of $14.60, and 193,798 PSUs at a fair value of $10.19 under the Hertz Global Holdings, Inc. 2008 Omnibus Incentive Plan, or the "Omnibus Plan." For the PSUs, 499,515 have a performance condition under which the number of units that will ultimately be awarded will vary from 0% to 150% of the original grant, based on the sum of 2011 and 2012 Corporate EBITDA results. The remaining 193,798 PSUs granted contain a market condition whereby the 20 day average trailing stock price must equal or exceed a certain price target at any time during the five year performance period. In May 2011, Hertz Holdings granted 130,275 RSUs at a fair value of $16.39.
18
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
In March 2011, Hertz Holdings granted options to acquire 2,108,944 shares of its common stock to certain executives and employees at exercise prices ranging from $14.60 to $15.02 under the Omnibus Plan.
The non-cash stock-based compensation expense associated with the Prior Plans (as defined below) and the Omnibus Plan is pushed down from Hertz Holdings and recorded on the books at the Hertz level.
A summary of the total compensation expense and associated income tax benefits recognized under the Hertz Global Holdings, Inc. Stock Incentive Plan and Hertz Global Holdings, Inc. Director Stock Incentive Plan, or the "Prior Plans," and the Omnibus Plan, including the cost of stock options, RSUs, and PSUs, is as follows (in millions of dollars):
|
Three Months Ended June 30, |
Six Months Ended June 30, |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2010 | 2011 | 2010 | ||||||||||
Compensation Expense |
$ | 7.6 | $ | 10.3 | $ | 16.6 | $ | 19.3 | ||||||
Income Tax Benefit |
(3.0 | ) | (4.0 | ) | (6.4 | ) | (7.5 | ) | ||||||
Total |
$ | 4.6 | $ | 6.3 | $ | 10.2 | $ | 11.8 | ||||||
As of June 30, 2011, there was approximately $49.4 million of total unrecognized compensation cost related to non-vested stock options, RSUs and PSUs granted by Hertz Holdings under the Prior Plans and the Omnibus Plan, including costs related to modifying the exercise prices of certain option grants in order to preserve the intrinsic value of the options, consistent with applicable tax law, to reflect special cash dividends of $4.32 per share paid on June 30, 2006 and $1.12 per share paid on November 21, 2006. The total unrecognized compensation cost is expected to be recognized over the remaining 1.7 years, on a weighted average basis, of the requisite service period that began on the grant dates.
Note 10Segment Information
Our operating segments are aggregated into reportable business segments based primarily upon similar economic characteristics, products, services, customers, and delivery methods. We have identified two reportable segments: rental of cars, crossovers and light trucks, or "car rental," and rental of industrial, construction and material handling equipment, or "equipment rental." Other reconciling items include general corporate assets and expenses, certain interest expense (including net interest on corporate debt), as well as other business activities, such as our third party claim management services.
Adjusted pre-tax income (loss) is the measure utilized by management in making decisions about allocating resources to segments and measuring their performance. We believe this measure best reflects the financial results from ongoing operations. Adjusted pre-tax income (loss) is calculated as income (loss) before income taxes plus other reconciling items, non-cash purchase accounting charges, non-cash debt charges and certain one-time charges and non-operational items. The
19
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
contribution of our reportable segments to revenues and adjusted pre-tax income (loss) and the reconciliation to consolidated amounts are summarized below (in millions of dollars).
|
Three Months Ended June 30, | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Revenues | Adjusted Pre-Tax Income (Loss) |
|||||||||||||
|
2011 | 2010 | 2011 | 2010 | |||||||||||
Car rental |
$ | 1,768.8 | $ | 1,611.4 | $ | 242.2 | $ | 174.9 | |||||||
Equipment rental |
301.7 | 265.8 | 33.4 | 14.4 | |||||||||||
Total reportable segments |
2,070.5 | 1,877.2 | 275.6 | 189.3 | |||||||||||
Other |
1.8 | 2.4 | |||||||||||||
Total |
$ | 2,072.3 | $ | 1,879.6 | |||||||||||
Adjustments: |
|||||||||||||||
Other reconciling items(1) |
(84.9 | ) | (87.3 | ) | |||||||||||
Purchase accounting(2) |
(22.5 | ) | (22.5 | ) | |||||||||||
Non-cash debt charges(3) |
(21.0 | ) | (44.2 | ) | |||||||||||
Restructuring charges |
(33.7 | ) | (20.3 | ) | |||||||||||
Restructuring related charges(4) |
(2.8 | ) | (2.0 | ) | |||||||||||
Derivative losses(5) |
| (0.6 | ) | ||||||||||||
Acquisition related costs |
(6.1 | ) | (7.0 | ) | |||||||||||
Pension adjustment(6) |
13.1 | | |||||||||||||
Premiums paid on debt(7) |
(10.7 | ) | | ||||||||||||
Income before income taxes |
$ | 107.0 | $ | 5.4 | |||||||||||
|
Six Months Ended June 30, | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Revenues | Adjusted Pre-Tax Income (Loss) |
|||||||||||||
|
2011 | 2010 | 2011 | 2010 | |||||||||||
Car rental |
$ | 3,279.1 | $ | 3,033.1 | $ | 303.5 | $ | 202.0 | |||||||
Equipment rental |
569.9 | 502.8 | 43.6 | 9.4 | |||||||||||
Total reportable segments |
3,849.0 | 3,535.9 | 347.1 | 211.4 | |||||||||||
Other |
3.3 | 4.6 | |||||||||||||
Total |
$ | 3,852.3 | $ | 3,540.5 | |||||||||||
Adjustments: |
|||||||||||||||
Other reconciling items(1) |
(166.1 | ) | (172.4 | ) | |||||||||||
Purchase accounting(2) |
(43.1 | ) | (44.6 | ) | |||||||||||
Non-cash debt charges(3) |
(75.1 | ) | (87.7 | ) | |||||||||||
Restructuring charges |
(38.4 | ) | (31.0 | ) | |||||||||||
Restructuring related charges(4) |
(3.3 | ) | (7.3 | ) | |||||||||||
Derivative losses(5) |
| (2.3 | ) | ||||||||||||
Acquisition related costs |
(9.0 | ) | (7.0 | ) | |||||||||||
Management transition costs |
(2.5 | ) | | ||||||||||||
Pension adjustment(6) |
13.1 | | |||||||||||||
Premiums paid on debt(7) |
(62.4 | ) | | ||||||||||||
Loss before income taxes |
$ | (39.7 | ) | $ | (140.9 | ) | |||||||||
20
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
Total assets increased $976.7 million from December 31, 2010 to June 30, 2011. The increase was primarily related to an increase in our car rental segment's revenue earning equipment, partly offset by a decrease in other cash and cash equivalents primarily relating to the redemption of our 10.5% Senior Subordinated Notes and a portion of our 8.875% Senior Notes.
Note 11Total Equity
(in Millions) |
100 Shares Common Stock |
Additional Paid-In Capital |
Retained Earnings (Deficit) |
Accumulated Other Comprehensive Income (Loss) |
Non- controlling Interest |
Total Equity |
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
December 31, 2010 |
$ | | $ | 3,452.0 | $ | (991.1 | ) | $ | 37.8 | $ | 16.5 | $ | 2,515.2 | |||||||
Net loss attributable to The Hertz Corporation and Subsidiaries' common stockholder |
(60.9 | ) | (60.9 | ) | ||||||||||||||||
Translation adjustment changes, net of tax |
58.7 | 58.7 | ||||||||||||||||||
Unrealized holding gains on securities, net of tax |
1.2 | 1.2 | ||||||||||||||||||
Unrealized gain on Euro-denominated debt, net of tax |
(14.9 | ) | (14.9 | ) | ||||||||||||||||
Defined benefit pension plans, net of tax |
14.5 | 14.5 | ||||||||||||||||||
Total Comprehensive Loss |
(1.4 | ) | ||||||||||||||||||
Net income relating to noncontrolling interest |
8.7 | 8.7 | ||||||||||||||||||
Dividend payment to noncontrolling interest |
(10.5 | ) | (10.5 | ) | ||||||||||||||||
Dividends paid |
(12.4 | ) | (12.4 | ) | ||||||||||||||||
Stock-based employee compensation charges, net of tax |
16.6 | 16.6 | ||||||||||||||||||
Employee stock purchase plan |
2.0 | 2.0 | ||||||||||||||||||
Hertz Holdings common shares issued to Directors |
1.4 | 1.4 | ||||||||||||||||||
June 30, 2011 |
$ | | $ | 3,472.0 | $ | (1,064.4 | ) | $ | 97.3 | $ | 14.7 | $ | 2,519.6 | |||||||
21
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
(in Millions) |
100 Shares Common Stock |
Additional Paid-In Capital |
Retained Earnings (Deficit) |
Accumulated Other Comprehensive Income (Loss) |
Non- controlling Interest |
Total Equity |
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
December 31, 2009 |
$ | | $ | 3,410.5 | $ | (950.4 | ) | $ | (3.3 | ) | $ | 17.3 | $ | 2,474.1 | ||||||
Net loss attributable to The Hertz Corporation and Subsidiaries' common stockholder |
(143.2 | ) | (143.2 | ) | ||||||||||||||||
Change in fair value of derivatives qualifying as cash flow hedges, net of tax |
29.0 | 29.0 | ||||||||||||||||||
Translation adjustment changes, net of tax |
(83.2 | ) | (83.2 | ) | ||||||||||||||||
Unrealized gain on Euro-denominated debt, net of tax |
27.6 | 27.6 | ||||||||||||||||||
Defined benefit pension plans, net of tax |
(0.9 | ) | (0.9 | ) | ||||||||||||||||
Total Comprehensive Loss |
(170.7 | ) | ||||||||||||||||||
Dividend payment to noncontrolling interest |
(7.6 | ) | (7.6 | ) | ||||||||||||||||
Net income relating to noncontrolling interest |
8.2 | 8.2 | ||||||||||||||||||
Dividends paid |
(12.5 | ) | (12.5 | ) | ||||||||||||||||
Stock-based employee compensation charges, net of tax |
19.3 | 19.3 | ||||||||||||||||||
Proceeds from employee stock purchase plan |
1.2 | 1.2 | ||||||||||||||||||
Hertz Holdings common shares issued to Directors |
1.4 | 1.4 | ||||||||||||||||||
June 30, 2010 |
$ | | $ | 3,432.4 | $ | (1,106.1 | ) | $ | (30.8 | ) | $ | 17.9 | $ | 2,313.4 | ||||||
Accumulated other comprehensive income as of June 30, 2011 and December 31, 2010 includes accumulated translation gains of $173.6 million and $114.9 million, respectively, pension benefits of $(55.8) million and $(70.2) million, respectively, unrealized losses on our Euro-denominated debt of $(21.7) million and $(6.8) million, respectively, and unrealized holding gains of $1.3 million and $0.1 million respectively.
Note 12Restructuring
As part of our ongoing effort to implement our strategy of reducing operating costs, we have evaluated our workforce and operations and made adjustments, including headcount reductions and business process reengineering resulting in optimized work flow at rental locations and maintenance facilities as well as streamlined our back-office operations and evaluated potential outsourcing opportunities. When we made adjustments to our workforce and operations, we incurred incremental expenses that delay the
22
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
benefit of a more efficient workforce and operating structure, but we believe that increased operating efficiency and reduced costs associated with the operation of our business are important to our long-term competitiveness.
During 2007 through 2010, we announced several initiatives to improve our competitiveness and industry leadership through targeted job reductions. These initiatives included, but were not limited to, job reductions at our corporate headquarters and back-office operations in the U.S. and Europe. As part of our re-engineering optimization we outsourced selected functions globally. In addition, we streamlined operations and reduced costs by initiating the closure of targeted car rental locations and equipment rental branches throughout the world. The largest of these closures occurred in 2008 which resulted in closures of approximately 250 off-airport locations and 22 branches in our U.S. equipment rental business. These initiatives impacted approximately 8,500 employees.
During the first quarter of 2011, we continued to streamline operations and reduce costs with the closure of several car rental and equipment rental locations globally as well as a reduction in our workforce by approximately 100 employees.
During the second quarter of 2011, we continued to streamline operations and reduce costs with the closure of twelve equipment rental locations in the U.S., consolidation of our European headquarters and the reduction in our global workforce by approximately 50 employees.
From January 1, 2007 through June 30, 2011, we incurred $512.7 million ($244.2 million for our car rental segment, $214.7 million for our equipment rental segment and $53.8 million of other) of restructuring charges.
Additional efficiency and cost saving initiatives are being developed during 2011. However, we presently do not have firm plans or estimates of any related expenses.
Restructuring charges in our consolidated statement of operations can be summarized as follows (in millions of dollars):
|
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2010 | 2011 | 2010 | |||||||||||
By Type: |
|||||||||||||||
Involuntary termination benefits |
$ | 3.4 | $ | 1.4 | $ | 4.4 | $ | 4.8 | |||||||
Pension and post retirement expense |
0.3 | 0.3 | 0.3 | 0.6 | |||||||||||
Consultant costs |
0.2 | | 0.3 | 0.7 | |||||||||||
Asset writedowns |
22.6 | 13.7 | 23.3 | 14.5 | |||||||||||
Facility closure and lease obligation costs |
6.9 | 3.0 | 10.0 | 6.6 | |||||||||||
Relocation costs and temporary labor costs |
| 1.2 | | 2.5 | |||||||||||
Other |
0.3 | 0.7 | 0.1 | 1.3 | |||||||||||
Total |
$ | 33.7 | $ | 20.3 | $ | 38.4 | $ | 31.0 | |||||||
23
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
|
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2010 | 2011 | 2010 | |||||||||||
By Caption: |
|||||||||||||||
Direct operating |
$ | 30.4 | $ | 18.3 | $ | 34.5 | $ | 25.3 | |||||||
Selling, general and administrative |
3.3 | 2.0 | 3.9 | 5.7 | |||||||||||
Total |
$ | 33.7 | $ | 20.3 | $ | 38.4 | $ | 31.0 | |||||||
|
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2010 | 2011 | 2010 | |||||||||||
By Segment: |
|||||||||||||||
Car rental |
$ | 3.5 | $ | 4.2 | $ | 4.5 | $ | 9.5 | |||||||
Equipment rental |
29.8 | 16.0 | 33.6 | 20.9 | |||||||||||
Other reconciling items |
0.4 | 0.1 | 0.3 | 0.6 | |||||||||||
Total |
$ | 33.7 | $ | 20.3 | $ | 38.4 | $ | 31.0 | |||||||
The following table sets forth the activity affecting the restructuring accrual during the six months ended June 30, 2011 (in millions of dollars). We expect to pay the remaining restructuring obligations relating to involuntary termination benefits over the next twelve months. The remainder of the restructuring accrual relates to future lease obligations which will be paid over the remaining term of the applicable leases.
|
Involuntary Termination Benefits |
Pension and Post Retirement Expense |
Consultant Costs |
Other | Total | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance as of January 1, 2011 |
$ | 6.3 | $ | 0.2 | $ | 0.1 | $ | 10.9 | $ | 17.5 | |||||||
Charges incurred |
4.4 | 0.3 | 0.3 | 33.4 | 38.4 | ||||||||||||
Cash payments |
(7.8 | ) | | (0.1 | ) | (0.8 | ) | (8.7 | ) | ||||||||
Other(1) |
0.1 | (0.2 | ) | | (26.0 | ) | (26.1 | ) | |||||||||
Balance as of June 30, 2011 |
$ | 3.0 | $ | 0.3 | $ | 0.3 | $ | 17.5 | $ | 21.1 | |||||||
Note 13Financial Instruments
Cash and Cash Equivalents and Restricted Cash and Cash Equivalents
Fair value approximates the amount indicated on the balance sheet at June 30, 2011 and December 31, 2010 because of the short-term maturity of these instruments. Money market accounts, whose fair value at June 30, 2011, is measured using Level 1 inputs, totaling $309.8 million and $103.4 million are included in "Cash and cash equivalents" and "Restricted cash and cash equivalents," respectively. Money market accounts, whose fair value at December 31, 2010, is measured using Level 1 inputs, totaling $1,747.9 million and $24.1 million are included in "Cash and cash equivalents" and "Restricted cash and cash equivalents," respectively.
24
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
Marketable Securities
Marketable securities held by us consist of equity securities classified as available-for-sale, which are carried at fair value and are included within "Prepaid expenses and other assets." Unrealized gains and losses, net of related income taxes, are included in "Accumulated other comprehensive income." As of June 30, 2011 and December 31, 2010, the fair value of marketable securities was $34.9 million and $0.0 million, respectively. For the three and six months ended June, 30, 2011, unrealized gains of $2.0 million and $2.0 million, respectively, were recorded in "Accumulated other comprehensive income." Fair values for marketable securities are based on Level 1 inputs consisting of quoted market prices.
Debt
For borrowings with an initial maturity of 93 days or less, fair value approximates carrying value because of the short-term nature of these instruments. For all other debt, fair value is estimated based on quoted market rates as well as borrowing rates currently available to us for loans with similar terms and average maturities (Level 2 inputs). The aggregate fair value of all debt at June 30, 2011 was $11,505.7 million, compared to its aggregate unpaid principal balance of $11,311.4 million. The aggregate fair value of all debt at December 31, 2010 was $11,156.1 million, compared to its aggregate unpaid principal balance of $10,954.8 million.
Derivative Instruments and Hedging Activities
The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis (in millions of dollars):
|
Fair Value of Derivative Instruments(1) | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Asset Derivatives(2) | Liability Derivatives(2) | |||||||||||||
|
June 30, 2011 |
December 31, 2010 |
June 30, 2011 |
December 31, 2010 |
|||||||||||
Derivatives not designated as hedging instruments under ASC 815: |
|||||||||||||||
Gasoline swaps |
$ | 1.3 | $ | 3.1 | $ | | $ | | |||||||
Interest rate caps |
2.4 | 7.2 | 2.4 | 7.2 | |||||||||||
Foreign exchange forward contracts |
1.8 | 2.6 | 13.7 | 11.1 | |||||||||||
Foreign exchange options |
0.2 | 0.1 | | | |||||||||||
Total derivatives not designated as hedging instruments under ASC 815 |
$ | 5.7 | $ | 13.0 | $ | 16.1 | $ | 18.3 | |||||||
25
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
|
Amount of Gain or (Loss) Recognized in Other Comprehensive Income (Loss) on Derivative (Effective Portion) |
Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income (Effective Portion) |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Three Months Ended June 30, | |||||||||||||
|
2011 | 2010 | 2011 | 2010 | ||||||||||
Derivatives in ASC 815 Cash Flow Hedging Relationship: |
||||||||||||||
HVF interest rate swaps |
$ | | $ | (5.6 | ) | $ | | $ | (23.6 | )(1) |
|
Amount of Gain or (Loss) Recognized in Other Comprehensive Income (Loss) on Derivative (Effective Portion) |
Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income (Effective Portion) |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Six Months Ended June 30, | |||||||||||||
|
2011 | 2010 | 2011 | 2010 | ||||||||||
Derivatives in ASC 815 Cash Flow Hedging Relationship: |
||||||||||||||
HVF interest rate swaps |
$ | | $ | (8.8 | ) | $ | | $ | (50.5 | )(1) |
|
|
Amount of Gain or (Loss) Recognized in Income on Derivative |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
|
Three Months Ended June 30, |
|||||||||
|
Location of Gain or (Loss) Recognized on Derivative |
||||||||||
|
2011 | 2010 | |||||||||
Derivatives Not Designated as Hedging Instruments under ASC 815: |
|||||||||||
Gasoline swaps |
Direct operating | $ | (0.2 | ) | $ | (2.5 | ) | ||||
Interest rate caps |
Selling, general and administrative | | (0.6 | ) | |||||||
Foreign exchange forward contracts |
Selling, general and administrative | (7.3 | ) | (10.1 | ) | ||||||
Foreign exchange options |
Selling, general and administrative | | | ||||||||
Total |
$ | (7.5 | ) | $ | (13.2 | ) | |||||
26
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
|
|
Amount of Gain or (Loss) Recognized in Income on Derivative |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
|
Six Months Ended June 30, |
|||||||||
|
Location of Gain or (Loss) Recognized on Derivative |
||||||||||
|
2011 | 2010 | |||||||||
Derivatives Not Designated as Hedging Instruments under ASC 815: |
|||||||||||
Gasoline swaps |
Direct operating | $ | 2.9 | $ | (1.7 | ) | |||||
Interest rate caps |
Selling, general and administrative | | (2.3 | ) | |||||||
Foreign exchange forward contracts |
Selling, general and administrative | (7.9 | ) | (1.4 | ) | ||||||
Foreign exchange options |
Selling, general and administrative | | (0.1 | ) | |||||||
Total |
$ | (5.0 | ) | $ | (5.5 | ) | |||||
In conjunction with the refinanced Series 2009-1 Notes and the new Series 2010-2 Notes, HVF purchased an interest rate cap for $6.7 million, with a maximum notional amount equal to the refinanced Series 2009-1 Notes and the new Series 2010-2 Notes with a combined maximum principal amount of $2.1 billion, a strike rate of 5% and expected maturity date of March 25, 2013. Additionally, Hertz sold a 5% interest rate cap for $6.2 million, with a matching notional amount and term to the HVF interest rate cap. Also in December 2010, the Australian Securitization was completed and our Australian operating subsidiary purchased an interest rate cap for $0.5 million, with a maximum notional amount equal to the Australian Securitization maximum principal amount of A$250 million, a strike rate of 7% and expected maturity date of December 2012. Additionally, Hertz sold a 7% interest rate cap, for $0.4 million with a matching notional amount and term to the Australian operating subsidiary's interest rate cap. The fair values of all interest rate caps were calculated using a discounted cash flow method and applying observable market data (i.e. the 1-month LIBOR yield curve and credit default swap spreads). Gains and losses resulting from changes in the fair value of these interest rate caps are included in our results of operations in the periods incurred.
We purchase unleaded gasoline and diesel fuel at prevailing market rates and maintain a program to manage our exposure to changes in fuel prices through the use of derivative commodity instruments. We currently have in place swaps to cover a portion of our fuel price exposure through January 2012. We presently hedge a portion of our overall unleaded gasoline and diesel fuel purchases with commodity swaps and have contracts in place that settle on a monthly basis. As of June 30, 2011, our outstanding commodity instruments for unleaded gasoline and diesel fuel totaled approximately 6.6 million gallons and 1.8 million gallons, respectively. The fair value of these commodity instruments was calculated using a discounted cash flow method and applying observable market data (i.e., NYMEX RBOB Gasoline and U.S. Department of Energy surveys, etc.). Gains and losses resulting from changes in the fair value of these commodity instruments are included in our results of operations in the periods incurred.
We manage our foreign currency risk primarily by incurring, to the extent practicable, operating and financing expenses in the local currency in the countries in which we operate, including making fleet and equipment purchases and borrowing for working capital needs. Also, we have purchased foreign exchange options to manage exposure to fluctuations in foreign exchange rates for selected marketing programs. The effect of exchange rate changes on these financial instruments would not materially affect our consolidated financial position, results of operations or cash flows. Our risks with respect to foreign exchange options are limited to the premium paid for the right to exercise the option and the future performance of the option's counterparty. Premiums paid for options outstanding as of June 30,
27
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
2011, were approximately $0.2 million. We limit counterparties to the transactions to financial institutions that have strong credit ratings. As of June 30, 2011 and December 31, 2010, the total notional amount of these foreign exchange options was $7.1 million and $3.5 million, respectively. As of June 30, 2011, these foreign exchange options mature through January 2012. The fair value of the foreign exchange options was calculated using a discounted cash flow method and applying observable market data (i.e. foreign currency exchange rates). Gains and losses resulting from changes in the fair value of these options are included in our results of operations in the periods incurred.
We also manage exposure to fluctuations in currency risk on intercompany loans we make to certain of our subsidiaries by entering into foreign currency forward contracts at the time of the loans which are intended to offset the impact of foreign currency movements on the underlying intercompany loan obligations. As of June 30, 2011 and December 31, 2010, the total notional amount of these forward contracts was $808.8 million and $721.8 million, respectively. As of June 30, 2011 these foreign currency forward contracts mature within four months. The fair value of these foreign currency forward contracts was calculated based on foreign currency forward exchange rates.
On October 1, 2006, we designated our 7.875% Senior Notes due 2014 as an effective net investment hedge of our Euro-denominated net investment in our international operations. As a result of this net investment hedge designation, as of June 30, 2011 and December 31, 2010, losses of $21.7 million (net of tax of $14.7 million) and $6.8 million (net of tax of $5.1 million), respectively, attributable to the translation of our 7.875% Senior Notes due 2014 into the U.S. dollar are recorded in our condensed consolidated balance sheet in "Accumulated other comprehensive income."
Note 14Related Party Transactions
Relationship with Hertz Investors, Inc., Hertz Holdings and the Sponsors
Other than as disclosed below, in the six months ended June 30, 2011, there were no material changes to our relationship with Hertz Investors, Inc., Hertz Holdings or the Sponsors.
On March 31, 2011, the Sponsors sold 50 million of our common shares to Goldman, Sachs & Co. as the sole underwriter in the registered public offering of those shares. Following this offering, the Sponsors continue to own an aggregate of approximately 160 million shares, or approximately 39% of Hertz Holdings' outstanding common stock.
Financing Arrangements with Related Parties
Affiliates of BAMLCP (which is one of the Sponsors), including Merrill Lynch & Co., Inc., Bank of America, N.A. and certain of their affiliates (which are stockholders of Hertz Holdings), have provided various investment and commercial banking and financial advisory services to us for which they have received customary fees and commissions. In addition, these parties have acted as agents, lenders, purchasers and/or underwriters to us under our respective financing arrangements, for which they have received customary fees, commissions, expenses and/or other compensation. More specifically, these parties have acted in the following capacities, or similar capacities, with respect to our financing arrangements: lenders and/or agents under the Senior Credit Facilities, the U.S. Fleet Financing Facility and certain of the U.S. Fleet Variable Funding Notes; purchasers and/or underwriters under the Senior Notes and certain of the U.S. Fleet Medium Term Notes; and structuring advisors and/or agents under the ABS Program.
As of June 30, 2011 and December 31, 2010, approximately $197 million and $255 million, respectively, of our outstanding debt was with related parties.
28
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
See Note 7Debt.
On June 29, 2007, we entered into a master loan agreement with Hertz Holdings. The maximum amount which may be borrowed by us under this facility is $100 million. The facility expires on June 29, 2012, or on an earlier date if mutually agreed by both parties. The interest rate is based on the U.S. Dollar LIBOR rate plus the margin in effect for the Eurocurrency Loans under our Senior ABL Facility. As of June 30, 2011 and December 31, 2010, $1.6 million and $1.4 million in borrowings were outstanding, respectively.
Note 15Contingencies and Off-Balance Sheet Commitments
Off-Balance Sheet Commitments
As of June 30, 2011 and December 31, 2010, the following guarantees (including indemnification commitments) were issued and outstanding.
Indemnification Obligations
In the ordinary course of business, we execute contracts involving indemnification obligations customary in the relevant industry and indemnifications specific to a transaction such as the sale of a business. These indemnification obligations might include claims relating to the following: environmental matters; intellectual property rights; governmental regulations and employment-related matters; customer, supplier and other commercial contractual relationships; and financial matters. Performance under these indemnification obligations would generally be triggered by a breach of terms of the contract or by a third party claim. We regularly evaluate the probability of having to incur costs associated with these indemnification obligations and have accrued for expected losses that are probable and estimable. The types of indemnification obligations for which payments are possible include the following:
Sponsors; Directors
We have entered into customary indemnification agreements with Hertz Holdings, the Sponsors and Hertz Holdings' stockholders affiliated with the Sponsors, pursuant to which Hertz Holdings and we will indemnify the Sponsors, Hertz Holdings' stockholders affiliated with the Sponsors and their respective affiliates, directors, officers, partners, members, employees, agents, representatives and controlling persons, against certain liabilities arising out of performance of a consulting agreement with Hertz Holdings and each of the Sponsors and certain other claims and liabilities, including liabilities arising out of financing arrangements or securities offerings. We do not believe that these indemnifications are reasonably likely to have a material impact on us. Hertz Holdings has entered into indemnification agreements with each of its directors.
Environmental
We have indemnified various parties for the costs associated with remediating numerous hazardous substance storage, recycling or disposal sites in many states and, in some instances, for natural resource damages. The amount of any such expenses or related natural resource damages for which we may be held responsible could be substantial. The probable expenses that we expect to incur for such matters have been accrued, and those expenses are reflected in our condensed consolidated financial statements. As of June 30, 2011 and December 31, 2010, the aggregate amounts accrued for environmental liabilities including liability for environmental indemnities, reflected in our condensed
29
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
consolidated balance sheets in "Accrued liabilities" were $1.7 million and $1.6 million, respectively. The accrual generally represents the estimated cost to study potential environmental issues at sites deemed to require investigation or clean-up activities, and the estimated cost to implement remediation actions, including on-going maintenance, as required. Cost estimates are developed by site. Initial cost estimates are based on historical experience at similar sites and are refined over time on the basis of in-depth studies of the sites. For many sites, the remediation costs and other damages for which we ultimately may be responsible cannot be reasonably estimated because of uncertainties with respect to factors such as our connection to the site, the materials there, the involvement of other potentially responsible parties, the application of laws and other standards or regulations, site conditions, and the nature and scope of investigations, studies, and remediation to be undertaken (including the technologies to be required and the extent, duration, and success of remediation).
Legal Proceedings
From time to time we are a party to various legal proceedings. We are currently a defendant in numerous actions and have received numerous claims on which actions have not yet been commenced for public liability and property damage arising from the operation of motor vehicles and equipment rented from us and our licensees. The obligation for public liability and property damage on self-insured U.S. and international vehicles and equipment, as stated on our balance sheet, represents an estimate for both reported accident claims not yet paid and claims incurred but not yet reported. The related liabilities are recorded on a non-discounted basis. Reserve requirements are based on actuarial evaluations of historical accident claim experience and trends, as well as future projections of ultimate losses, expenses, premiums and administrative costs. At June 30, 2011 and December 31, 2010 our liability recorded for public liability and property damage matters was $286.0 million and $278.7 million, respectively. We believe that our analysis was based on the most relevant information available, combined with reasonable assumptions, and that we may prudently rely on this information to determine the estimated liability. We note the liability is subject to significant uncertainties. The adequacy of the liability reserve is regularly monitored based on evolving accident claim history and insurance related state legislation changes. If our estimates change or if actual results differ from these assumptions, the amount of the recorded liability is adjusted to reflect these results.
For a detailed description of certain of our legal proceedings please see Note 11 of the Notes to our audited annual consolidated financial statements included in our Form 10-K under the caption "Item 8Financial Statements and Supplementary Data."
The following recent development pertaining to a legal proceeding described in our Form 10-K is furnished on a supplemental basis:
In May 2011, the judge in the related cases of Janet Sobel et al. v. The Hertz Corporation and Lydia Lee et al. v. Enterprise Rent-A-Car Company et al. denied the plaintiffs' motion for final approval of the proposed settlement and denied the plaintiffs' motion for attorneys' fees, expenses and incentive awards as moot. The court concluded that the absence of evidence as to the actual value to the class of the coupons offered in settlement and the value of the claims to be surrendered precluded a finding that the settlement is fair, reasonable and adequate.
None of the other legal proceedings described in our Form 10-K have experienced material changes.
In addition to the above mentioned and those described in our Form 10-K or in our other filings with Securities and Exchange Commission, various other legal actions, claims and governmental inquiries and proceedings are pending or may be instituted or asserted in the future against us and our
30
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
subsidiaries. Other than with respect to the aggregate claims for public liability and property damage pending against us, management does not believe that any of the matters resolved, or pending against us, are material to us and our subsidiaries taken as a whole.
We have established reserves for matters where we believe that the losses are probable and reasonably estimated. Other than with respect to the reserve established for claims for public liability and property damage, none of those reserves are material. For matters where we have not established a reserve, the ultimate outcome or resolution cannot be predicted at this time, or the amount of ultimate loss, if any, cannot be reasonably estimated. Litigation is subject to many uncertainties and the outcome of the individual litigated matters is not predictable with assurance. It is possible that certain of the actions, claims, inquiries or proceedings, including those discussed in our Form 10-K or in our other filings with Securities and Exchange Commission, could be decided unfavorably to us or any of our subsidiaries involved. Accordingly, it is possible that an adverse outcome from such a proceeding could exceed the amount accrued in an amount that could be material to our consolidated financial condition, results of operations or cash flows in any particular reporting period.
Note 16Guarantor and Non-Guarantor Condensed Consolidating Financial Statements
The following condensed consolidating financial information presents the Condensed Consolidating Balance Sheets as of June 30, 2011 and December 31, 2010 and the Condensed Consolidating Statements of Operations for the three and six month periods ended June 30, 2011 and 2010, and Statements of Cash Flows for the six months ended June 30, 2011 and 2010, of (a) The Hertz Corporation, ("the Company" or "the Parent"); (b) the Parent's subsidiaries that guarantee the Parent's indebtedness, or the Guarantor Subsidiaries; (c) the Parent's subsidiaries that do not guarantee the Parent's indebtedness, or the Non-Guarantor Subsidiaries; (d) elimination entries necessary to consolidate the Parent with the Guarantor Subsidiaries and Non-Guarantor Subsidiaries; and of (e) the Company on a consolidated basis.
Investments in subsidiaries are accounted for using the equity method for purposes of the consolidating presentation. The principal elimination entries relate to investments in subsidiaries and intercompany balances and transactions. Separate financial statements and other disclosures with respect to the Guarantor Subsidiaries have not been provided as management believes the following information is sufficient, as the Guarantor Subsidiaries are 100% owned by the Parent and all guarantees are full and unconditional and joint and several. Additionally, substantially all of the assets of the Guarantor Subsidiaries are pledged under the Senior Credit Facilities, and consequently will not be available to satisfy the claims of our general creditors.
We have revised our Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2010 to reflect a reclassification of revenue earning equipment proceeds between the operating and investing sections of the Parent and Non-Guarantor Subsidiaries. We previously reported "Net cash provided by operating activities" of $361.5 million for the Parent and $880.7 million for the Non-Guarantor Subsidiaries for the six months ended June 30, 2010. We previously reported "Net cash used in investing activities" of $45.5 million for the Parent and $2,406.0 million for the Non-Guarantor Subsidiaries for the six months ended June 30, 2010. We have also revised our Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2010 to reflect a reclassification of certain payments to a third party finance company for purchases of revenue earning equipment between the investing and financing sections of the Non-Guarantor Subsidiaries. We previously reported "Net cash provided by financing activities" of $1,286.1 million for the Non-Guarantor Subsidiaries for the six months ended June 30, 2010. There was no impact to The Hertz Corporation's Consolidated Statement of Cash Flows. Management has concluded that this footnote revision is not material to our previously issued financial statements.
31
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
CONDENSED CONSOLIDATING BALANCE SHEET
June 30, 2011
(In Thousands of Dollars)
|
Parent (The Hertz Corporation) |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | The Hertz Corporation & Subsidiaries |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
ASSETS |
|||||||||||||||||
Cash and cash equivalents |
$ | 305,177 | $ | 4,419 | $ | 437,984 | $ | | $ | 747,580 | |||||||
Restricted cash and cash equivalents |
17,911 | 14,455 | 241,923 | | 274,289 | ||||||||||||
Receivables, less allowance for doubtful accounts |
243,085 | 171,616 | 1,032,469 | | 1,447,170 | ||||||||||||
Due from Hertz affiliate |
806,262 | 55,169 | 651,897 | (1,513,328 | ) | | |||||||||||
Inventories, at lower cost or market |
29,016 | 31,722 | 39,261 | | 99,999 | ||||||||||||
Prepaid expenses and other assets |
2,013,678 | 7,432 | 161,837 | (1,724,754 | ) | 458,193 | |||||||||||
Revenue earning equipment, net |
176,601 | 1,267,555 | 9,781,197 | | 11,225,353 | ||||||||||||
Property and equipment, net |
784,680 | 170,856 | 263,006 | | 1,218,542 | ||||||||||||
Investment in subsidiaries, net |
4,256,989 | 27,416 | | (4,284,405 | ) | | |||||||||||
Other intangible assets, net |
104,755 | 2,326,882 | 90,903 | | 2,522,540 | ||||||||||||
Goodwill |
71,835 | 12,502 | 222,875 | | 307,212 | ||||||||||||
Total assets |
$ | 8,809,989 | $ | 4,090,024 | $ | 12,923,352 | $ | (7,522,487 | ) | $ | 18,300,878 | ||||||
LIABILITIES AND EQUITY |
|||||||||||||||||
Due to Hertz affiliate |
$ | 706,761 | $ | 220,708 | $ | 587,437 | $ | (1,513,328 | ) | $ | 1,578 | ||||||
Accounts payable |
111,800 | 141,467 | 1,307,589 | | 1,560,856 | ||||||||||||
Accrued liabilities |
691,318 | 38,170 | 312,441 | | 1,041,929 | ||||||||||||
Accrued taxes |
61,925 | 173,137 | 152,890 | (226,098 | ) | 161,854 | |||||||||||
Debt |
4,627,667 | 104 | 6,667,983 | | 11,295,754 | ||||||||||||
Public liability and property damage |
105,699 | 16,434 | 163,885 | | 286,018 | ||||||||||||
Deferred taxes on income |
| 1,277,985 | 1,654,004 | (1,498,656 | ) | 1,433,333 | |||||||||||
Total liabilities |
6,305,170 | 1,868,005 | 10,846,229 | (3,238,082 | ) | 15,781,322 | |||||||||||
Equity: |
|||||||||||||||||
The Hertz Corporation and Subsidiaries stockholder's equity |
2,504,819 | 2,222,019 | 2,062,386 | (4,284,405 | ) | 2,504,819 | |||||||||||
Noncontrolling interest |
| | 14,737 | | 14,737 | ||||||||||||
Total equity |
2,504,819 | 2,222,019 | 2,077,123 | (4,284,405 | ) | 2,519,556 | |||||||||||
Total liabilities and equity |
$ | 8,809,989 | $ | 4,090,024 | $ | 12,923,352 | $ | (7,522,487 | ) | $ | 18,300,878 | ||||||
32
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2010
(In Thousands of Dollars)
|
Parent (The Hertz Corporation) |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | The Hertz Corporation & Subsidiaries |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
ASSETS |
|||||||||||||||||
Cash and cash equivalents |
$ | 1,754,378 | $ | 5,180 | $ | 614,448 | $ | | $ | 2,374,006 | |||||||
Restricted cash and cash equivalents |
16,092 | 25,468 | 166,016 | | 207,576 | ||||||||||||
Receivables, less allowance for doubtful accounts |
265,195 | 166,483 | 924,875 | | 1,356,553 | ||||||||||||
Due from Hertz affiliate |
501,735 | 47,166 | 313,466 | (862,367 | ) | | |||||||||||
Inventories, at lower cost or market |
21,164 | 31,734 | 34,531 | | 87,429 | ||||||||||||
Prepaid expenses and other assets |
1,756,704 | 6,814 | 169,539 | (1,588,131 | ) | 344,926 | |||||||||||
Revenue earning equipment, net |
166,316 | 1,265,641 | 7,507,452 | | 8,939,409 | ||||||||||||
Property and equipment, net |
735,770 | 178,691 | 249,108 | | 1,163,569 | ||||||||||||
Investment in subsidiaries, net |
4,044,084 | 47,109 | | (4,091,193 | ) | | |||||||||||
Other intangible assets, net |
114,840 | 2,334,500 | 101,219 | | 2,550,559 | ||||||||||||
Goodwill |
71,835 | 9,971 | 218,368 | | 300,174 | ||||||||||||
Total assets |
$ | 9,448,113 | $ | 4,118,757 | $ | 10,299,022 | $ | (6,541,691 | ) | $ | 17,324,201 | ||||||
LIABILITIES AND EQUITY |
|||||||||||||||||
Due to Hertz affiliate |
$ | 360,069 | $ | 191,832 | $ | 311,862 | $ | (862,367 | ) | $ | 1,396 | ||||||
Accounts payable |
144,261 | 177,170 | 623,542 | | 944,973 | ||||||||||||
Accrued liabilities |
681,125 | 30,961 | 355,916 | | 1,068,002 | ||||||||||||
Accrued taxes |
51,916 | 174,553 | 22,331 | (112,403 | ) | 136,397 | |||||||||||
Debt |
5,601,707 | 112 | 5,317,526 | | 10,919,345 | ||||||||||||
Public liability and property damage |
110,346 | 16,939 | 151,400 | | 278,685 | ||||||||||||
Deferred taxes on income |
| 1,284,768 | 1,651,172 | (1,475,728 | ) | 1,460,212 | |||||||||||
Total liabilities |
6,949,424 | 1,876,335 | 8,433,749 | (2,450,498 | ) | 14,809,010 | |||||||||||
Equity: |
|||||||||||||||||
The Hertz Corporation and Subsidiaries stockholder's equity |
2,498,689 | 2,242,422 | 1,848,771 | (4,091,193 | ) | 2,498,689 | |||||||||||
Noncontrolling interest |
| | 16,502 | | 16,502 | ||||||||||||
Total equity |
2,498,689 | 2,242,422 | 1,865,273 | (4,091,193 | ) | 2,515,191 | |||||||||||
Total liabilities and equity |
$ | 9,448,113 | $ | 4,118,757 | $ | 10,299,022 | $ | (6,541,691 | ) | $ | 17,324,201 | ||||||
33
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Three Months Ended June 30, 2011
(In Thousands of Dollars)
|
Parent (The Hertz Corporation) |
Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Eliminations | The Hertz Corporation & Subsidiaries |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Total revenues |
$ | 1,022,145 | $ | 237,359 | $ | 1,417,951 | $ | (605,162 | ) | $ | 2,072,293 | ||||||
Expenses: |
|||||||||||||||||
Direct operating |
576,641 | 172,021 | 438,644 | | 1,187,306 | ||||||||||||
Depreciation of revenue earning equipment |
511,166 | 54,776 | 458,889 | (605,162 | ) | 419,669 | |||||||||||
Selling, general and administrative |
91,582 | 23,169 | 80,747 | | 195,498 | ||||||||||||
Interest expense |
70,558 | 8,358 | 74,673 | | 153,589 | ||||||||||||
Interest income |
(51 | ) | (7 | ) | (1,488 | ) | | (1,546 | ) | ||||||||
Other (income) expense, net |
10,655 | | 146 | | 10,801 | ||||||||||||
Total expenses |
1,260,551 | 258,317 | 1,051,611 | (605,162 | ) | 1,965,317 | |||||||||||
Income (loss) before income taxes, noncontrolling interest and equity in earnings (losses) of subsidiaries |
(238,406 | ) | (20,958 | ) | 366,340 | | 106,976 | ||||||||||
(Provision) benefit for taxes on income |
75,968 | 6,619 | (122,380 | ) | | (39,793 | ) | ||||||||||
Net income (loss) |
(162,438 | ) | (14,339 | ) | 243,960 | | 67,183 | ||||||||||
Noncontrolling interest |
| | (5,087 | ) | | (5,087 | ) | ||||||||||
Equity in earnings (losses) of subsidiaries (net of tax) |
224,534 | (2,347 | ) | | (222,187 | ) | | ||||||||||
Net income (loss) attributable to The Hertz Corporation and Subsidiaries' common stockholder |
$ | 62,096 | $ | (16,686 | ) | $ | 238,873 | $ | (222,187 | ) | $ | 62,096 | |||||
34
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 2011
(In Thousands of Dollars)
|
Parent (The Hertz Corporation) |
Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Eliminations | The Hertz Corporation & Subsidiaries |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Total revenues |
$ | 1,952,498 | $ | 456,227 | $ | 2,625,578 | $ | (1,182,007 | ) | $ | 3,852,296 | ||||||
Expenses: |
|||||||||||||||||
Direct operating |
1,132,819 | 312,876 | 815,276 | | 2,260,971 | ||||||||||||
Depreciation of revenue earning equipment |
976,851 | 113,352 | 947,562 | (1,182,007 | ) | 855,758 | |||||||||||
Selling, general and administrative |
179,763 | 42,939 | 154,986 | | 377,688 | ||||||||||||
Interest expense |
175,042 | 15,514 | 147,794 | | 338,350 | ||||||||||||
Interest income |
(410 | ) | (8 | ) | (2,984 | ) | | (3,402 | ) | ||||||||
Other (income) expense, net |
62,396 | (9 | ) | 290 | 62,677 | ||||||||||||
Total expenses |
2,526,461 | 484,664 | 2,062,924 | (1,182,007 | ) | 3,892,042 | |||||||||||
Income (loss) before income taxes, noncontrolling interest and equity in earnings (losses) of subsidiaries |
(573,963 | ) | (28,437 | ) | 562,654 | | (39,746 | ) | |||||||||
(Provision) benefit for taxes on income |
182,692 | 9,018 | (204,075 | ) | | (12,365 | ) | ||||||||||
Net income (loss) |
(391,271 | ) | (19,419 | ) | 358,579 | | (52,111 | ) | |||||||||
Less: Net income attributable to noncontrolling interest |
| | (8,760 | ) | | (8,760 | ) | ||||||||||
Equity in earnings (losses) of subsidiaries (net of tax) |
330,400 | (3,304 | ) | | (327,096 | ) | | ||||||||||
Net income (loss) attributable to The Hertz Corporation and Subsidiaries' common stockholder |
$ | (60,871 | ) | $ | (22,723 | ) | $ | 349,819 | $ | (327,096 | ) | $ | (60,871 | ) | |||
35
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Three Months Ended June 30, 2010
(In Thousands of Dollars)
|
Parent (The Hertz Corporation) |
Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Eliminations | The Hertz Corporation & Subsidiaries |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Total revenues |
$ | 993,816 | $ | 199,583 | $ | 1,303,526 | $ | (617,339 | ) | $ | 1,879,586 | ||||||
Expenses: |
|||||||||||||||||
Direct operating |
556,393 | 140,424 | 378,220 | | 1,075,037 | ||||||||||||
Depreciation of revenue earning equipment |
487,276 | 56,832 | 529,951 | (617,339 | ) | 456,720 | |||||||||||
Selling, general and administrative |
92,118 | 17,777 | 62,108 | | 172,003 | ||||||||||||
Interest expense |
72,257 | 7,118 | 97,846 | | 177,221 | ||||||||||||
Interest and other income, net |
(43 | ) | (2 | ) | (6,746 | ) | | (6,791 | ) | ||||||||
Total expenses |
1,208,001 | 222,149 | 1,061,379 | (617,339 | ) | 1,874,190 | |||||||||||
Income (loss) before income taxes, noncontrolling interest and equity in earnings (losses) of subsidiaries |
(214,185 | ) | (22,566 | ) | 242,147 | | 5,396 | ||||||||||
Provision (benefit) for taxes on income (loss) |
23,230 | 2,818 | (34,293 | ) | | (8,245 | ) | ||||||||||
Net income (loss) |
(190,955 | ) | (19,748 | ) | 207,854 | | (2,849 | ) | |||||||||
Less: Net income attributable to noncontrolling interest |
| | (4,673 | ) | | (4,673 | ) | ||||||||||
Equity in earnings (losses) of subsidiaries (net of tax) |
183,433 | (1,426 | ) | | (182,007 | ) | | ||||||||||
Net income (loss) attributable to The Hertz Corporation and Subsidiaries' common stockholder |
$ | (7,522 | ) | $ | (21,174 | ) | $ | 203,181 | $ | (182,007 | ) | $ | (7,522 | ) | |||
36
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 2010
(In Thousands of Dollars)
|
Parent (The Hertz Corporation) |
Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Eliminations | The Hertz Corporation & Subsidiaries |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Total revenues |
$ | 1,906,734 | $ | 381,370 | $ | 2,430,730 | $ | (1,178,360 | ) | $ | 3,540,474 | ||||||
Expenses: |
|||||||||||||||||
Direct operating |
1,094,714 | 260,701 | 732,621 | | 2,088,036 | ||||||||||||
Depreciation of revenue earning equipment |
968,993 | 116,088 | 1,009,172 | (1,178,360 | ) | 915,893 | |||||||||||
Selling, general and administrative |
170,274 | 34,712 | 134,734 | | 339,720 | ||||||||||||
Interest expense |
142,418 | 14,363 | 190,029 | | 346,810 | ||||||||||||
Interest and other income, net |
(92 | ) | (3 | ) | (8,974 | ) | | (9,069 | ) | ||||||||
Total expenses |
2,376,307 | 425,861 | 2,057,582 | (1,178,360 | ) | 3,681,390 | |||||||||||
Income (loss) before income taxes, noncontrolling interest and equity in earnings (losses) of subsidiaries |
(469,573 | ) | (44,491 | ) | 373,148 | | (140,916 | ) | |||||||||
Provision (benefit) for taxes on income (loss) |
81,133 | 7,964 | (83,129 | ) | | 5,968 | |||||||||||
Net income (loss) |
(388,440 | ) | (36,527 | ) | 290,019 | | (134,948 | ) | |||||||||
Less: Net income attributable to noncontrolling interest |
| | (8,251 | ) | | (8,251 | ) | ||||||||||
Equity in earnings (losses) of subsidiaries (net of tax) |
245,241 | (1,791 | ) | | (243,450 | ) | | ||||||||||
Net income (loss) attributable to The Hertz Corporation and Subsidiaries' common stockholder |
$ | (143,199 | ) | $ | (38,318 | ) | $ | 281,768 | $ | (243,450 | ) | $ | (143,199 | ) | |||
37
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 2011
(In Thousands of Dollars)
|
Parent (The Hertz Corporation) |
Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Eliminations | The Hertz Corporation & Subsidiaries |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net cash provided by (used in) operating activities |
$ | 388,425 | $ | 132,542 | $ | 452,580 | $ | (273,946 | ) | $ | 699,601 | |||||||
Cash flows from investing activities: |
||||||||||||||||||
Net change in restricted cash and cash equivalents |
(1,819 | ) | 11,014 | (69,428 | ) | | (60,233 | ) | ||||||||||
Revenue earning equipment expenditures |
(103,214 | ) | (189,323 | ) | (5,174,319 | ) | | (5,466,856 | ) | |||||||||
Proceeds from disposal of revenue earning equipment |
66,993 | 56,343 | 3,365,554 | | 3,488,890 | |||||||||||||
Property and equipment expenditures |
(82,334 | ) | (11,537 | ) | (31,499 | ) | | (125,370 | ) | |||||||||
Proceeds from disposal of property and equipment |
11,793 | 2,803 | 13,792 | | 28,388 | |||||||||||||
Capital contributions to subsidiaries |
(1,801,000 | ) | | | 1,801,000 | | ||||||||||||
Return of capital from subsidiaries |
1,251,054 | | | (1,251,054 | ) | | ||||||||||||
Acquisitions, net of acquired |
| (500 | ) | (10,476 | ) | | (10,976 | ) | ||||||||||
Purchase of short-term investments, net |
(32,891 | ) | | | | (32,891 | ) | |||||||||||
Other investing activities |
| | 1,303 | | 1,303 | |||||||||||||
Net cash provided by (used in) investing activities |
(691,418 | ) | (131,200 | ) | (1,905,073 | ) | 549,946 | (2,177,745 | ) | |||||||||
Cash flows from financing activities: |
||||||||||||||||||
Proceeds from issuance of long-term debt |
2,426,505 | | 602,086 | | 3,028,591 | |||||||||||||
Payment of long-term debt |
(3,585,159 | ) | (8 | ) | (46,305 | ) | | (3,631,472 | ) | |||||||||
Short-term borrowings: |
||||||||||||||||||
Proceeds |
| | 285,803 | | 285,803 | |||||||||||||
Payments |
(8,596 | ) | | (480,621 | ) | | (489,217 | ) | ||||||||||
Proceeds (payments) under the revolving lines of credit, net |
110,872 | (2,095 | ) | 620,078 | | 728,855 | ||||||||||||
Distributions to noncontrolling interest |
| | (10,500 | ) | | (10,500 | ) | |||||||||||
Capital contributions received from parent |
| | 1,801,000 | (1,801,000 | ) | | ||||||||||||
Payment of dividends and return of capital |
(12,450 | ) | | (1,525,000 | ) | 1,525,000 | (12,450 | ) | ||||||||||
Proceeds from employee stock purchase plan |
1,716 | | | | 1,716 | |||||||||||||
Loan from Hertz Global Holdings, Inc. |
182 | | | | 182 | |||||||||||||
Payment of financing costs |
(79,278 | ) | | (2,114 | ) | | (81,392 | ) | ||||||||||
Net cash provided by (used in) financing activities |
(1,146,208 | ) | (2,103 | ) | 1,244,427 | (276,000 | ) | (179,884 | ) | |||||||||
Effect of foreign exchange rate changes on cash and cash equivalents |
| | 31,602 | | 31,602 | |||||||||||||
Net decrease in cash and cash equivalents during the period |
(1,449,201 | ) | (761 | ) | (176,464 | ) | | (1,626,426 | ) | |||||||||
Cash and cash equivalents at beginning of period |
1,754,378 | 5,180 | 614,448 | | 2,374,006 | |||||||||||||
Cash and cash equivalents at end of period |
$ | 305,177 | $ | 4,419 | $ | 437,984 | $ | | $ | 747,580 | ||||||||
38
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 2010
(In Thousands of Dollars)
|
Parent (The Hertz Corporation) |
Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Eliminations | The Hertz Corporation & Subsidiaries |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net cash provided by (used in) operating activities |
$ | 361,230 | $ | 14,695 | $ | 846,626 | $ | (191,420 | ) | $ | 1,031,131 | |||||||
Cash flows from investing activities: |
||||||||||||||||||
Net change in restricted cash and cash equivalents |
1,801 | (3,492 | ) | (387,551 | ) | | (389,242 | ) | ||||||||||
Revenue earning equipment expenditures |
(72,362 | ) | (36,776 | ) | (5,208,160 | ) | | (5,317,298 | ) | |||||||||
Proceeds from disposal of revenue earning equipment |
43,550 | 33,015 | 3,366,945 | | 3,443,510 | |||||||||||||
Property and equipment expenditures |
(44,545 | ) | (9,867 | ) | (37,606 | ) | | (92,018 | ) | |||||||||
Proceeds from disposal of property and equipment |
117 | 8,538 | 6,539 | | 15,194 | |||||||||||||
Capital contributions to subsidiaries |
(301,521 | ) | | | 301,521 | | ||||||||||||
Return of capital from subsidiaries |
324,490 | | | (324,490 | ) | | ||||||||||||
Acquisitions, net of cash acquired |
| | (157 | ) | | (157 | ) | |||||||||||
Purchase of short-term investments, net |
3,183 | 94 | (106 | ) | | 3,171 | ||||||||||||
Other investing activities |
| | 817 | | 817 | |||||||||||||
Net cash provided by (used in) investing activities |
(45,287 | ) | (8,488 | ) | (2,259,279 | ) | (22,969 | ) | (2,336,023 | ) | ||||||||
Cash flows from financing activities: |
||||||||||||||||||
Proceeds from issuance of long-term debt |
8,018 | | 673,352 | | 681,370 | |||||||||||||
Payment of long-term debt |
(65,550 | ) | (39 | ) | (691,375 | ) | | (756,964 | ) | |||||||||
Short-term borrowings: |
||||||||||||||||||
Proceeds |
9,621 | | 265,109 | | 274,730 | |||||||||||||
Repayments |
| | (281,009 | ) | | (281,009 | ) | |||||||||||
Proceeds (payments) under the revolving lines of credit, net |
(23,755 | ) | (4,298 | ) | 1,451,456 | | 1,423,403 | |||||||||||
Distributions to noncontrolling interest |
| | (7,630 | ) | | (7,630 | ) | |||||||||||
Capital contributions received from parent |
| | 301,521 | (301,521 | ) | | ||||||||||||
Payment of dividends and return of capital |
(12,500 | ) | | (515,910 | ) | 515,910 | (12,500 | ) | ||||||||||
Proceeds from employee stock purchase plan |
1,222 | | | | 1,222 | |||||||||||||
Loan from Hertz Global Holdings, Inc. |
(5,607 | ) | | | | (5,607 | ) | |||||||||||
Payment of financing costs |
(2,944 | ) | | (22,028 | ) | | (24,972 | ) | ||||||||||
Net cash provided by (used in) financing activities |
(91,495 | ) | (4,337 | ) | 1,173,486 | 214,389 | 1,292,043 | |||||||||||
Effect of foreign exchange rate changes on cash and cash equivalents |
| | (75,836 | ) | | (75,836 | ) | |||||||||||
Net change in cash and cash equivalents during the period |
224,448 | 1,870 | (315,003 | ) | | (88,685 | ) | |||||||||||
Cash and cash equivalents at beginning of period |
108,522 | 6,069 | 870,876 | | 985,467 | |||||||||||||
Cash and cash equivalents at end of period |
$ | 332,970 | $ | 7,939 | $ | 555,873 | $ | | $ | 896,782 | ||||||||
39
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
Note 17Subsequent Events
On July 12, 2011, Hertz entered into a definitive merger agreement under which it will acquire a fleet leasing and management services company, Donlen Corporation, or "Donlen," for an aggregate purchase price of $250 million, subject to adjustment either upward or downward based on the net assets of Donlen at closing. In addition, Hertz will assume or refinance approximately $680 million of Donlen's outstanding fleet debt. The transaction is subject to customary closing conditions and regulatory approvals and has been approved by the board of directors and stockholders of Donlen.
40
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion and analysis provides information that we believe to be relevant to an understanding of our consolidated financial condition and results of operations. Unless the context otherwise requires, in this Report, (i) "we," "us" and "our" mean The Hertz Corporation and its consolidated subsidiaries, (ii) "Hertz," the "Registrant," or the "Company" means The Hertz Corporation, (iii) "HERC" means Hertz Equipment Rental Corporation, our wholly-owned equipment rental subsidiary, together with our various other wholly-owned international subsidiaries that conduct our industrial, construction and material handling equipment rental business, (iv) "Hertz Holdings" means Hertz Global Holdings, Inc., our ultimate parent company (previously known as CCMG Holdings, Inc.), (v) "cars" means cars, crossovers and light trucks (including sport utility vehicles and, outside North America, light commercial vehicles), (vi) "program cars" means cars purchased by car rental companies under repurchase or guaranteed depreciation programs with car manufacturers, (vii) "non-program cars" mean cars not purchased under repurchase or guaranteed depreciation programs for which the car rental company is exposed to residual risk and (viii) "equipment" means industrial, construction and material handling equipment.
You should read the following discussion and analysis together with the section below entitled "Cautionary Note Regarding Forward-Looking Statements," with the financial statements and the related notes thereto contained elsewhere in this Form 10-Q, or this "Report."
Cautionary Note Regarding Forward-Looking Statements
Certain statements contained or incorporated by reference in this Report and in reports we subsequently file with the United States Securities and Exchange Commission, or the "SEC," on Forms 10-K, 10-Q and file or furnish on Form 8-K, and in related comments by our management, include "forward-looking statements." Forward-looking statements include information concerning our liquidity and our possible or assumed future results of operations, including descriptions of our business strategies. These statements often include words such as "believe," "expect," "project," "anticipate," "intend," "plan," "estimate," "seek," "will," "may," "would," "should," "could," "forecasts" or similar expressions. These statements are based on certain assumptions that we have made in light of our experience in the industry as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate in these circumstances. We believe these judgments are reasonable, but you should understand that these statements are not guarantees of performance or results, and our actual results could differ materially from those expressed in the forward-looking statements due to a variety of important factors, both positive and negative, that may be revised or supplemented in subsequent reports on SEC Forms 10-K, 10-Q and 8-K.
Some important factors that could affect our actual results include, among others, those that may be disclosed from time to time in subsequent reports filed with the SEC, those described under "Item 1ARisk Factors" included in The Hertz Corporation's Annual Report on Form 10-K and for the fiscal year ended December 31, 2010, filed with the SEC, on February 28, 2011, or our "Form 10-K," and in Part II, "Item 1ARisk Factors" included in this Form 10-Q and the following, which were derived in part from the risks set forth in the Form 10-K:
41
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
42
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
You should not place undue reliance on forward-looking statements. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing cautionary statements. All such statements speak only as of the date made, and we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
Corporate History
We are a successor to corporations that have been engaged in the car and truck rental and leasing business since 1918 and the equipment rental business since 1965. Hertz was incorporated in Delaware in 1967. Ford Motor Company, "Ford," acquired an ownership interest in us in 1987. Prior to this, we were a subsidiary of United Continental Holdings, Inc. (formerly Allegis Corporation), which acquired our outstanding capital stock from RCA Corporation in 1985.
On December 21, 2005, investment funds associated with or designated by:
or collectively the "Sponsors," acquired all of our common stock from Ford Holdings LLC. We refer to the acquisition of all of our common stock by the Sponsors as the "Acquisition."
In March 2011, the Sponsors sold 50,000,000 shares of their Hertz Holdings common stock to Goldman, Sachs & Co. as the sole underwriter in the registered public offering of those shares.
As a result of Hertz Holdings' initial public offering in November 2006 and subsequent offerings in June 2007, May 2009, June 2009 and March 2011, the Sponsors reduced their holdings to approximately 39% of the outstanding shares of common stock of Hertz Holdings.
In January 2009, Bank of America Corporation, or "Bank of America," acquired Merrill Lynch & Co., Inc., the parent company of BAMLCP. Accordingly, Bank of America is now an indirect beneficial owner of Hertz Holdings' common stock held by BAMLCP and certain of its affiliates.
Overview of Our Business
We are engaged principally in the business of renting cars and renting equipment.
Our revenues primarily are derived from rental and related charges and consist of:
43
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
and vehicle license fees, the fueling of vehicles and the sale of loss or collision damage waivers, liability insurance coverage and other products);
Our expenses primarily consist of:
Our profitability is primarily a function of the volume, mix and pricing of rental transactions and the utilization of cars and equipment. Significant changes in the purchase price or residual values of cars and equipment or interest rates can have a significant effect on our profitability depending on our ability to adjust pricing for these changes. We continue to balance our mix of non-program and program vehicles based on market conditions. Our business requires significant expenditures for cars and equipment, and consequently we require substantial liquidity to finance such expenditures. See "Liquidity and Capital Resources" below.
On July 12, 2011, Hertz entered into a definitive merger agreement under which it will acquire a fleet leasing and management services company, Donlen Corporation, or "Donlen," for an aggregate purchase price of $250 million, subject to adjustment either upward or downward based on the net assets of Donlen at closing. In addition, Hertz will assume or refinance approximately $680 million of Donlen's outstanding fleet debt. The transaction is subject to customary closing conditions and regulatory approvals and has been approved by the board of directors and stockholders of Donlen.
Car Rental
In the U.S., as of June 30, 2011, the percentage of non-program cars was 68% as compared to 61% as of June 30, 2010. Internationally, as of June 30, 2011, the percentage of non-program cars was 58% as compared to 48% as of June 30, 2010. In the U.S., as of December 31, 2010, the percentage of non-program cars was 72% as compared to 67% as of December 31, 2009. Internationally, as of December 31, 2010, the percentage of non-program cars was 70%, compared to 71% as of December 31, 2009.
In recent periods we have decreased the percentage of program cars in our car rental fleet. Non-program cars typically have lower acquisition costs and lower depreciation rates than comparable
44
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
program cars. As a result of decreasing our reliance on program cars, we reduce our risk related to the creditworthiness of the vehicle manufacturers. With fewer program cars in our fleet, we have an increased risk that the market value of a car at the time of its disposition will be less than its estimated residual value. Program cars generally provide us with flexibility to reduce the size of our fleet by returning cars sooner than originally expected without risk of loss in the event of an economic downturn or to respond to changes in rental demand. This flexibility will be reduced as the percentage of non-program cars in our car rental fleet increases. Furthermore, it is expected that the average age of our fleet will increase since the average holding period for non-program vehicles is longer than program vehicles. However, the longer holding period does not necessarily equate to higher costs due to the stringent turnback requirements imposed by vehicle manufacturers for program cars.
In the six months ended June 30, 2011, our vehicle depreciation costs decreased as compared to the prior year period due to improved residual values, a continued move towards a greater proportion of non-program vehicles, mix optimization and improved procurement and remarketing efforts. We believe the increase in residual values is partially due to the recent events in Japan and we are unsure if they will remain this high as these events work their way through the vehicle and equipment supply chain.
For the six months ended June 30, 2011, we experienced a 6.5% increase in transaction days versus the prior period in the United States, while rental rate revenue per transaction day, or "RPD," declined by 3.0%. During the six months ended June 30, 2011, in our European operations, we experienced a 6.9% improvement in transaction days while RPD declined by 2.5% compared to the six months ended June 30, 2010.
Our U.S. off-airport operations represented $550.3 million and $496.0 million of our total car rental revenues in the six months ended June 30, 2011 and 2010, respectively. As of June 30, 2011, we have approximately 2,030 off-airport locations. Our strategy includes selected openings of new off-airport locations, the disciplined evaluation of existing locations and the pursuit of same-store sales growth. Our strategy also includes increasing penetration in the off-airport market and growing the online leisure market, particularly in the longer length weekly sector, which is characterized by lower vehicle costs and lower transaction costs at a lower RPD. Increasing our penetration in these sectors is consistent with our long-term strategy to generate profitable growth. When we open a new off-airport location, we incur a number of costs, including those relating to site selection, lease negotiation, recruitment of employees, selection and development of managers, initial sales activities and integration of our systems with those of the companies who will reimburse the location's replacement renters for their rentals. A new off-airport location, once opened, takes time to generate its full potential revenues and, as a result, revenues at new locations do not initially cover their start-up costs and often do not, for some time, cover the costs of their ongoing operations.
Equipment Rental
HERC experienced higher rental volumes and pricing worldwide for the six months ended June 30, 2011 compared to the prior year period as the industry begins to recover and fleet levels begin to align with demand in the industry. Specifically, we saw increases in HERC specialty services as well as government work.
45
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
HERC locations:
|
Total | U.S. | Canada | France | Spain | Italy | China | Saudi Arabia |
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
December 31, 2010 |
322 | 210 | 38 | 65 | 4 | 1 | 4 | | ||||||||||||||||||
Net increase (decrease) |
(8 | ) | (9 | ) | | | | | | 1 | ||||||||||||||||
Additions relating to acquisitions |
1 | 1 | | | | | | | ||||||||||||||||||
June 30, 2011 |
315 | 202 | 38 | 65 | 4 | 1 | 4 | 1 | ||||||||||||||||||
Seasonality
Our car rental and equipment rental operations are seasonal businesses, with decreased levels of business in the winter months and heightened activity during the spring and summer. We have the ability to dynamically manage fleet capacity, the most significant portion of our cost structure, to meet market demand. For instance, to accommodate increased demand, we increase our available fleet and staff during the second and third quarters of the year. As business demand declines, fleet and staff are decreased accordingly. A number of our other major operating costs, including airport concession fees, commissions and vehicle liability expenses, are directly related to revenues or transaction volumes. In addition, our management expects to utilize enhanced process improvements, including efficiency initiatives and the use of our information technology systems, to help manage our variable costs. Approximately two-thirds of our typical annual operating costs represent variable costs, while the remaining one-third is fixed or semi-fixed. We also maintain a flexible workforce, with a significant number of part time and seasonal workers. However, certain operating expenses, including rent, insurance, and administrative overhead, remain fixed and cannot be adjusted for seasonal demand.
Restructuring
During the first quarter of 2011, we continued to streamline operations and reduce costs with the closure of several car rental and equipment rental locations globally as well as a reduction in our workforce by approximately 100 employees.
During the second quarter of 2011, we continued to streamline operations and reduce costs with the closure of twelve equipment rental locations in the U.S., consolidation of our European headquarters and the reduction in our global workforce by approximately 50 employees.
For the three and six months ended June 30, 2011, our consolidated statement of operations includes restructuring charges of $33.7 million and $38.4 million, respectively. For the three and six months ended June 30, 2010, our consolidated statement of operations includes restructuring charges relating to the initiatives discussed above of $20.3 million and $31.0 million, respectively.
Additional efficiency and cost saving initiatives are being developed during 2011. However, we presently do not have firm plans or estimates of any related expenses. See Note 12 to the Notes to our condensed consolidated financial statements included in this Report.
46
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
RESULTS OF OPERATIONS
Three Months Ended June 30, 2011 Compared with Three Months Ended June 30, 2010
Summary
The following table sets forth the percentage of total revenues represented by the various line items in our consolidated statements of operations for the three months ended June 30, 2011 and 2010 (in millions of dollars):
|
|
|
Percentage of Revenues |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Three Months Ended June 30, |
Three Months Ended June 30, |
|||||||||||||
|
2011 | 2010 | 2011 | 2010 | |||||||||||
Revenues: |
|||||||||||||||
Car rental |
$ | 1,731.2 | $ | 1,583.0 | 83.5 | % | 84.2 | % | |||||||
Equipment rental |
301.6 | 265.7 | 14.6 | 14.1 | |||||||||||
Other |
39.5 | 30.9 | 1.9 | 1.7 | |||||||||||
Total revenues |
2,072.3 | 1,879.6 | 100.0 | 100.0 | |||||||||||
Expenses: |
|||||||||||||||
Direct operating |
1,187.3 | 1,075.0 | 57.3 | 57.2 | |||||||||||
Depreciation of revenue earning equipment and lease charges |
419.7 | 456.7 | 20.3 | 24.3 | |||||||||||
Selling, general and administrative |
195.5 | 172.0 | 9.4 | 9.2 | |||||||||||
Interest expense |
153.6 | 177.3 | 7.4 | 9.4 | |||||||||||
Interest income |
(1.6 | ) | (6.8 | ) | (0.1 | ) | (0.4 | ) | |||||||
Other (income) expense, net |
10.8 | | 0.5 | | |||||||||||
Total expenses |
1,965.3 | 1,874.2 | 94.8 | 99.7 | |||||||||||
Income before income taxes |
107.0 | 5.4 | 5.2 | 0.3 | |||||||||||
Provision for taxes on income |
(39.8 | ) | (8.2 | ) | (2.0 | ) | (0.5 | ) | |||||||
Net income (loss) |
67.2 | (2.8 | ) | 3.2 | (0.2 | ) | |||||||||
Less: Net income attributable to noncontrolling interest |
(5.1 | ) | (4.7 | ) | (0.2 | ) | (0.2 | ) | |||||||
Net income (loss) attributable to The Hertz Corporation and Subsidiaries' common stockholder |
$ | 62.1 | $ | (7.5 | ) | 3.0 | % | (0.4 | )% | ||||||
47
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
The following table sets forth certain of our selected car rental, equipment rental and other operating data for the three months ended or as of June 30, 2011 and 2010:
|
Three Months Ended or as of June 30, |
||||||||
---|---|---|---|---|---|---|---|---|---|
|
2011 | 2010 | |||||||
Selected Car Rental Operating Data: |
|||||||||
Worldwide number of transactions (in thousands) |
7,146 | 6,821 | |||||||
Domestic |
5,255 | 5,021 | |||||||
International |
1,891 | 1,800 | |||||||
Worldwide transaction days (in thousands)(a) |
34,826 | 32,194 | |||||||
Domestic |
23,889 | 22,061 | |||||||
International |
10,937 | 10,133 | |||||||
Worldwide rental rate revenue per transaction day(b) |
$ | 41.16 | $ | 42.83 | |||||
Domestic |
$ | 39.32 | $ | 41.07 | |||||
International |
$ | 45.17 | $ | 46.66 | |||||
Worldwide average number of company-operated cars during the period |
487,600 | 448,400 | |||||||
Domestic |
328,200 | 300,000 | |||||||
International |
159,400 | 148,400 | |||||||
Adjusted pre-tax income (in millions of dollars)(c) |
$ | 242.2 | $ | 174.9 | |||||
Worldwide revenue earning equipment, net (in millions of dollars) |
$ | 9,522.7 | $ | 8,762.1 | |||||
Selected Worldwide Equipment Rental Operating Data: |
|||||||||
Rental and rental related revenue (in millions of dollars)(d) |
$ | 267.8 | $ | 239.6 | |||||
Same store revenue growth (decline), including growth initiatives(e) |
10.4 | % | (5.0 | )% | |||||
Average acquisition cost of rental equipment operated during the period (in millions of dollars) |
$ | 2,778.8 | $ | 2,704.4 | |||||
Adjusted pre-tax income (in millions of dollars)(c) |
$ | 33.4 | $ | 14.4 | |||||
Revenue earning equipment, net (in millions of dollars) |
$ | 1,702.7 | $ | 1,649.1 |
48
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
segment revenues to our rental rate revenue and rental rate revenue per transaction day (based on December 31, 2010 foreign exchange rates) for the three months ended June 30, 2011 and 2010 (in millions of dollars, except as noted):
|
Three Months Ended June 30, |
||||||
---|---|---|---|---|---|---|---|
|
2011 | 2010 | |||||
Car rental segment revenues |
$ | 1,768.8 | $ | 1,611.4 | |||
Non-rental rate revenue |
(292.4 | ) | (261.4 | ) | |||
Foreign currency adjustment |
(43.1 | ) | 29.0 | ||||
Rental rate revenue |
$ | 1,433.3 | $ | 1,379.0 | |||
Transaction days (in thousands) |
34,826 | 32,194 | |||||
Rental rate revenue per transaction day (in whole dollars) |
$ | 41.16 | $ | 42.83 |
|
Three Months Ended June 30, |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2010 | ||||||||
Adjusted pre-tax income: |
||||||||||
Car rental |
$ | 242.2 | $ | 174.9 | ||||||
Equipment rental |
33.4 | 14.4 | ||||||||
Total reportable segments |
275.6 | 189.3 | ||||||||
Adjustments: |
||||||||||
Other reconciling items(1) |
(84.9 | ) | (87.3 | ) | ||||||
Purchase accounting(2) |
(22.5 | ) | (22.5 | ) | ||||||
Non-cash debt charges(3) |
(21.0 | ) | (44.2 | ) | ||||||
Restructuring charges |
(33.7 | ) | (20.3 | ) | ||||||
Restructuring related charges(4) |
(2.8 | ) | (2.0 | ) | ||||||
Derivative losses(5) |
| (0.6 | ) | |||||||
Acquisition related costs |
(6.1 | ) | (7.0 | ) | ||||||
Pension adjustment(6) |
13.1 | | ||||||||
Premiums paid on debt(7) |
(10.7 | ) | | |||||||
Income before income taxes |
$ | 107.0 | $ | 5.4 | ||||||
49
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
incurred to facilitate business process re-engineering initiatives that involve significant organization redesign and extensive operational process changes.
|
Three Months Ended June 30, |
||||||
---|---|---|---|---|---|---|---|
|
2011 | 2010 | |||||
Equipment rental segment revenues |
$ | 301.7 | $ | 265.8 | |||
Equipment sales and other revenue |
(29.4 | ) | (28.7 | ) | |||
Foreign currency adjustment |
(4.5 | ) | 2.5 | ||||
Rental and rental related revenue |
$ | 267.8 | $ | 239.6 | |||
REVENUES
|
Three Months Ended June 30, |
|
|
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in millions of dollars) |
2011 | 2010 | $ Change | % Change | |||||||||||
Revenues by Segment |
|||||||||||||||
Car rental |
$ | 1,768.8 | $ | 1,611.4 | $ | 157.4 | 9.8 | % | |||||||
Equipment rental |
301.7 | 265.8 | 35.9 | 13.5 | % | ||||||||||
Other reconciling items |
1.8 | 2.4 | (0.6 | ) | (25.0 | )% | |||||||||
Total revenues |
$ | 2,072.3 | $ | 1,879.6 | $ | 192.7 | 10.3 | % | |||||||
Car Rental Segment
Revenues from our car rental segment increased 9.8%, primarily as a result of increases in car rental transaction days worldwide of 8.2%, refueling fees of $15.2 million and airport concession recovery fees of $9.8 million as well as the effects of foreign currency translation of approximately $74.1 million, partly offset by a decrease in worldwide RPD.
RPD for worldwide car rental for the three months ended June 30, 2011 decreased 3.9% from 2010, due to decreases in U.S. and International RPD of 4.3% and 3.2%, respectively. U.S. off-airport RPD declined
50
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
by 1.8% and U.S. airport RPD decreased 5.1%. U.S. airport RPD decreased due to the lower RPD that our Advantage brand generates, as well as the competitive pricing environment. International RPD decreased primarily due to a decrease in Europe's airport RPD.
Equipment Rental Segment
Revenues from our equipment rental segment increased 13.5%, primarily due to increases of 11.3% and 2.2% in equipment rental volumes and pricing, respectively, as well as the effects of foreign currency translation of approximately $8.1 million. The increase in volume was primarily due to strong industrial performance.
Other
Revenues from all other sources decreased $0.6 million.
EXPENSES
|
Three Months Ended June 30, |
|
|
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in millions of dollars) |
2011 | 2010 | $ Change | % Change | ||||||||||||
Expenses: |
||||||||||||||||
Fleet related expenses |
$ | 287.0 | $ | 248.8 | $ | 38.2 | 15.4 | % | ||||||||
Personnel related expenses |
373.5 | 354.7 | 18.8 | 5.3 | % | |||||||||||
Other direct operating expenses |
526.8 | 471.5 | 55.3 | 11.7 | % | |||||||||||
Direct operating |
1,187.3 | 1,075.0 | 112.3 | 10.4 | % | |||||||||||
Depreciation of revenue earning equipment and lease charges |
419.7 | 456.7 | (37.0 | ) | (8.1 | )% | ||||||||||
Selling, general and administrative |
195.5 | 172.0 | 23.5 | 13.7 | % | |||||||||||
Interest expense |
153.6 | 177.3 | (23.7 | ) | (13.3 | )% | ||||||||||
Interest income |
(1.6 | ) | (6.8 | ) | 5.2 | (77.2 | )% | |||||||||
Other (income) expense, net |
10.8 | | 10.8 | 100.0 | % | |||||||||||
Total expenses |
$ | 1,965.3 | $ | 1,874.2 | $ | 91.1 | 4.9 | % | ||||||||
Total expenses increased 4.9%, but total expenses as a percentage of revenues decreased from 99.7% for the three months ended June 30, 2010 to 94.8% for the three months ended June 30, 2011.
Direct Operating Expenses
Car Rental Segment
Direct operating expenses for our car rental segment of $977.9 million for the three months ended June 30, 2011 increased 9.7% from $891.5 million for the three months ended June 30, 2010 as a result of increases in other direct operating expenses, fleet related expenses and personnel related expenses.
Other direct operating expenses for our car rental segment of $434.7 million for the three months ended June 30, 2011 increased $40.7 million, or 10.3%, from the three months ended June 30, 2010. The increase was primarily related to increases in concession fees of $7.8 million, a value added tax reclaim of approximately $4.0 million received in the three months ended June 30, 2010, field administrative expenses of $2.8 million, commissions of $2.1 million and charge card fees of
51
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
$1.7 million, as well as the effects of foreign currency translation of approximately $18.4 million. These increases were primarily a result of improved worldwide rental volume demand. The increases in other direct operating expenses were partly offset by decreases in field systems of $3.7 million and restructuring and restructuring related charges of $2.8 million.
Fleet related expenses for our car rental segment of $236.6 million for the three months ended June 30, 2011 increased $34.1 million, or 16.9%, from the three months ended June 30, 2010. The increase was primarily related to worldwide rental volume demand which resulted in increases in gasoline costs of $17.4 million and self insurance expenses of $6.8 million, as well as the effects of foreign currency translation of approximately $10.4 million. The increase in gasoline costs also related to higher gasoline prices.
Personnel related expenses for our car rental segment of $306.6 million for the three months ended June 30, 2011 increased $11.6 million, or 3.9%, from the three months ended June 30, 2010. The increase was primarily related to the effects of foreign currency translation of approximately $10.6 million, as well as an increase in salaries of $7.4 million, partly offset by a decrease in benefits of $9.2 million. The increase in salaries was primarily related to improved volume, as well as additional U.S. off-airport locations in 2011. The decrease in benefits primarily related to the U.K. pension curtailment gain.
Equipment Rental Segment
Direct operating expenses for our equipment rental segment of $208.7 million for the three months ended June 30, 2011 increased 15.7% from $180.5 million for the three months ended June 30, 2010 as a result of increases in other direct operating expenses, fleet related expenses and personnel related expenses.
Other direct operating expenses for our equipment rental segment of $101.4 million for the three months ended June 30, 2011 increased $18.2 million, or 21.8% from the three months ended June 30, 2010. The increase was primarily related to increases in restructuring charges of $13.7 million and legal expenses of $2.0 million, as well as the effects of foreign currency translation of approximately $2.1 million.
Fleet related expenses for our equipment rental segment of $50.4 million for the three months ended June 30, 2011 increased $5.1 million, or 11.2% from the three months ended June 30, 2010. The increase was primarily related to increased worldwide rental volume resulting in increased freight and delivery costs of $2.6 million and continued aging of the fleet which resulted in an increase in maintenance costs of $1.6 million, as well as the effects of foreign currency translation of approximately $1.3 million.
Personnel related expenses for our equipment rental segment of $56.9 million for the three months ended June 30, 2011 increased $5.0 million, or 9.6%, from the three months ended June 30, 2010. The increase was related to wages and benefits of $1.4 million and incentives of $1.7 million primarily related to improved results, as well as the effects of foreign currency translation of approximately $1.5 million.
52
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Depreciation of Revenue Earning Equipment and Lease Charges
Car Rental Segment
Depreciation of revenue earning equipment and lease charges for our car rental segment of $355.1 million for the three months ended June 30, 2011 decreased 8.9% from $389.7 million for the three months ended June 30, 2010. The decrease was primarily due to an improvement in certain vehicle residual values and a higher mix of non-program cars, partly offset by the effects of foreign currency translation of approximately $16.8 million.
Equipment Rental Segment
Depreciation of revenue earning equipment and lease charges in our equipment rental segment of $64.6 million for the three months ended June 30, 2011 decreased 3.6% from $67.0 million for the three months ended June 30, 2010. The decrease was primarily due to higher residual values on the disposal of used equipment, partly offset by a 2.8% increase in the average acquisition cost of rental equipment operated during the period and the effects of foreign currency translation of approximately $1.5 million.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 13.7%, due to increases in administrative expenses, advertising expenses and sales promotion expenses.
Administrative expenses increased $12.0 million, or 11.2%, primarily due to increases in salaries and related expenses of $5.0 million, restructuring and restructuring related charges of $2.8 million and consultant fees of $1.7 million, as well as the effects of foreign currency translation of approximately $4.4 million. These increases were partly offset by a decrease in stock option expense of $2.8 million.
Advertising expenses increased $6.8 million, or 20.6%, primarily due to increased media and production related to the new campaign ("Gas and Brake"), as well as the effects of foreign currency translation of approximately $2.3 million.
Sales promotion expenses increased $4.7 million, or 14.7%, primarily related to increases in sales salaries and commissions due to improved results, as well as the effects of foreign currency translation of approximately $1.4 million.
Interest Expense
Car Rental Segment
Interest expense for our car rental segment of $79.0 million for the three months ended June 30, 2011 decreased 18.5% from $96.9 million for the three months ended June 30, 2010. The decrease was primarily due to a decrease in interest rates, as well as a decrease in the weighted average debt outstanding.
Equipment Rental Segment
Interest expense for our equipment rental segment of $12.2 million for the three months ended June 30, 2011 increased 19.6% from $10.2 million for the three months ended June 30, 2010. The increase was primarily due to an increase in Senior Term Facility and Senior ABL Facility interest rates in 2011.
53
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Other
Other interest expense relating to interest on corporate debt of $62.4 million for the three months ended June 30, 2011 decreased 11.1% from $70.2 million for the three months ended June 30, 2010. The decrease was primarily due to lower interest rates in 2011, partly offset by the write-off of unamortized debt costs in connection with the redemption of a portion of our 8.875% Senior Notes in 2011.
Interest Income
Interest income decreased $5.2 million primarily due to a value added tax reclaim received in the three months ended June 30, 2010.
Other (Income) Expense, Net
Other (income) expense, net increased $10.8 million primarily due to premiums paid in connection with the redemption of portions of our 8.875% Senior Notes during 2011.
ADJUSTED PRE-TAX INCOME (LOSS)
Car Rental Segment
Adjusted pre-tax income for our car rental segment of $242.2 million increased $67.3 million from $174.9 million for the three months ended June 30, 2010. The increase was primarily due to stronger volumes, improved residual values and disciplined cost management, partly offset by decreased pricing. Adjustments to our car rental segment income before income taxes for the three months ended June 30, 2011 totaled $10.1 million (which consists of non-cash debt charges of $10.6 million, purchase accounting of $8.5 million, restructuring and related charges of $4.0 million, pension adjustment of $(13.1) million and loss on derivatives of $0.1 million). Adjustments to our car rental segment income before income taxes for the three months ended June 30, 2010 totaled $53.5 million (which consists of non-cash debt charges of $37.7 million, purchase accounting of $9.7 million and restructuring and related charges of $6.1 million). See footnote (c) to the table under "Results of Operations" for a summary and description of these adjustments.
Equipment Rental Segment
Adjusted pre-tax income for our equipment rental segment of $33.4 million increased $19.0 million from $14.4 million for the three months ended June 30, 2010. The increase was primarily due to stronger volumes and pricing, strong cost management performance and higher residual values on the disposal of used equipment. Adjustments to our equipment rental segment loss before income taxes for the three months ended June 30, 2011 totaled $46.7 million (which consists of restructuring and related charges of $32.1 million, purchase accounting of $13.1 million and non-cash debt charges of $1.5 million). Adjustments to our equipment rental loss before income taxes for the three months ended June 30, 2010 totaled $30.2 million (which consists of restructuring charges of $16.0 million, purchase accounting of $12.0 million and non-cash debt charges of $2.2 million). See footnote (c) to the table under "Results of Operations" for a summary and description of these adjustments.
54
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
PROVISION FOR TAXES ON INCOME, NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST AND NET (INCOME) LOSS ATTRIBUTABLE TO THE HERTZ CORPORATION AND SUBSIDIARIES' COMMON STOCKHOLDER
|
Three Months Ended June 30, |
|
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in millions of dollars) |
2011 | 2010 | $ Change | % Change | |||||||||
Income before income taxes |
$ | 107.0 | $ | 5.4 | $ | 101.6 | 1,882.5 | % | |||||
Provision for taxes on income |
(39.8 | ) | (8.2 | ) | (31.6 | ) | 382.6 | % | |||||
Net income (loss) |
67.2 | (2.8 | ) | 70.0 | 2,458.1 | % | |||||||
Less: Net income attributable to noncontrolling interest |
(5.1 | ) | (4.7 | ) | (0.4 | ) | 8.9 | % | |||||
Net income (loss) attributable to The Hertz Corporation and Subsidiaries' common stockholder |
$ | 62.1 | $ | (7.5 | ) | $ | 69.6 | 925.5 | % | ||||
Provision for Taxes on Income
The effective tax rate for the three months ended June 30, 2011 was 37.2% as compared to 152.8% in the three months ended June 30, 2010. The provision for taxes on income increased $31.6 million, primarily due to higher income before income taxes, changes in geographic earnings mix and changes in losses in certain non-U.S. jurisdictions for which tax benefits cannot be realized.
Net Income Attributable to Noncontrolling Interest
Net income attributable to noncontrolling interest increased $0.4 million due to an increase in our majority-owned subsidiary Navigation Solutions, L.L.C.'s net income for the three months ended June 30, 2011 as compared to the three months ended June 30, 2010.
Net Income (Loss) Attributable to The Hertz Corporation and Subsidiaries' Common Stockholder
The net income attributable to The Hertz Corporation and Subsidiaries' common stockholder was $62.1 million in the three months ended June 30, 2011 as compared to a loss of $7.5 million in the prior year primarily due to higher rental volumes in our worldwide car and equipment rental operations, improved residual values on the disposal of certain vehicles and used equipment and disciplined cost management, partly offset by lower pricing in our worldwide car rental operations. The impact of changes in exchange rates on net loss was mitigated by the fact that not only revenues but also most expenses outside of the United States were incurred in local currencies.
55
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Six Months Ended June 30, 2011 Compared with Six Months Ended June 30, 2010
Summary
The following table sets forth the percentage of total revenues represented by the various line items in our consolidated statements of operations for the six months ended June 30, 2011 and 2010 (in millions of dollars):
|
|
|
Percentage of Revenues | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Six Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||
|
2011 | 2010 | 2011 | 2010 | |||||||||||
Revenues: |
|||||||||||||||
Car rental |
$ | 3,210.1 | $ | 2,979.6 | 83.3 | % | 84.2 | % | |||||||
Equipment rental |
569.7 | 502.7 | 14.8 | 14.2 | |||||||||||
Other |
72.5 | 58.2 | 1.9 | 1.6 | |||||||||||
Total revenues |
3,852.3 | 3,540.5 | 100.0 | 100.0 | |||||||||||
Expenses: |
|||||||||||||||
Direct operating |
2,261.0 | 2,088.0 | 58.7 | 59.0 | |||||||||||
Depreciation of revenue earning equipment and lease charges |
855.7 | 915.9 | 22.2 | 25.9 | |||||||||||
Selling, general and administrative |
377.7 | 339.8 | 9.8 | 9.6 | |||||||||||
Interest expense |
338.3 | 346.8 | 8.7 | 9.8 | |||||||||||
Interest income |
(3.4 | ) | (9.1 | ) | | (0.3 | ) | ||||||||
Other (income) expense, net |
62.7 | | 1.6 | | |||||||||||
Total expenses |
3,892.0 | 3,681.4 | 101.0 | 104.0 | |||||||||||
Loss before income taxes |
(39.7 | ) | (140.9 | ) | (1.0 | ) | (4.0 | ) | |||||||
(Provision) benefit for taxes on income |
(12.4 | ) | 6.0 | (0.4 | ) | 0.2 | |||||||||
Net loss |
(52.1 | ) | (134.9 | ) | (1.4 | ) | (3.8 | ) | |||||||
Less: Net income attributable to noncontrolling interest |
(8.8 | ) | (8.3 | ) | (0.2 | ) | (0.2 | ) | |||||||
Net loss attributable to The Hertz Corporation and Subsidiaries' common stockholder |
$ | (60.9 | ) | $ | (143.2 | ) | (1.6 | )% | (4.0 | )% | |||||
56
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
The following table sets forth certain of our selected car rental, equipment rental and other operating data for the six months ended or as of June 30, 2011 and 2010:
|
Six Months Ended or as of June 30, |
||||||||
---|---|---|---|---|---|---|---|---|---|
|
2011 | 2010 | |||||||
Selected Car Rental Operating Data: |
|||||||||
Worldwide number of transactions (in thousands) |
13,174 | 12,678 | |||||||
Domestic |
9,733 | 9,418 | |||||||
International |
3,441 | 3,260 | |||||||
Worldwide transaction days (in thousands)(a) |
64,476 | 60,310 | |||||||
Domestic |
44,710 | 42,001 | |||||||
International |
19,766 | 18,309 | |||||||
Worldwide rental rate revenue per transaction day(a)(b) |
$ | 41.66 | $ | 42.77 | |||||
Domestic |
$ | 40.26 | $ | 41.49 | |||||
International |
$ | 44.83 | $ | 45.69 | |||||
Worldwide average number of company-operated cars during the period |
457,500 | 433,100 | |||||||
Domestic |
311,900 | 296,900 | |||||||
International |
145,600 | 136,200 | |||||||
Adjusted pre-tax income (in millions of dollars)(a)(c) |
$ | 303.5 | $ | 202.0 | |||||
Worldwide revenue earning equipment, net (in millions of dollars) |
$ | 9,522.7 | $ | 8,762.1 | |||||
Selected Worldwide Equipment Rental Operating Data: |
|||||||||
Rental and rental related revenue (in millions of dollars)(a)(d) |
$ | 511.0 | $ | 455.2 | |||||
Same store revenue growth (decline), including growth initiatives(a) |
9.9 | % | (11.3 | )% | |||||
Average acquisition cost of rental equipment operated during the period (in millions of dollars) |
$ | 2,769.2 | $ | 2,741.7 | |||||
Adjusted pre-tax income (in millions of dollars)(a)(c) |
$ | 43.6 | $ | 9.4 | |||||
Revenue earning equipment, net (in millions of dollars) |
$ | 1,702.7 | $ | 1,649.1 |
|
Six Months Ended June 30, |
||||||
---|---|---|---|---|---|---|---|
|
2011 | 2010 | |||||
Car rental segment revenues |
$ | 3,279.1 | $ | 3,033.1 | |||
Non-rental rate revenue |
(540.4 | ) | (484.3 | ) | |||
Foreign currency adjustment |
(52.6 | ) | 30.5 | ||||
Rental rate revenue |
$ | 2,686.1 | $ | 2,579.3 | |||
Transaction days (in thousands) |
64,476 | 60,310 | |||||
Rental rate revenue per transaction day (in whole dollars) |
$ | 41.66 | $ | 42.77 |
57
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
|
Six Months Ended June 30, |
||||||||
---|---|---|---|---|---|---|---|---|---|
|
2011 | 2010 | |||||||
Adjusted pre-tax income: |
|||||||||
Car rental |
$ | 303.5 | $ | 202.0 | |||||
Equipment rental |
43.6 | 9.4 | |||||||
Total reportable segments |
347.1 | 211.4 | |||||||
Adjustments: |
|||||||||
Other reconciling items(1) |
(166.1 | ) | (172.4 | ) | |||||
Purchase accounting(2) |
(43.1 | ) | (44.6 | ) | |||||
Non-cash debt charges(3) |
(75.1 | ) | (87.7 | ) | |||||
Restructuring charges |
(38.4 | ) | (31.0 | ) | |||||
Restructuring related charges(4) |
(3.3 | ) | (7.3 | ) | |||||
Derivative losses(5) |
| (2.3 | ) | ||||||
Acquisition related costs |
(9.0 | ) | (7.0 | ) | |||||
Management transition costs |
(2.5 | ) | | ||||||
Pension adjustment(6) |
13.1 | | |||||||
Premiums paid on debt(7) |
(62.4 | ) | | ||||||
Loss before income taxes |
$ | (39.7 | ) | $ | (140.9 | ) | |||
58
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
|
Six Months Ended June 30, |
||||||
---|---|---|---|---|---|---|---|
|
2011 | 2010 | |||||
Equipment rental segment revenues |
$ | 569.9 | $ | 502.8 | |||
Equipment sales and other revenue |
(52.8 | ) | (50.8 | ) | |||
Foreign currency adjustment |
(6.1 | ) | 3.2 | ||||
Rental and rental related revenue |
$ | 511.0 | $ | 455.2 | |||
REVENUES
|
Six Months Ended June 30, |
|
|
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in millions of dollars) |
2011 | 2010 | $ Change | % Change | |||||||||||
Revenues by Segment |
|||||||||||||||
Car rental |
$ | 3,279.1 | $ | 3,033.1 | $ | 246.0 | 8.1 | % | |||||||
Equipment rental |
569.9 | 502.8 | 67.1 | 13.3 | % | ||||||||||
Other reconciling items |
3.3 | 4.6 | (1.3 | ) | (28.3 | )% | |||||||||
Total revenues |
$ | 3,852.3 | $ | 3,540.5 | $ | 311.8 | 8.8 | % | |||||||
Car Rental Segment
Revenues from our car rental segment increased 8.1%, primarily as a result of increases in car rental transaction days worldwide of 6.9%, refueling fees of $23.5 million and airport concession recovery fees of $18.0 million as well as the effects of foreign currency translation of approximately $88.6 million, partly offset by a decrease in worldwide RPD.
RPD for worldwide car rental for the six months ended June 30, 2011 decreased 2.6% from 2010, due to decreases in U.S. and International RPD of 3.0% and 1.9%, respectively. U.S. off-airport RPD declined by 0.7% and U.S. airport RPD decreased 3.4%. U.S. airport RPD decreased due to the lower RPD that our Advantage brand generates, as well as the competitive pricing environment. International RPD decreased primarily due to a decrease in Europe's airport RPD.
Equipment Rental Segment
Revenues from our equipment rental segment increased 13.3%, primarily due to increases of 12.7% and 1.1% in equipment rental volumes and pricing, respectively, as well as the effects of foreign currency translation of approximately $11.0 million. The increase in volume was primarily due to strong industrial performance.
Other
Revenues from all other sources decreased $1.3 million, primarily due to a decrease in revenues from our third-party claim management services.
59
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
EXPENSES
|
Six Months Ended June 30, |
|
|
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in millions of dollars) |
2011 | 2010 | $ Change | % Change | ||||||||||||
Expenses: |
||||||||||||||||
Fleet related expenses |
$ | 536.9 | $ | 477.8 | $ | 59.1 | 12.4 | % | ||||||||
Personnel related expenses |
739.5 | 701.1 | 38.4 | 5.5 | % | |||||||||||
Other direct operating expenses |
984.6 | 909.1 | 75.5 | 8.3 | % | |||||||||||
Direct operating |
2,261.0 | 2,088.0 | 173.0 | 8.3 | % | |||||||||||
Depreciation of revenue earning equipment and lease charges |
855.7 | 915.9 | (60.2 | ) | (6.6 | )% | ||||||||||
Selling, general and administrative |
377.7 | 339.8 | 37.9 | 11.2 | % | |||||||||||
Interest expense |
338.3 | 346.8 | (8.5 | ) | (2.4 | )% | ||||||||||
Interest income |
(3.4 | ) | (9.1 | ) | 5.7 | (62.5 | )% | |||||||||
Other (income) expense, net |
62.7 | | 62.7 | 100.0 | % | |||||||||||
Total expenses |
$ | 3,892.0 | $ | 3,681.4 | $ | 210.6 | 5.7 | % | ||||||||
Total expenses increased 5.7%, but total expenses as a percentage of revenues decreased from 104.0% for the six months ended June 30, 2010 to 101.0% for the six months ended June 30, 2011.
Direct Operating Expenses
Car Rental Segment
Direct operating expenses for our car rental segment of $1,881.7 million for the six months ended June 30, 2011 increased $135.5 million, or 7.8%, from the six months ended June 30, 2010 as a result of increases in other direct operating expenses, fleet related expenses and personnel related expenses.
Other direct operating expenses for our car rental segment of $833.5 million for the six months ended June 30, 2011 increased $59.3 million or 7.7% from the six months ended June 30, 2010. The increase was primarily related to increases in field administrative expenses of $16.8 million, concession fees of $9.1 million, third-party claim management expenses of $6.9 million, charge card fees of $3.1 million and reservation costs of $2.1 million, as well as the effects of foreign currency translation of approximately $21.1 million. The increases were primarily a result of improved worldwide rental volume demand. The increase in field administrative expenses also related to a reimbursement received from a manufacturer in the six months ended June 30, 2010. The increases in other direct operating expenses were partly offset by a decrease in restructuring and restructuring related charges of $8.5 million.
Fleet related expenses for our car rental segment of $441.5 million for the six months ended June 30, 2011 increased $48.6 million, or 12.4% from the six months ended June 30, 2010. The increase was primarily related to worldwide rental volume demand which resulted in increases in gasoline costs of $22.8 million, vehicle license taxes of $4.8 million, vehicle registration fees of $3.6 million and self insurance expenses of $3.0 million, as well as the effects of foreign currency translation of approximately $17.5 million. The increase in gasoline costs also related to higher gasoline prices. These increases were partly offset by a decrease in vehicle damage costs of $5.3 million.
60
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Personnel related expenses for our car rental segment of $606.7 million for the six months ended June 30, 2011 increased $27.5 million, or 4.7%, from the six months ended June 30, 2010. The increase was related to increases in salaries of $9.6 million, outside services, including transporter wages of $7.2 million and incentive compensation costs of $5.9 million, as well as the effects of foreign currency translation of approximately $12.7 million, partly offset by a decrease in benefits of $10.9 million. The expense increases were primarily related to improved results, as well as additional U.S. off-airport and Advantage locations in 2011. The decrease in benefits primarily related to the U.K. pension plan curtailment gain.
Equipment Rental Segment
Direct operating expenses for our equipment rental segment of $379.5 million for the six months ended June 30, 2011 increased 12.4% from $337.7 million for the six months ended June 30, 2010 as a result of increases in other direct operating expenses, fleet related expenses and personnel related expenses.
Other direct operating expenses for our equipment rental segment of $171.2 million for the six months ended June 30, 2011 increased $22.6 million, or 15.2% from the six months ended June 30, 2010. The increase was primarily related to increases in restructuring charges of $12.6 million, legal expenses of $2.3 million and re-rent expense of $1.9 million, as well as the effects of foreign currency translation of approximately $2.8 million. The increase in re-rent expense primarily related to improved worldwide rental volume demand.
Fleet related expenses for our equipment rental segment of $95.3 million for the six months ended June 30, 2011 increased $10.7 million, or 12.6% from the six months ended June 30, 2010. The increase was primarily related to continued aging of the fleet which resulted in an increase in maintenance costs of $7.7 million and increased worldwide rental volume resulting in increased freight and delivery costs of $5.0 million, as well as the effects of foreign currency translation of approximately $1.7 million.
Personnel related expenses for our equipment rental segment of $113.0 million for the six months ended June 30, 2011 increased $8.6 million, or 8.2% from the six months ended June 30, 2010. The increase was related to an increase in wages of $5.1 million primarily related to improved results, as well as the effects of foreign currency translation of approximately $2.0 million.
Depreciation of Revenue Earning Equipment and Lease Charges
Car Rental Segment
Depreciation of revenue earning equipment and lease charges for our car rental segment of $723.9 million for the six months ended June 30, 2011 decreased 7.0% from $778.0 million for the six months ended June 30, 2010. The decrease was primarily due to an improvement in certain vehicle residual values and a higher mix of non-program cars, partly offset by the effects of foreign currency translation of approximately $20.3 million.
Equipment Rental Segment
Depreciation of revenue earning equipment and lease charges in our equipment rental segment of $131.8 million for the six months ended June 30, 2011 decreased 4.4% from $137.9 million for the six months ended June 30, 2010. The decrease was primarily due to higher residual values on the disposal of used equipment, partly offset by a 1.0% increase in the average acquisition cost of rental equipment
61
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
operated during the period, as well as the effects of foreign currency translation of approximately $1.8 million.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 11.2%, due to increases in administrative expenses, sales promotion expenses and advertising expenses.
Administrative expenses increased $24.5 million, or 11.9%, primarily due to increases in salaries and related expenses of $14.0 million and consulting expenses of $4.7 million, as well as the effects of foreign currency translation of approximately $5.6 million.
Sales promotion expenses increased $9.4 million, or 14.7%, primarily related to increases in sales salaries and commissions due to improved results.
Advertising expenses increased $4.0 million, or 5.8%, primarily due to increased media and production related to the new campaign ("Gas and Brake").
Interest Expense
Car Rental Segment
Interest expense for our car rental segment of $154.5 million for the six months ended June 30, 2011 decreased 17.0% from $186.2 million for the six months ended June 30, 2010. The decrease was primarily due to lower interest rates in 2011, as well as a decrease in the weighted average debt outstanding.
Equipment Rental Segment
Interest expense for our equipment rental segment of $23.3 million for the six months ended June 30, 2011 increased 14.2% from $20.4 million for the six months ended June 30, 2010. The increase was primarily due to a portion of the write-off of the unamortized debt costs in connection with the refinancing of our Senior ABL Facility which was allocated to our equipment rental segment in 2011.
Other
Other interest expense relating to interest on corporate debt of $160.5 million for the six months ended June 30, 2011 increased 14.5% from $140.2 million for the six months ended June 30, 2010. The increase was primarily due to the write-off of unamortized debt costs in connection with the refinancing of our Senior Term Facility and Senior ABL Facility, financing costs incurred in connection with the new Senior Term Facility and the write-off of unamortized debt costs in connection with the redemption of our 10.5% Senior Subordinated Notes and a portion of our 8.875% Senior Notes in 2011.
Interest Income
Interest income decreased $5.7 million primarily due to a value added tax reclaim received in the six months ended June 30, 2010.
62
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Other (Income) Expense, Net
Other (income) expense, net increased $62.7 million primarily due to premiums paid in connection with the redemption of our 10.5% Senior Subordinated Notes and a portion of our 8.875% Senior Notes during 2011.
ADJUSTED PRE-TAX INCOME (LOSS)
Car Rental Segment
Adjusted pre-tax income for our car rental segment of $303.5 million increased $101.5 million from $202.0 million for the six months ended June 30, 2010. The increase was primarily due to stronger volumes, improved residual values and disciplined cost management, partly offset by decreased pricing. Adjustments to our car rental segment income before income taxes for the six months ended June 30, 2011 totaled $30.4 million (which consists of non-cash debt charges of $20.8 million, purchase accounting of $16.6 million, restructuring and restructuring related charges of $5.5 million, pension adjustment of $(13.1) million and loss on derivatives of $0.6 million). Adjustments to our car rental segment income before income taxes for the six months ended June 30, 2010 totaled $110.7 million (which consists of non-cash debt charges of $74.7 million, purchase accounting of $19.5 million and restructuring and restructuring related charges of $16.5 million). See footnote (c) to the table under "Results of Operations" for a summary and description of these adjustments.
Equipment Rental Segment
Adjusted pre-tax income for our equipment rental segment of $43.6 million increased $34.2 million from $9.4 million for the six months ended June 30, 2010. The increase was primarily due to stronger volumes and pricing, strong cost management performance and higher residual values on the disposal of used equipment. Adjustments to our equipment rental segment loss before income taxes for the six months ended June 30, 2011 totaled $64.6 million (which consists of restructuring and restructuring related charges of $35.9 million, purchase accounting of $24.8 million and non-cash debt charges of $3.9 million). Adjustments to our equipment rental loss before income taxes for the six months ended June 30, 2010 totaled $48.6 million (which consists of purchase accounting of $23.5 million, restructuring and restructuring related charges of $21.0 million and non-cash debt charges of $4.1 million). See footnote (c) to the table under "Results of Operations" for a summary and description of these adjustments.
63
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
(PROVISION) BENEFIT FOR TAXES ON INCOME, NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST AND NET LOSS ATTRIBUTABLE TO THE HERTZ CORPORATION AND SUBSIDIARIES' COMMON STOCKHOLDER
|
Six Months Ended June 30, |
|
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in millions of dollars) |
2011 | 2010 | $ Change | % Change | |||||||||
Loss before income taxes |
$ | (39.7 | ) | $ | (140.9 | ) | $ | 101.2 | (71.8 | )% | |||
(Provision) benefit for taxes on income |
(12.4 | ) | 6.0 | (18.4 | ) | (307.2 | )% | ||||||
Net loss |
(52.1 | ) | (134.9 | ) | 82.8 | (61.4 | )% | ||||||
Less: Net income attributable to noncontrolling interest |
(8.8 | ) | (8.3 | ) | (0.5 | ) | 6.2 | % | |||||
Net loss attributable to The Hertz Corporation and Subsidiaries' common stockholder |
$ | (60.9 | ) | $ | (143.2 | ) | $ | 82.3 | (57.5 | )% | |||
(Provision) benefit for Taxes on Income
The effective tax rate for the six months ended June 30, 2011 was (31.1)% as compared to 4.2% in the six months ended June 30, 2010. The provision for taxes on income was $12.4 million for the six months ended June 30, 2011 versus a benefit of $6.0 million for the six months ended June 30, 2010. The change was primarily due to lower loss before income taxes, changes in geographic earnings mix and changes in losses in certain non-U.S. jurisdictions for which tax benefits cannot be realized.
Net Income Attributable to Noncontrolling Interest
Net income attributable to noncontrolling interest increased $0.5 million due to an increase in our majority-owned subsidiary Navigation Solutions, L.L.C.'s net income for the six months ended June 30, 2011 as compared to the six months ended June 30, 2010.
Net Loss Attributable to The Hertz Corporation and Subsidiaries' Common Stockholder
The net loss attributable to The Hertz Corporation and Subsidiaries' common stockholder decreased 57.5% primarily due to higher rental volumes in our worldwide car and equipment rental operations, improved residual values on the disposal of certain vehicles and used equipment and disciplined cost management, partly offset by lower pricing in our worldwide car rental operations, costs incurred in connection with the refinancing of our Senior Term Facility and Senior ABL Facility and the write-off of unamortized debt costs and premiums paid in connection with the redemption of our 10.5% Senior Subordinated Notes and a portion of our 8.875% Senior Notes during 2011. The impact of changes in exchange rates on net loss was mitigated by the fact that not only revenues but also most expenses outside of the United States were incurred in local currencies.
LIQUIDITY AND CAPITAL RESOURCES
Our domestic and international operations are funded by cash provided by operating activities and by extensive financing arrangements maintained by us in the United States and internationally.
64
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Cash Flows
As of June 30, 2011, we had cash and cash equivalents of $747.6 million, a decrease of $1,626.4 million from $2,374.0 million as of December 31, 2010. The following table summarizes such decrease:
|
Six Months Ended June 30, |
|
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2010 | $ Change | ||||||||
(in millions of dollars) |
|
|
|
||||||||
Cash provided by (used in): |
|||||||||||
Operating activities |
$ | 699.6 | $ | 1,031.1 | $ | (331.5 | ) | ||||
Investing activities |
(2,177.7 | ) | (2,336.0 | ) | 158.3 | ||||||
Financing activities |
(179.9 | ) | 1,292.0 | (1,471.9 | ) | ||||||
Effect of exchange rate changes |
31.6 | (75.8 | ) | 107.4 | |||||||
Net change in cash and cash equivalents |
$ | (1,626.4 | ) | $ | (88.7 | ) | $ | (1,537.7 | ) | ||
During the six months ended June 30, 2011, we generated $331.5 million less cash from operating activities compared with the same period in 2010. The decrease was primarily due to the timing of our equipment rental customer receivables, VAT receivables and vendor payments as a result of improvements in the operating performance of our business. The decrease was also due to premiums paid to redeem debt in 2011 and timing of interest payments.
Our primary use of cash in investing activities is for the acquisition of revenue earning equipment, which consists of cars and equipment. During the six months ended June 30, 2011, we used $158.3 million less cash for investing activities compared with the same period in 2010. The decrease in the use of funds was primarily due to the year-over-year change in restricted cash and cash equivalents and increase in proceeds from disposal of revenue earning equipment, partly offset by increases in revenue earning equipment and property and equipment expenditures. The increase in proceeds from the disposal of revenue earning equipment was primarily related to opportunistically selling our fleet while residuals are at peak levels as well as refreshing the age of our fleet. The increase in revenue earning equipment expenditures was primarily due to higher equipment rental volumes. As of June 30, 2011 and December 31, 2010, we had $274.3 million and $207.6 million, respectively, of restricted cash and cash equivalents to be used for the purchase of revenue earning vehicles and other specified uses under our fleet financing facilities, our Like Kind Exchange Program, or "LKE Program," and to satisfy certain of our self-insurance regulatory reserve requirements. The increase in restricted cash and cash equivalents of $66.7 million from December 31, 2010 to June 30, 2011, primarily related to the timing of purchases and sales of revenue earning vehicles.
During the six months ended June 30, 2011, we generated $1,471.9 million less cash from financing activities compared with the same period in 2010. The decrease was primarily due to payment of long-term debt (includes redemption of $518.5 million principal amount of 10.5% Senior Subordinated Notes, redemption of $1,585 million principal amount of our outstanding 8.875% Senior Notes and a payment of $1.3 billion for the 2005 Senior Term Facility), a decrease in proceeds under the revolving lines of credit, net and payments of short-term borrowings, partly offset by an increase in proceeds from the issuance of long-term debt (includes $1.4 billion Senior Term Facility issued March 2011 and $1 billion of 6.75% Senior Notes issued in February and March 2011).
65
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Capital Expenditures
The tables below set forth the revenue earning equipment and property and equipment capital expenditures and related disposal proceeds on a cash basis consistent with our consolidated statements of cash flows for the first and second quarters of 2011 and 2010 (in millions of dollars).
|
Revenue Earning Equipment | Property and Equipment | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Capital Expenditures |
Disposal Proceeds |
Net Capital Expenditures (Disposal Proceeds) |
Capital Expenditures |
Disposal Proceeds |
Net Capital Expenditures |
||||||||||||||
2011 |
||||||||||||||||||||
First Quarter |
$ | 1,963.8 | $ | (1,690.2 | ) | $ | 273.6 | $ | 56.8 | $ | (14.5 | ) | $ | 42.3 | ||||||
Second Quarter |
3,503.0 | (1,798.7 | ) | 1,704.3 | 68.6 | (13.9 | ) | 54.7 | ||||||||||||
|
5,466.8 | (3,488.9 | ) | 1,977.9 | 125.4 | (28.4 | ) | 97.0 | ||||||||||||
2010 |
||||||||||||||||||||
First Quarter |
$ | 2,214.5 | $ | (1,606.4 | ) | $ | 608.1 | $ | 51.3 | $ | (6.7 | ) | $ | 44.6 | ||||||
Second Quarter |
3,102.8 | (1,837.1 | ) | 1,265.7 | 40.7 | (8.5 | ) | 32.2 | ||||||||||||
|
$ | 5,317.3 | $ | (3,443.5 | ) | $ | 1,873.8 | $ | 92.0 | $ | (15.2 | ) | $ | 76.8 | ||||||
|
Six Months Ended June 30, |
|
|
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2010 | $ Change | % Change | |||||||||||
Revenue earning equipment expenditures |
|||||||||||||||
Car rental |
$ | 5,211.3 | $ | 5,259.9 | $ | (48.6 | ) | (0.9 | )% | ||||||
Equipment rental |
255.5 | 57.4 | 198.1 | 345.1 | % | ||||||||||
Total |
$ | 5,466.8 | $ | 5,317.3 | $ | 149.5 | 2.8 | % | |||||||
The decrease in our car rental operations revenue earning equipment expenditures was primarily due to continued efforts to increase utilization of existing fleet during the six months ended June 30, 2011 as compared to the six months ended June 30, 2010. The increase in our equipment rental operations revenue earning equipment expenditures was primarily due to a continued improvement in economic conditions as well as efforts to reduce the age of our fleet during the six months ended June 30, 2011 as compared to the six months ended June 30, 2010.
|
Six Months Ended June 30, |
|
|
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2010 | $ Change | % Change | |||||||||||
Property and equipment expenditures |
|||||||||||||||
Car rental |
$ | 98.5 | $ | 82.2 | $ | 16.3 | 19.8 | % | |||||||
Equipment rental |
12.7 | 5.7 | 7.0 | 122.8 | % | ||||||||||
Other |
14.2 | 4.1 | 10.1 | 246.3 | % | ||||||||||
Total |
$ | 125.4 | $ | 92.0 | $ | 33.4 | 36.3 | % | |||||||
The increases in property and equipment expenditures were primarily due to a continued improvement in economic conditions.
66
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Financing
Our primary liquidity needs include servicing of corporate and fleet related debt, the payment of operating expenses and purchases of rental vehicles and equipment to be used in our operations. Our primary sources of funding are operating cash flows, cash received on the disposal of vehicles and equipment, borrowings under our asset-backed securitizations and our asset-based revolving credit facilities and access to the credit markets generally.
As of June 30, 2011, we had $11,295.7 million of total indebtedness outstanding. Cash paid for interest during the six months ended June 30, 2011, was $330.9 million, net of amounts capitalized. Accordingly, we are highly leveraged and a substantial portion of our liquidity needs arise from debt service on our indebtedness and from the funding of our costs of operations and capital expenditures.
Our liquidity as of June 30, 2011 consisted of cash and cash equivalents, unused commitments under our Senior ABL Facility and unused commitments under our fleet debt. For a description of these amounts, see Note 7 to the Notes to our condensed consolidated financial statements included in this Report as well as "Borrowing Capacity and Availability," below.
We have a significant amount of debt that will mature over the next several years. The aggregate amounts of maturities of debt for each of the twelve-month periods ending June 30 (in millions of dollars) are as follows:
2012 |
$ | 3,889.4 | (including $3,693.0 of other short-term borrowings) | ||
2013 |
$ | 597.8 | |||
2014 |
$ | 743.1 | |||
2015 |
$ | 1,210.7 | |||
2016 |
$ | 963.9 | |||
After 2016 |
$ | 3,906.5 |
Our short-term borrowings as of June 30, 2011 include, among other items, the amounts outstanding under the European Securitization, Australian Securitization, U.S. Fleet Financing Facility, U.S. Variable Funding Notes, Brazilian Fleet Financing Facility, Canadian Securitization, Capitalized Leases and European Revolving Credit Facility. These amounts are reflected as short-term borrowings, regardless of the facility maturity date, as these facilities are revolving in nature and/or the outstanding borrowings have maturities of three months or less.
The agreements governing our indebtedness require us to comply with certain covenants. Our failure to comply with the obligations contained in any agreements governing our indebtedness could result in an event of default under the applicable instrument, which could result in the related debt becoming immediately due and payable and could further result in a cross default or cross acceleration of our debt issued under other instruments.
As a result of our successful refinancing efforts in 2009, 2010 and the six months ended June 30, 2011 and the strategic cost reduction actions taken in the past, we believe that we will remain in compliance with our debt covenants and that cash generated from operations and cash received on the disposal of vehicles and equipment, together with amounts available under various facilities will be adequate to permit us to meet our debt service obligations, ongoing costs of operations, working capital needs and capital expenditure requirements for the next twelve months.
A significant number of cars that we purchase are subject to repurchase by car manufacturers under contractual repurchase or guaranteed depreciation programs. Under these programs, car manufacturers agree to repurchase cars at a specified price or guarantee the depreciation rate on the
67
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
cars during a specified time period, typically subject to certain car condition and mileage requirements. We use book values derived from this specified price or guaranteed depreciation rate to calculate financing capacity under certain asset-backed and asset-based financing arrangements.
In the event of a bankruptcy of a car manufacturer, our liquidity would be impacted by several factors including reductions in fleet residual values and the risk that we would be unable to collect outstanding receivables due to us from such bankrupt manufacturer. In addition, the program cars manufactured by any such company would need to be removed from our fleet or re-designated as non-program vehicles, which would require us to furnish additional credit enhancement associated with these program vehicles. For a discussion of the risks associated with a manufacturer's bankruptcy or our reliance on asset-backed and asset-based financing, see "Item 1ARisk Factors" included in our Form 10-K.
We rely significantly on asset-backed and asset-based financing arrangements to purchase cars for our domestic and international car rental fleet. The amount of financing available to us pursuant to these programs depends on a number of factors, many of which are outside our control, including recently adopted legislation, proposed SEC rules and regulations and other legislative and administrative developments. In this regard, there has been uncertainty regarding the potential impact of recently proposed SEC rules and regulations governing the issuance of asset-backed securities and additional requirements contained in the Dodd-Frank Wall Street Reform and Consumer Protection Act. While we will continue to monitor these developments and their impact on our ABS program, the SEC rules and regulations, once adopted and implemented, may impact our ability and/or desire to engage in asset-backed financings in the future. For further information concerning our asset-backed financing programs and our indebtedness, see Note 4 to the Notes to our audited annual consolidated financial statements included in our Form 10-K under the caption "Item 8Financial Statements and Supplementary Data." For a discussion of the risks associated with our reliance on asset-backed and asset-based financing and the significant amount of indebtedness, see "Item 1ARisk Factors" in our Form 10-K.
For further information on our indebtedness, see Note 7 to the Notes to our condensed consolidated financial statements included in this Report.
On May 9, 2011, Hertz Holdings' announced an offer to exchange each issued and outstanding share of common stock of Dollar Thrifty for $57.60 in cash and 0.8546 shares of its common stock, or the "tender offer." Based on the closing stock price for Hertz Holdings on May 6, 2011, Dollar Thrifty shareholders would have received $72.00 per share, or approximately $2.2 billion in the aggregate. Hertz Holdings intends, promptly after completion of the tender offer, to consummate a second-step merger of HDTMS, Inc., or another of its wholly owned subsidiaries, with and into Dollar Thrifty, or the "second-step merger." Hertz Holdings intends to fund the transactions contemplated by the tender offer and second-step merger using cash on hand, borrowings under bank credit facilities and/or the issuance of debt securities. We estimate that the total amount of cash required to complete the transactions contemplated by the tender offer and second-step merger, including payment of any fees, expenses and other related amounts incurred in connection with the offer and second-step merger and the refinancing of a portion of Dollar Thrifty's outstanding indebtedness, will be approximately $1.9 billion (exclusive of fees and expenses related to new borrowings and/or issuances of debt securities in connection with the offer and second-step merger and exclusive of any cash and cash equivalents available from Dollar Thrifty). The tender offer is subject to a number of conditions, including, among others, a minimum tender of a number of shares of Dollar Thrifty common stock which, together with Dollar Thrifty shares then owned by Hertz Holdings and its subsidiaries, represents at least a majority of the then outstanding shares of Dollar Thrifty common stock on a fully diluted basis, as well as the receipt of required regulatory approvals.
68
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Covenants
Certain of our debt instruments and credit facilities contain a number of covenants that, among other things, limit or restrict the ability of the borrowers and the guarantors to dispose of assets, incur additional indebtedness, incur guarantee obligations, prepay certain indebtedness, make certain restricted payments (including paying dividends, redeeming stock or making other distributions), create liens, make investments, make acquisitions, engage in mergers, fundamentally change the nature of their business, make capital expenditures, or engage in certain transactions with certain affiliates.
Under the new terms of our amended Senior Term Facility and Senior ABL Facility, we are not subject to ongoing financial maintenance covenants; however, under the Senior ABL Facility we are subject to a springing financial maintenance covenant upon the occurrence of certain triggering events. As of June 30, 2011, no triggering event had occurred requiring testing of the springing financial maintenance covenant.
In addition to borrowings under our Senior Credit Facilities, we have a significant amount of additional debt outstanding. For further information on the terms of our Senior Credit Facilities as well as our significant amount of debt outstanding, see Note 7 to the Notes to our condensed consolidated financial statements included in this Report and Note 4 to the Notes to our audited annual consolidated financial statements included in our Form 10-K under the caption "Item 8Financial Statements and Supplementary Data." For a discussion of the risks associated with our significant indebtedness, see "Item 1ARisk Factors" in our Form 10-K.
Borrowing Capacity and Availability
As of June 30, 2011, the following facilities were available for the use of Hertz and its subsidiaries (in millions of dollars):
|
Remaining Capacity |
Availability Under Borrowing Base Limitation |
||||||
---|---|---|---|---|---|---|---|---|
Corporate Debt |
||||||||
Senior ABL Facility |
$ | 1,340.8 | $ | 828.9 | ||||
Total Corporate Debt |
1,340.8 | 828.9 | ||||||
Fleet Debt |
||||||||
U.S. Fleet Variable Funding Notes |
298.1 | 29.6 | ||||||
European Seasonal Revolving Credit Facility |
43.1 | 43.1 | ||||||
European Securitization |
174.3 | 34.6 | ||||||
Canadian Securitization |
101.4 | 20.3 | ||||||
Australian Securitization |
121.2 | 2.6 | ||||||
Brazilian Fleet Financing Facility |
0.9 | | ||||||
Capitalized Leases |
15.0 | | ||||||
Total Fleet Debt |
754.0 | 130.2 | ||||||
Total |
$ | 2,094.8 | $ | 959.1 | ||||
Our borrowing capacity and availability primarily comes from our "revolving credit facilities," which are a combination of asset-backed securitization facilities and asset-based revolving credit facilities. Creditors under each of our revolving credit facilities have a claim on a specific pool of assets as collateral. Our
69
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
ability to borrow under each revolving credit facility is a function of, among other things, the value of the assets in the relevant collateral pool. We refer to the amount of debt we can borrow given a certain pool of assets as the "borrowing base."
We refer to "Remaining Capacity" as the maximum principal amount of debt permitted to be outstanding under the respective facility (i.e., the amount of debt we could borrow assuming we possessed sufficient assets as collateral) less the principal amount of debt then-outstanding under such facility.
We refer to "Availability Under Borrowing Base Limitation" and "borrowing base availability" as the lower of Remaining Capacity or the borrowing base less the principal amount of debt then-outstanding under such facility (i.e., the amount of debt we could borrow given the collateral we possess at such time).
As of June 30, 2011, the Senior Term Facility had approximately $0.5 million available under the letter of credit facility and the Senior ABL Facility had $1,111.7 million available under the letter of credit facility sublimit, subject to borrowing base restrictions.
Substantially all of our revenue earning equipment and certain related assets are owned by special purpose entities, or are encumbered in favor of our lenders under our various credit facilities.
Some of these special purpose entities are consolidated variable interest entities, of which we are the primary beneficiary, whose sole purpose is to provide commitments to lend in various currencies subject to borrowing bases comprised of rental vehicles and related assets of certain of Hertz International, Ltd.'s subsidiaries. As of June 30, 2011 and December 31, 2010, our International Fleet Financing No. 1 B.V., International Fleet Financing No. 2 B.V. and HA Funding Pty, Ltd. variable interest entities had total assets primarily comprised of loans receivable and revenue earning equipment of $651.4 million and $652.1 million, respectively, and total liabilities primarily comprised of debt of $650.8 million and $651.6 million, respectively.
Off-Balance Sheet Commitments and Arrangements
As of June 30, 2011 and December 31, 2010, the following guarantees (including indemnification commitments) were issued and outstanding:
Indemnification Obligations
In the ordinary course of business, we execute contracts involving indemnification obligations customary in the relevant industry and indemnifications specific to a transaction such as the sale of a business. These indemnification obligations might include claims relating to the following: environmental matters; intellectual property rights; governmental regulations and employment-related matters; customer, supplier and other commercial contractual relationships; and financial matters. Performance under these indemnification obligations would generally be triggered by a breach of terms of the contract or by a third party claim. We regularly evaluate the probability of having to incur costs associated with these indemnification obligations and have accrued for expected losses that are probable and estimable. The types of indemnification obligations for which payments are possible include the following:
Sponsors; Directors
We have entered into customary indemnification agreements with Hertz Holdings, the Sponsors and Hertz Holdings' stockholders affiliated with the Sponsors, pursuant to which Hertz Holdings and we will indemnify the Sponsors, Hertz Holdings' stockholders affiliated with the Sponsors and their respective
70
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
affiliates, directors, officers, partners, members, employees, agents, representatives and controlling persons, against certain liabilities arising out of performance of a consulting agreement with Hertz Holdings and each of the Sponsors and certain other claims and liabilities, including liabilities arising out of financing arrangements or securities offerings. We do not believe that these indemnifications are reasonably likely to have a material impact on us. Hertz Holdings has entered into indemnification agreements with each of its directors.
Environmental
We have indemnified various parties for the costs associated with remediating numerous hazardous substance storage, recycling or disposal sites in many states and, in some instances, for natural resource damages. The amount of any such expenses or related natural resource damages for which we may be held responsible could be substantial. The probable expenses that we expect to incur for such matters have been accrued, and those expenses are reflected in our condensed consolidated financial statements. As of June 30, 2011 and December 31, 2010, the aggregate amounts accrued for environmental liabilities, including liability for environmental indemnities, reflected in our condensed consolidated balance sheets in "Accrued liabilities" were $1.7 million and $1.6 million, respectively. The accrual generally represents the estimated cost to study potential environmental issues at sites deemed to require investigation or clean-up activities, and the estimated cost to implement remediation actions, including on-going maintenance, as required. Cost estimates are developed by site. Initial cost estimates are based on historical experience at similar sites and are refined over time on the basis of in-depth studies of the sites. For many sites, the remediation costs and other damages for which we ultimately may be responsible cannot be reasonably estimated because of uncertainties with respect to factors such as our connection to the site, the materials there, the involvement of other potentially responsible parties, the application of laws and other standards or regulations, site conditions, and the nature and scope of investigations, studies, and remediation to be undertaken (including the technologies to be required and the extent, duration, and success of remediation).
Risk Management
For a discussion of additional risks arising from our operations, including vehicle liability, general liability and property damage insurable risks, see "Item 1BusinessRisk Management" in our Form 10-K and "Part II, Item 1ARisk Factors" in our subsequent quarterly reports on Form 10-Q.
Market Risks
We are exposed to a variety of market risks, including the effects of changes in interest rates, foreign currency exchange rates and fluctuations in gasoline prices. We manage our exposure to these market risks through our regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. Derivative financial instruments are viewed as risk management tools and have not been used for speculative or trading purposes. In addition, derivative financial instruments are entered into with a diversified group of major financial institutions in order to manage our exposure to counterparty nonperformance on such instruments. For more information on these exposures, see Note 13 to the Notes to our condensed consolidated financial statements included in this Report.
Interest Rate Risk
From time to time, we may enter into interest rate swap agreements and/or interest rate cap agreements to manage interest rate risk. See Notes 7 and 13 to the Notes to our condensed consolidated financial
71
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
statements included in this Report and Notes 4 and 13 to the Notes to our audited annual consolidated financial statements included in our Form 10-K under the caption "Item 8Financial Statements and Supplementary Data."
We have a significant amount of debt with variable rates of interest based generally on LIBOR, Euro inter-bank offered rate, or "EURIBOR," or their equivalents for local currencies or bank conduit commercial paper rates plus an applicable margin. Increases in interest rates could therefore significantly increase the associated interest payments that we are required to make on this debt.
We have assessed our exposure to changes in interest rates by analyzing the sensitivity to our earnings assuming various changes in market interest rates. Assuming a hypothetical increase of one percentage point in interest rates on our debt portfolio as of June 30, 2011, our net loss would increase by an estimated $26.4 million over a twelve-month period.
Consistent with the terms of the agreements governing the respective debt obligations, we may hedge a portion of the floating rate interest exposure under the various debt facilities to provide protection in respect of such exposure.
Foreign Currency Risk
We have foreign currency exposure to exchange rate fluctuations worldwide and primarily with respect to the Euro, Canadian dollar, Australian dollar and British pound.
We manage our foreign currency risk primarily by incurring, to the extent practicable, operating and financing expenses in the local currency in the countries in which we operate, including making fleet and equipment purchases and borrowing for working capital needs. Also, we have purchased foreign exchange options to manage exposure to fluctuations in foreign exchange rates for selected marketing programs. The effect of exchange rate changes on these financial instruments would not materially affect our consolidated financial position, results of operations or cash flows. Our risks with respect to foreign exchange options are limited to the premium paid for the right to exercise the option and the future performance of the option's counterparty.
We also manage exposure to fluctuations in currency risk on intercompany loans we make to certain of our subsidiaries by entering into foreign currency forward contracts at the time of the loans which are intended to offset the impact of foreign currency movements on the underlying intercompany loan obligations.
On October 1, 2006, we designated our 7.875% Senior Notes due 2014 as an effective net investment hedge of our Euro-denominated net investment in our international operations.
For the three-month and six-month periods ended June 30, 2011, our consolidated statement of operations contained realized and unrealized losses relating to the effects of foreign currency of $5.1 million and $7.7 million, respectively.
See Note 13 to the Notes to our condensed consolidated financial statements included in this Report.
Other Risks
We purchase unleaded gasoline and diesel fuel at prevailing market rates. In January 2009, we began a program to manage our exposure to changes in fuel prices through the use of derivative commodity instruments. For the three-month and six-month periods ended June 30, 2011, we recognized a loss of $0.2 million and a gain of $2.9 million, respectively, in "Direct operating" on our consolidated statement
72
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
of operations relating to our gasoline swaps. See Note 13 to the Notes to our condensed consolidated financial statements included in this Report.
Inflation
The increased cost of vehicles is the primary inflationary factor affecting us. Many of our other operating expenses are also expected to increase with inflation, including health care costs and gasoline. Management does not expect that the effect of inflation on our overall operating costs will be greater for us than for our competitors.
Income Taxes
In January 2006, we implemented a LKE Program for our U.S. car rental business. Pursuant to the program, we dispose of vehicles and acquire replacement vehicles in a form intended to allow such dispositions and replacements to qualify as tax-deferred "like-kind exchanges" pursuant to section 1031 of the Internal Revenue Code. The program has resulted in deferral of federal and state income taxes for fiscal years 2006, 2007, 2008 and 2009 and part of 2010. A LKE Program for HERC has also been in place for several years. The program allows tax deferral if a qualified replacement asset is acquired within a specific time period after asset disposal. Accordingly, if a qualified replacement asset is not purchased within this limited time period, taxable gain is recognized. Over the last few years, for strategic purposes, such as cash management and fleet reduction, we have recognized some taxable gains in the program. In 2009, the bankruptcy filing of an original equipment manufacturer, or "OEM," also resulted in minimal gain recognition. We had sufficient net operating losses to fully offset the taxable gains recognized. We cannot offer assurance that the expected tax deferral will continue or that the relevant law concerning the programs will remain in its current form. An extended reduction in our car rental fleet could result in reduced deferrals in the future, which in turn could require us to make material cash payments for federal and state income tax liabilities. Our inability to obtain replacement financing as our fleet financing facilities mature would likely result in an extended reduction in the fleet. In the event of an extended fleet reduction, we believe the likelihood of making material cash tax payments in the near future is low because of our significant net operating losses. In August 2010, we elected to temporarily suspend the U.S. car rental LKE Program allowing cash proceeds from sales of vehicles to be utilized for various business purposes, including paying down existing debt obligations, future growth initiatives and for general operating purposes. Purchases of vehicles will continue to be funded with a combination of asset-backed securitizations, asset-based revolving credit facilities and corporate liquidity. We expect that recent tax legislation, effective September 2010 through December 2011, will result in the LKE suspension having a neutral effect on our taxes. The new law allows 100% bonus depreciation for qualified asset acquisitions during the period the law is effective. We estimate recognized tax gains on vehicle dispositions resulting from the LKE suspension to be mainly offset by 100% tax depreciation on newly acquired vehicles. Our federal net operating loss position for U.S. tax purposes should remain relatively unchanged when the LKE program is re-instated.
On January 1, 2009, Bank of America acquired Merrill Lynch & Co., Inc., the parent company of BAMLCP. Accordingly, Bank of America is now an indirect beneficial owner of Hertz Holdings' common stock held by BAMLCP and certain of its affiliates. For U.S. income tax purposes the transaction, when combined with other unrelated transactions during the previous 36 months, resulted in a change in control as that term is defined in Section 382 of the Internal Revenue Code. Consequently, utilization of all pre-2009 U.S. net operating losses is subject to an annual limitation. The limitation is not expected to result in a loss of net operating losses or have a material adverse impact on taxes.
73
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Employee Retirement Benefits
Pension
We sponsor defined benefit pension plans worldwide. Pension obligations give rise to significant expenses that are dependent on assumptions discussed in Note 5 of the Notes to our audited annual consolidated financial statements included in our Form 10-K under the caption "Item 8Financial Statements and Supplementary Data." Our 2011 worldwide pre-tax pension expense is expected to be approximately $38.3 million, which would represent an increase of $6.1 million from 2010. The anticipated increase in expense compared to 2010 is primarily due to lower expected rates of return on assets as well as adverse exchange rate movements.
We participate in various "multiemployer" pension plans. In the event that we withdraw from participation in one of these plans, then applicable law could require us to make an additional lump-sum contribution to the plan, and we would have to reflect that as an expense in our consolidated statement of operations and as a liability on our condensed consolidated balance sheet. Our withdrawal liability for any multiemployer plan would depend on the extent of the plan's funding of vested benefits. At least one multiemployer plan in which we participate is reported to have, and other of our multiemployer plans could have, significant underfunded liabilities. Such underfunding may increase in the event other employers become insolvent or withdraw from the applicable plan or upon the inability or failure of withdrawing employers to pay their withdrawal liability. In addition, such underfunding may increase as a result of lower than expected returns on pension fund assets or other funding deficiencies.
Recent Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board issued Accounting Standards Update No. 2011-05, "Presentation of Comprehensive Income," requiring companies to present items of net income and other comprehensive income either in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements of net income and other comprehensive income. The amendments in this update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. These provisions will become effective for us beginning with our quarterly report for the period ended March 31, 2012.
Other Financial Information
With respect to the unaudited interim financial information of The Hertz Corporation as of June 30, 2011 and for the three-month and six-month periods ended June 30, 2011 and 2010 included in this Form 10-Q, PricewaterhouseCoopers LLP reported that they applied limited procedures in accordance with professional standards for reviews of such unaudited interim financial information. However, their separate report dated August 5, 2011 included in this Form 10-Q herein states that they did not audit and they do not express an opinion on such unaudited interim financial information. Accordingly, the degree of reliance on their report should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933 for their report on such unaudited interim financial information because that report is not a "report" or "part" of a registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Securities Act of 1933.
74
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
There is no material change in the information reported under "Part II, Item 7AQuantitative and Qualitative Disclosures About Market Risk," included in our Form 10-K for the fiscal year ended December 31, 2010. See "Item 2Management's Discussion and Analysis of Financial Condition and Results of OperationsMarket Risks," included in this Report.
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in company reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in company reports filed under the Securities Exchange Act of 1934 is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
An evaluation of the effectiveness of our disclosure controls and procedures was performed under the supervision of, and with the participation of, management, including our Chief Executive Officer and Chief Financial Officer, as of the end of the period covered by this Report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.
Changes in Internal Control Over Financial Reporting
An evaluation of our internal controls over financial reporting was performed under the supervision of, and with the participation of, management, including our Chief Executive Officer and Chief Financial Officer, to determine whether any changes have occurred during the period covered by this Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that no changes in our internal control over financial reporting have occurred during the three months ended June 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
75
For a description of certain pending legal proceedings, see Note 11 to the Notes to our annual audited consolidated financial statements included in our Form 10-K.
The following recent development pertaining to a legal proceeding described in our Form 10-K is furnished on a supplemental basis:
In May 2011, the judge in the related cases of Janet Sobel et al. v. The Hertz Corporation and Lydia Lee et al. v. Enterprise Rent-A-Car Company et al. denied the plaintiffs' motion for final approval of the proposed settlement and denied the plaintiffs' motion for attorneys' fees, expenses and incentive awards as moot. The court concluded that the absence of evidence as to the actual value to the class of the coupons offered in settlement and the value of the claims to be surrendered precluded a finding that the settlement is fair, reasonable and adequate.
Aside from the above mentioned, none of the other legal proceedings described in our Form 10-K have experienced material changes.
On June 15, 2011 we received a subpoena from the staff of the Securities and Exchange Commission, or "SEC," seeking production of documents related to our proposed business combination with Dollar Thrifty Automotive Group, Inc. We intend to cooperate fully with the SEC's investigation. We do not expect this investigation to have any effect on our proposed business combination with Dollar Thrifty.
ITEM 1A. RISK FACTORS
There is no material change in the information reported under "Part IItem 1ARisk Factors" contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 and "Part II, Item 1ARisk Factors" in our subsequent quarterly reports on Form 10-Q with the exception of the following:
Risks Related to Acquisition of Dollar Thrifty
If we acquire Dollar Thrifty Automotive Group, or "Dollar Thrifty," in addition to the risks described below, we may be subject to the risks and uncertainties associated with Dollar Thrifty's business. See "Item 1ARisk Factors" in the Dollar Thrifty Form 10-K for the fiscal year ended December 31, 2010 for a discussion of these risks. This item is not incorporated by reference into this quarterly report on Form 10-Q and you should not consider the contents of this item to be a part of this quarterly report on Form 10-Q.
Even if the proposed acquisition of Dollar Thrifty is consummated, we may fail to realize all of the anticipated benefits of the proposed acquisition.
Hertz Holdings announced the Dollar Thrifty exchange offer because it believes that acquiring Dollar Thrifty will be beneficial to us and Hertz Holdings' stockholders. To realize these anticipated benefits, after the completion of the transactions contemplated by the tender offer and second-step merger, we expect to achieve significant cost savings as we integrate our respective businesses. However, there is no assurance that if the transactions contemplated by the tender offer and second-step merger are consummated, we will be able to integrate the operations of Dollar Thrifty without encountering unexpected difficulties, including unanticipated costs, difficulty in retaining customers, challenges associated with information technology integration, and failure to retain key employees. We may also incur substantial delays or costs in connection with the completion of the transactions contemplated by the tender offer and second-step merger. Additionally, as a condition to their approval of our acquisition of Dollar Thrifty, regulatory agencies may impose requirements, limitations or costs or require divestitures or place restrictions on the conduct of the combined company's business. Any or all of the preceding could jeopardize our ability to obtain the anticipated benefits of the transactions
76
ITEM 1A. RISK FACTORS (Continued)
contemplated by the tender offer and second-step merger, which could have a material adverse effect on Hertz Holdings' stock price, financial condition and results of operations.
Hertz Holdings will incur a substantial amount of indebtedness to acquire the shares of Dollar Thrifty common stock pursuant to the offer and second-step merger, to refinance a portion of Dollar Thrifty's outstanding indebtedness, and to pay related fees and expenses.
We cannot guarantee that the combined company will be able to generate sufficient cash flow to make all of the principal and interest payments under this indebtedness when such payments are due or that it will be able to refinance such indebtedness.
77
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: August 5, 2011 | THE HERTZ CORPORATION (Registrant) |
|||
By: |
/s/ ELYSE DOUGLAS |
|||
Elyse Douglas | ||||
Executive Vice President and Chief Financial Officer (principal financial officer and duly authorized officer) |
78
Exhibit Number |
Description | |
---|---|---|
4.11 | Series 2011-1 Supplement, dated as of June 16, 2011, between Hertz Vehicle Financing LLC, as Issuer, and The Bank of New York Mellon Trust Company, N.A., as Trustee and Securities Intermediary, to the Third Amended and Restated Base Indenture, dated as of September 18, 2009, between Hertz Vehicle Financing LLC., as Issuer, and The Bank of New York Mellon Trust Company, N.A., as Trustee.** | |
10.22 |
Amended and Restated Indemnification Agreement, dated as of November 23, 2009, by and among Hertz Global Holdings, Inc., The Hertz Corporation, Clayton, Dubilier & Rice Fund VII, L.P., CDR CCMG Co-Investor L.P., Clayton, Dubilier & Rice, Inc., Clayton, Dubilier & Rice, LLC and Clayton Dubilier & Rice Holdings, L.P.** |
|
10.6.3 |
Form of Performance Stock Unit Agreement under the Hertz Global Holdings, Inc. 2008 Omnibus Incentive Plan (form used for agreements entered into after January 1, 2011) (Incorporated by reference to Exhibit 10.6.6 to the Registration Statement on Form S-4 (File No. 333-173023) of The Hertz Corporation, as filed on March 23, 2011). ** |
|
10.6.4 |
Form of Special Performance Stock Unit Agreement under the Hertz Global Holdings, Inc. 2008 Omnibus Incentive Plan approved for fiscal year 2011 grant to Mark P. Frissora (Incorporated by reference to Exhibit 10.6.7 to the Registration Statement on Form S-4 (File No. 333-173023) of The Hertz Corporation, as filed on March 23, 2011). ** |
|
10.28 |
Form of Special Award Agreement (Incorporated by reference to Exhibit 10.15 to the Registration Statement on Form S-4 (File No. 333-173023) of The Hertz Corporation, as filed on March 23, 2011). ** |
|
31.131.2 |
Rule 13a-14(a)/15d-14(a) Certifications of Chief Executive Officer and Chief Financial Officer |
|
32.132.2 |
18 U.S.C. Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer |
|
101.INS |
XBRL Instance Document* |
|
101.SCH |
XBRL Taxonomy Extension Schema Document* |
|
101.CAL |
XBRL Taxonomy Extension Calculation Linkbase Document* |
|
101.DEF |
XBRL Taxonomy Extension Definition Linkbase Document* |
|
101.LAB |
XBRL Taxonomy Extension Label Linkbase Document* |
|
101.PRE |
XBRL Taxonomy Extension Presentation Linkbase Document* |
79
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO RULE 13a-14(a)/15d-14(a)
I, Mark P. Frissora, certify that:
Date: August 5, 2011
By: |
/s/ MARK P. FRISSORA Mark P. Frissora Chief Executive Officer |
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO RULE 13a-14(a)/15d-14(a)
I, Elyse Douglas, certify that:
Date: August 5, 2011
By: |
/s/ ELYSE DOUGLAS Elyse Douglas Chief Financial Officer |
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
In connection with the quarterly report of The Hertz Corporation (the "Company") on Form 10-Q for the period ending June 30, 2011 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Mark P. Frissora, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
Date: August 5, 2011
By: |
/s/ MARK P. FRISSORA Mark P. Frissora Chief Executive Officer |
EXHIBIT 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
In connection with the quarterly report of The Hertz Corporation (the "Company") on Form 10-Q for the period ending June 30, 2011 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Elyse Douglas, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
Date: August 5, 2011
By: |
/s/ ELYSE DOUGLAS Elyse Douglas Chief Financial Officer |
CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)
In Thousands |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2011
|
Jun. 30, 2010
|
Jun. 30, 2011
|
Jun. 30, 2010
|
|
Revenues: | Â | Â | Â | Â |
Car rental | $ 1,731,200 | $ 1,582,983 | $ 3,210,138 | $ 2,979,554 |
Equipment rental | 301,641 | 265,706 | 569,727 | 502,677 |
Other | 39,452 | 30,897 | 72,431 | 58,243 |
Total revenues | 2,072,293 | 1,879,586 | 3,852,296 | 3,540,474 |
Expenses: | Â | Â | Â | Â |
Direct operating | 1,187,306 | 1,075,037 | 2,260,971 | 2,088,036 |
Depreciation of revenue earning equipment and lease charges | 419,669 | 456,720 | 855,758 | 915,893 |
Selling, general and administrative | 195,498 | 172,003 | 377,688 | 339,720 |
Interest expense | 153,589 | 177,221 | 338,350 | 346,810 |
Interest income | (1,546) | (6,791) | (3,402) | (9,069) |
Other (income) expense, net | 10,801 | Â | 62,677 | Â |
Total expenses | 1,965,317 | 1,874,190 | 3,892,042 | 3,681,390 |
Income (loss) before income taxes | 106,976 | 5,396 | (39,746) | (140,916) |
(Provision) benefit for taxes on income | (39,793) | (8,245) | (12,365) | 5,968 |
Net income (loss) | 67,183 | (2,849) | (52,111) | (134,948) |
Less: Net income attributable to noncontrolling interest | (5,087) | (4,673) | (8,760) | (8,251) |
Net income (loss) attributable to The Hertz Corporation and Subsidiaries' common stockholder | $ 62,096 | $ (7,522) | $ (60,871) | $ (143,199) |
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