FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-7541
THE HERTZ CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 13-1938568
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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(201)307-2000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report.)
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND
(b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 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 [X] No[ ]
Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of June 30, 2001: Common Stock, $0.01 par value - 100 shares.
Page 1 of 17 pages
THE HERTZ CORPORATION AND SUBSIDIARIES
INDEX
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
Consolidated Balance Sheet as of June 30, 2001
and December 31, 2000................................................... 3
Consolidated Statement of Income for the
three months ended June 30, 2001 and 2000............................... 4
Consolidated Statement of Income for the
six months ended June 30, 2001 and 2000................................. 5
Consolidated Statement of Cash Flows for the
six months ended June 30, 2001 and 2000................................. 6
Notes to Condensed Consolidated Financial Statements...................... 7 - 10
ITEM 2. Management's discussion and Analysis of Financial
Condition and Results of Operations..................................... 11 - 15
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.......................................... 16
SIGNATURES................................................................................. 16
EXHIBIT INDEX.............................................................................. 17
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PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS)
UNAUDITED
ASSETS
June 30, Dec. 31,
2001 2000
------------ ------------
Cash and equivalents $ 149,902 $ 206,477
Receivables, less allowance for
doubtful accounts of $31,456 and $34,788 982,733 1,115,509
Due from affiliates 120,044 343,568
Inventories, at lower of cost or market 81,495 78,942
Prepaid expenses and other assets 152,183 129,115
Revenue earning equipment, at cost:
Cars 7,288,171 5,757,090
Less accumulated depreciation (543,799) (570,855)
Other equipment 2,417,430 2,310,118
Less accumulated depreciation (671,226) (573,837)
------------ ------------
Total revenue earning equipment 8,490,576 6,922,516
------------ ------------
Property and equipment, at cost:
Land, buildings and leasehold improvements 926,107 876,123
Service equipment 903,850 863,708
------------ ------------
1,829,957 1,739,831
Less accumulated depreciation (797,570) (739,670)
------------ ------------
Total property and equipment 1,032,387 1,000,161
------------ ------------
Goodwill and other intangible assets, net of amortization (Note 3) 820,636 823,693
------------ ------------
Total assets $ 11,829,956 $ 10,619,981
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable $ 828,738 $ 546,082
Accrued liabilities 597,649 573,662
Accrued taxes 173,594 160,901
Debt (Note 6) 7,520,238 6,675,988
Public liability and property damage 283,695 272,779
Deferred taxes on income 410,600 406,500
Stockholder's equity (Note 2):
Common Stock, $0.01 par value, 3,000 shares authorized,
100 shares issued at June 30, 2001 -- --
Preferred Stock, $0.01 par value,
none issued at December 31, 2000 -- --
Class A Common Stock, $0.01 par value,
40,956,858 shares issued at December 31, 2000 -- 410
Class B Common Stock, $0.01 par value,
67,310,167 shares issued at December 31, 2000 -- 673
Additional capital paid-in 983,132 995,871
Unamortized restricted stock grants -- (5,518)
Retained earnings 1,153,283 1,103,401
Accumulated other comprehensive loss (Note 8) (120,973) (84,270)
Treasury stock, at cost, 779,534 shares at December 31, 2000 -- (26,498)
------------ ------------
Total stockholder's equity 2,015,442 1,984,069
------------ ------------
Total liabilities and stockholder's equity $ 11,829,956 $ 10,619,981
============ ============
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The accompanying notes are an integral part of this statement.
THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS OF DOLLARS)
UNAUDITED
Three Months
Ended June 30,
------------------------------
2001 2000
---------- ----------
Revenues:
Car rental $1,003,059 $1,021,658
Industrial and construction equipment rental 256,515 234,977
Car leasing 1,227 10,507
Franchise fees and other revenue 24,695 22,185
---------- ----------
Total revenues 1,285,496 1,289,327
---------- ----------
Expenses:
Direct operating 615,202 569,495
Depreciation of revenue earning equipment (Note 5) 363,688 336,068
Selling, general and administrative 117,932 115,730
Interest, net of interest income of $2,312 and $3,963 102,868 99,014
---------- ----------
Total expenses 1,199,690 1,120,307
---------- ----------
Income before income taxes 85,806 169,020
Provision for taxes on income (Note 4) 26,602 65,289
---------- ----------
Net income $ 59,204 $ 103,731
========== ==========
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The accompanying notes are an integral part of this statement.
THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS OF DOLLARS)
UNAUDITED
Six Months
Ended June 30,
------------------------------
2001 2000
---------- ----------
Revenues:
Car rental $1,931,341 $1,920,489
Industrial and construction equipment rental 485,244 437,008
Car leasing 2,643 21,111
Franchise fees and other revenue 47,139 45,924
---------- ----------
Total revenues 2,466,367 2,424,532
---------- ----------
Expenses:
Direct operating 1,233,347 1,108,496
Depreciation of revenue earning equipment (Note 5) 701,130 640,098
Selling, general and administrative 247,184 225,343
Interest, net of interest income of $5,094 and $7,480 204,705 188,289
---------- ----------
Total expenses 2,386,366 2,162,226
---------- ----------
Income before income taxes 80,001 262,306
Provision for taxes on income (Note 4) 24,734 102,275
---------- ----------
Net income $ 55,267 $ 160,031
========== ==========
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The accompanying notes are an integral part of this statement.
THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
UNAUDITED
Six Months
Ended June 30,
-------------------------------
2001 2000
--------- -----------
Cash flows from operating activities:
Net income $ 55,267 $ 160,031
Adjustments to reconcile net income
to net cash used in operating activities (918,762) (1,050,754)
--------- -----------
Net cash used in operating activities (863,495) (890,723)
--------- -----------
Cash flows from investing activities:
Property and equipment expenditures (134,857) (128,823)
Proceeds from sales of property and equipment 12,994 13,477
Available-for-sale securities:
Purchases (5,607) (3,255)
Sales 5,062 3,281
Decrease (Increase) in investment in joint venture 480 (2,700)
Purchases of various operations, net of cash
(see supplemental disclosures below) (2,661) (76,388)
--------- -----------
Net cash used in investing activities (124,589) (194,408)
--------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 809,088 496,720
Repayment of long-term debt (408,931) (136,116)
Short-term borrowings:
Proceeds 566,915 284,146
Repayments (369,356) (442,263)
Ninety day term or less, net 332,877 832,241
Cash dividends paid on common stock (5,385) (10,777)
Purchases of treasury stock -- (22,426)
Proceeds from sale of treasury stock 9,995 4,243
--------- -----------
Net cash provided by financing activities 935,203 1,005,768
--------- -----------
Effect of foreign exchange rate changes on cash (3,694) (1,987)
--------- -----------
Net decrease in cash and equivalents during the period (56,575) (81,350)
Cash and equivalents at beginning of year 206,477 208,652
--------- -----------
Cash and equivalents at end of period $ 149,902 $ 127,302
========= ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of amounts capitalized) $ 211,934 $ 197,528
Income taxes 28,507 36,390
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In connection with acquisitions made in the first six months of 2001 and 2000, liabilities assumed were $13 million and $58 million, respectively.
The accompanying notes are an integral part of this statement.
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
NOTE 1 - BASIS OF PRESENTATION
The summary of accounting policies set forth in Note 1 to the consolidated financial statements contained in the Form 10-K for the fiscal year ended December 31, 2000, filed by the registrant (the "Company") with the Securities and Exchange Commission on March 30, 2001, has been followed in preparing the accompanying consolidated financial statements.
The condensed consolidated financial statements for interim periods included herein have not been audited by independent public accountants. In the Company's opinion, all adjustments (which include only normal recurring adjustments) necessary for a fair presentation of the results of operations for the interim periods have been made. Results for interim periods are not necessarily indicative of results for a full year.
NOTE 2 - ACQUISITION OF SHARES OWNED BY PUBLIC STOCKHOLDERS
On March 9, 2001, Ford FSG, Inc., ("FSG"), an indirect wholly owned subsidiary of Ford Motor Company ("Ford") that owned an approximate 81.5% economic interest in the Company, completed its acquisition of all of the Company's outstanding Class A Common Stock that FSG did not already own for $35.50 per share. The acquisition was accomplished through a cash tender offer followed by a merger of a wholly owned subsidiary of FSG with and into the Company, with the Company surviving the merger. After the merger, all outstanding shares of Class A Common Stock of the Company were owned by FSG, and all shares of Class A Common Stock of the Company, including those shares previously held by the Company as treasury stock, along with all shares of Class B Common Stock of the Company owned by a wholly owned subsidiary of FSG, were cancelled. The merger had no effect on the outstanding obligations (including debt obligations, leases and guarantees) of the Company. As a result of FSG's acquisition, the Company's Class A Common Stock is no longer traded on the New York Stock Exchange. On May 3, 2001, the Company's restated Certificate of Incorporation was amended to change the authorized capital stock of the Company to 3,000 shares, par value $.01 per share, of common stock, of which 100 shares have been issued to the Company's sole shareholder, FSG.
At the time FSG completed its acquisition, the Employee Stock Purchase Plan (the "ESPP) was terminated, and all accumulated after-tax payroll deductions that had not been used to purchase shares of the Company's Class A Common Stock were returned to the participants, without interest, in accordance with terms of the ESPP. Outstanding employee stock options to purchase Company stock under the Long Term Equity Compensation Plan (the "LTECP") (other than options held by non-employee Directors of the Company) were converted into options to purchase shares of common stock of Ford, as determined and approved by the Company and Ford. In addition, holders of restricted stock awarded under the LTECP received the same consideration as all other holders of the Company's Class A Common Stock received in the merger. The Company recognized $9.7 million of expenses associated with the merger in the first quarter of 2001. FSG's cost of acquiring the Company's minority interest has not been reflected in the accompanying condensed consolidated financial statements.
NOTE 3 - ACQUISITIONS
During the six months ended June 30, 2001, the Company acquired one European equipment rental and sales company and one North American car rental company. The aggregate purchase price of the acquisitions was $2.7 million, net of cash acquired, plus the assumption of $9.1 million of debt. The aggregate consideration exceeded the fair value of the net assets acquired by approximately $4.2 million, which has been recognized as goodwill and is being amortized over periods from 25 to 40 years. The acquisitions were accounted for as purchases, and the results of operations have been included in the Company's condensed consolidated financial statements since their respective dates of acquisition. Had the acquisitions occurred as of the beginning of the year, the effect of including their results would not be material to the results of operations of the Company.
NOTE 4 - TAXES ON INCOME
The income tax provision is based upon the expected effective tax rate applicable to the full year. The effective tax rate in 2001 is lower than the U.S. statutory rate of 35% primarily due to the anticipated effects of foreign tax credits on U.S. income taxes.
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
NOTE 5 - DEPRECIATION OF REVENUE EARNING EQUIPMENT
Depreciation of revenue earning equipment includes the following (in thousands of dollars):
Three Months Ended
June 30,
-----------------------------
2001 2000
--------- ---------
Depreciation of revenue earning equipment $ 360,466 $ 343,247
Adjustment of depreciation upon disposal of the equipment (791) (10,676)
Rents paid for vehicles leased 4,013 3,497
--------- ---------
Total $ 363,688 $ 336,068
========= =========
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Six Months Ended
June 30,
-----------------------------
2001 2000
--------- ---------
Depreciation of revenue earning equipment $ 698,153 $ 652,518
Adjustment of depreciation upon disposal of the equipment (4,504) (19,200)
Rents paid for vehicles leased 7,481 6,780
--------- ---------
Total $ 701,130 $ 640,098
========= =========
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The adjustment of depreciation upon disposal of revenue earning equipment for the three months ended June 30, 2001 and 2000 included net gains of $4.0 million and $3.7 million, respectively, on the sale of equipment in the Company's industrial and construction equipment rental operations; and a net loss of $3.2 million and a net gain of $7.0 million, respectively, in the car rental and car leasing operations.
The adjustment of depreciation upon disposal of revenue earning equipment for the six months ended June 30, 2001 and 2000 included net gains of $6.9 million and $9.3 million, respectively, on the sale of equipment in the industrial and construction equipment rental operations; and a net loss of $2.4 million and a net gain of $9.9 million, respectively, in the car rental and car leasing operations.
During the six months ended June 30, 2001, the Company purchased Ford vehicles at a cost of approximately $2.9 billion, and sold Ford vehicles to Ford or its affiliates under various repurchase programs for approximately $1.8 billion.
NOTE 6 - DEBT
Debt at June 30, 2001 and December 31, 2000 consisted of the following (in thousands of dollars):
June 30, Dec. 31,
2001 2000
---------- ----------
Notes payable, including commercial paper,
average interest rate: 2001, 3.9%; 2000, 6.6% $2,134,163 $1,580,391
Promissory notes, average interest rate:
2001, 7.0%; 2000, 7.1% (effective average
interest rate: 2001, 7.0%; 2000, 7.2%);
net of unamortized discount: 2001, $10,788;
2000, $9,448; due 2002 to 2028 3,939,210 3,540,550
Junior subordinated promissory notes,
average interest rate 7.0%; net of unamortized
discount: 2001, $63; 2000, $78; due 2003 249,937 249,922
Subsidiaries' short-term debt, in dollars and foreign
currencies, including commercial paper in millions
(2001, $708.7; 2000, $765.5); and other borrowings;
average interest rate: 2001, 4.8%; 2000, 5.3% 1,196,928 1,305,125
---------- ----------
Total $7,520,238 $6,675,988
========== ==========
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THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
The aggregate amounts of maturities of debt for the twelve-month periods following June 30, 2001 are as follows (in millions): 2002, $3,608.0 (including $3,302.6 of commercial paper and short-term borrowings); 2003, $701.6; 2004, $250.7; 2005, $762.2; 2006, $355.2, after 2006, $1,842.5.
At June 30, 2001, Notes payable included a $300 million loan outstanding with Ford Motor Credit Company, a wholly-owned subsidiary of Ford.
At June 30, 2001, approximately $1,323 million of the Company's consolidated stockholder's equity was free of dividend limitations pursuant to its existing debt agreements.
NOTE 7 - SEGMENT INFORMATION
The Company's business principally consists of two significant segments:
rental and leasing of cars and light trucks and related franchise fees ("car
rental and leasing"); and rental of industrial, construction and materials
handling equipment ("industrial and construction equipment rental"). The
contributions of these segments, as well as "corporate and other," to revenues
and income (loss) before income taxes for the three months and six months ended
June 30, 2001 and 2000 are summarized below (in millions of dollars). Corporate
and other includes general corporate expenses, principally amortization of
certain intangibles and certain interest, as well as other business activities,
such as claim management and telecommunication services.
Three Months Ended June 30,
---------------------------------------------------
Income (Loss)
Revenues Before Income Taxes
---------------------- -----------------------
2001 2000 2001 2000
-------- -------- -------- --------
Car rental and leasing $1,017.9 $1,044.8 $ 85.8 $ 162.3(a)
Industrial and construction equipment rental 256.5 235.0 7.4 9.8
Corporate and other 11.1 9.5 (7.4) (3.1)
-------- -------- -------- --------
Consolidated total $1,285.5 $1,289.3 $ 85.8 $ 169.0
======== ======== ======== ========
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Six Months Ended June 30,
---------------------------------------------------
Income (Loss)
Revenues Before Income Taxes
---------------------- -----------------------
2001 2000 2001 2000
-------- -------- -------- --------
Car rental and leasing $1,959.0 $1,965.4 $ 107.6 $ 255.4(a)
Industrial and construction equipment rental 485.3 437.1 (3.7) 13.8
Corporate and other 22.1 22.0 (23.9)(b) (6.9)
-------- -------- -------- --------
Consolidated total $2,466.4 $2,424.5 $ 80.0 $ 262.3
======== ======== ======== ========
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(a) Includes a gain of $9.0 million from the condemnation of a car rental and support facility in California.
(b) Includes $9.7 million of expenses associated with the merger, as described in Note 2 to the condensed consolidated financial statements.
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
NOTE 8 - COMPREHENSIVE INCOME
Accumulated other comprehensive income includes an accumulated translation loss (in thousands of dollars) of $119,721 and $83,057 at June 30, 2001 and December 31, 2000, respectively. Comprehensive income for the three months and six months ended June 30, 2001 and 2000 was as follows (in thousands of dollars):
Three Months Ended
June 30,
------------------------
2001 2000
-------- ---------
Net income $ 59,204 $ 103,731
-------- ---------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments (10,676) (4,559)
Unrealized (loss) gain on available-for-sale securities (50) 21
-------- ---------
Other comprehensive loss (10,726) (4,538)
-------- ---------
Comprehensive income $ 48,478 $ 99,193
======== =========
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Six Months Ended
June 30,
------------------------
2001 2000
-------- ---------
Net income $ 55,267 $ 160,031
-------- ---------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments (36,664) (19,267)
Unrealized (loss) gain on available-for-sale securities (39) 2
-------- ---------
Other comprehensive loss (36,703) (19,265)
-------- ---------
Comprehensive income $ 18,564 $ 140,766
======== =========
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NOTE 9 - RECENT PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statements of Financial Accounting Standards ("SFAS") No. 141 "Business Combinations" and No. 142 "Goodwill and Other Intangible Assets". SFAS No. 141 addresses financial accounting and reporting for business combinations and requires all business combinations to be accounted for using one method, the purchase method. SFAS No. 142 addresses financial accounting for acquired goodwill and other intangible assets and how such assets should be accounted for in financial statements upon their acquisition and after they have been initially recognized in the financial statements. The Company will adopt SFAS No. 141 and No. 142 beginning January 1, 2002. The Company is currently evaluating the impact of these pronouncements to determine the effect they will have on the Company's consolidated financial position and results of operations.
Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. SFAS No. 133 establishes a new model for accounting for derivatives and hedging activities. The adoption of SFAS No. 133 did not have a material effect on the Company's financial position, results of operations or cash flows.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2001 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2000
SUMMARY
The following table sets forth for the three months ended June 30, 2001 and 2000 the percentage of operating revenues represented by certain items in the Company's consolidated statement of income:
Percentage of Revenues
Three Months Ended
June 30,
-------------------
2001 2000
------ ------
Revenues:
Car rental 78.0% 79.2%
Industrial and construction equipment rental 20.0 18.2
Car leasing .1 .8
Franchise fees and other revenue 1.9 1.8
------ ------
100.0 100.0
------ ------
Expenses:
Direct operating 47.8 44.2
Depreciation of revenue earning equipment 28.3 26.0
Selling, general and administrative 9.2 9.0
Interest, net of interest income 8.0 7.7
------ ------
93.3 86.9
------ ------
Income before income taxes 6.7 13.1
Provision for taxes on income 2.1 5.1
------ ------
Net income 4.6% 8.0%
====== ======
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REVENUES
Total revenues in the second quarter of 2001 of $1,285.5 million decreased by 0.3% from $1,289.3 million in the second quarter of 2000. Revenues from car rental operations of $1,003.1 million in the second quarter of 2001 decreased by $18.6 million, or 1.8% from $1,021.7 million in the second quarter of 2000. This decrease was primarily due to $18.0 million from the effects of foreign currency translation. The remaining decrease resulted from a 4.7% decrease in pricing in the United States, which was mostly offset by an increase in volume worldwide (transaction days) of 3.6%. The translation impact of exchange rates on net income is not significant because the majority of the Company's foreign expenses are also incurred in local currency.
Revenues from industrial and construction equipment rental of $256.5 million in the second quarter of 2001 increased by 9.1% from $235.0 million in the second quarter of 2000. Of this $21.5 million increase, approximately $4.3 million was due to the inclusion of businesses acquired worldwide since the first quarter of 2000.
Revenues from all other sources of $25.9 million in the second quarter of 2001 decreased by 20.8% from $32.7 million in the second quarter of 2000, primarily due to the transfer of certain foreign car leasing operations to an affiliated company on August 31, 2000.
EXPENSES
Total expenses of $1,199.7 million in 2001 increased by 7.1% from $1,120.3 million in 2000, and total expenses as a percentage of revenues increased to 93.3% in 2001 from 86.9% in 2000.
Direct operating expenses of $615.2 million in 2001 increased by 8.0% from $569.5 million in 2000. The increase was due primarily to higher wages, facility costs and vehicle damage costs in car rental operations, and the expansion of the industrial and construction equipment rental business. The increase was also due to the inclusion of a gain of $9.0 million in the second quarter of 2000 from the condemnation of a car rental and support facility in California.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Depreciation of revenue earning equipment for the car rental and car leasing operations of $298.7 million in 2001 increased by 6.7% from $279.9 million in 2000, primarily due to an increase in the number of cars operated in the United States, higher vehicle costs worldwide and a decrease of $10.2 million in the net proceeds received in excess of book value on the disposal of used vehicles, primarily in the United States. These increases were partly offset by a decrease due to the transfer of the car leasing operations to an affiliated company in August of 2000. Depreciation of revenue earning equipment for the industrial and construction equipment rental operations of $65.0 million in 2001 increased by 15.7% from $56.2 million in 2000, primarily due to acquisitions of equipment rental and sales companies and an increase in equipment operated.
Selling, general and administrative expenses of $117.9 million in 2001 increased by 1.9% from $115.7 million in 2000. The increase was primarily due to an increase in sales promotion expenses, partly offset by a decrease in advertising expenses.
Interest expense of $102.9 million in 2001 increased 3.9% from $99.0 million in 2000, primarily due to higher average debt levels and lower interest income in the second quarter of 2001.
The tax provision of $26.6 million in 2001 decreased 59.3% from $65.3 million in 2000, primarily due to the lower income before income taxes in 2001. The effective tax rate in 2001 is 31.0% as compared to 38.6% in 2000. The decrease in the effective tax rate is primarily due to greater anticipated utilization of foreign tax credits in 2001. See Note 4 to the Notes to the Company's condensed consolidated financial statements.
NET INCOME
The Company had net income of $59.2 million in the second quarter of 2001, representing a decrease of 42.9% from $103.7 million in 2000. This decrease was primarily due to a slowdown in the economy and its impact on pricing, reduced business travel transaction volume and cost coverage, higher 2001 model year vehicle costs, lower proceeds received on the disposal of vehicles, and the net effect of the other contributing factors noted above.
The Company believes that continued competitive pricing in the car rental industry and a slowing economy will adversely impact operating results for 2001 when compared to 2000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2001 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2000
SUMMARY
The following table sets forth for the six months ended June 30, 2001 and 2000 the percentage of operating revenues represented by certain items in the Company's consolidated statement of income:
Percentage of Revenues
Six Months Ended
June 30,
-------------------
2001 2000
------ ------
Revenues:
Car rental 78.3% 79.2%
Industrial and construction equipment rental 19.7 18.0
Car leasing .1 .9
Franchise fees and other revenue 1.9 1.9
------ ------
100.0 100.0
------ ------
Expenses:
Direct operating 50.0 45.7
Depreciation of revenue earning equipment 28.5 26.4
Selling, general and administrative 10.0 9.3
Interest, net of interest income 8.3 7.8
------ ------
96.8 89.2
------ ------
Income before income taxes 3.2 10.8
Provision for taxes on income 1.0 4.2
------ ------
Net income 2.2% 6.6%
====== ======
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REVENUES
Total revenues of $2,466.4 million in the first half of 2001, increased by 1.7% from $2,424.5 million in the first half of 2000. Revenues from car rental operations of $1,931.4 million in the first half of 2001 increased by $10.9 million, or 0.6% from $1,920.5 million in the first half of 2000. The increase was primarily the result of a worldwide increase in volume (transaction days) of 5.5%, partly offset by a 3.9% decrease in pricing in the United States. These factors contributed to a net increase in revenues of $44.2 million, partly offset by a decrease of $33.3 million from the effects of foreign currency translation. The translation impact of exchange rates on net income is not significant because the majority of the Company's foreign expenses are also incurred in local currencies.
Revenues from industrial and construction equipment rental of $485.2 million in the first half of 2001 increased by 11.0% from $437.0 million in the second quarter of 2000. Of this $48.2 million increase, approximately $16.1 million was due to the inclusion of businesses acquired worldwide during 2000 and the first half of 2001.
Revenues from all other sources of $49.8 million in the first half of 2001 decreased by 25.7% from $67.0 million in the first half of 2000, primarily due to the transfer of certain foreign car leasing operations to an affiliated company on August 31, 2000.
EXPENSES
Total expenses of $2,386.4 million in 2001 increased by 10.4% from $2,162.2 million in 2000; and total expenses as a percentage of revenues increased to 96.8% in 2001 from 89.2% in 2000.
Direct operating expenses of $1,233.4 million in 2001 increased by 11.3% from $1,108.5 million in 2000. The increase was primarily the result of an increase in wages, facility costs and vehicle damage costs in car rental operations and the expansion of the industrial and construction equipment rental business. The increase also was due to the recognition of a gain of $9.0 million in 2000 from the condemnation of a car rental and support facility in California.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Depreciation of revenue earning equipment for the car rental and car leasing operations of $571.7 million in 2001 increased by 7.1% from $533.9 million in 2000, primarily due to a worldwide increase in the number of cars operated and higher vehicle costs. The increase also includes a decrease of $12.3 million in the net proceeds received in excess of book value on the disposal of used vehicles. These increases were partly offset by a decrease due to the transfer of certain foreign car leasing operations to an affiliated company in August of 2000. Depreciation of revenue earning equipment for the industrial and construction equipment rental operations of $129.4 million in 2001 increased by 21.8% from $106.2 million in 2000, primarily due to acquisitions of equipment rental and sales companies, an increase in equipment operated and a decrease in the net proceeds received in excess of book value on the disposal of used equipment.
Selling, general and administrative expenses of $247.2 million in 2001 increased by 9.7% from $225.3 million in 2000. The increase was primarily due to an increase in administrative and sales promotion expenses and includes $9.7 million of expenses related to the merger of the Company with a wholly-owned subsidiary of Ford. See Note 2 to the Notes to the Company's condensed consolidated financial statements. These increases were partly offset by a decrease in advertising costs.
Interest expense of $204.7 million in 2001 increased 8.7% from $188.3 million in 2000, primarily due to higher average debt levels and lower interest income in 2001.
The tax provision of $24.7 million in 2001 decreased 75.9% from $102.3 million in 2000, primarily due to the lower income before income taxes in 2001. The effective tax rate in 2001 is 30.9% as compared to 39.0% in 2000. The decrease in the effective tax rate is primarily due to greater anticipated utilization of foreign tax credits in 2001. See Note 4 to the Notes to the Company's condensed consolidated financial statements.
NET INCOME
The Company had net income of $55.3 million in the first half of 2001, representing a decrease of 65.5% from $160.0 million in 2000. This decrease was primarily due to a slowdown in the economy and its impact on pricing, reduced business travel transaction volume and cost coverage, higher 2001 model year vehicle costs, lower proceeds received on the disposal of vehicles and equipment, and the net effect of other contributing factors noted above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's domestic and foreign operations are funded by cash provided by operating activities, and by extensive financing arrangements maintained by the Company in the United States, Europe, Australia, New Zealand, Canada and Brazil. The Company's primary use of funds is for the acquisition of revenue earning equipment, which consists of cars, and industrial and construction equipment. For the six months ended June 30, 2001, the Company's expenditures for revenue earning equipment were $6.6 billion (partially offset by proceeds from the sale of such equipment of $4.9 billion). These assets are purchased by the Company in accordance with the terms of programs negotiated with automobile and equipment manufacturers. In the first half of 2001, the Company expended $2.7 million for new businesses acquired and assumed $9.1 million of related debt. For the six months ended June 30, 2001, the Company's capital investments for property and non-revenue earning equipment were $134.9 million.
To finance its domestic operations, the Company maintains an active commercial paper program. The Company is also active in the domestic medium-term and long-term debt markets. As the need arises, it is the Company's intention to issue either unsecured senior, senior subordinated or junior subordinated debt securities on terms to be determined at the time the securities are offered for sale. The total amount of medium-term and long-term debt outstanding as of June 30, 2001 was $4.2 billion with maturities ranging from 2002 to 2028. Borrowing for the Company's international operations consists mainly of loans obtained from local and international banks and commercial paper programs established in Australia, Canada, Ireland and the Netherlands. The Company guarantees only the borrowings of its subsidiaries in Australia, Canada, Ireland and the Netherlands, which consist principally of commercial paper and short-term bank loans. At June 30, 2001, the total debt for the foreign operations was $1,196 million, of which $1,173 million was short-term (original maturity of less than one year) and $23 million was long-term. At June 30, 2001, the total amounts outstanding (in millions of U.S. dollars) under the Australian, Canadian, Irish and the Netherlands commercial paper programs were $17, $373, $242 and $77, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
At June 30, 2001, the Company had committed credit facilities totaling $3.3 billion. Of this amount, $2.6 billion is represented by a combination of multi-year and 364-day global committed credit facilities provided by 31 relationship banks and seasonal facilities from three banks. In addition to direct borrowings by the Company, these facilities allow any subsidiary of the Company to borrow on the basis of a guarantee by the Company. Effective July 1, 2001, the multi-year facilities totaling $1,401 million were renegotiated and currently expire as follows: $63 million on June 30, 2002, $137 million on June 30, 2003, $46 million on June 30, 2004, $69 million on June 30, 2005 and $1,086 million on June 30, 2006. Effective June 21, 2001, the 364-day facilities totaling $1,172 million were renegotiated and currently expire on June 19, 2002. The multi-year facilities that expire in 2006 have an evergreen feature which provides for the automatic extension of the expiration date one year forward unless timely notice is provided by the bank. Under the terms of the 364-day facilities, the Company is permitted to convert any amount outstanding prior to expiration into a four-year term loan. The $300 million of seasonal facilities currently expire as follows: $100 million on April 30, 2002, $100 million on June 19, 2002 and $100 million on October 15, 2002. In addition to the bank credit facilities, in February 1997, Ford extended to the Company a line of credit of $500 million, expiring June 30, 2003. This line of credit has an evergreen feature that provides on an annual basis for automatic one-year extensions of the expiration date, unless timely notice is provided by Ford at least one year prior to the then scheduled expiration date.
On March 9, 2001, the Company paid a quarterly dividend totaling $5.4 million on its Class A and Class B Common Stock to shareholders of record as of February 15, 2001, which was prior to the acquisition of the Company by a subsidiary of Ford of the Company's stock owned by public shareholders. See Note 2 to the Notes to the Company's condensed consolidated financial statements.
Ford has stated that it has no current plans or proposals which would result in a merger, reorganization or liquidation involving the Company, any purchase, sale or transfer of a material amount of assets of the Company or any other material change in the Company's corporate structure or business; however, by virtue of its 100% ownership interest in the Company, Ford may make any changes that it deems necessary or appropriate in light of future developments. Ford may consider material changes in the dividend policy, indebtedness and capitalization of the Company and may consider pursuing acquisition opportunities through the Company.
Car rental is a seasonal business, with decreased travel in both the business and leisure segments in the winter months and heightened activity during the spring and summer. To accommodate increased demand, the Company increases its available fleet and staff during the second and third quarters. As business demand declines, fleet and staff are decreased accordingly. However, certain operating expenses, including rent, insurance, and administrative overhead, remains fixed and cannot be adjusted for seasonal demand. In certain geographic markets, the impact of seasonality has been reduced by emphasizing leisure or business travel in the off-seasons.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3(i) Certificate of Amendment of Restated Certificate of Incorporation of The Hertz Corporation.
12 Consolidated Computation of Ratio of Earnings to Fixed Charges for the six months ended June 30, 2001 and 2000.
(b) Reports on Form 8-K:
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
THE HERTZ CORPORATION
(Registrant)
Date: August 7, 2001 By: /s/ Paul J. Siracusa
-------------------------------------
Paul J. Siracusa
Executive Vice President and
Chief Financial Officer
(principal financial officer and duly
authorized officer)
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EXHIBIT INDEX
3(i) Certificate of Amendment of Restated Certificate of Incorporation of
The Hertz Corporation.
12 Consolidated Computation of Ratio of Earnings to Fixed Charges for the
six months ended June 30, 2001 and 2000.
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EXHIBIT 3(i)
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
THE HERTZ CORPORATION
THE HERTZ CORPORATION, a Delaware corporation (the "Corporation"), does hereby certify:
The amendments set forth below to the Corporation's Restated Certificate of Incorporation, were duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware:
1. (a) That Article 4 be and hereby is amended as follows:
4. CAPITAL STOCK. The total number of shares of stock which the
Corporation shall have authority to issue is 3,000 shares, par value
$.01 per share, of common stock.
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(b) Immediately upon the effectiveness of this Certificate of Amendment, the shares of Class A Common Stock issued and outstanding immediately prior to such effectiveness shall be changed into an equal number of shares authorized by Article 4 of the Restated Certificate of Incorporation, as hereby amended.
2. That Articles 5 and 11 be and hereby are deleted.
3. That paragraph (a) of Article 6 be and hereby is amended as follows:
6. COMPUTATION; USE OF TERMS. (a) In determining the number or the record holders of outstanding shares of stock of the Corporation for the purpose of computing or determining the method of computing the vote or determining the right to vote at any meeting of stockholders, the original stock ledger of the Corporation as at the close of business on the record date fixed for such meeting or, if the stock transfer books of the Corporation shall have been closed for a period immediately preceding the date of such meeting, then as at the close of business on the date as of which such stock transfer books were so closed, shall be conclusive for all purposes, and in determining the number or the record holders of outstanding shares of stock of the Corporation for any other purpose, the original stock ledger of the Corporation as at the close of business on the date as of which the determination is being made, shall be conclusive for all purposes; all notwithstanding any other provision of this Restated Certificate of Incorporation.
4. That Article 10 be and hereby is amended as follows:
10. BOARD OF DIRECTORS - NUMBER AND VACANCIES. (a) The number of directors of the Corporation shall be not more than twelve (12) nor less than three (3), with the exact number to be fixed from time to time as provided in the By-Laws of the Corporation.
(b) Unless the Corporation's Board of Directors otherwise determines, any vacancy occurring in the Board of Directors caused by death, resignation, increase in number of directors or otherwise may be filled by the affirmative vote of a majority of the remaining members of the Board of Directors, though less than a quorum, or by a sole remaining director.
5. That Article 12 be and hereby is amended as follows:
12. MEETINGS. (a) If the By-Laws so provide, the stockholders and the directors may hold their meetings, and he Corporation may have one or more offices, either inside or outside of the State of Delaware. The books and records of the Corporation (subject to the provisions of the laws of the State of Delaware) may be kept either inside or outside of the State of Delaware at such places as from time to time may be determined by the Board of Directors.
(b) Any corporate action required to be taken at any annual or special meeting of stockholders of the Corporation, or any corporate action which may be taken at any annual or special meeting of the stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the corporate action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered to the Corporation by delivery to its registered office in Delaware (either by hand or by certified or registered mail, return receipt requested), its principal place of business or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded.
(c) Unless otherwise prescribed by law or this Restated Certificate of Incorporation, special meetings of stockholders may be held at any time on call of the Chairman of the Board of Directors, the President or, at the request in writing of a majority of the Board of Directors, any officer.
6. That Article 16 be and hereby is amended as follows:
16. BY-LAWS AMENDMENTS. The By-Laws of the Corporation may be altered, amended or repealed by the Board of Directors by the affirmative vote of directors constituting not less than a majority of the entire Board of Directors.
7. Giving effect to this Certificate of Amendment, Articles 6 through 17 of the Corporation's Restated Certificate of Incorporation be and hereby are redesignated as Articles 5 through 15, and all references therein to other paragraphs or Articles shall be read as referring to such provisions in the Restated Certificate of Incorporation, as hereby amended.
IN WITNESS WHEREOF, THE HERTZ CORPORATION has caused this Certificate to be signed and attested by its duly authorized officers, this 2nd day of May, 2001.
THE HERTZ CORPORATION
By: /s/ Harold E. Rolfe
-----------------------------
Senior Vice President,
General Counsel and Secretary
ATTEST:
/s/ I. David Parkoff
-----------------------
Assistant Secretary
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EXHIBIT 12
THE HERTZ CORPORATION AND SUBSIDIARIES
CONSOLIDATED COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS OF DOLLARS EXCEPT RATIOS)
UNAUDITED
Six Months Ended
June 30,
--------------------------
2001 2000
-------- --------
Income before income taxes $ 80,001 $262,306
Interest expense 209,799 195,769
Portion of rent estimated to represent the
interest factor 54,452 47,130
-------- --------
Earnings before income taxes and fixed charges $344,252 $505,205
======== ========
Interest expense (including capitalized interest) $210,519 $197,416
Portion of rent estimated to represent the
interest factor 54,452 47,130
-------- --------
Fixed charges $264,971 $244,546
======== ========
Ratio of earnings to fixed charges 1.3 2.1
======== ========
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