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 September 30, 2009 |
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OR |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 001-33139
HERTZ GLOBAL HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
20-3530539 (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.)
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 o 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 ý | Accelerated filer o | Non-accelerated filer o (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
There were 409,739,273 shares of the Registrant's common stock, par value $0.01 per share, issued and outstanding as of November 3, 2009.
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
INDEX
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Page | |||||
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PART I. FINANCIAL INFORMATION |
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ITEM 1. |
Condensed Consolidated Financial Statements (Unaudited) |
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Report of Independent Registered Public Accounting Firm |
1 |
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Condensed Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008 |
2 |
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Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2009 and 2008 |
3 |
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Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008 |
45 |
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Notes to Condensed Consolidated Financial Statements |
639 |
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ITEM 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
4070 |
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ITEM 3. |
Quantitative and Qualitative Disclosures About Market Risk |
70 |
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ITEM 4. |
Controls and Procedures |
71 |
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PART II. OTHER INFORMATION |
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ITEM 1. |
Legal Proceedings |
72 |
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ITEM 1A. |
Risk Factors |
72 |
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ITEM 6. |
Exhibits |
7274 |
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SIGNATURE |
75 |
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EXHIBIT INDEX |
7677 |
ITEM l. Condensed Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and
Shareholders of Hertz Global Holdings, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of Hertz Global Holdings, Inc. and its subsidiaries as of September 30, 2009, and the related consolidated statements of operations for the three-month and nine-month periods ended September 30, 2009 and September 30, 2008 and the consolidated statements of cash flows for the nine month periods ended September 30, 2009 and September 30, 2008. 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 balance sheet and the related consolidated interim statements of operations and of cash flows 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, 2008, the related consolidated statements of operations, of stockholders' equity and of cash flows for the year then ended (not presented herein), and in our report dated March 3, 2009, we expressed an unqualified opinion on those consolidated financial statements. As discussed in Note 1 to the accompanying condensed consolidated balance sheet and the related consolidated interim statements of operations and of cash flows, the Company changed its method of accounting for noncontrolling interests in accordance with the provisions of Financial Accounting Standards Board Accounting Standards Codification 810. The accompanying December 31, 2008 condensed consolidated balance sheet reflects this change.
/s/
PricewaterhouseCoopers LLP
Florham Park, New Jersey
November 6, 2009
1
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars)
Unaudited
|
September 30, 2009 |
December 31, 2008 |
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ASSETS |
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Cash and cash equivalents |
$ | 926,717 | $ | 594,266 | ||||||
Restricted cash |
404,658 | 731,373 | ||||||||
Receivables, less allowance for doubtful accounts of $21,486 and $16,572 |
1,266,926 | 1,911,084 | ||||||||
Inventories, at lower of cost or market |
99,274 | 96,187 | ||||||||
Prepaid expenses and other assets |
312,900 | 286,712 | ||||||||
Revenue earning equipment, at cost: |
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Cars |
8,463,129 | 7,635,402 | ||||||||
Less accumulated depreciation |
(1,306,016 | ) | (1,133,946 | ) | ||||||
Other equipment |
2,558,009 | 2,708,254 | ||||||||
Less accumulated depreciation |
(664,897 | ) | (518,172 | ) | ||||||
Total revenue earning equipment |
9,050,225 | 8,691,538 | ||||||||
Property and equipment, at cost: |
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Land, buildings and leasehold improvements |
1,023,722 | 1,033,098 | ||||||||
Service equipment |
810,390 | 751,925 | ||||||||
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1,834,112 | 1,785,023 | ||||||||
Less accumulated depreciation |
(644,029 | ) | (530,463 | ) | ||||||
Total property and equipment |
1,190,083 | 1,254,560 | ||||||||
Other intangible assets, net |
2,620,289 | 2,621,586 | ||||||||
Goodwill |
285,588 | 264,061 | ||||||||
Total assets |
$ | 16,156,660 | $ | 16,451,367 | ||||||
LIABILITIES AND EQUITY |
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Accounts payable |
$ | 747,326 | $ | 931,336 | ||||||
Accrued liabilities |
986,540 | 1,137,874 | ||||||||
Accrued taxes |
92,702 | 128,360 | ||||||||
Debt |
10,348,381 | 10,972,297 | ||||||||
Public liability and property damage |
294,748 | 311,352 | ||||||||
Deferred taxes on income |
1,566,054 | 1,481,866 | ||||||||
Total liabilities |
14,035,751 | 14,963,085 | ||||||||
Commitments and contingencies (Note 15) |
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Equity: |
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Hertz Global Holdings Inc. and Subsidiaries stockholders' equity |
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Common Stock, $0.01 par value, 2,000,000,000 shares authorized, 409,645,364 and 322,987,299 shares issued |
4,096 | 3,230 | ||||||||
Preferred Stock, $0.01 par value, 200,000,000 shares authorized, no shares issued |
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Additional paid-in capital |
3,135,299 | 2,503,819 | ||||||||
Accumulated deficit |
(1,031,415 | ) | (936,296 | ) | ||||||
Accumulated other comprehensive loss |
(4,243 | ) | (100,135 | ) | ||||||
Total Hertz Global Holdings, Inc. and Subsidiaries stockholders' equity |
2,103,737 | 1,470,618 | ||||||||
Noncontrolling interest |
17,172 | 17,664 | ||||||||
Total equity |
2,120,909 | 1,488,282 | ||||||||
Total liabilities and equity |
$ | 16,156,660 | $ | 16,451,367 | ||||||
The accompanying notes are an integral part of these financial statements.
2
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands of Dollars, except per share data)
Unaudited
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
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2009 | 2008 | 2009 | 2008 | |||||||||||
Revenues: |
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Car rental |
$ | 1,724,887 | $ | 1,946,136 | $ | 4,436,691 | $ | 5,339,955 | |||||||
Equipment rental |
280,281 | 432,885 | 836,421 | 1,286,836 | |||||||||||
Other |
36,247 | 42,853 | 87,673 | 109,521 | |||||||||||
Total revenues |
2,041,415 | 2,421,874 | 5,360,785 | 6,736,312 | |||||||||||
Expenses: |
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Direct operating |
1,118,596 | 1,351,790 | 3,062,489 | 3,801,827 | |||||||||||
Depreciation of revenue earning equipment |
499,050 | 595,016 | 1,468,228 | 1,658,715 | |||||||||||
Selling, general and administrative |
179,778 | 234,321 | 488,012 | 595,744 | |||||||||||
Interest expense |
169,294 | 220,077 | 498,238 | 637,151 | |||||||||||
Interest and other income, net |
(1,066 | ) | (5,490 | ) | (52,598 | ) | (20,450 | ) | |||||||
Total expenses |
1,965,652 | 2,395,714 | 5,464,369 | 6,672,987 | |||||||||||
Income (loss) before income taxes |
75,763 | 26,160 | (103,584 | ) | 63,325 | ||||||||||
(Provision) benefit for taxes on income |
(6,792 | ) | (2,855 | ) | 19,873 | (35,972 | ) | ||||||||
Net income (loss) |
68,971 | 23,305 | (83,711 | ) | 27,353 | ||||||||||
Less: Net income attributable to noncontrolling interest |
(4,443 | ) | (5,641 | ) | (11,408 | ) | (16,146 | ) | |||||||
Net income (loss) attributable to Hertz Global Holdings, Inc. and Subsidiaries' common stockholders |
$ | 64,528 | $ | 17,664 | $ | (95,119 | ) | $ | 11,207 | ||||||
Weighted average shares outstanding (in thousands) |
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Basic |
407,364 | 322,886 | 358,452 | 322,599 | |||||||||||
Diluted |
425,171 | 322,886 | 358,452 | 322,599 | |||||||||||
Earnings (loss) per share attributable to Hertz Global Holdings, Inc. and Subsidiaries' common stockholders: |
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Basic |
$ | 0.16 | $ | 0.05 | $ | (0.27 | ) | $ | 0.03 | ||||||
Diluted |
$ | 0.15 | $ | 0.05 | $ | (0.27 | ) | $ | 0.03 |
The accompanying notes are an integral part of these financial statements.
3
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
Unaudited
|
Nine Months Ended September 30, |
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2009 | 2008 | ||||||||
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(Note 1) |
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Cash flows from operating activities: |
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Net income (loss) |
$ | (83,711 | ) | $ | 27,353 | |||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
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Depreciation of revenue earning equipment |
1,468,228 | 1,658,715 | ||||||||
Depreciation of property and equipment |
119,712 | 131,441 | ||||||||
Amortization of other intangible assets |
50,161 | 49,747 | ||||||||
Amortization of deferred financing costs |
42,249 | 36,777 | ||||||||
Amortization of debt discount |
26,731 | 11,630 | ||||||||
Stock-based compensation charges |
26,603 | 20,303 | ||||||||
Loss on derivatives |
2,020 | 12,058 | ||||||||
Amortization and ineffectiveness of cash flow hedges |
52,227 | 7,791 | ||||||||
Provision for losses on doubtful accounts |
22,459 | 21,693 | ||||||||
Asset writedowns |
26,463 | 34,113 | ||||||||
Deferred taxes on income |
99,922 | 5,010 | ||||||||
Gain on sale of property and equipment |
(1,149 | ) | (9,370 | ) | ||||||
Changes in assets and liabilities, net of effects of acquisition: |
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Receivables |
(25,118 | ) | (101,462 | ) | ||||||
Inventories, prepaid expenses and other assets |
(252 | ) | (61,860 | ) | ||||||
Accounts payable |
(188,137 | ) | 86,570 | |||||||
Accrued liabilities |
(191,165 | ) | (31,043 | ) | ||||||
Accrued taxes |
(112,994 | ) | 37,760 | |||||||
Public liability and property damage |
(27,047 | ) | (7,307 | ) | ||||||
Net cash provided by operating activities |
$ | 1,307,202 | $ | 1,929,919 | ||||||
The accompanying notes are an integral part of these financial statements.
4
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In Thousands of Dollars)
Unaudited
|
Nine Months Ended September 30, |
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2009 | 2008 | ||||||||
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(Note 1) |
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Cash flows from investing activities: |
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Net change in restricted cash |
$ | 330,627 | $ | 146,084 | ||||||
Revenue earning equipment expenditures |
(5,194,514 | ) | (8,888,941 | ) | ||||||
Proceeds from disposal of revenue earning equipment |
4,162,671 | 6,010,267 | ||||||||
Property and equipment expenditures |
(68,970 | ) | (152,868 | ) | ||||||
Proceeds from disposal of property and equipment |
6,140 | 62,281 | ||||||||
Acquisitions, net of cash acquired |
(76,212 | ) | (68,864 | ) | ||||||
Purchase of short-term investments, net |
(4,169 | ) | | |||||||
Other investing activities |
652 | 82 | ||||||||
Net cash used in investing activities |
(843,775 | ) | (2,891,959 | ) | ||||||
Cash flows from financing activities: |
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Proceeds from issuance of long-term debt |
7,151 | 19,357 | ||||||||
Proceeds from convertible debt offering |
459,483 | | ||||||||
Repayment of long-term debt |
(814,099 | ) | (362,776 | ) | ||||||
Short-term borrowings: |
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Proceeds |
324,576 | 391,131 | ||||||||
Repayments |
(272,559 | ) | (302,856 | ) | ||||||
Proceeds (repayments) under the revolving lines of credit, net |
(374,846 | ) | 1,294,208 | |||||||
Distributions to noncontrolling interest |
(11,900 | ) | (12,950 | ) | ||||||
Proceeds from sale of stock |
528,758 | | ||||||||
Proceeds from exercise of stock options |
4,807 | 6,753 | ||||||||
Proceeds from employee stock purchase plan |
1,846 | | ||||||||
Proceeds from disgorgement of stockholder short-swing profits |
15 | 135 | ||||||||
Payment of financing costs |
(40,888 | ) | (33,839 | ) | ||||||
Net cash provided by (used in) financing activities |
(187,656 | ) | 999,163 | |||||||
Effect of foreign exchange rate changes on cash and cash equivalents |
56,680 | (35,787 | ) | |||||||
Net increase in cash and cash equivalents during the period |
332,451 | 1,336 | ||||||||
Cash and cash equivalents at beginning of period |
594,266 | 730,203 | ||||||||
Cash and cash equivalents at end of period |
$ | 926,717 | $ | 731,539 | ||||||
Supplemental disclosures of cash flow information: |
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Cash paid during the period for: |
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Interest (net of amounts capitalized) |
$ | 556,932 | $ | 626,934 | ||||||
Income taxes |
20,721 | 22,562 | ||||||||
Supplemental disclosures of non-cash flow information: |
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Purchases of revenue earning equipment included in accounts payable |
$ | 207,720 | $ | 232,045 | ||||||
Sales of revenue earning equipment included in receivables |
358,013 | 842,831 | ||||||||
Purchases of property and equipment included in accounts payable |
12,629 | 31,153 | ||||||||
Sales of property and equipment included in receivables |
8,741 | 5,008 |
The accompanying notes are an integral part of these financial statements.
5
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
Note 1Background, Basis of Presentation and Liquidity
Background
Hertz Global Holdings, Inc., or "Hertz Holdings," is our top-level holding company. The Hertz Corporation, or "Hertz," is our primary operating company and a direct wholly-owned subsidiary of Hertz Investors, Inc., which is wholly-owned by Hertz Holdings. "We," "us" and "our" mean Hertz Holdings and its consolidated subsidiaries, including Hertz. Capitalized terms used in this Form 10-Q without definition have the meanings given in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed with the United States Securities and Exchange Commission, or "SEC," on March 3, 2009, or the "Form 10-K."
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 Holdings was incorporated in Delaware in 2005 and had no operations prior to the Acquisition (as defined below).
On
December 21, 2005, investment funds associated with or designated by:
or collectively the "Sponsors," acquired all of Hertz's common stock from Ford Holdings LLC for aggregate consideration of $4,379 million in cash, debt refinanced or assumed of $10,116 million and transaction fees and expenses of $447 million. We refer to the acquisition of all of Hertz's common stock by the Sponsors as the "Acquisition."
In November 2006, we completed our initial public offering of 88,235,000 shares of our common stock. In June 2007, the Sponsors completed a secondary public offering of 51,750,000 shares of their Hertz Holdings common stock. In January 2009, Bank of America Corporation, or "Bank of America," acquired Merrill Lynch & Co., the parent company of MLGPE. Accordingly, Bank of America is now an indirect beneficial owner of our common stock held by MLGPE and certain of its affiliates.
2009 Hertz Holdings Offerings
In May and June 2009, we completed a follow-on public offering of 52,900,000 shares of our common stock at a price of $6.50 per share with proceeds before underwriting discounts and offering expenses of approximately $343.9 million, or the "Common Stock Public Offering."
In addition, in May 2009 we entered into subscription agreements with investment funds affiliated with CD&R and Carlyle to purchase an additional 32,101,182 shares of our common stock at a price of $6.23 per share (the same price per share paid to us by the underwriters in the Common Stock Public Offering) with proceeds to us of approximately $200.0 million, or the "Private Offering." The Private Offering closed on July 7, 2009 and the 32,101,182 shares of our common stock were issued to the CD&R and Carlyle affiliated investment funds on the same date. Giving effect to the Common Stock Public Offering and the Private Offering, the Sponsors' ownership percentage in us is approximately 51%.
In May and June 2009, we also completed a public offering of an aggregate principal amount of $474,755,000 of 5.25% convertible senior notes due 2014, or the "Convertible Debt Public Offering."
6
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
We used the net proceeds from the Common Stock Public Offering, the Private Offering and the Convertible Debt Public Offering, collectively the "2009 Hertz Holdings Offerings," to increase our liquidity and for general corporate purposes, including the repayment of principal amounts with respect to maturing debt under the fleet financing facilities of certain of our consolidated subsidiaries.
See Note 7Debt and Note 11Total Equity.
Basis of Presentation
The significant accounting policies summarized in Note 1 to our audited consolidated financial statements contained in our Form 10-K, have been followed in preparing the accompanying condensed consolidated financial statements, except for the adoption of Financial Accounting Standards Board Accounting Standards Codification, or "ASC," or "Codification," 810-10, "Noncontrolling Interests in Consolidated Financial Statementsan amendment of ARB No. 51," or "ASC 810-10," ASC 805, "Business Combinations," and ASC 820-10 "Fair Value Measurements."
The December 31, 2008 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."
In our opinion, all adjustments (which include only normal recurring 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, including those relating to noncontrolling interests which conform with the provisions of ASC 810-10, which became effective for us in January 2009.
For all periods presented in this Report we have revised our consolidated statements of cash flows to exclude the impact of non-cash purchases and sales of revenue earning equipment and property and equipment which were included in "accounts payable" or "receivables" at the end of the period. See Note 17 in our Form 10-Q for the quarterly period ended June 30, 2009 filed with the SEC on August 7, 2009, or the "Second Quarter Form 10-Q."
Liquidity
The car and equipment rental industries are significantly influenced by general economic conditions. In the final three months of 2008 and continuing in the nine months ended September 30, 2009, both the car and equipment rental markets experienced unprecedented declines due to the precipitous slowdown in consumer spending as well as significantly reduced demand for industrial and construction equipment. The car rental industry is also significantly influenced by developments in the travel industry, and, particularly, in airline passenger traffic while the equipment rental segment is being impacted by the difficult economic and business environment as investment in commercial construction and the industrial markets slow. The United States and international markets are currently experiencing a significant decline in economic activities, including a tightening of the credit markets, reduced airline passenger traffic, reduced consumer spending and volatile fuel prices. These conditions are expected to continue through the remainder of 2009. During 2008 and the nine months ended September 30, 2009, this resulted in a rapid decline in the volume of car rental and equipment rental transactions, soft industry pricing and until only recently an increase in depreciation and fleet related costs as a percentage of revenues and lower residual values for the non-program cars and equipment that we sold.
7
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
"Non-program cars" mean cars not purchased under repurchase or guaranteed depreciation programs for which the car rental company is exposed to residual risk.
In response to the economic downturn, in 2008 we implemented aggressive strategic actions to reduce costs and improve liquidity. These actions included reducing wage and benefit costs through significant headcount reductions, accelerating fleet deletions and delaying additions to right-size the fleet to current demand levels and rationalizing our location footprint by closing a number of locations. We have developed additional plans for the remainder of 2009 in an effort to mitigate the impact of continued revenue declines on our results of operations, including reducing costs further through the additional headcount reductions that we announced in 2009, continuing to right-size our car and equipment rental fleet in response to the economic conditions, continued re-engineering of our processes, increasing prices and continuing to reduce the cost of acquiring our car and equipment rental fleet, among other actions.
As of September 30, 2009, we had $10,348.4 million of total indebtedness outstanding. Accordingly, we are highly leveraged and a substantial portion of our liquidity needs arise from debt service on indebtedness incurred in connection with the Acquisition and from the funding of our costs of operations and capital expenditures.
In 2009 we have also significantly addressed the fact that we had approximately $4.2 billion of our fleet debt that matures in 2010. We began addressing these liquidity needs at the end of the second quarter and the beginning of the third quarter by completing the 2009 Hertz Holdings Offerings, pursuant to which we received approximately $990 million of net proceeds, after deducting underwriting discounts and commissions and before offering expenses payable by Hertz Holdings. $200 million of the $990 million of net proceeds were received during the three months ended September 30, 2009.
On September 18, 2009, Hertz Vehicle Financing LLC, or "HVF," a bankruptcy-remote special purpose entity wholly-owned by Hertz, completed the closing of a new variable funding note facility referred to as the Series 2009-1 Variable Funding Rental Car Asset Backed Notes, or the "Series 2009-1 Notes." The facility has an expected maturity date of January 2012 and a 3 month controlled amortization period beginning in November 2011. The aggregate principal amount of such facility is $2.1 billion and such facility is available to HVF on a revolving basis until the controlled amortization period begins in November 2011. As of September 30, 2009, we had an aggregate principal amount outstanding of $300.0 million of Series 2009-1 Notes. This amount was subsequently paid in October 2009.
Immediately prior to the issuance of the Series 2009-1 Notes, HVF caused the termination of the series supplements and note purchase agreements relating to its Series 2005-3 Variable Funding Rental Car Asset Backed Notes, or the "Series 2005-3 Notes," Series 2005-4 Variable Funding Rental Car Asset Backed Notes, or the "Series 2005-4 Notes," and Series 2008-1 Variable Funding Rental Car Asset Backed Notes, or the "Series 2008-1 Notes," or the "Terminated VFNs," and caused the repayment and cancellation in full of the Terminated VFNs. The Terminated VFNs had expected final maturity dates ranging from November 2009 to November 2010 and we had an aggregate of approximately $2.0 billion of total capacity (prior to borrowing base or other limitations) under the Terminated VFNs. In effect we replaced the $2.0 billion of total capacity under the Terminated VFNs with the $2.1 billion of capacity that we have under the Series 2009-1 Notes while extending the expected final maturity date to January 2012.
In October 2009 HVF issued $1.2 billion in aggregate principal amount of new medium term notes (3 and 5 year) Series 2009-2 rental car asset backed notes, or the "Series 2009-2 Notes." The 3 year notes carry a 4.26% coupon (4.30% yield) and the 5 year notes carry a 5.29% coupon (5.35% yield) with expected
8
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
final maturities in 2013 and 2015, respectively. The advance rate on the notes is approximately 66%. In general, we expect to use the Series 2009-2 Notes to replace the Series 2005-1 and 2005-2 Rental Car Asset Backed Notes, or the "2005 Notes," as they mature in 2010.
Based on all that we have been able to accomplish in the first 10 months of 2009, our current availability under our various credit facilities and our business plan, we believe we have sufficient liquidity to meet our 2010 debt maturities. We still need to refinance approximately $1.7 billion of our international fleet debt that matures in December 2010 and we are currently in discussions with banks and lenders to review our refinancing options; however there can be no assurance that we will be able to refinance this indebtedness on terms comparable to our recent refinancings, or at all.
The agreements governing our corporate indebtedness require us to comply with two key covenants based on a consolidated leverage ratio and a consolidated interest expense coverage ratio. 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. However, as a result of the above-mentioned actions and planned future actions, we believe that we will remain in compliance with our corporate debt covenants and that cash generated from operations, together with amounts available under various liquidity 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. Our future financial and operating performance, ability to service or refinance our debt and ability to comply with covenants and restrictions contained in our corporate debt agreements will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control.
Chrysler LLC and General Motors Bankruptcies / Financial Status of Monoline Insurance Companies
Immediately prior to Chrysler LLC's bankruptcy, less than 1% of our fleet was comprised of Chrysler LLC vehicles, so its bankruptcy filing has not had a material impact on our business, financial condition or results of operations.
General
Motors filed for bankruptcy in June 2009, which we will refer to as "Old General Motors," however we do not believe that this will have a material long-term impact on our business,
financial condition or results of operations, because:
MBIA Insurance Corporation, or "MBIA," and Ambac Corporation, or "Ambac," provide credit enhancements in the form of financial guaranties for our 2005 Notes, with each providing guaranties for
9
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
approximately half of the $3.2 billion in principal amount of the 2005 Notes that was outstanding as of September 30, 2009, all of which matures in 2010.
An event of bankruptcy with respect to MBIA or Ambac between now and November 2010 would result in an amortization event under the portion of the 2005 Notes guaranteed by the affected insurer. In addition, if an amortization event continues for 30 days or longer, the noteholders of the affected series of notes would have the right to require liquidation of a portion of the fleet sufficient to repay such notes, provided that the exercise of the right was exercised by a majority of the affected noteholders.
Since MBIA and Ambac are facing financial instability, have been downgraded one or more times and are on review for further credit downgrade or under developing outlook by one or more credit agencies, we did not have the Series 2009-1 Notes or the Series 2009-2 Notes guaranteed. Accordingly, if a bankruptcy of MBIA or Ambac were to occur prior to the 2005 Notes maturing, we expect that we would use our corporate liquidity and the borrowings under or proceeds from the Series 2009-1 Notes and the Series 2009-2 Notes to pay down the amounts owed under the affected series of 2005 Notes.
Note 2Recently Issued and/or Adopted Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board, or "FASB," issued The FASB Accounting Standards Codification. The Codification became the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On July 1, 2009, the Codification superseded all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification became nonauthoritative.
Under ASC 470-20, "Debt with Conversion and Other Options", or "ASC 470-20," cash settled convertible securities are separated into their debt and equity components. The value assigned to the debt component is the estimated fair value, as of the issuance date, of a similar debt instrument without the conversion feature, and the difference between the proceeds for the convertible debt and the amount reflected as a debt liability is recorded as additional paid-in capital. As a result, the debt is recorded at a discount reflecting its below market coupon interest rate. The debt is subsequently accreted to its par value over its expected life, with the rate of interest that reflects the market rate at issuance being reflected on the consolidated statements of operations. We applied the provisions of ASC 470-20 to the Convertible Debt Public Offering. See Note 7Debt and Note 11Total Equity.
In January 2009, the FASB issued FSP No. FAS 132(R)-1, "Employers' Disclosures about Postretirement Benefit Plan Assets." This FSP has been incorporated into and contains amendments to ASC 715,"CompensationRetirement Benefits," or "ASC 715," that are intended to enhance the transparency surrounding the types of assets and associated risks in an employer's defined benefit pension or other postretirement plan. These particular amendments to ASC 715 will become effective for us beginning with our annual report for the period ended December 31, 2009. We will provide the required disclosure requirements beginning December 31, 2009, as required, and we do not believe it will have a material impact on our financial position or results of operations.
In June 2009, the FASB issued SFAS No. 167, "Amendments to FASB Interpretation No 46(R)," or "SFAS No. 167." SFAS No. 167 changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other
10
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
things, an entity's purpose and design and a company's ability to direct the activities of the entity that most significantly impact the entity's economic performance. The provisions of SFAS No. 167 become effective for us on January 1, 2010, and we do not believe that they will have a material impact on our financial position or results of operations.
Note 3Cash and Cash Equivalents and Restricted Cash
We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Restricted cash 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 programs and to satisfy certain of our self-insurance regulatory reserve requirements. As of September 30, 2009 and December 31, 2008, the portion of total restricted cash that was associated with our fleet debt facilities was $282.5 million and $557.2 million, respectively. The decrease in restricted cash associated with our fleet debt of $274.7 million from December 31, 2008 to September 30, 2009, primarily related to payments to reduce fleet debt and the timing of purchases and sales of revenue earning vehicles.
Note 4Goodwill and Other Intangible Assets
The following summarizes the changes in our goodwill for the period presented (in millions of dollars):
|
Car Rental | Equipment Rental |
Total | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Balance as of January 1, 2009 |
|||||||||||
Goodwill |
$ | 307.1 | $ | 651.9 | $ | 959.0 | |||||
Accumulated impairment losses |
(43.0 | ) | (651.9 | ) | (694.9 | ) | |||||
|
264.1 | | 264.1 | ||||||||
Goodwill acquired during the year |
13.9 |
2.4 |
16.3 |
||||||||
Other changes during the year(1) |
5.0 | 0.2 | 5.2 | ||||||||
Balance as of September 30, 2009 |
|||||||||||
Goodwill |
326.0 | 654.5 | 980.5 | ||||||||
Accumulated impairment losses |
(43.0 | ) | (651.9 | ) | (694.9 | ) | |||||
|
$ | 283.0 | $ | 2.6 | $ | 285.6 | |||||
11
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
Other intangible assets, net, consisted of the following major classes (in millions of dollars):
|
September 30, 2009 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Value |
||||||||||
Amortizable intangible assets: |
|||||||||||||
Customer-related |
$ | 600.7 | $ | (231.9 | ) | $ | 368.8 | ||||||
Other |
56.4 | (10.2 | ) | 46.2 | |||||||||
Total |
657.1 | (242.1 | ) | 415.0 | |||||||||
Indefinite-lived intangible assets: |
|||||||||||||
Trade name |
2,190.0 | | 2,190.0 | ||||||||||
Other |
15.3 | | 15.3 | ||||||||||
Total |
2,205.3 | | 2,205.3 | ||||||||||
Total other intangible assets, net |
$ | 2,862.4 | $ | (242.1 | ) | $ | 2,620.3 | ||||||
|
December 31, 2008 | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Gross Carrying Amount |
Accumulated Amortization |
Impairment Charge |
Net Carrying Value |
||||||||||||
Amortizable intangible assets: |
||||||||||||||||
Customer-related |
$ | 620.2 | $ | (187.9 | ) | $ | (17.0 | ) | $ | 415.3 | ||||||
Other |
10.9 | (4.5 | ) | | 6.4 | |||||||||||
Total |
631.1 | (192.4 | ) | (17.0 | ) | 421.7 | ||||||||||
Indefinite-lived intangible assets: |
||||||||||||||||
Trade name |
2,624.0 | | (434.0 | ) | 2,190.0 | |||||||||||
Other |
9.9 | | | 9.9 | ||||||||||||
Total |
2,633.9 | | (434.0 | ) | 2,199.9 | |||||||||||
Total other intangible assets, net |
$ | 3,265.0 | $ | (192.4 | ) | $ | (451.0 | ) | $ | 2,621.6 | ||||||
Amortization of other intangible assets for the three months ended September 30, 2009 and 2008, was approximately $16.5 million and $16.5 million, respectively, and for the nine months ended September 30, 2009 and 2008, was approximately $49.7 million and $49.7 million, respectively. Based on our amortizable intangible assets as of September 30, 2009, we expect amortization expense to be approximately $18.5 million for the remainder of 2009 and range from $59.4 million to $67.6 million for each of the next five fiscal years.
During the nine months ended September 30, 2009, we added 27 locations by acquiring former franchisees in our domestic and international car rental operations, as well as approximately 20 locations associated with our acquisition of Advantage Rent A Car and two locations related to an external acquisition done within our equipment rental operations. Total cash paid for intangible assets during the nine months ended September 30, 2009 was $50.9 million, of this amount, $45.5 million was allocated to amortizable intangible assets, primarily comprised of the tradename and concession agreements associated with the Advantage Rent A Car acquisition and technology assets associated with the acquisition of Eileo, S.A., and $5.4 million was allocated to indefinite-lived intangible assets
12
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
associated with reacquired franchise rights during the nine months ended September 30, 2009. Each of these transactions has been accounted for using the acquisition method of accounting in accordance with GAAP and operating results of the acquired entities from the dates of acquisition are included in our consolidated statements 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, individually or collectively, to the consolidated amounts presented within our statement of operations for the nine months ended September 30, 2009.
Note 5Taxes on Income
The effective tax rate for the three and nine months ended September 30, 2009 was 9.0% and 19.2%, respectively. The effective tax rate for the three and nine months ended September 30, 2008 was 10.9% and 56.8%, respectively. The provision for taxes on income of $6.9 million in the three months ended September 30, 2009 increased from $2.9 million in the three months ended September 30, 2008, primarily due to the increase in income before income taxes and an increase in losses in certain non-U.S. jurisdictions for which a tax benefit cannot be recognized, partially offset by an increase in discrete benefits. The benefit for taxes on income was $19.9 million in the nine months ended September 30, 2009 compared to a provision for taxes on income of $36.0 million in the nine months ended September 30, 2008. The change is primarily due to pretax losses and discrete benefits recorded in the nine months ended September 30, 2009 compared to pretax income and discrete charges for the nine months ended September 30, 2008. This was partially offset by an increase in losses in certain non-U.S. jurisdictions for which a tax benefit cannot be recognized.
Note 6Depreciation of Revenue Earning Equipment
Depreciation of revenue earning equipment includes the following (in millions of dollars):
|
Three months ended September 30, |
|||||||
---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | ||||||
Depreciation of revenue earning equipment |
$ | 479.8 | $ | 553.8 | ||||
Adjustment of depreciation upon disposal of the equipment |
1.3 | 20.7 | ||||||
Rents paid for vehicles leased |
18.0 | 20.5 | ||||||
Total |
$ | 499.1 | $ | 595.0 | ||||
|
Nine months ended September 30, |
|||||||
---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | ||||||
Depreciation of revenue earning equipment |
$ | 1,346.9 | $ | 1,534.4 | ||||
Adjustment of depreciation upon disposal of the equipment |
68.1 | 53.8 | ||||||
Rents paid for vehicles leased |
53.2 | 70.5 | ||||||
Total |
$ | 1,468.2 | $ | 1,658.7 | ||||
The adjustment of depreciation upon disposal of revenue earning equipment for the three months ended September 30, 2009 and 2008, reflects a net gain of $2.0 million and a net loss of $9.4 million, respectively, on the disposal of vehicles used in our car rental operations and for the three months ended September 30, 2009 and 2008 reflects net losses of $3.3 million and $11.3 million, respectively, on the
13
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
disposal of industrial and construction equipment used in our equipment rental operations. The adjustment of depreciation upon disposal of revenue earning equipment for the nine months ended September 30, 2009 and 2008, reflects net losses of $27.3 million and $39.7 million, respectively, on the disposal of vehicles used in our car rental operations and for the nine months ended September 30, 2009 and 2008 reflects net losses of $40.8 million and $14.1 million, respectively, on the disposal of industrial and construction equipment used in our equipment rental operations.
Depreciation rates are reviewed on an ongoing 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 nine months ended September 30, 2009, 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 increases of $2.4 million and $14.4 million in depreciation expense for the three and nine months ended September 30, 2009, respectively. During the three and nine months ended September 30, 2009, depreciation rate changes in our equipment rental operations resulted in increases in depreciation expense of $2.3 million and $3.9 million, respectively.
For the three months ended September 30, 2009 and 2008, our worldwide car rental operations sold approximately 40,900 and 55,600 non-program cars, respectively, a 26.4% year over year decrease primarily due to a lower average fleet size. For the nine months ended September 30, 2009 and 2008, our worldwide car rental operations sold approximately 107,900 and 162,000 non-program cars, respectively, a 33.4% year over year decrease primarily due to a lower average fleet size.
Note 7Debt
Open Market Repurchases
In April 2009, we made aggregate open market repurchases, at a discount, of approximately $68.0 million and $81.5 million in face value of our Senior Notes and Senior Subordinated Notes, respectively. As a result of these repurchases, we recorded a gain of $48.5 million, net of transaction costs, in "Interest and other income, net" for the nine months ended September 30, 2009.
Convertible Debt Offering
In May and June 2009, we issued $474.8 million in aggregate principal amount of Convertible Senior Notes. Our Convertible Senior Notes may be convertible by holders into shares of our common stock, cash or a combination of cash and shares of our common stock, as elected by us, initially at a conversion rate of 120.6637 shares per $1,000 principal amount of notes, subject to adjustment. However, we have a policy of settling the conversion of our Convertible Senior Notes using a combination settlement, which calls for settling the fixed dollar amount per $1,000 in principal amount in cash and settling in shares, the excess conversion value, if any. Proceeds from the Convertible Debt Offering were allocated between "Debt" and "Additional paid-in capital." The value assigned to the debt component was the estimated fair value, as of the issuance date, of a similar debt instrument without the conversion feature, and the difference between the proceeds for the Convertible Senior Notes and the amount reflected as a debt liability was recorded as "Additional paid-in capital." As a result, the debt was recorded at a discount of $117.9 million reflecting its below market coupon interest rate. The debt is subsequently accreted to its par value over its expected life, with the rate of interest that reflects the market rate at issuance being reflected in the consolidated statements of operations.
14
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
Canadian Fleet Financing Facility
In June 2009, subsidiaries of Hertz entered into a second omnibus amendment to our Canadian Fleet Financing Facility, reducing the facility limit from CAD$400 million (or $371.9 million, calculated using exchange rates in effect on September 30, 2009) to CAD$225 million (or $209.2 million), changing the maturity date from May 2012 to May 2011 and adding increases in commitment fees. Also, among other things, certain covenants pertaining to fleet composition were eliminated and certain limitations on the number of vehicles supplied by a single manufacturer which may be included in the borrowing base calculation were added.
Amendment and Restatement of U.S. Fleet Debt Program Documents
In September 2009, HVF entered into amendments and restatements, of many of the agreements relating to its U.S. asset-backed fleet debt, or
collectively, the "U.S. Fleet Debt Program Documents," including:
Among other things, these amendments (i) give HVF the ability, subject to certain conditions, to issue series of notes secured by segregated pools of collateral pledged to support only such series; (ii) modify the conditions precedent to HVF issuing a new series of notes under the ABS Indenture; (iii) modify certain conditions precedent to the amendment of the ABS Indenture, series supplements and certain of the other U.S. Fleet Debt Program Documents; (iv) provide that if certain events of default with respect to manufacturers of vehicles subject to repurchase programs (each, a "Manufacturer Event of Default") are cured, the effects of such events of default on the U.S. Fleet Debt Program Documents generally cease; (v) provide that if a Manufacturer Event of Default occurs, the related manufacturer does not cease to be an eligible manufacturer, thereby allowing HVF to finance a greater proportion of vehicles manufactured by such manufacturer during a Manufacturer Event of Default and (vi) give HVF the ability, subject to certain conditions, to issue one or more series of notes that would be subordinated in rights to payment of interest and principal to each other series of notes outstanding.
15
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
Amendment of 2005-1 Notes
In addition, on September 18, 2009, HVF entered into amendments to the series supplements relating to its 2005 Notes. Among other things, the amendments with respect to each such series supplement add new concentration limits and change existing concentration limits for vehicles manufactured by certain manufacturers.
Series 2009-1 Notes
In September 2009, HVF issued the Series 2009-1 Notes. The aggregate principal amount of such facility is $2.1 billion and this facility is available to HVF on a revolving basis through the expected final maturity date of January 2012 with a January 2013 legal final maturity. The Series 2009-1 Notes are expected to bear interest at variable rates based upon the weighted average of the commercial paper rates paid by the bank conduits advancing funds to HVF plus a borrowing spread which varies based on the rating of the Series 2009-1 Notes. The borrowing spread on the Series 2009-1 Notes is subject to increase if Moody's Investors Service, or "Moody's," downgrades their rating of the Series 2009-1 Notes below "Aa3." The borrowing spread on the Series 2009-1 Notes is also subject to increase during the continuance of an amortization event with respect to the Series 2009-1 Notes. The Series 2009-1 Notes are currently rated "Aa1" by Moody's. The Series 2009-1 Notes are subject to events of default and amortization events that are customary in nature for U.S. rental car asset-backed securitizations of this type, including non-payment of principal or interest, violation of covenants, material inaccuracy of representations or warranties, failure to maintain certain enhancement levels, failure to maintain an interest rate hedge and insolvency or certain bankruptcy events. The occurrence of an amortization event or event of default could result in the rapid amortization of the Series 2009-1 Notes and in certain instances the liquidation of vehicles in the U.S. car rental fleet. As of September 30, 2009, we had an aggregate principal amount outstanding of $300.0 million of Series 2009-1 Notes. This amount was subsequently paid in October 2009.
In connection with the issuance of the Series 2009-1 Notes, HVF purchased a 5% interest rate cap. See Note 13Financial Instruments.
Immediately prior to the issuance of the Series 2009-1 Notes, HVF terminated the series supplements and note purchase agreements relating to its Series 2005-3 Notes, Series 2005-4 Notes and Series 2008-1 Notes and caused the repayment and cancellation in full of such notes.
Series 2009-2 Notes
On October 23, 2009, HVF issued $1.2 billion in aggregate principal amount of Series 2009-2 Notes. See Note 17Subsequent Events.
16
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
Our debt consists of the following (in millions of dollars):
|
September 30, 2009 |
December 31, 2008 |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
Corporate Debt |
||||||||||
Senior Term Facility, average interest rate: 2009, 2.0%; 2008, 3.3% (effective average interest rate: 2009, 2.0%; 2008, 3.4%); net of unamortized discount: 2009, $15.1; 2008, $18.6 |
$ | 1,346.9 | $ | 1,353.6 | ||||||
Senior ABL Facility; net of unamortized discount: 2009, $10.6; 2008, $13.3 |
(10.6 | ) | (13.3 | ) | ||||||
Senior Notes, average interest rate: 2009, 8.7%; 2008, 8.7% |
2,059.4 | 2,113.6 | ||||||||
Senior Subordinated Notes, average interest rate: 2009, 10.5%; 2008, 10.5% |
518.5 | 600.0 | ||||||||
Promissory Notes, average interest rate: 2009, 7.3%; 2008, 7.2% (effective average interest rate: 2009, 7.4%; 2008, 7.3%); net of unamortized discount: 2009, $3.4; 2008, $4.0 |
394.9 | 461.4 | ||||||||
Convertible Senior Notes(1), average interest rate: 2009, 5.25%; (effective average interest rate: 2009, 6.9%); net of unamortized discount: 2009, $112.0 |
362.8 | | ||||||||
Notes payable, average interest rate: 2009, 6.0%; 2008, 5.5% |
5.1 | 9.7 | ||||||||
Foreign subsidiaries' debt denominated in foreign currencies: |
||||||||||
Short-term bank borrowings, average interest rate: 2009, 10.8%; 2008, 4.5% |
6.5 | 54.9 | ||||||||
Other borrowings, average interest rate: 2009, 2.7%; 2008, 5.1% |
4.3 | 5.6 | ||||||||
Total Corporate Debt |
4,687.8 | 4,585.5 | ||||||||
Fleet Debt |
||||||||||
U.S. Fleet Debt(2), average interest rate: 2009, 4.4%; 2008, 4.3% (effective average interest rate: 2009, 4.4%; 2008, 4.3%); net of unamortized discount: 2009, $3.8; 2008, $7.5 |
3,546.2 | 4,254.5 | ||||||||
International Fleet Debt, average interest rate: 2009, 2.4%; 2008, 5.0% (effective average interest rate: 2009, 2.4%; 2008, 5.1%); net of unamortized discount: 2009, $11.1; 2008, $6.5 |
904.8 | 1,027.1 | ||||||||
International ABS Fleet Financing Facility, average interest rate: 2009, 2.8%; 2008, 7.2%; (effective average interest rate: 2009, 2.9%; 2008, 7.4%); net of unamortized discount: 2009, $7.2; 2008, $10.3 |
573.0 | 565.3 | ||||||||
Fleet Financing Facility, average interest rate: 2009, 1.5%; 2008, 2.0% (effective average interest rate: 2009, 1.5%; 2008, 2.1%); net of unamortized discount: 2009, $0.9; 2008, $1.2 |
144.6 | 149.3 | ||||||||
Brazilian Fleet Financing Facility, average interest rate: 2009, 13.4%; 2008, 16.3% |
67.8 | 54.1 | ||||||||
Canadian Fleet Financing Facility, average interest rate: 2009, 3.9%; 2008, 3.8% |
126.8 | 111.6 | ||||||||
Belgian Fleet Financing Facility, average interest rate: 2009, 1.7%; 2008, 4.7% |
38.6 | 31.2 | ||||||||
Capitalized Leases(3), average interest rate: 2009, 4.5%; 2008, 6.2% |
258.8 | 193.7 | ||||||||
Total Fleet Debt |
5,660.6 | 6,386.8 | ||||||||
Total Debt |
$ | 10,348.4 | $ | 10,972.3 | ||||||
NOTE: For further information on the definitions and terms of our debt, see Note 3 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."
17
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
The aggregate amounts of maturities of debt for each of the twelve-month periods ending September 30 (in millions of dollars) are as follows: 2010, $4,836.1 (including $2,400.6 of other short-term borrowings); 2011, $1,036.1; 2012, $176.4; 2013, $1,362.1; 2014, $2,555.4; after 2014, $546.4.
Our short-term borrowings as of September 30, 2009 include, among other items, the amounts outstanding under our International Fleet Debt facility, International ABS Fleet Financing Facility, Fleet Financing Facility, Brazilian Fleet Financing Facility, Canadian Fleet Financing Facility, Belgian Fleet Financing Facility and Capitalized Leases. These amounts are considered short-term in nature since they have maturity dates of three months or less; however these facilities are revolving in nature and do not expire at the time of the short-term debt maturity. In addition, we include certain scheduled payments of principal under our ABS Program as short-term borrowings.
As of September 30, 2009, there were outstanding standby letters of credit totaling $532.7 million. Of this amount, $264.0 million has been issued for the benefit of the ABS Program ($200.0 million of which was issued by Ford Motor Company, or "Ford," and $64.0 million of which was used under the Senior Credit Facilities) and the remainder is primarily to support self-insurance programs (including insurance policies with respect to which we have indemnified the policy issuers for any losses) in the United States, Canada and Europe and to support airport concession obligations in the United States and Canada. As of September 30, 2009, none of these letters of credit have been drawn upon.
As of September 30, 2009, Capitalized Leases have maturities ranging from October 2009 to February 2013.
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 September 30, 2009 has been issued from the terms as disclosed in our Form 10-K except as mentioned below.
The Series 2009-1 Notes are secured by, among other things, a pledge in certain collateral owned by HVF, including (i) the majority of the U.S. car rental fleet that we use in our daily rental operations, (ii) with respect to the portion of those vehicles subject to repurchase programs with vehicle manufacturers, the related manufacturer receivables, (iii) all rights of HVF under a master lease agreement between HVF and Hertz, and (iv) all monies on deposit from time to time in certain collection and cash collateral accounts and all proceeds thereof. The assets of HVF, including the U.S. car rental fleet owned by HVF, will not be available to satisfy the claims of Hertz's general creditors.
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 other indebtedness, make dividends and other restricted payments, create liens, make investments, make acquisitions, engage in mergers, change the nature of their business, make capital expenditures, or engage in certain transactions with affiliates. Some of these agreements also require the maintenance of certain financial covenants. As of September 30, 2009, we were in compliance with all of these financial covenants.
As of September 30, 2009, we had an aggregate principal amount outstanding of $1,362.0 million pursuant to our Senior Term Facility and no amounts outstanding in our Senior ABL Facility. As of September 30, 2009, Hertz was required under the Senior Term Facility to have a consolidated leverage
18
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
ratio of not more than 5.50:1 and a consolidated interest expense coverage ratio of not less than 2.00:1. In addition, under our Senior ABL Facility, if there was less than $200 million of available borrowing capacity under that facility as of September 30, 2009, Hertz was required to have a consolidated leverage ratio of not more than 5.50:1 and a consolidated fixed charge coverage ratio of not less than 1:1 for the quarter then ended. Under the Senior Term Facility, as of September 30, 2009, we had a consolidated leverage ratio of 4.39:1 and a consolidated interest expense coverage ratio of 2.56:1. Since we had maintained sufficient borrowing capacity under our Senior ABL Facility as of September 30, 2009, and expect to maintain such capacity in the future, the consolidated fixed charge coverage ratio was not deemed relevant for presentation. For further information on the terms of our senior credit facilities, see Note 3 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."
Derivatives
We utilize certain derivative instruments to enhance our ability to manage risks relating to cash flow and interest rate exposure. See Note 13Financial Instruments.
Credit Facilities
As of September 30, 2009, the following credit facilities were available for the use of Hertz and its subsidiaries (in millions of dollars):
|
Remaining Capacity |
Availability Under Borrowing Base or Other Limitation |
||||||
---|---|---|---|---|---|---|---|---|
Corporate Debt |
||||||||
Senior ABL Facility |
$ | 1,691.3 | $ | 1,013.2 | ||||
Total Corporate Debt |
1,691.3 | 1,013.2 | ||||||
Fleet Debt |
||||||||
U.S. Fleet Debt |
1,841.9 | 447.3 | ||||||
International Fleet Debt |
677.4 | 114.3 | ||||||
International ABS Fleet Financing Facility |
445.6 | 66.0 | ||||||
Fleet Financing Facility |
20.4 | 20.0 | ||||||
Brazilian Fleet Financing Facility |
6.3 | | ||||||
Canadian Fleet Financing Facility |
82.4 | 31.3 | ||||||
Capitalized Leases |
53.4 | | ||||||
Total Fleet Debt |
3,127.4 | 678.9 | ||||||
Total |
$ | 4,818.7 | $ | 1,692.1 | ||||
As of September 30, 2009, the Senior Term Facility had approximately $1.6 million available under the letter of credit facility and the Senior ABL Facility had $151.9 million available under the letter of credit facility sublimit.
Our liquidity as of September 30, 2009 was approximately $5,067.3 million, which consisted of $926.7 million of cash, $1,013.2 million of unused commitments under our Senior ABL Facility and
19
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
$3,127.4 million of unused commitments under our fleet debt facilities. Taking into consideration the borrowing base limitations in our Senior ABL Facility and in our fleet debt facilities, the amount that we had available for immediate use as of September 30, 2009 under our Senior ABL Facility was $1,013.2 million and we had $678.9 million available under our various fleet debt facilities. Accordingly, as of September 30, 2009, we had $2,618.8 million ($926.7 million in cash, $1,013.2 million available under our Senior ABL Facility and $678.9 million available under our various fleet debt facilities) in liquidity that was available for our immediate use. Future availability of borrowings under these facilities will depend on borrowing base requirements and other factors, many of which are outside our control.
As of September 30, 2009, substantially all of our assets were pledged under one or more of the facilities noted above.
Accrued Interest
As of September 30, 2009 and December 31, 2008, accrued interest was $80.9 million and $131.4 million, respectively, which is reflected in our condensed consolidated balance sheet in "Accrued liabilities."
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 September 30, | |||||||||||||||||||
|
2009 | 2008 | 2009 | 2008 | 2009 | 2008 | ||||||||||||||
Components of Net Periodic Benefit Cost: |
||||||||||||||||||||
Service cost |
$ | 5.7 | $ | 5.0 | $ | 1.4 | $ | 1.6 | $ | | $ | | ||||||||
Interest cost |
7.0 | 6.6 | 2.5 | 2.1 | 0.2 | 0.1 | ||||||||||||||
Expected return on plan assets |
(5.4 | ) | (6.2 | ) | (2.0 | ) | (2.3 | ) | | | ||||||||||
Net amortizations |
0.1 | (0.3 | ) | (0.1 | ) | (0.1 | ) | (0.1 | ) | (2.6 | ) | |||||||||
Settlement loss |
0.8 | 0.2 | | | | | ||||||||||||||
Net pension/postretirement expense |
$ | 8.2 | $ | 5.3 | $ | 1.8 | $ | 1.3 | $ | 0.1 | $ | (2.5 | ) | |||||||
|
Pension Benefits | |
|
|||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Postretirement Benefits (U.S.) |
|||||||||||||||||||
|
U.S. | Non-U.S. | ||||||||||||||||||
|
Nine months ended September 30, | |||||||||||||||||||
|
2009 | 2008 | 2009 | 2008 | 2009 | 2008 | ||||||||||||||
Components of Net Periodic Benefit Cost: |
||||||||||||||||||||
Service cost |
$ | 16.5 | $ | 18.0 | $ | 4.1 | $ | 5.9 | $ | 0.1 | $ | 0.1 | ||||||||
Interest cost |
21.0 | 20.3 | 7.1 | 7.5 | 0.6 | 0.5 | ||||||||||||||
Expected return on plan assets |
(17.1 | ) | (18.5 | ) | (5.6 | ) | (8.3 | ) | | | ||||||||||
Net amortizations |
0.3 | 0.2 | (0.3 | ) | (0.5 | ) | (0.3 | ) | (2.8 | ) | ||||||||||
Settlement loss |
1.5 | 2.5 | | | | | ||||||||||||||
Net pension/postretirement expense |
$ | 22.2 | $ | 22.5 | $ | 5.3 | $ | 4.6 | $ | 0.4 | $ | (2.2 | ) | |||||||
20
HERTZ GLOBAL HOLDINGS, INC. 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 nine months ended September 30, 2009, we contributed to and made benefit payments of $11.7 million and $28.9 million, respectively, to our funded worldwide plans. For the three and nine months ended September 30, 2008, our contributions to and benefit payments through unfunded plans were $9.7 million and $29.6 million, respectively. Of the contributions to worldwide plans, we contributed $6.5 million to the U.S. defined benefit plans during the three months ended September 30, 2009. No contributions were made to the U.S. plans during the same period in the previous year. For the three and nine months ended September 30, 2009, we made discretionary contributions of $1.3 million and $3.9 million, respectively, to our U.K. defined benefit pension plan. The amounts contributed to the U.K. plans for the three and nine months ended September 30, 2008, were $4.9 million and $7.2 million, respectively. We expect to contribute $42.6 million to our U.S. pension plan during 2009, including $13.0 million contributed during the nine months ended September 30, 2009, $14.2 million contributed in October 2009, and $15.4 million to be contributed later in the fourth quarter of 2009. These contributions are necessary primarily because of the significant decline in asset values in 2008.
We participate in various "multiemployer" pension plans administered by labor unions representing some of our employees. We make periodic contributions to these plans to allow them to meet their pension benefit obligations to their participants. 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. In the ordinary course of our renegotiation of collective bargaining agreements with labor unions that maintain these plans, we could decide to discontinue participation in a plan, and in that event, we could face a withdrawal liability. Some multiemployer plans, including one in which we participate, are reported to have significant underfunded liabilities. Such underfunding could increase the size of our potential withdrawal liability.
Note 9Stock-Based Compensation
In February 2009, we granted 2,115,000 Restricted Stock Units, or "RSUs," to key executives and employees at fair values ranging from $2.75 to $3.24 and 3,819,739 Performance Stock Units, or "PSUs," at a fair value of $3.24, including a grant of 1,724,363 PSUs to Mark P. Frissora, our Chief Executive Officer. RSUs granted in 2009 generally have the terms set forth in the Hertz Global Holdings, Inc. 2008 Omnibus Incentive Plan, or the "Omnibus Plan," however in the event of an employee's death or disability (as defined in the Omnibus Plan), a pro rata portion of the RSUs that would have vested on the next anniversary of the grant date will vest and the remainder of the RSUs will be canceled.
In February 2009, we granted options to acquire 52,500 shares of our common stock to certain executives at an exercise price of $3.24 under the Omnibus Plan.
In May 2009, we granted 505,500 RSUs to key employees at fair values ranging from $6.45 to $8.38. We also granted 155,588 shares of common stock to non-management directors or their assignees.
In July and August 2009, we granted 25,000 RSUs to key executives and employees at fair values ranging from $9.44 to $11.02.
21
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
For the three and nine months ended September 30, 2009, we recognized compensation cost of approximately $9.1 million ($5.6 million, net of tax) and $25.6 million ($15.7 million, net of tax), respectively, pursuant to our 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. As of September 30, 2009, there was approximately $63.1 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. These remaining costs are expected to be recognized over the remaining 1.4 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 and light trucks, or "car rental"; and rental of industrial, construction and material handling equipment, or "equipment rental."
Adjusted pre-tax income 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 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 contribution of our reportable segments to revenues and adjusted pre-tax income and the reconciliation to consolidated revenues and income before income taxes for the three and nine months ended September 30, 2009 and 2008 are summarized below (in millions of dollars).
|
Three months ended September 30, | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Revenues | Adjusted Pre-Tax Income | |||||||||||||
|
2009 | 2008 | 2009 | 2008 | |||||||||||
Car rental |
$ | 1,757.7 | $ | 1,986.5 | $ | 258.3 | $ | 167.1 | |||||||
Equipment rental |
280.5 | 433.1 | 25.2 | 81.1 | |||||||||||
Total reportable segments |
2,038.2 | 2,419.6 | 283.5 | 248.2 | |||||||||||
Other |
3.2 | 2.3 | |||||||||||||
Total |
$ | 2,041.4 | $ | 2,421.9 | |||||||||||
Adjustments: |
|||||||||||||||
Other reconciling items(1) |
(88.2 | ) | (79.1 | ) | |||||||||||
Purchase accounting(2) |
(21.7 | ) | (25.2 | ) | |||||||||||
Non-cash debt charges(3) |
(48.5 | ) | (20.2 | ) | |||||||||||
Restructuring charges |
(35.7 | ) | (74.9 | ) | |||||||||||
Restructuring related charges(4) |
(11.4 | ) | (10.1 | ) | |||||||||||
Derivative losses(5) |
(1.9 | ) | (15.0 | ) | |||||||||||
Management transition costs |
(0.3 | ) | | ||||||||||||
Vacation accrual adjustment(6) |
| 2.5 | |||||||||||||
Income before income taxes |
$ | 75.8 | $ | 26.2 | |||||||||||
22
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
|
Nine months ended September 30, | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Revenues | Adjusted Pre-Tax Income | |||||||||||||
|
2009 | 2008 | 2009 | 2008 | |||||||||||
Car rental |
$ | 4,515.3 | $ | 5,442.8 | $ | 368.4 | $ | 355.8 | |||||||
Equipment rental |
837.0 | 1,287.4 | 50.6 | 225.9 | |||||||||||
Total reportable segments |
5,352.3 | 6,730.2 | 419.0 | 581.7 | |||||||||||
Other |
8.5 | 6.1 | |||||||||||||
Total |
$ | 5,360.8 | $ | 6,736.3 | |||||||||||
Adjustments: |
|||||||||||||||
Other reconciling items(1) |
(259.3 | ) | (240.9 | ) | |||||||||||
Purchase accounting(2) |
(69.5 | ) | (74.4 | ) | |||||||||||
Non-cash debt charges(3) |
(121.2 | ) | (56.4 | ) | |||||||||||
Restructuring charges |
(87.2 | ) | (127.2 | ) | |||||||||||
Restructuring related charges(4) |
(31.6 | ) | (21.0 | ) | |||||||||||
Management transition costs |
(1.0 | ) | (1.3 | ) | |||||||||||
Derivative gains(5) |
3.0 | 2.8 | |||||||||||||
Gain on debt buyback(7) |
48.5 | | |||||||||||||
Third-party bankruptcy accrual(8) |
(4.3 | ) | | ||||||||||||
Income (loss) before income taxes |
$ | (103.6 | ) | $ | 63.3 | ||||||||||
23
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
Note 11Total Equity
Common Stock and Additional Paid-In Capital
In May and June 2009, we completed the Common Stock Public Offering of 52,900,000 shares of our common stock at a price of $6.50 per share with proceeds before underwriting discounts and offering expenses of approximately $343.9 million.
In May and June 2009, we also completed the Convertible Debt Public Offering. The Convertible Senior Notes will be convertible by holders into shares of our common stock, cash or a combination of cash and shares of our common stock, as elected by us, initially at a conversion rate of 120.6637 shares per $1,000 principal amount of notes, subject to adjustment. Gross proceeds from the Convertible Debt Public Offering of $474.8 million were allocated between "Debt" and "Additional paid-in capital." The value assigned to the debt component was the estimated fair value, as of the issuance date, of a similar debt instrument without the conversion feature, and the difference between the proceeds for the Convertible Senior Notes and the amount reflected as a debt liability was recorded as "Additional paid-in capital" ($114.3 million).
On July 7, 2009, as a result of the Private Offering, 32,101,182 shares of our common stock were issued to CD&R and Carlyle affiliated investment funds with total proceeds to us of $200.0 million. See Note 1Background, Basis of Presentation and Liquidity.
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive loss as of September 30, 2009 and December 31, 2008 primarily includes unrealized losses on cash flow hedges of $(65.2) million and $(89.6) million, respectively, changes due to the pension mark-to-market adjustment of $(50.0) million and $(49.4) million, respectively, and unrealized losses on our Euro-denominated debt of $(23.9) million and $(15.7) million, respectively, and accumulated translation gains of $134.8 million and $54.5 million, respectively.
Comprehensive income (loss) for the three and nine months ended September 30, 2009 and 2008 were as follows (in millions of dollars):
|
Three Months Ended September 30, |
||||||||
---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | |||||||
Net income |
$ | 68.9 | $ | 23.3 | |||||
Other comprehensive income (loss), net of tax: |
|||||||||
Foreign currency translation adjustments |
45.3 | (134.1 | ) | ||||||
Unrealized gain (loss) on Euro-denominated debt |
(7.2 | ) | 20.8 | ||||||
Change due to the pension mark-to-market adjustment |
0.4 | (19.1 | ) | ||||||
Change in fair value of cash flow hedges |
11.5 | (4.8 | ) | ||||||
Total other comprehensive income (loss) |
50.0 | (137.2 | ) | ||||||
Comprehensive income (loss) |
118.9 | (113.9 | ) | ||||||
Less: Comprehensive income attributable to the noncontrolling interest |
(4.4 | ) | (5.6 | ) | |||||
Comprehensive income (loss) attributable to Hertz Global Holdings, Inc. and Subsidiaries |
$ | 114.5 | $ | (119.5 | ) | ||||
24
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
|
Nine Months Ended September 30, |
||||||||
---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | |||||||
Net income (loss) |
$ | (83.7 | ) | $ | 27.3 | ||||
Other comprehensive income (loss), net of tax: |
|||||||||
Foreign currency translation adjustments |
80.3 | (70.1 | ) | ||||||
Unrealized loss on Euro-denominated debt |
(8.2 | ) | 6.5 | ||||||
Change due to the pension mark-to-market adjustment |
(0.6 | ) | (19.2 | ) | |||||
Change in fair value of cash flow hedges |
24.4 | (5.8 | ) | ||||||
Total other comprehensive income (loss) |
95.9 | (88.6 | ) | ||||||
Comprehensive income (loss) |
12.2 | (61.3 | ) | ||||||
Less: Comprehensive income attributable to the noncontrolling interest |
(11.4 | ) | (16.1 | ) | |||||
Comprehensive loss attributable to Hertz Global Holdings, Inc. and Subsidiaries |
$ | 0.8 | $ | (77.4 | ) | ||||
Note 12Restructuring
As part of our ongoing effort to implement our strategy of reducing operating costs, we are evaluating our workforce and operations and making adjustments, including headcount reductions and business process re-engineering to optimize work flow at rental locations and maintenance facilities as well as streamlining our back-office operations and evaluating potential outsourcing opportunities. When we make adjustments to our workforce and operations, we may incur incremental expenses that delay the benefit of a more efficient workforce and operating structure, but we believe that increasing our operating efficiency and reducing the costs associated with the operation of our business are important to our long-term competitiveness. For further information on the actions taken in 2007 and 2008, see Note 12 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."
In January 2009, we announced that, as part of a comprehensive plan to further decrease costs and as a result of reduced rental demand, we were reducing our global workforce by more than 4,000 employees beginning in the fourth quarter 2008 and continuing through the first quarter of 2009, more than half of whom are not eligible for severance benefits. We incurred job reductions in the car and equipment rental businesses, corporate and support areas, and in all geographies, with an emphasis on eliminating non-customer facing jobs. Related to these location closures and continued cost reduction initiatives, we incurred restructuring charges for employee termination liabilities covering approximately 1,500 employee separations in the fourth quarter of 2008.
During the first and second quarters of 2009, our equipment rental business incurred charges mainly for losses on disposal of surplus equipment and recognition of facility lease obligations related to previously announced U.S. branch closures that were completed during the quarters. Our North American and European car rental businesses incurred charges mainly for facility lease obligations related to previously announced off-airport location closures that were completed during the quarters. In the first quarter of 2009, our European car rental business also eliminated certain specialty rental equipment as a future cost reduction initiative and incurred related lease termination costs. The first and second quarter 2009 restructuring charges included employee termination liabilities covering approximately 500 and 600 employees, respectively.
25
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
During the third quarter of 2009, our equipment rental business incurred charges mainly for costs related to facility lease obligations for previously closed branches and additional losses on the disposal of remaining surplus equipment related to these locations. Our European car rental business incurred employee termination benefits costs associated with the migration of work to the European shared service center and the creation of two regions to manage our country operations. Additionally, our European car rental business recognized a loss on sale of a building due to reduced office space needs resulting from headcount reductions. During the quarter, restructuring charges included employee termination liabilities covering approximately 300 employees globally.
For the three months ended September 30, 2009, our consolidated statement of operations included restructuring charges relating to the initiatives discussed above of $35.7 million which was composed of $18.8 million of involuntary termination benefits, $11.2 million in facility closures and lease obligation costs, $2.7 million in asset impairment charges, $0.8 million in pension liability settlements, $0.8 million in relocation and $1.4 million of other restructuring charges. The after-tax effect of the restructuring charges reduced diluted earnings per share by $0.07 for the three months ended September 30, 2009.
For the nine months ended September 30, 2009, our consolidated statement of operations included restructuring charges relating to the initiatives discussed above of $87.2 million which was composed of $37.4 million of involuntary termination benefits, $23.2 million in facility closures and lease obligation costs, $8.7 million in asset impairment charges, $6.9 million in consulting costs, $4.5 million in lease termination costs, $2.3 million in relocation costs, $1.7 million in contract termination costs and $2.5 million of other restructuring charges. The after-tax effect of the restructuring charges increased diluted loss per share by $0.19 for the nine months ended September 30, 2009.
For the three months ended September 30, 2008, our consolidated statement of operations included restructuring charges relating to the initiatives discussed above of $74.9 million, which was composed of $38.5 million of involuntary termination benefits, $23.5 million in asset impairment charges, $7.9 million in facility lease obligations, $2.2 million in consulting costs, $0.2 million in pension settlement loss and $2.6 million of other restructuring charges. The after-tax effect of the restructuring charges reduced diluted earnings per share by $0.16 for the three months ended September 30, 2008.
For the nine months ended September 30, 2008, our consolidated statement of operations included restructuring charges relating to the initiatives discussed above of $127.2 million, which was composed of $62.5 million of involuntary termination benefits, $34.1 million in asset impairment charges, $11.6 million in facility lease obligations, $9.6 million in consulting costs, $1.2 million in pension settlement loss, and $8.2 million of other restructuring charges. The after-tax effect of the restructuring charges reduced diluted earnings per share by $0.27 for the nine months ended September 30, 2008.
Additional efficiency and cost saving initiatives may be developed during the fourth quarter of 2009 and in 2010. 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 September 30, | ||||||||
---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | |||||||
By Caption: |
|||||||||
Direct operating |
$ | 16.5 | $ | 55.8 | |||||
Selling, general and administrative |
19.2 | 19.1 | |||||||
Total |
$ | 35.7 | $ | 74.9 | |||||
26
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
|
Nine months ended September 30, | ||||||||
---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | |||||||
By Caption: |
|||||||||
Direct operating |
$ | 51.7 | $ | 87.2 | |||||
Selling, general and administrative |
35.5 | 40.0 | |||||||
Total |
$ | 87.2 | $ | 127.2 | |||||
|
Three months ended September 30, | ||||||||
---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | |||||||
By Segment: |
|||||||||
Car rental |
$ | 25.4 | $ | 36.4 | |||||
Equipment rental |
9.1 | 36.6 | |||||||
Other reconciling items |
1.2 | 1.9 | |||||||
Total |
$ | 35.7 | $ | 74.9 | |||||
|
Nine months ended September 30, | ||||||||
---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | |||||||
By Segment: |
|||||||||
Car rental |
$ | 50.3 | $ | 64.7 | |||||
Equipment rental |
28.9 | 55.0 | |||||||
Other reconciling items |
8.0 | 7.5 | |||||||
Total |
$ | 87.2 | $ | 127.2 | |||||
Our condensed consolidated balance sheet as of September 30, 2009, included accruals relating to the restructuring program of $36.5 million. We expect to pay substantially all of the remaining restructuring obligations by the end of the second quarter 2010. The following table sets forth the activity affecting the accrual during the nine months ended September 30, 2009 (in millions of dollars):
|
Involuntary Termination Benefits |
Pension and Post Retirement Expense |
Consultant Costs |
Other | Total | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance as of January 1, 2009 |
$ | 43.4 | $ | 0.5 | $ | | $ | 16.4 | $ | 60.3 | |||||||
Charges incurred |
37.5 | 0.8 | 6.9 | 42.0 | 87.2 | ||||||||||||
Cash payments |
(55.9 | ) | | (6.7 | ) | (18.8 | ) | (81.4 | ) | ||||||||
Other(1) |
(1.1 | ) | (1.3 | ) | (0.1 | ) | (27.1 | ) | (29.6 | ) | |||||||
Balance as of September 30, 2009 |
$ | 23.9 | $ | | $ | 0.1 | $ | 12.5 | $ | 36.5 | |||||||
Note 13Financial Instruments
GAAP establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs other than the quoted prices in active markets that are observable either directly or indirectly; and (Level 3)
27
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
Cash and Cash Equivalents and Restricted Cash
Fair value approximates the amount indicated on the balance sheet at September 30, 2009 because of the short-term maturity of these instruments. Money market accounts, the fair value of which at September 30, 2009, is measured using Level 1 inputs, totaling $345.0 million and $275.6 million are included in "Cash and cash equivalents" and "Restricted cash," respectively.
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. The aggregate fair value of all debt at September 30, 2009 approximated $10,631.3 million, compared to its aggregate carrying value of $10,512.5 million. The aggregate fair value of all debt at December 31, 2008 approximated $7,968.3 million, compared to its aggregate carrying value of $11,033.9 million.
Derivative Instruments and Hedging Activities
The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2009 and December 31, 2008 (in millions of dollars):
|
Fair Value of Derivative Instruments(1) | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Asset Derivatives(2) | Liability Derivatives(2) | |||||||||||||
|
September 30, 2009 |
December 31, 2008 |
September 30, 2009 |
December 31, 2008 |
|||||||||||
Derivatives designated as hedging instruments under ASC 815: |
|||||||||||||||
HVF interest rate swaps |
$ | | $ | | $ | 15.5 | $ | 134.5 | |||||||
Derivatives not designated as hedging instruments under ASC 815: |
|||||||||||||||
Gasoline swaps |
1.7 | | | | |||||||||||
Interest rate caps |
9.3 | 0.3 | 6.1 | 0.3 | |||||||||||
Foreign exchange options |
0.1 | 0.6 | | | |||||||||||
Total derivatives not designated as hedging instruments under ASC 815 |
11.1 | 0.9 | 6.1 | 0.3 | |||||||||||
Total derivatives |
$ | 11.1 | $ | 0.9 | $ | 21.6 | $ | 134.8 | |||||||
28
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
|
Amount of Gain or (Loss) Recognized in Other Comprehensive Income on Derivative (Effective Portion) |
Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion) |
Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion) |
|||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Three months ended September 30, | |||||||||||||||||||
|
2009 | 2008 | 2009 | 2008 | 2009 | 2008 | ||||||||||||||
Derivatives in ASC 815 Cash Flow Hedging Relationship: |
||||||||||||||||||||
HVF interest rate swaps |
$ | (3.5 | ) | $ | (8.0 | ) | $ | (22.4) | (1) | $ | | $ | | $ | (2.8 | ) |
|
Amount of Gain or (Loss) Recognized in Other Comprehensive Income on Derivative (Effective Portion) |
Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion) |
Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion) |
|||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Nine months ended September 30, | |||||||||||||||||||
|
2009 | 2008 | 2009 | 2008 | 2009 | 2008 | ||||||||||||||
Derivatives in ASC 815 Cash Flow Hedging Relationship: |
||||||||||||||||||||
HVF interest rate swaps |
$ | (15.5 | ) | $ | (9.6 | ) | $ | (52.2) | (1) | $ | | $ | | $ | (7.8 | ) |
Note: The location of both the effective portion reclassified from "Accumulated other comprehensive loss" into income and the ineffective portion recognized in income is in "Interest expense" on our consolidated statement of operations.
|
|
Amount of Gain or (Loss) Recognized in Income on Derivative |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
|
Three months ended September 30, |
|||||||||
|
Location of Gain or (Loss) Recognized on Derivative |
||||||||||
|
2009 | 2008 | |||||||||
Derivatives Not Designated as Hedging Instruments under ASC 815: |
|||||||||||
Gasoline swaps |
Direct operating | $ | 0.1 | $ | | ||||||
Interest rate caps |
Selling, general and administrative | (2.0 | ) | | |||||||
Foreign exchange options |
Selling, general and administrative | 0.1 | 0.2 | ||||||||
HIL swaptions |
Selling, general and administrative | | (15.0 | ) | |||||||
Total |
$ | (1.8 | ) | $ | (14.8 | ) | |||||
29
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
|
|
Amount of Gain or (Loss) Recognized in Income on Derivative |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
|
Nine months ended September 30, |
|||||||||
|
Location of Gain or (Loss) Recognized on Derivative |
||||||||||
|
2009 | 2008 | |||||||||
Derivatives Not Designated as Hedging Instruments under ASC 815: |
|||||||||||
Gasoline swaps |
Direct operating | $ | 5.0 | $ | | ||||||
Interest rate caps |
Selling, general and administrative | (2.0 | ) | | |||||||
Foreign exchange options |
Selling, general and administrative | 0.2 | 0.1 | ||||||||
HIL swaptions |
Selling, general and administrative | | 2.8 | ||||||||
Total |
$ | 3.2 | $ | 2.9 | |||||||
In connection with the Acquisition and the issuance of $3,550.0 million of floating rate U.S. Fleet Debt, our subsidiary HVF entered into certain interest rate swap agreements, or the "HVF Swaps," effective December 21, 2005, which qualify as cash flow hedging instruments in accordance with GAAP. These agreements mature at various terms, in connection with the scheduled maturity of the associated debt obligations, through November 2010. Under these agreements, until February 2009, HVF was paying monthly interest at a fixed rate of 4.5% per annum in exchange for monthly interest at one-month LIBOR, effectively transforming the floating rate U.S. Fleet Debt to fixed rate obligations. In March 2009, HVF made a cash payment to have the fixed rate on these swaps reset to the then current market rates of 0.872% and 1.25% for the swaps maturing in February 2010 and November 2010, respectively. $80.4 million of this payment was made to an affiliate of MLGPE which is a counterparty to the HVF Swaps. Concurrently with this payment, the hedging relationship was de-designated and the amount remaining in "Accumulated other comprehensive loss" associated with this cash flow hedging relationship was frozen and will be amortized into "Interest expense" over the respective terms of the associated debt in accordance with GAAP. We expect to amortize approximately $83.6 million from "Accumulated other comprehensive loss" into "Interest expense" over the next twelve months. Additionally, a new hedging relationship was designated between the HVF Swaps and the remaining $2,825.0 million of floating rate U.S. Fleet Debt, which also qualifies for cash flow hedge accounting in accordance with GAAP. Both at the inception of the hedge and on an ongoing basis, we measure ineffectiveness by comparing the fair value of the HVF Swaps and the fair value of hypothetical swaps, with similar terms, using the Hypothetical Method in accordance with GAAP. The hypothetical swaps represent a perfect hedge of the variability in interest payments associated with the U.S. Fleet Debt. Subsequent to the resetting of the swaps at current market rates, we anticipate that there will be no ineffectiveness in the hedging relationship because the critical terms of the HVF Swaps match the terms of the hypothetical swaps.
For the three and nine months ended September 30, 2009, we recorded an expense of $22.4 million and $52.2 million, respectively, in our consolidated statement of operations, in "Interest expense," associated with the amortization of the amount remaining in "Accumulated other comprehensive loss" associated with the de-designation of the cash flow hedging relationship described above. For the three and nine months ended September 30, 2008, we recorded an expense of $2.8 million and $7.8 million, respectively, in our consolidated statement of operations, in "Interest expense," associated with the ineffectiveness of the HVF Swaps. The ineffectiveness in 2008 resulted from a decline in the value of the HVF Swaps due to a decrease in forward interest rates along with a decrease in the time value component as we approached the maturity dates of the HVF Swaps. The effective portion of the change in fair value of the HVF Swaps is recorded in "Accumulated other comprehensive loss." As of
30
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
September 30, 2009 and December 31, 2008, the balance reflected in "Accumulated other comprehensive loss," net of tax, was a loss of $65.2 million (net of tax of $41.5 million) and a loss of $89.6 million (net of tax of $57.4 million), respectively. The fair values of the HVF Swaps were calculated using the income approach and applying observable market data (i.e. the 1-month LIBOR yield curve and credit default swap spreads).
In connection with the entrance into the HVF Swaps, Hertz entered into seven differential interest rate swap agreements, or the "differential swaps." These differential swaps were required to be put in place to protect the counterparties to the HVF Swaps in the event of an "amortization event" under the asset-backed notes agreements. In the event of an "amortization event," the amount by which the principal balance on the floating rate portion of the U.S. Fleet Debt is reduced, exclusive of the originally scheduled amortization, becomes the notional amount of the differential swaps and is transferred to Hertz. There was no payment associated with these differential swaps and their notional amounts are and will continue to be zero unless (1) there is an amortization event, which causes the amortization of the loan balance, or (2) the debt is prepaid.
An "event of bankruptcy" (as defined in the ABS Base Indenture) with respect to MBIA or Ambac would constitute an "amortization event" under the portion of the U.S. Fleet Debt facilities guaranteed by the affected insurer.
On September 12, 2008, a supplement was signed to the Indenture, dated as of August 1, 2006, between HVF and the Bank of New York Mellon Trust Company, N.A. This supplement created the Series 2008-1 Notes for issuance by HVF. In order to satisfy rating agency requirements related to its bankruptcy-remote status, HVF acquired an interest rate cap in an amount equal to the Series 2008-1 Notes maximum principal amount of $825.0 million with a strike rate of 7% and a term until August 15, 2011. HVF bought the cap on the date the supplement was signed for $0.4 million and in an associated transaction, Hertz sold an equal and opposite cap for $0.3 million. In connection with the issuance of the Series 2009-1 Notes, HVF caused the termination of the Series 2008-1 Notes, as well as both of the associated interest rate caps.
On September 18, 2009, HVF completed the closing of the Series 2009-1 Notes. In order to satisfy rating agency requirements related to its bankruptcy-remote status, HVF purchased an interest rate cap, for $11.7 million, with a maximum notional amount equal to the Series 2009-1 Notes maximum principal amount of $2.1 billion with a strike rate of 5% and a term until January 25, 2013. Additionally, Hertz sold a 5% interest rate cap, for $6.5 million, with a notional amount equal to 33.3% of the notional amount of the HVF cap through January 2012, and then subsequently with a matching notional amount to the HVF cap through its maturity date of January 25, 2013. The fair value of these interest rate caps was calculated using a discounted cash flow method and applying observable market data. 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.
In May 2006, in connection with the forecasted issuance of the permanent take-out international asset-based facilities, our subsidiary HIL purchased two swaptions for €3.3 million, to protect itself from interest rate increases. These swaptions gave HIL the right, but not the obligation, to enter into three year interest rate swaps, based on a total notional amount of €600 million at an interest rate of 4.155%. The swaptions were renewed twice in 2007, prior to their scheduled expiration dates of March 15, 2007 and September 5, 2007, at a total cost of €2.7 million, and expired on June 5, 2008. The fair values of the HIL swaptions were calculated using the income approach and applying observable market data. On June 4, 2008, these swaptions were sold for a realized gain of €9.4 million (or $14.8 million). Additionally, on June 4, 2008, HIL purchased two new swaptions for €8.6 million, to protect itself from interest rate increases associated with the International ABS Fleet Financing Facility, which closed on July 24, 2008.
31
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
These swaptions were based on an underlying transaction with a notional amount of €600 million at an interest rate of 4.25%. As of September 30, 2008, the fair value of the swaptions was €5.3 million (or $7.6 million), which is reflected in our condensed consolidated balance sheet in "Prepaid expenses and other assets." During the three and nine months ended September 30, 2008, the fair value adjustments related to these swaptions were gains of $15.0 million (unrealized loss on the new swaptions) and a gain of $2.8 million ($14.8 million realized gain on the sale of the old swaptions and a net $12.0 million unrealized loss on the old and new swaptions), respectively, which were recorded in our consolidated statement of operations in "Selling, general and administrative" expenses. On October 10, 2008, the outstanding swaptions were terminated and Hertz received a €1.9 million payment from counterparties.
We purchase unleaded gasoline at prevailing market rates. In January 2009, we began a program to manage our exposure to changes in prices through the use of derivative commodity instruments. In July 2009, we executed additional swaps to cover a portion of our exposure through June 2010. We presently hedge a portion of our overall gasoline purchases with commodity swaps and have contracts in place that settle on a monthly basis. As of September 30, 2009, our outstanding commodity instruments totaled approximately 7.7 million gallons. The fair value of these commodity instruments was calculated using a discounted cash flow method and applying observable market data. 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 September 30, 2009, were approximately $0.3 million and we limit counterparties to financial institutions that have strong credit ratings. As of September 30, 2009 and December 31, 2008, the total notional amount of these foreign exchange options was $2.5 million and $15.1 million, respectively, maturing through February 2010, and the fair value of all outstanding foreign exchange options, was approximately $0.1 million and $0.5 million, respectively, which was recorded in our condensed consolidated balance sheet in "Prepaid expenses and other assets." The fair value of the foreign exchange options was calculated using a discounted cash flow method and applying observable market data. 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 a result, the forward contracts have no material impact on our results of operations. As of September 30, 2009, the total notional amount of these forward contracts was $926.1 million, maturing within two months.
On October 1, 2006, we designated our Senior Euro Notes 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 September 30, 2009 and December 31, 2008, losses of $23.9 million (net of tax of $17.9 million) and $15.7 million (net of tax of $12.6 million), respectively, attributable to the translation
32
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
of our Senior Euro Notes into the U.S. dollar are recorded in our condensed consolidated balance sheet in "Accumulated other comprehensive loss."
Note 14Related Party Transactions
Relationship with Hertz Investors, Inc. and the Sponsors
Other than as disclosed below, in the three months ended September 30, 2009, there were no material changes to our relationship with Hertz Investors, Inc. or the Sponsors.
Director Compensation Policy
Several of our directors are employed by or affiliated with our Sponsors. In October 2006, our Board of Directors approved a compensation policy for the members of our board, our "Director Compensation Policy". Pursuant to the Director Compensation Policy our directors who are not our employees each received a $150,000 annual retainer fee, of which 40% (i.e., $60,000) was payable in cash and 60% (i.e., $90,000) was payable in the form of stock options having a Black-Scholes value equal to such dollar amount.
In May 2009, the Board of Directors approved an amendment to the Director Compensation Policy, whereby the equity portion of the annual retainer fee will now be paid in the form of shares of Hertz Holdings common stock instead of options. In addition, the Board of Directors also passed a resolution reducing the annual retainer fee by 20% for the period from May 2009 to May 2010 or such earlier date as Hertz Holdings fully restores the salary reductions of its officers. In the fall of 2009, Hertz Holdings fully restored the salary reductions of its officers and accordingly, the annual retainer fee for the Board of Directors will also be restored on a going forward basis.
For the three and nine months ended September 30, 2009, we recognized $0.4 million and $1.2 million, respectively, of expense relating to the Director Compensation Policy in our consolidated statement of operations in "Selling, general and administrative" expenses. For the three and nine months ended September 30, 2008, we recognized $0.5 million and $1.4 million, respectively, of expense relating to the Director Compensation Policy in our consolidated statement of operations in "Selling, general and administrative" expenses.
Other Sponsor Relationships
In May and June 2009, Merrill Lynch & Co., or "ML," an affiliate of one of our Sponsors, MLGPE, acted as an underwriter in the Common Stock Public Offering and in the Convertible Debt Public Offering, for which they received customary fees and expenses.
In May 2009 we entered into subscription agreements with investment funds affiliated with CD&R and Carlyle to purchase an additional 32,101,182 shares of our common stock at a price of $6.23 per share (the same price per share paid to us by the underwriters in the Common Stock Public Offering) with proceeds to us of approximately $200.0 million. The Private Offering closed on July 7, 2009 and the 32,101,182 shares of our common stock were issued to CD&R and Carlyle affiliated investment funds on the same date. Giving effect to the Common Stock Public Offering and the Private Offering the Sponsors' ownership percentage in us is approximately 51%.
Banc of America Securities LLC, an affiliate of MLGPE acted as one of the joint lead bookrunners in the issuance of the Series 2009-2 Notes, for which they received customary fees and expenses.
33
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
In the second quarter of 2007, we were advised by ML, that between November 17, 2006, and April 19, 2007, ML engaged in principal trading activity in our common stock. Some of those purchases and sales of our common stock should have been reported to the SEC on Form 4, but were not reported. ML and certain of its affiliates have engaged in additional principal trading activity since that time. ML and certain of its affiliates have since filed amended or additional reports on Form 4 disclosing the current number of shares of our common stock held by ML and its affiliates. To date, ML has paid to us approximately $4.9 million for its "short-swing" profit liability resulting from its principal trading activity that is subject to recovery by us under Section 16 of the Securities Exchange Act of 1934, as amended. In the event that ML or its affiliates (including private investment funds managed by certain private equity-arm affiliates of ML) sell additional shares of our common stock in the future, this amount may change. In 2008 and 2007, we recorded $0.1 million, net of tax and $2.9 million (net of tax of $1.9 million), respectively, in our condensed consolidated balance sheet in "Additional paid-in capital." In. addition, because ML may be deemed to be an affiliate of Hertz Holdings and there was no registration statement in effect with respect to its sale of shares during this period, certain of these sales may have been made in violation of Section 5 of the Securities Act of 1933, as amended.
Note 15Commitments and Contingencies
Off-Balance Sheet Commitments
As of September 30, 2009 and December 31, 2008, the following guarantees (including indemnification commitments) were issued and outstanding:
Indemnifications
In the ordinary course of business, we execute contracts involving indemnifications standard in the relevant industry and indemnifications specific to a transaction such as the sale of a business. These indemnifications 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 indemnities 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 indemnifications and have accrued for expected losses that are probable and estimable. The types of indemnifications for which payments are possible include the following:
Sponsors; Directors
Hertz has entered into customary indemnification agreements with us, the Sponsors and our stockholders affiliated with the Sponsors, pursuant to which Hertz Holdings and Hertz will indemnify the Sponsors, our 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 also entered into indemnification agreements with each of our directors. We do not believe that these indemnifications are reasonably likely to have a material impact on us.
34
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
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 September 30, 2009 and December 31, 2008, the aggregate amounts accrued for environmental liabilities including liability for environmental indemnities, reflected in our condensed consolidated balance sheet in "Accrued liabilities" were $2.1 million and $2.2 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
Below is a brief description of those legal proceedings that we believe may result in a material contingency. For a detailed description of these legal proceedings please see Note 10 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."
Other Consumer or Supplier Class Actions
On August 15, 2006, Davis Landscape, Ltd., individually and on behalf of all others similarly situated, v. Hertz Equipment Rental Corporation, was filed in the United States District Court for the District of New Jersey. Davis Landscape, Ltd., purported to be a nationwide class action on behalf of all persons and business entities who rented equipment from HERC and who paid a Loss Damage Waiver, or "LDW," charge. The plaintiff sought an unspecified amount of statutory damages under the New Jersey Consumer Fraud Act, an unspecified amount of compensatory damages with the return of all LDW charges paid, declaratory relief and an injunction prohibiting HERC from engaging in acts with respect to the LDW charge that violated the New Jersey Consumer Fraud Act. The complaint also asked for attorneys' fees and costs.
On October 13, 2006, Janet Sobel, Daniel Dugan, PhD. and Lydia Lee, individually and on behalf of all others similarly situated v. The Hertz Corporation and Enterprise Rent-A-Car Company was filed in the United States District Court for the District of Nevada. Sobel purported to be a nationwide class action on behalf of all persons who rented cars from Hertz or Enterprise Rent-A-Car, or "Enterprise," at airports in Nevada and whom Hertz or Enterprise charged
35
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
airport concession recovery fees. The plaintiffs sought an unspecified amount of compensatory damages, restitution of any charges found to be improper and an injunction prohibiting Hertz and Enterprise from quoting or charging any of the fees prohibited by Nevada law. The complaint also asked for attorneys' fees and costs.
On May 3, 2007, Fun Services of Kansas City, Inc., individually and as the representative of a class of similarly-situated persons, v. Hertz Equipment Rental Corporation was commenced in the District Court of Wyandotte County, Kansas. Fun Services purported to be a class action on behalf of all persons in Kansas and throughout the United States who on or after four years prior to the filing of the action were sent facsimile messages of advertising materials relating to the availability of property, goods or services by HERC and who did not provide express permission for sending such faxes. In August 2009, the District Court of Johnson County, Kansaswhere the case is now venuedissued an Order Granting Joint Motion to Stay Proceedings pending the outcome of another Telephone Consumer Protection Act case that is currently before the Kansas Supreme Court.
On November 14, 2007, Michael Shames, Gary Gramkow, on behalf of themselves and on behalf of all persons similarly situated v. The Hertz Corporation, Dollar Thrifty Automotive Group, Inc., Avis Budget Group, Inc., Vanguard Car Rental USA, Inc., Enterprise Rent-A-Car Company, Fox Rent A Car, Inc., Coast Leasing Corp., The California Travel and Tourism Commission, and Caroline Beteta was commenced in the United States District Court for the Southern District of California. Shames purported to be a class action brought on behalf of all individuals or entities that purchased rental car services from a defendant at a California situs airport after January 1, 2007. The complaint alleged that the defendants agreed to charge consumers a 2.5% assessment and not to compete with respect to this assessment, while misrepresenting that this assessment is owed by consumers, rather than the rental car defendants, to the California Travel and Tourism Commission. The complaint also alleges that defendants agreed to pass through to consumers a fee known as the Airport Concession Fee, which fee had previously been required to be included in the rental car defendants' individual base rates, without reducing their base rates. Based on these allegations, the complaint sought treble damages, disgorgement, injunctive relief, interest, attorneys' fees, and costs.
On December 13, 2007, Thomas J. Comiskey, on behalf of himself and all others similarly situated v. Avis Budget Group, Inc., Vanguard Car Rental USA, Inc., Dollar Thrifty Automotive Group, Inc., Advantage Rent-A-Car, Inc., Avalon Global Group, The Hertz Corporation, Enterprise Rent-A-Car Company, Fox Rent A Car, Inc., Beverly Hills Rent-A-Car, Inc., Rent4Less, Inc., Autorent Car Rental, Inc., Pacific Rent-A-Car, Inc., ABC Rent-A-Car, Inc., The California Travel and Tourism Commission, and Dale E. Bonner was commenced in the United States District Court for the Central District of California. Comiskey purported to be a class action brought on behalf of all persons and entities that have paid an assessment since the inception of the Passenger Car Rental Industry Tourism Assessment Program in California on January 1, 2007. On December 14, 2007, Isabel S. Cohen filed in the United States District Court for the Central District of California a complaint virtually identical to that filed in Comiskey. In February 2008, the court consolidated Comiskey and Cohen, captioned the consolidated action "In re Tourism Assessment Fee Litigation," and ordered the plaintiffs to serve a single
36
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
consolidated class action complaint. In March 2009, the plaintiffs filed a Notice of Appeal with the U.S. Court of Appeals for the Ninth Circuit seeking to overturn the District Court's entry of final judgment and the District Court's order denying plaintiffs' Ex Parte Motion for Leave to File a Motion for Relief from Judgment Pursuant to FRCP 59(e) and/or for Leave to File a Second Amended Complaint.
We believe that we have meritorious defenses in the foregoing matters and will defend ourselves vigorously.
In addition, 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. In the aggregate, we can be expected to expend material sums to defend and settle public liability and property damage actions and claims or to pay judgments resulting from them.
In addition to the foregoing, various legal actions, claims and governmental inquiries and proceedings are pending or may be instituted or asserted in the future against us and our subsidiaries. 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 above, could be decided unfavorably to us or any of our subsidiaries involved. Although the amount of liability with respect to these matters cannot be ascertained, potential liability in excess of related accruals is not expected to materially affect our consolidated financial position, results of operations or cash flows, but it could be material in the period in which it is recorded.
Note 16Earnings (Loss) Per Share
Basic earnings (loss) per share is computed based upon the weighted average number of common shares outstanding. Diluted earnings (loss) per share is computed based upon the weighted average number of common shares outstanding plus the effect of all potentially dilutive common stock equivalents, except when the effect would be anti-dilutive.
37
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
The following table sets forth the computation of basic and diluted earnings (loss) per share (in millions, except per share amounts):
|
Three Months Ended September 30, |
|||||||
---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | ||||||
Basic and diluted earnings per share: |
||||||||
Numerator: |
||||||||
Net income attributable to Hertz Global Holdings, Inc. and Subsidiaries' common stockholders |
$ | 64.5 | $ | 17.7 | ||||
Denominator: |
||||||||
Weighted average shares used in basic computation |
407.4 | 322.9 | ||||||
Add: Stock options, RSUs and PSUs |
8.0 | | ||||||
Add: Potential issuance of common stock upon conversion of Convertible Senior Notes |
9.8 | | ||||||
Weighted average shares used in diluted computation |
425.2 | 322.9 | ||||||
Earnings per share attributable to Hertz Global Holdings, Inc. and Subsidiaries' common stockholders, basic |
$ | 0.16 | $ | 0.05 | ||||
Earnings per share attributable to Hertz Global Holdings, Inc. and Subsidiaries' common stockholders, diluted |
$ | 0.15 | $ | 0.05 |
|
Nine Months Ended September 30, |
|||||||
---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | ||||||
Basic and diluted earnings (loss) per share: |
||||||||
Numerator: |
||||||||
Income (loss) attributable to Hertz Global Holdings, Inc. and Subsidiaries' common stockholders |
$ | (95.1 | ) | $ | 11.2 | |||
Denominator: |
||||||||
Weighted average shares used in basic and diluted computation |
358.5 | 322.6 | ||||||
Earnings (loss) per share attributable to Hertz Global Holdings, Inc. and Subsidiaries' common stockholders, basic |
$ | (0.27 | ) | $ | 0.03 | |||
Earnings (loss) per share attributable to Hertz Global Holdings, Inc. and Subsidiaries' common stockholders, diluted |
$ | (0.27 | ) | $ | 0.03 |
Diluted earnings (loss) per share computations for the three and nine months ended September 30, 2009 excluded the weighted-average impact of the assumed exercise of approximately 8.1 million and 22.6 million shares, respectively, of stock options, RSUs and PSUs, because such impact would be anti-dilutive. Additionally, for the nine months ended September 30, 2009, there was no impact to the diluted earnings (loss) per share computations associated with the Convertible Senior Notes, because such impact would be anti-dilutive. Diluted earnings per share computations for the three and nine months ended September 30, 2008 excluded the weighted average impact of the assumed exercise of approximately 16.4 million stock options because such impact would be anti-dilutive.
38
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited
Note 17Subsequent Events
We have evaluated subsequent events through the time of filing these financial statements with the SEC on November 6, 2009.
In October 2009 HVF issued $1.2 billion in aggregate principal amount of Series 2009-2 Notes. The 3 year notes carry a 4.26% coupon (4.30% yield) and the 5 year notes carry a 5.29% coupon (5.35% yield) with expected final maturities in 2013 and 2015, respectively. The advance rate on the notes is approximately 66%. In general, we will use the Series 2009-2 Notes to replace the 2005 Notes as they mature in 2010.
39
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion and analysis provides information that management believes to be relevant to understanding our consolidated financial condition and results of operations. This discussion should be read in conjunction 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 including, without limitation, those concerning our liquidity and capital resources, contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 concerning our results of operations; economic performance; financial condition; management forecasts; efficiencies, cost savings and opportunities to increase productivity and profitability; income and margins; liquidity and availability to us of additional or continued sources of financing for our revenue earning equipment; financial instability of insurance companies providing financial guarantees for asset-backed securities; anticipated growth; financial instability of the manufacturers of our cars; economies of scale; the economy; future economic performance; our ability to maintain profitability during adverse economic cycles and unfavorable external events; fuel costs; future acquisitions and dispositions; litigation; potential and contingent liabilities; management's plans; taxes; tangible and intangible asset impairment charges; and refinancing of existing debt. Because such statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. These statements often include words such as "believes," "expects," "projects," "anticipates," "intends," "plans," "estimates," "seeks," "will," "may," "should," "forecasts" or similar expressions.
Forward-looking statements are not guarantees of performance or results and by their nature are subject to inherent risks and uncertainties. We caution you therefore that you should not rely on these forward-looking statements. You should understand that the risks and uncertainties discussed in "Part II"Item 1ARisk Factors" in Hertz Global Holdings, Inc.'s Quarterly Report on the Form 10-Q for the quarterly period ended June 30, 2009, or "Second Quarter Form 10-Q," and in "Part IItem 1ARisk Factors" included in Hertz Global Holdings, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed with the United States Securities and Exchange Commission, or the "SEC," on March 3, 2009, or our "Form 10-K," could affect our future results and could cause those results or other outcomes to differ materially from those expressed or implied in our forward-looking statements.
Any forward-looking information contained in this Report speaks only as of the date of this Report. We undertake no obligation to update or revise any forward-looking statements to reflect new information, changed circumstances or unanticipated events.
Unless the context otherwise requires, in this Report, (i) "we," "us," "our," the "Registrant" and the "Company" mean Hertz Global Holdings, Inc. (previously known as CCMG Holdings, Inc.), or "Hertz Holdings," and its consolidated subsidiaries, (ii) "Hertz" means The Hertz Corporation, (iii) "HERC" means Hertz Equipment Rental Corporation, our wholly owned subsidiary, and our various other wholly owned international subsidiaries that conduct our industrial, construction and material handling equipment rental business, (iv) "cars" means cars and light trucks (including sport utility vehicles and, outside North America, light commercial vehicles), (v) "program cars" mean cars purchased by car rental companies under repurchase or guaranteed depreciation programs, (vi) "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 (vii) "equipment" means industrial, construction and material handling equipment.
40
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
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 Holdings was incorporated in Delaware in 2005 and had no operations prior to the Acquisition (as defined below).
On
December 21, 2005, investment funds associated with or designated by:
or collectively the "Sponsors," acquired all of Hertz's common stock from Ford Holdings LLC for aggregate consideration of $4,379 million in cash, debt refinanced or assumed of $10,116 million and transaction fees and expenses of $447 million. We refer to the acquisition of all of Hertz's common stock by the Sponsors as the "Acquisition."
In November 2006, we completed our initial public offering of 88,235,000 shares of our common stock. In June 2007, the Sponsors completed a secondary public offering of 51,750,000 shares of their Hertz Holdings common stock.
In January 2009, Bank of America Corporation, or "Bank of America," acquired Merrill Lynch & Co., the parent company of MLGPE. Accordingly, Bank of America is now an indirect beneficial owner of our common stock held by MLGPE and certain of its affiliates.
2009 Hertz Holdings Offerings
In May and June 2009, we completed a follow-on public offering of 52,900,000 shares of our common stock at a price of $6.50 per share with proceeds before underwriting discounts and offering expenses of approximately $343.9 million, or the "Common Stock Public Offering."
In addition, in May 2009 we entered into subscription agreements with investment funds affiliated with CD&R and Carlyle to purchase an additional 32,101,182 shares of our common stock at a price of $6.23 per share (the same price per share paid to us by the underwriters in the Common Stock Public Offering) with proceeds to us of approximately $200.0 million, or the "Private Offering." The Private Offering closed on July 7, 2009 and the 32,101,182 shares of our common stock were issued to the CD&R and Carlyle affiliated investment funds on the same date. Giving effect to the Common Stock Public Offering and the Private Offering, the Sponsors' ownership percentage in us is approximately 51%.
In May and June 2009, we also completed a public offering of an aggregate principal amount of $474,755,000 of 5.25% convertible senior notes due 2014, or the "Convertible Debt Public Offering."
We used the net proceeds from the Common Stock Public Offering, the Private Offering and the Convertible Debt Public Offering, collectively the "2009 Hertz Holdings Offerings," to increase our liquidity and for general corporate purposes, including the repayment of principal amounts with respect to maturing debt under the fleet financing facilities of certain of our consolidated subsidiaries.
See Note 7 and Note 11 to the Notes to our condensed consolidated financial statements included in this Report.
Overview of Our Business
We are engaged principally in the business of renting cars and renting equipment.
41
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Our
revenues primarily are derived from rental and related charges and consist of:
Our equipment rental business also derives revenues from the sale of new equipment and consumables.
Our
expenses primarily consist of:
The car and equipment rental industries are significantly influenced by general economic conditions. In the final three months of 2008 and continuing in the nine months ended September 30, 2009, both the car and equipment rental markets experienced unprecedented declines due to the precipitous slowdown in consumer spending as well as significantly reduced demand for industrial and construction equipment. The car rental industry is also significantly influenced by developments in the travel industry, and, particularly, in airline passenger traffic while the equipment rental segment is being impacted by the difficult economic and business environment as investment in commercial construction and the industrial markets slow. The United States and international markets are currently experiencing a significant decline in economic activities, including a tightening of the credit markets, reduced airline passenger traffic, reduced consumer spending and volatile fuel prices. These conditions are expected to continue through the remainder of 2009. During 2008 and the nine months ended September 30, 2009, this resulted in a rapid decline in the volume of car rental and equipment rental transactions, soft industry pricing and until only recently an increase in depreciation and fleet related costs as a percentage of revenues and lower residual values for the non-program cars and equipment that we sold. See "Item 1ARisk Factors" in our Form 10-K and our Second Quarter Form 10-Q.
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 also have a significant effect on our profitability depending on our ability to adjust pricing for these changes. We continue to have an overall strategy of increasing the proportion of non-program cars we have in our worldwide fleet. However in 2008, given the recent economic downturn described above, we sold a higher proportion of non-program cars during the third
42
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
quarter, when the used car market is traditionally stronger, to reduce exposure to residual value declines in the fourth quarter. Accordingly, for the year ended December 31, 2008, the percentage of non-program cars in the U.S. fleet decreased from 58% to 46% as compared to the year ended December 31, 2007; however, the percentage of non-program cars increased slightly internationally and for the year ended December 31, 2008, the percentage of non-program cars in our international fleet was 41%, compared to 35% for the year ended December 31, 2007. In the U.S., as of September 30, 2009, the percentage of non-program cars was 66% as compared to 59% as of September 30, 2008. Internationally, as of September 30, 2009, the percentage of non-program cars was 58%, compared to 55% as of September 30, 2008.
Our per car vehicle depreciation costs in the United States for 2008 increased approximately 6% from our per car vehicle depreciation costs for 2007 and increased approximately 20% in Europe year-over-year. In the nine months ended September 30, 2009, our per car vehicle depreciation costs decreased 1% and increased 16% in the United States and Europe, respectively, as compared to the prior year period. We expect our per car vehicle depreciation costs for the full year of 2009 in the United States to be slightly lower than 2008 and in Europe to be higher than 2008. 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.
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 minimum concession fees, rent, insurance, and administrative overhead, remain fixed and cannot be adjusted for seasonal demand.
As part of our ongoing effort to implement our strategy of reducing operating costs, we are evaluating our workforce and operations and making adjustments, including headcount reductions and business process re-engineering to optimize work flow at rental locations and maintenance facilities as well as streamlining our back-office operations and evaluating potential outsourcing opportunities. When we make adjustments to our workforce and operations, we may incur incremental expenses that delay the benefit of a more efficient workforce and operating structure, but we believe that increasing our operating efficiency and reducing the costs associated with the operation of our business are important to our long-term competitiveness. For further information on the actions taken in 2007 and 2008, see Note 12 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."
In January 2009, we announced that, as part of a comprehensive plan to further decrease costs and as a result of reduced rental demand, we were reducing our global workforce by more than 4,000 employees beginning in the fourth quarter 2008 and continuing through the first quarter of 2009, more than half of whom are not eligible for severance benefits. We incurred job reductions in the car and equipment rental
43
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
businesses, corporate and support areas, and in all geographies, with an emphasis on eliminating non-customer facing jobs. Related to these location closures and continued cost reduction initiatives, we incurred restructuring charges for employee termination liabilities covering approximately 1,500 employee separations in the fourth quarter of 2008.
During the first and second quarters of 2009, our equipment rental business incurred charges mainly for losses on disposal of surplus equipment and recognition of facility lease obligations related to previously announced U.S. branch closures that were completed during the quarters. Our North American and European car rental businesses incurred charges mainly for facility lease obligations related to previously announced off-airport location closures that were completed during the quarters. In the first quarter of 2009, our European car rental business also eliminated certain specialty rental equipment as a future cost reduction initiative and incurred related lease termination costs. The first and second quarter 2009 restructuring charges included employee termination liabilities covering approximately 500 and 600 employees, respectively.
During the third quarter of 2009, our equipment rental business incurred charges mainly for costs related to facility lease obligations for previously closed branches and additional losses on the disposal of remaining surplus equipment related to these locations. Our European car rental business incurred employee termination benefits costs associated with the migration of work to the European shared service center and the creation of two regions to manage our country operations. Additionally, our European car rental business recognized a loss on sale of a building due to reduced office space needs resulting from headcount reductions. During the quarter, restructuring charges included employee termination liabilities covering approximately 300 employees globally.
For the three and nine months ended September 30, 2009, our consolidated statement of operations included restructuring charges relating to the initiatives discussed above of $35.7 million and $87.2 million, respectively. For the three and nine months ended September 30, 2008, our consolidated statement of operations included restructuring charges relating to the initiatives discussed above of $74.9 million and $127.2 million, respectively.
Additional efficiency and cost saving initiatives may be developed during the remainder of 2009 and in 2010. 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.
For the nine months ended September 30, 2009, we experienced a 9.3% decrease in transaction days versus the prior period in the United States, and rental rate revenue per transaction day, or "RPD," was down 2.5%. During the nine months ended September 30, 2009, in our European operations, we experienced a low double digit decline in transaction days and our car rental RPD was below the level of our RPD during the nine months ended September 30, 2008. For the nine months ended September 30, 2009, based on publicly available information, we believe some U.S. car rental brands experienced declines in transaction days with varying RPD changes compared to the nine months ended September 30, 2008.
Our U.S. off-airport operations represented $722.8 million and $758.2 million of our total car rental revenues in the nine months ended September 30, 2009 and 2008, respectively. As of September 30, 2009, we had 1,643 off-airport locations. In the balance of 2009 and subsequent years, our strategy will include selected openings of new off-airport locations, the disciplined evaluation of existing locations and the pursuit of same-store sales growth. Our strategy 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
44
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
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.
HERC experienced lower equipment rental volumes and pricing worldwide for the nine months ended September 30, 2009 compared to the prior year period. During the nine months ended September 30, 2009, based on publicly available information, we believe the majority of the U.S. equipment rental industry experienced reduced or decreased volumes and downward pricing. During the nine months ended September 30, 2009 (excluding additions relating to acquisitions), HERC had net decreases of five U.S. locations and 14 European locations, an increase of one location in China and no change in the number of locations in Canada.
45
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Three Months Ended September 30, 2009 Compared with Three Months Ended September 30, 2008
Summary
The following table sets forth the percentage of total revenues represented by the various line items set forth in our consolidated statements of operations for the three months ended September 30, 2009 and 2008 (in millions of dollars):
|
|
|
Percentage of Revenues | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Three Months Ended September 30, |
Three Months Ended September 30, |
|||||||||||||
|
2009 | 2008 | 2009 | 2008 | |||||||||||
Revenues: |
|||||||||||||||
Car rental |
$ | 1,724.9 | $ | 1,946.1 | 84.5 | % | 80.3 | % | |||||||
Equipment rental |
280.3 | 432.9 | 13.7 | 17.9 | |||||||||||
Other |
36.2 | 42.9 | 1.8 | 1.8 | |||||||||||
Total revenues |
2,041.4 | 2,421.9 | 100.0 | 100.0 | |||||||||||
Expenses: |
|||||||||||||||
Direct operating |
1,118.6 | 1,351.8 | 54.8 | 55.8 | |||||||||||
Depreciation of revenue earning equipment |
499.1 | 595.0 | 24.4 | 24.5 | |||||||||||
Selling, general and administrative |
179.7 | 234.3 | 8.8 | 9.7 | |||||||||||
Interest expense |
169.3 | 220.1 | 8.3 | 9.1 | |||||||||||
Interest and other income, net |
(1.1 | ) | (5.5 | ) | | (0.2 | ) | ||||||||
Total expenses |
1,965.6 | 2,395.7 | 96.3 | 98.9 | |||||||||||
Income before income taxes |
75.8 | 26.2 | 3.7 | 1.1 | |||||||||||
Provision for taxes on income |
(6.9 | ) | (2.9 | ) | (0.3 | ) | (0.2 | ) | |||||||
Net income |
68.9 | 23.3 | 3.4 | 0.9 | |||||||||||
Less: Net income attributable to noncontrolling interest |
(4.4 | ) | (5.6 | ) | (0.2 | ) | (0.2 | ) | |||||||
Net income attributable to Hertz Global Holdings, Inc. and Subsidiaries' common stockholders |
$ | 64.5 | $ | 17.7 | 3.2 | % | 0.7 | % | |||||||
46
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 September 30, 2009 and 2008:
|
Three Months Ended or as of September 30, |
||||||||
---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | |||||||
Selected Car Rental Operating Data: |
|||||||||
Worldwide number of transactions (in thousands) |
6,482 | 7,133 | |||||||
Domestic |
4,629 | 5,052 | |||||||
International |
1,853 | 2,081 | |||||||
Worldwide transaction days (in thousands)(a) |
33,456 | 35,525 | |||||||
Domestic |
21,705 | 22,613 | |||||||
International |
11,751 | 12,912 | |||||||
Worldwide rental rate revenue per transaction day(b) |
$ | 43.98 | $ | 44.84 | |||||
Domestic |
$ | 43.47 | $ | 45.01 | |||||
International |
$ | 44.90 | $ | 44.55 | |||||
Worldwide average number of company-operated cars during the period |
445,200 | 490,700 | |||||||
Domestic |
285,500 | 312,400 | |||||||
International |
159,700 | 178,300 | |||||||
Adjusted pre-tax income (in millions of dollars)(c) |
$ | 258.3 | $ | 167.1 | |||||
Worldwide revenue earning equipment, net (in millions of dollars) |
$ | 7,157.1 | $ | 8,472.7 | |||||
Selected Worldwide Equipment Rental Operating Data: |
|||||||||
Rental and rental related revenue (in millions of dollars)(d) |
$ | 248.9 | $ | 374.7 | |||||
Same store revenue growth, including growth initiatives(e) |
(33.4 | )% | (5.5 | )% | |||||
Average acquisition cost of rental equipment operated during the period (in millions of dollars) |
$ | 2,833.7 | $ | 3,411.7 | |||||
Adjusted pre-tax income (in millions of dollars)(c) |
$ | 25.2 | $ | 81.1 | |||||
Revenue earning equipment, net (in millions of dollars) |
$ | 1,893.1 | $ | 2,411.6 |
47
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
revenue to our rental rate revenue and rental rate revenue per transaction day (based on December 31, 2008 foreign exchange rates) for the three months ended September 30, 2009 and 2008 (in millions of dollars, except as noted):
|
Three Months Ended September 30, |
|||||||
---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | ||||||
Car rental revenue per statement of operations |
$ | 1,724.9 | $ | 1,946.1 | ||||
Non-rental rate revenue |
(219.6 | ) | (262.8 | ) | ||||
Foreign currency adjustment |
(34.0 | ) | (90.4 | ) | ||||
Rental rate revenue |
$ | 1,471.3 | $ | 1,592.9 | ||||
Transaction days (in thousands) |
33,456 | 35,525 | ||||||
Rental rate revenue per transaction day (in whole dollars) |
$ | 43.98 | $ | 44.84 |
|
Three Months Ended September 30, 2009 |
||||||||
---|---|---|---|---|---|---|---|---|---|
|
Car Rental | Equipment Rental | |||||||
Income before income taxes |
$ | 174.2 | $ | 3.0 | |||||
Adjustments: |
|||||||||
Purchase accounting(1) |
10.4 | 10.8 | |||||||
Non-cash debt charges(2) |
37.7 | 2.2 | |||||||
Restructuring charges |
25.4 | 9.1 | |||||||
Restructuring related charges(3) |
10.6 | 0.1 | |||||||
Adjusted pre-tax income |
$ | 258.3 | $ | 25.2 | |||||
|
Three Months Ended September 30, 2008 |
|||||||
---|---|---|---|---|---|---|---|---|
|
Car Rental | Equipment Rental | ||||||
Income before income taxes |
$ | 85.8 | $ | 26.9 | ||||
Adjustments: |
||||||||
Purchase accounting(1) |
9.9 | 14.8 | ||||||
Non-cash debt charges(2) |
13.5 | 2.6 | ||||||
Restructuring charges |
36.4 | 36.6 | ||||||
Restructuring related charges(3) |
8.3 | 0.8 | ||||||
Derivative loss(4) |
15.0 | | ||||||
Vacation accrual adjustment(5) |
(1.8 | ) | (0.6 | ) | ||||
Adjusted pre-tax income |
$ | 167.1 | $ | 81.1 | ||||
48
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
|
Three Months Ended September 30, |
|||||||
---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | ||||||
Equipment rental revenue per statement of operations |
$ | 280.3 | $ | 432.9 | ||||
Equipment sales and other revenue |
(26.3 | ) | (44.8 | ) | ||||
Foreign currency adjustment |
(5.1 | ) | (13.4 | ) | ||||
Rental and rental related revenue |
$ | 248.9 | $ | 374.7 | ||||
Revenues
|
Three Months Ended September 30, |
|
|
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in millions of dollars) |
2009 | 2008 | $ Change | % Change | |||||||||||
Revenues: |
|||||||||||||||
Car rental |
$ | 1,724.9 | $ | 1,946.1 | $ | (221.2 | ) | (11.4 | )% | ||||||
Equipment rental |
280.3 | 432.9 | (152.6 | ) | (35.3 | )% | |||||||||
Other |
36.2 | 42.9 | (6.7 | ) | (15.4 | )% | |||||||||
Total revenues |
$ | 2,041.4 | $ | 2,421.9 | $ | (380.5 | ) | (15.7 | )% | ||||||
Total revenues decreased 15.7% (13.4% excluding the effects of foreign currency) for the three months ended September 30, 2009 compared to the three months ended September 30, 2008.
Revenues from our car rental operations decreased 11.4%, primarily as a result of a 5.8% decrease in car rental transaction days worldwide, the effects of foreign currency translation of approximately $48.5 million, lower RPD described below and decreases of $41.1 million and $13.3 million in refueling fees and airport concession recovery fees, respectively.
49
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
RPD for worldwide car rental for the three months ended September 30, 2009 declined 1.9% from the same period in 2008, due to a decline in U.S. RPD of 3.4%, partly offset by an increase in International RPD of 0.8%. U.S. airport RPD declined by 2.1% and U.S. off-airport RPD declined by 4.1%.
Revenues from our equipment rental operations decreased 35.3%, primarily due to a 28.7% decrease in equipment rental volume, an 8.6% decline in pricing and the effects of foreign currency translation of approximately $5.7 million.
Revenues from all other sources decreased 15.4%, primarily due to a decrease in car rental licensee revenue of $5.6 million, including the effects of foreign currency translation of approximately $1.4 million.
Expenses
|
Three Months Ended September 30, |
|
|
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in millions of dollars) |
2009 | 2008 | $ Change | % Change | |||||||||||
Expenses: |
|||||||||||||||
Direct operating |
$ | 1,118.6 | $ | 1,351.8 | $ | (233.2 | ) | (17.3 | )% | ||||||
Depreciation of revenue earning equipment |
499.1 | 595.0 | (95.9 | ) | (16.1 | )% | |||||||||
Selling, general and administrative |
179.7 | 234.3 | (54.6 | ) | (23.3 | )% | |||||||||
Interest expense |
169.3 | 220.1 | (50.8 | ) | (23.1 | )% | |||||||||
Interest and other income, net |
(1.1 | ) | (5.5 | ) | 4.4 | (80.6 | )% | ||||||||
Total expenses |
$ | 1,965.6 | $ | 2,395.7 | $ | (430.1 | ) | (18.0 | )% | ||||||
Total expenses decreased 18.0%, and total expenses as a percentage of revenues decreased from 98.9% for the three months ended September 30, 2008 to 96.3% for the three months ended September 30, 2009.
Direct operating expenses decreased 17.3% as a result of decreases in fleet related expenses, other direct operating expenses and personnel related expenses.
Fleet related expenses decreased $96.7 million, or 27.6%. The decrease was primarily related to a decrease in fleet levels as a result of decreased worldwide rental volume which resulted in decreases in gasoline costs of $54.4 million, vehicle damage and maintenance costs of $15.6 million, self-insurance expense of $14.1 million and equipment rental delivery costs of $6.6 million. These decreases include the effects of foreign currency translation of approximately $9.7 million.
Other direct operating expenses decreased $89.7 million, or 14.8%. The decrease was primarily related to a decrease in fleet levels as a result of decreased worldwide rental volume which resulted in decreases in restructuring and restructuring related costs of $33.9 million, equipment rental cost of goods sold of $14.8 million, field incentive compensation of $12.5 million, concession fees in our car rental operations of $12.2 million, facility expenses of $10.8 million and charge card fees of $4.0 million. These decreases include the effects of foreign currency translation of approximately $15.0 million.
Personnel related expenses decreased $46.8 million, or 11.9%. The decrease was primarily related to a decrease in wages and benefits related to restructuring of $53.7 million, including the effects of foreign currency translation of approximately $7.4 million, partly offset by an increase in incentive compensation of $9.9 million.
50
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Depreciation of revenue earning equipment for our car rental operations of $425.4 million for the three months ended September 30, 2009 decreased 15.6% from $504.2 million for the three months ended September 30, 2008. The decrease was primarily due to a decrease in average fleet operated, higher net proceeds received in excess of book value on the disposal of used vehicles and the effects of foreign currency translation of approximately $11.1 million. Depreciation of revenue earning equipment in our equipment rental operations of $73.7 million for the three months ended September 30, 2009 decreased 18.8% from $90.8 million for the three months ended September 30, 2008. The decrease was primarily due to a 16.9% decrease in the average acquisition cost of rental equipment operated during the period, higher net proceeds received in excess of book value on the disposal of used equipment and the effects of foreign currency translation of approximately $1.2 million.
Selling, general and administrative expenses decreased 23.3%, due to decreases in advertising expenses, administrative expenses and sales promotion expenses, including the effects of foreign currency translation of approximately $5.1 million.
Advertising expenses decreased $26.8 million, or 45.4%, primarily due to decreased media advertising.
Administrative expenses decreased $19.1 million, or 14.1%, primarily due to decreases in administrative salaries and related costs of $14.5 million, losses on our derivatives of $13.0 million and restructuring and restructuring related charges of $4.1 million, including the effects of foreign currency translation of approximately $3.8 million, partly offset by an increase in management incentive compensation of $11.5 million.
Sales promotion expenses decreased $8.7 million, or 21.5%, primarily related to a decrease in sales salaries and commissions of $5.2 million, including the effects of foreign currency translation of approximately $1.2 million.
Interest expense decreased 23.1%, primarily due to a decrease in the weighted average debt outstanding, a decrease in the weighted average interest rate on our borrowings, and the effects of foreign currency translation of approximately $2.7 million.
Interest and other income, net decreased $4.4 million due a decrease in interest income as a result of lower cash balances during the period.
Adjusted Pre-Tax Income
Adjusted pre-tax income for our car rental segment was $258.3 million for the three months ended September 30, 2009, an increase of 54.6% from $167.1 million for the three months ended September 30, 2008. The increase was primarily due to strong cost management performance, including higher revenues per vehicle, lower overall fleet costs and staffing/wage levels commensurate with rental volumes. Adjustments to our car rental segment income before income taxes on a GAAP basis for the three months ended September 30, 2009 and 2008, totaled $84.1 million and $81.3 million, respectively. See footnote c to the table under "Three Months Ended September 30, 2009 Compared with Three Months Ended September 30, 2008Summary" for a summary and description of these adjustments. Adjusted pre-tax income for our car rental segment as a percent of its revenues increased from 8.4% in the three months ended September 30, 2008 to 14.7% in the three months ended September 30, 2009.
Adjusted pre-tax income for our equipment rental segment was $25.2 million for the three months ended September 30, 2009, compared with $81.1 million for the three months ended September 30, 2008. The
51
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
decrease was primarily due to decreases in volume and pricing, partly offset by strong cost management performance. Adjustments to our equipment rental segment income before income taxes on a GAAP basis for the three months ended September 30, 2009 and 2008, totaled $22.2 million and $54.2 million, respectively. See footnote c to the table under "Three Months Ended September 30, 2009 Compared with Three Months Ended September 30, 2008Summary" for a summary and description of these adjustments. Adjusted pre-tax income for our equipment rental segment as a percent of its revenues decreased from 18.7% in the three months ended September 30, 2008 to 9.0% in the three months ended September 30, 2009.
The ratio of adjusted pre-tax income to revenues for our two segments has historically reflected the different environments in which they operate, although the historical difference has been reversed for the three months ended September 30, 2009 because of the more rapid decline in revenues in our equipment rental segment. In general, our infrastructure costs are higher within our car rental segment due to the number and type of locations in which it operates and the corresponding headcount. Within our equipment rental segment, our revenue earning equipment generates lower depreciation expense due to its longer estimated useful life.
Provision for Taxes on Income, Net income attributable to Noncontrolling interests and Net income attributable to Hertz Holdings, Inc. and Subsidiaries' common stockholders
|
Three Months Ended September 30, |
|
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in millions of dollars) |
2009 | 2008 | $ Change | % Change | |||||||||
Income before income taxes |
$ | 75.8 | $ | 26.2 | $ | 49.6 | 189.6 | % | |||||
Provision for taxes on income |
(6.9 | ) | (2.9 | ) | (4.0 | ) | 137.9 | % | |||||
Net income |
68.9 | 23.3 | 45.6 | 195.9 | % | ||||||||
Less: Net income attributable to noncontrolling interests |
(4.4 | ) | (5.6 | ) | 1.2 | (21.2 | )% | ||||||
Net income attributable to Hertz Holdings, Inc. and Subsidiaries' common stockholders |
$ | 64.5 | $ | 17.7 | $ | 46.8 | 265.3 | % | |||||
The provision for taxes on income increased $4.0 million for the three months ended September 30, 2009, primarily due to the increase in income before income taxes and an increase in losses in certain non-U.S. jurisdictions for which a tax benefit cannot be recognized, partially offset by an increase in discrete benefits. The effective tax rate for the three months ended September 30, 2009 was 9.0% compared to 10.9% for the three months ended September 30, 2008. The decrease in tax rate was primarily attributable to tax benefits, discrete to the quarter, recorded on lower pre-tax income.
Net income attributable to noncontrolling interests decreased 21.2% due to a decrease in our majority-owned subsidiary Navigation Solutions, L.L.C.'s net income in the three months ended September 30, 2009 as compared to the three months ended September 30, 2008.
The net income attributable to Hertz Holdings, Inc. and Subsidiaries' common stockholders increased 265.3% primarily due strong cost management performance, partly offset by lower rental volume and pricing in our worldwide car and equipment rental, as well as the net effect of other contributing factors noted above. The impact of changes in exchange rates on the net income was mitigated by the fact that not only foreign revenues but also most foreign expenses were incurred in local currencies.
52
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Nine Months Ended September 30, 2009 Compared with Nine Months Ended September 30, 2008
Summary
The following table sets forth the percentage of total revenues represented by the various line items set forth in our consolidated statements of operations for the nine months ended September 30, 2009 and 2008 (in millions of dollars):
|
|
|
Percentage of Revenues | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Nine Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||
|
2009 | 2008 | 2009 | 2008 | |||||||||||
Revenues: |
|||||||||||||||
Car rental |
$ | 4,436.7 | $ | 5,340.0 | 82.8 | % | 79.3 | % | |||||||
Equipment rental |
836.4 | 1,286.8 | 15.6 | 19.1 | |||||||||||
Other |
87.7 | 109.5 | 1.6 | 1.6 | |||||||||||
Total revenues |
5,360.8 | 6,736.3 | 100.0 | 100.0 | |||||||||||
Expenses: |
|||||||||||||||
Direct operating |
3,062.5 | 3,801.8 | 57.1 | 56.4 | |||||||||||
Depreciation of revenue earning equipment |
1,468.2 | 1,658.7 | 27.4 | 24.6 | |||||||||||
Selling, general and administrative |
488.0 | 595.8 | 9.1 | 8.9 | |||||||||||
Interest expense |
498.3 | 637.1 | 9.3 | 9.5 | |||||||||||
Interest and other income, net |
(52.6 | ) | (20.4 | ) | (1.0 | ) | (0.3 | ) | |||||||
Total expenses |
5,464.4 | 6,673.0 | 101.9 | 99.1 | |||||||||||
Income (loss) before income taxes |
(103.6 | ) | 63.3 | (1.9 | ) | 0.9 | |||||||||
(Provision) benefit for taxes on income |
19.9 | (36.0 | ) | 0.3 | (0.5 | ) | |||||||||
Net income (loss) |
(83.7 | ) | 27.3 | (1.6 | ) | 0.4 | |||||||||
Less: Net income attributable to noncontrolling interest |
(11.4 | ) | (16.1 | ) | (0.2 | ) | (0.2 | ) | |||||||
Net income (loss) attributable to Hertz Global Holdings, Inc. and Subsidiaries' common stockholders |
$ | (95.1 | ) | $ | 11.2 | (1.8 | )% | 0.2 | % | ||||||
53
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 nine months ended or as of September 30, 2009 and 2008:
|
Nine Months Ended or as of September 30, |
||||||||
---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | |||||||
Selected Car Rental Operating Data: |
|||||||||
Worldwide number of transactions (in thousands) |
18,392 | 21,158 | |||||||
Domestic |
13,300 | 15,368 | |||||||
International |
5,092 | 5,790 | |||||||
Worldwide transaction days (in thousands)(a) |
89,293 | 99,041 | |||||||
Domestic |
60,163 | 66,353 | |||||||
International |
29,130 | 32,688 | |||||||
Worldwide rental rate revenue per transaction day(a)(b) |
$ | 42.89 | $ | 43.85 | |||||
Domestic |
$ | 42.33 | $ | 43.41 | |||||
International |
$ | 44.04 | $ | 44.74 | |||||
Worldwide average number of company-operated cars during the period |
410,500 | 467,700 | |||||||
Domestic |
272,100 | 310,900 | |||||||
International |
138,400 | 156,800 | |||||||
Adjusted pre-tax income (in millions of dollars)(a)(c) |
$ | 368.4 | $ | 355.8 | |||||
Worldwide revenue earning equipment, net (in millions of dollars) |
$ | 7,157.1 | $ | 8,472.7 | |||||
Selected Worldwide Equipment Rental Operating Data: |
|||||||||
Rental and rental related revenue (in millions of dollars)(a)(d) |
$ | 750.9 | $ | 1,103.2 | |||||
Same store revenue growth, including growth initiatives(a) |
(28.9 | )% | (3.3 | )% | |||||
Average acquisition cost of rental equipment operated during the period (in millions of dollars) |
$ | 2,888.8 | $ | 3,452.4 | |||||
Adjusted pre-tax income (in millions of dollars)(a)(c) |
$ | 50.6 | $ | 225.9 | |||||
Revenue earning equipment, net (in millions of dollars) |
$ | 1,893.1 | $ | 2,411.6 |
|
Nine Months Ended September 30, |
|||||||
---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | ||||||
Car rental revenue per statement of operations |
$ | 4,436.7 | $ | 5,340.0 | ||||
Non-rental rate revenue |
(590.6 | ) | (740.2 | ) | ||||
Foreign currency adjustment |
(16.7 | ) | (257.0 | ) | ||||
Rental rate revenue |
$ | 3,829.4 | $ | 4,342.8 | ||||
Transaction days (in thousands) |
89,293 | 99,041 | ||||||
Rental rate revenue per transaction day (in whole dollars) |
$ | 42.89 | $ | 43.85 |
54
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
|
Nine Months Ended September 30, 2009 |
||||||||
---|---|---|---|---|---|---|---|---|---|
|
Car Rental | Equipment Rental | |||||||
Income (loss) before income taxes |
$ | 164.4 | $ | (23.5 | ) | ||||
Adjustments: |
|||||||||
Purchase accounting(1) |
29.7 | 38.1 | |||||||
Non-cash debt charges(2) |
91.9 | 6.8 | |||||||
Restructuring charges |
50.3 | 28.9 | |||||||
Restructuring related charges(3) |
27.8 | 0.3 | |||||||
Third-party bankruptcy accrual(4) |
4.3 | | |||||||
Adjusted pre-tax income |
$ | 368.4 | $ | 50.6 | |||||
|
Nine Months Ended September 30, 2008 |
||||||||
---|---|---|---|---|---|---|---|---|---|
|
Car Rental | Equipment Rental | |||||||
Income before income taxes |
$ | 209.4 | $ | 118.5 | |||||
Adjustments: |
|||||||||
Purchase accounting(1) |
30.5 | 42.4 | |||||||
Non-cash debt charges(2) |
37.9 | 8.0 | |||||||
Restructuring charges |
64.7 | 55.0 | |||||||
Restructuring related charges(3) |
16.1 | 2.0 | |||||||
Derivative gain(5) |
(2.8 | ) | | ||||||
Adjusted pre-tax income |
$ | 355.8 | $ | 225.9 | |||||
55
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
|
Nine Months Ended September 30, |
|||||||
---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | ||||||
Equipment rental revenue per statement of operations |
$ | 836.4 | $ | 1,286.8 | ||||
Equipment sales and other revenue |
(82.2 | ) | (137.4 | ) | ||||
Foreign currency adjustment |
(3.3 | ) | (46.2 | ) | ||||
Rental and rental related revenue |
$ | 750.9 | $ | 1,103.2 | ||||
Revenues
|
Nine Months Ended September 30, |
|
|
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in millions of dollars) |
2009 | 2008 | $ Change | % Change | ||||||||||||
Revenues: |
||||||||||||||||
Car rental |
$ | 4,436.7 | $ | 5,340.0 | $ | (903.3 | ) | (16.9 | )% | |||||||
Equipment rental |
836.4 | 1,286.8 | (450.4 | ) | (35.0 | )% | ||||||||||
Other |
87.7 | 109.5 | (21.8 | ) | (19.9 | )% | ||||||||||
Total revenues |
$ | 5,360.8 | $ | 6,736.3 | $ | (1,375.5 | ) | (20.4 | )% | |||||||
Total revenues decreased 20.4% (16.7% excluding the effects of foreign currency) for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008.
Revenues from our car rental operations decreased 16.9%, primarily as a result of a 9.8% decrease in car rental transaction days worldwide, the effects of foreign currency translation of approximately $208.8 million, lower RPD described below and decreases of $120.9 million and $56.0 million in refueling fees and airport concession recovery fees, respectively.
RPD for worldwide car rental for the nine months ended September 30, 2009 declined 2.2% from the same period in 2008, due to declines in U.S. and International RPD of 2.5% and 1.6%, respectively. U.S. airport RPD decreased 1.4% and U.S. off-airport RPD declined by 2.5%.
Revenues from our equipment rental operations decreased 35.0%, primarily due to a 28.0% decrease in equipment rental volume, a 6.7% decline in pricing and the effects of foreign currency translation of approximately $37.2 million.
Revenues from all other sources decreased 19.9%, primarily due to a decrease in car rental licensee revenue of $19.9 million, including the effects of foreign currency translation of approximately $5.9 million.
56
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Expenses
|
Nine Months Ended September 30, |
|
|
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in millions of dollars) |
2009 | 2008 | $ Change | % Change | |||||||||||
Expenses: |
|||||||||||||||
Direct operating |
$ | 3,062.5 | $ | 3,801.8 | $ | (739.3 | ) | (19.4 | )% | ||||||
Depreciation of revenue earning equipment |
1,468.2 | 1,658.7 | (190.5 | ) | (11.5 | )% | |||||||||
Selling, general and administrative |
488.0 | 595.8 | (107.8 | ) | (18.1 | )% | |||||||||
Interest expense |
498.3 | 637.1 | (138.8 | ) | (21.8 | )% | |||||||||
Interest and other income, net |
(52.6 | ) | (20.4 | ) | (32.2 | ) | 157.2 | % | |||||||
Total expenses |
$ | 5,464.4 | $ | 6,673.0 | $ | (1,208.6 | ) | (18.1 | )% | ||||||
Total expenses decreased 18.1%, and total expenses as a percentage of revenues increased from 99.1% for the nine months ended September 30, 2008 to 101.9% for the nine months ended September 30, 2009.
Direct operating expenses decreased 19.4% as a result of decreases in fleet related expenses, personnel related expenses and other direct operating expenses.
Fleet related expenses decreased $300.2 million, or 31.4%. The decrease was primarily related to a decrease in fleet levels as a result of decreased worldwide rental volume which resulted in decreases in gasoline costs of $137.6 million, vehicle damage and maintenance costs of $79.6 million, self-insurance expense of $47.7 million, equipment rental delivery costs of $22.3 million and vehicle taxes and registration fees of $20.3 million. These decreases include the effects of foreign currency translation of approximately $46.5 million.
Personnel related expenses decreased $230.2 million, or 19.0%. The decrease was primarily related to decreases in wages and benefits related to restructuring of $208.5 million, a decrease in incentive compensation of $10.8 million and a decrease in reservation costs of $10.6 million. These decreases include the effects of foreign currency translation of approximately $41.0 million.
Other direct operating expenses decreased $208.9 million, or 12.8%. The decrease was primarily related to a decrease in fleet levels as a result of decreased worldwide rental volume which resulted in decreases in concession fees in our car rental operations of $45.6 million, equipment rental cost of goods sold of $41.5 million, facility expenses of $27.7 million, restructuring and restructuring related charges of $21.1 million, commission fees of $15.8 million, charge card fees of $15.7 million and re-rent expense of $13.5 million. These decreases include the effects of foreign currency translation of approximately $78.5 million.
Depreciation of revenue earning equipment for our car rental operations of $1,220.6 million for the nine months ended September 30, 2009 decreased 12.8% from $1,399.7 million for the nine months ended September 30, 2008. The decrease was primarily due to a decrease in average fleet operated, higher net proceeds received in excess of book value on the disposal of used vehicles and the effects of foreign currency translation of approximately $57.8 million, partly offset by a $14.4 million net increase in depreciation in certain of our car rental operations resulting from changes in depreciation rates to reflect changes in the estimated residual value of vehicles. Depreciation of revenue earning equipment in our equipment rental operations of $247.6 million for the nine months ended September 30, 2009 decreased 4.4% from $259.0 million for the nine months ended September 30, 2008. The decrease was primarily due to a 16.3% decrease in the average acquisition cost of rental equipment operated during the period
57
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
and the effects of foreign currency translation of approximately $8.0 million, partly offset by lower net proceeds received in excess of book value on the disposal of used equipment.
Selling, general and administrative expenses decreased 18.1%, due to decreases in advertising expenses, administrative expenses and sales promotion expenses, including the effects of foreign currency translation of approximately $23.7 million.
Advertising expenses decreased $43.5 million, or 32.8%, primarily due to decreased media advertising and the effects of foreign currency translation of approximately $2.8 million.
Administrative expenses decreased $32.7 million, or 9.7%, primarily due to decreases in administrative salaries and related costs of $44.1 million and restructuring and restructuring related charges of $3.3 million, including the effects of foreign currency translation of approximately $14.4 million, partly offset by an increase in the loss on derivatives of $4.8 million and an increase in management incentive compensation of $3.0 million.
Sales promotion expenses decreased $31.6 million, or 25.0%, primarily related to a decrease in sales salaries and commissions of $19.4 million, including the effects of foreign currency translation of approximately $6.5 million.
Interest expense decreased 21.8%, primarily due to a decrease in the weighted average debt outstanding, a decrease in the weighted average interest rate on our borrowings, and the effects of foreign currency translation of approximately $14.7 million.
Interest and other income, net increased $32.2 million due to a gain of $48.5 million, net of transaction costs, recorded in connection with the buyback of portions of our Senior Notes and Senior Subordinated Notes, partly offset by a decrease in interest income of $16.3 million as a result of lower cash balances during the period.
Adjusted Pre-Tax Income
Adjusted pre-tax income for our car rental segment was $368.4 million for the nine months ended September 30, 2009, an increase of 3.5% from $355.8 million for the nine months ended September 30, 2008. The increase was primarily due to strong cost management performance, including higher revenues per vehicle, lower overall fleet costs and staffing/wage levels commensurate with rental volumes. Adjustments to our car rental segment income before income taxes on a GAAP basis for the nine months ended September 30, 2009 and 2008, totaled $204.0 million and $146.4 million, respectively. See footnote c to the table under "Nine Months Ended September 30, 2009 Compared with Nine Months Ended September 30, 2008Summary" for a summary and description of these adjustments. Adjusted pre-tax income for our car rental segment as a percent of its revenues increased from 6.5% in the nine months ended September 30, 2008 to 8.2% in the nine months ended September 30, 2009.
Adjusted pre-tax income for our equipment rental segment was $50.6 million for the nine months ended September 30, 2009, compared with $225.9 million for the nine months ended September 30, 2008. The decrease was primarily due to decreases in volume and pricing and lower net proceeds received in excess of book value on the disposal of used equipment, partly offset by strong cost management performance. Adjustments to our equipment rental segment income (loss) before income taxes on a GAAP basis for the nine months ended September 30, 2009 and 2008, totaled $74.1 million and $107.4 million, respectively. See footnote c to the table under "Nine Months Ended September 30, 2009 Compared with Nine Months Ended September 30, 2008Summary" for a summary and
58
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
description of these adjustments. Adjusted pre-tax income for our equipment rental segment as a percent of its revenues decreased from 17.5% in the nine months ended September 30, 2008 to 6.0% in the nine months ended September 30, 2009.
The ratio of adjusted pre-tax income (loss) to revenues for our two segments has historically reflected the different environments in which they operate, although the difference has been eliminated for the nine months ended September 30, 2009 because of the more rapid decline in revenues in our equipment rental segment. In general, our infrastructure costs are higher within our car rental segment due to the number and type of locations in which it operates and the corresponding headcount. Within our equipment rental segment, our revenue earning equipment generates lower depreciation expense due to its longer estimated useful life.
(Provision) benefit for Taxes on Income, Net income attributable to Noncontrolling interests and Net income (loss) attributable to Hertz Holdings, Inc. and Subsidiaries' common stockholders
|
Nine Months Ended September 30, |
|
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in millions of dollars) |
2009 | 2008 | $ Change | % Change | |||||||||
Income (loss) before income taxes |
$ | (103.6 | ) | $ | 63.3 | $ | (166.9 | ) | (263.6 | )% | |||
(Provision) benefit for taxes on income |
19.9 | (36.0 | ) | 55.9 | (155.2 | )% | |||||||
Net income (loss) |
(83.7 | ) | 27.3 | (111.0 | ) | (406.0 | )% | ||||||
Less: Net income attributable to noncontrolling interests |
(11.4 | ) | (16.1 | ) | 4.7 | (29.3 | )% | ||||||
Net income (loss) attributable to Hertz Holdings, Inc. and Subsidiaries' common stockholders |
$ | (95.1 | ) | $ | 11.2 | $ | (106.3 | ) | (948.7 | )% | |||
The benefit for taxes on losses for the nine months ended September 30, 2009 was $19.9 million and the provision for taxes on income for the nine months ended September 30, 2008 was $36.0 million. The change was primarily due to pretax losses and discrete benefits in the nine months ended September 30, 2009 as compared to pretax income and discrete charges for nine months ended September 30, 2008. This is partially offset by an increase in losses in certain non-U.S. jurisdictions for which a tax benefit cannot be recognized. The effective tax rate for the nine months ended September 30, 2009 was 19.2% compared to 56.8% for the nine months ended September 30, 2008. The change in tax rates was generally due to the factors noted above.
Net income attributable to noncontrolling interests decreased 29.3% due to a decrease in our majority-owned subsidiary Navigation Solutions, L.L.C.'s net income in the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008.
The net loss attributable to Hertz Holdings, Inc. and Subsidiaries' common stockholders increased $106.3 million primarily due to lower rental volume and pricing in our worldwide car and equipment rental operations, as well as the net effect of other contributing factors noted above. The impact of changes in exchange rates on the net loss was mitigated by the fact that not only foreign revenues but also most foreign expenses were incurred in local currencies.
Liquidity and Capital Resources
As of September 30, 2009, we had cash and cash equivalents of $926.7 million, an increase of $332.5 million from December 31, 2008. As of September 30, 2009, we had $404.7 million of restricted
59
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
cash to be used for the purchase of revenue earning vehicles and other specified uses under our Fleet Debt facilities, our like-kind exchange programs and to satisfy certain of our self-insurance regulatory reserve requirements. The decrease in restricted cash of $326.7 million from December 31, 2008 to September 30, 2009, primarily related to payments to reduce fleet debt and the timing of purchases and sales of revenue earning vehicles.
Our domestic and foreign operations are funded by cash provided by operating activities and by extensive financing arrangements maintained by us in the United States, Europe, Puerto Rico, Australia, New Zealand, Canada and Brazil. Net cash provided by operating activities during the nine months ended September 30, 2009 was $1,307.2 million, a decrease of $622.7 million from the nine months ended September 30, 2008. The decrease was primarily due to a net loss, changes in working capital and a decrease in depreciation of revenue earning equipment, partly offset by increases in deferred taxes and the amortization and ineffectiveness of cash flow hedges.
Our primary use of cash in investing activities is for the acquisition of revenue earning equipment, which consists of cars and equipment. Net cash used in investing activities during the nine months ended September 30, 2009 was $843.8 million, a decrease of $2,048.2 million from the nine months ended September 30, 2008. The change is primarily due to decreases in revenue earning equipment expenditures, partly offset by decreases in proceeds from the disposal of revenue earning equipment and an increase in the change in restricted cash. For the nine months ended September 30, 2009, our expenditures for revenue earning equipment were $5,194.5 million and our proceeds from the disposal of such equipment were $4,162.7 million, as compared to $8,888.9 million and $6,010.3 million, respectively, for the nine months ended September 30, 2008. For the nine months ended September 30, 2009, our capital expenditures for property and non-revenue earning equipment were $69.0 million and our proceeds from the disposal of such equipment were $6.1 million, as compared to $152.9 million and $62.3 million, respectively, for the nine months ended September 30, 2008.
For the nine months ended September 30, 2009, we experienced a decreased level of net expenditures for revenue earning equipment and property and equipment compared to the nine months ended September 30, 2008. This net decrease was primarily due to a decrease in year over year expenditures for revenue earning equipment related to decreased volume, partly offset by a year over year decrease in disposal proceeds for revenue earning equipment. For the full year 2009, we expect the level of net expenditures for revenue earning equipment, property and non-revenue earning equipment to be lower than that of the full year 2008. See "Capital Expenditures" below.
Our car rental and equipment rental operations are seasonal businesses with decreased levels of business in the winter months and typically heightened activity during the spring and summer. This is particularly true of our airport car rental operations and our equipment rental operations. To accommodate increased demand, we maintain a larger fleet by holding vehicles and equipment and purchasing additional fleet which increases our financing requirements in the second and third quarters of the year. These seasonal financing needs are funded by increasing the utilization of our various corporate and fleet credit facilities and the variable funding notes portion of our U.S. Fleet Debt facilities as defined in Note 3 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." As business demand moderates during the winter, we reduce our fleet accordingly and dispose of vehicles and equipment. The disposal proceeds are used to reduce debt.
In April 2009, we made aggregate open market repurchases, at a discount, of approximately $68.0 million and $81.5 million in face value of our Senior Notes and Senior Subordinated Notes, respectively. In addition, we and our affiliates have repurchased and may in the future repurchase or
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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
otherwise retire debt of our subsidiaries and take other steps to reduce such debt or otherwise improve our balance sheet. These actions include open market purchases, negotiated repurchases and other retirements of outstanding debt. The amount of debt that may be repurchased or otherwise retired, if any, will depend on market conditions, trading levels of such debt from time to time, our cash position and other considerations.
In response to the economic downturn, in 2008 we implemented aggressive strategic actions to reduce costs and improve liquidity. These actions included reducing wage and benefit costs through significant headcount reductions, accelerating fleet deletions and delaying additions to right-size the fleet to current demand levels and rationalizing our location footprint by closing a number of locations. We have developed additional plans for the remainder of 2009 in an effort to mitigate the impact of continued revenue declines on our results of operations, including reducing costs further through the additional headcount reductions that we announced in 2009, continuing to right-size our car and equipment rental fleet in response to the economic conditions, continued re-engineering of our processes, increasing prices and continuing to reduce the cost of acquiring our car and equipment rental fleet, among other actions.
As of September 30, 2009, we had $10,348.4 million of total indebtedness outstanding. Cash paid for interest during the nine months ended September 30, 2009, was $556.9 million, net of amounts capitalized. Accordingly, we are highly leveraged and a substantial portion of our liquidity needs arise from debt service on indebtedness incurred in connection with the Acquisition and from the funding of our costs of operations and capital expenditures.
In 2009 we have also significantly addressed the fact that we had approximately $4.2 billion of our fleet debt that matures in 2010. We began addressing these liquidity needs at the end of the second quarter and the beginning of the third quarter by completing the 2009 Hertz Holdings Offerings, pursuant to which we received approximately $990 million of net proceeds, after deducting underwriting discounts and commissions and before offering expenses payable by Hertz Holdings. $200 million of the $990 million of net proceeds were received during the three months ended September 30, 2009.
On September 18, 2009, HVF, a bankruptcy-remote special purpose entity wholly-owned by Hertz, completed the closing of a new variable funding note facility referred to as the Series 2009-1 Variable Funding Rental Car Asset Backed Notes, or the "Series 2009-1 Notes." The facility has an expected maturity date of January 2012 and a 3 month controlled amortization period beginning in November 2011. The aggregate principal amount of such facility is $2.1 billion and such facility is available to HVF on a revolving basis until the controlled amortization period begins in November 2011. As of September 30, 2009, we had an aggregate principal amount outstanding of $300.0 million of Series 2009-1 Notes. This amount was subsequently paid in October 2009.
Immediately prior to the issuance of the Series 2009-1 Notes, HVF caused the termination of the series supplements and note purchase agreements relating to its Series 2005-3 Variable Funding Rental Car Asset Backed Notes, or the "Series 2005-3 Notes," Series 2005-4 Variable Funding Rental Car Asset Backed Notes, or the "Series 2005-4 Notes," and Series 2008-1 Variable Funding Rental Car Asset Backed Notes, or the "Series 2008-1 Notes," or the "Terminated VFNs," and caused the repayment and cancellation in full of the Terminated VFNs. The Terminated VFNs had expected final maturity dates ranging from November 2009 to November 2010 and we had an aggregate of approximately $2.0 billion of total capacity (prior to borrowing base or other limitations) under the Terminated VFNs. In effect we replaced the $2.0 billion of total capacity under the Terminated VFNs with the $2.1 billion of capacity that we have under the Series 2009-1 Notes while extending the expected final maturity date to January 2012.
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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
In October 2009 HVF issued $1.2 billion in aggregate principal amount of new medium term notes (3 and 5 year) Series 2009-2 rental car asset backed notes, or the "Series 2009-2 Notes." The 3 year notes carry a 4.26% coupon (4.30% yield) and the 5 year notes carry a 5.29% coupon (5.35% yield) with expected final maturities in 2013 and 2015, respectively. The advance rate on the notes is approximately 66%. In general, we expect to use the Series 2009-2 Notes to replace the Series 2005-1 and 2005-2 Rental Car Asset Backed Notes, or the "2005 Notes," as they mature in 2010.
Based on all that we have been able to accomplish in the first 10 months of 2009, our current availability under our various credit facilities and our business plan, we believe we have sufficient liquidity to meet our 2010 debt maturities. We still need to refinance approximately $1.7 billion of our international fleet debt that matures in December 2010 and we are currently in discussions with banks and lenders to review our refinancing options; however there can be no assurance that we will be able to refinance this indebtedness on terms comparable to our recent refinancings, or at all.
The agreements governing our corporate indebtedness require us to comply with two key covenants based on a consolidated leverage ratio and a consolidated interest expense coverage ratio. 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. However, as a result of the above-mentioned actions and planned future actions, we believe that we will remain in compliance with our corporate debt covenants and that cash generated from operations, together with amounts available under various liquidity 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. Our future financial and operating performance, ability to service or refinance our debt and ability to comply with covenants and restrictions contained in our corporate debt agreements will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control.
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 cars during a specified time period, typically subject to certain car condition and mileage requirements. We use this specified price or guaranteed depreciation rate to calculate our asset-backed financing capacity. If any manufacturer of our cars fails to fulfill its repurchase or guaranteed depreciation obligations, due to bankruptcy or otherwise, our asset-backed financing capacity could be decreased, or we may be required to materially increase the credit enhancement levels related to the financing of the fleet vehicles provided by such bankrupt manufacturer under certain of our Fleet Financing Facilities. For a discussion of risks related to the repurchase of program cars from us or the guarantee of the depreciation rate of program cars by the manufacturers of our cars and for a discussion of the risks associated with a manufacturer's bankruptcy or our reliance on asset-backed financing, see "Item 1ARisk Factors" in our Form 10-K and our Second Quarter Form 10-Q.
We rely significantly on asset-backed financing 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. In the past several years, Ford and Old General Motors, as defined below, which are the principal suppliers of cars to us on both a program and non-program basis, have experienced deterioration in their operating results and significant declines in their credit ratings and in June 2009, Old General Motors filed for bankruptcy. For further information concerning our asset-backed financing programs, see Note 3 to the Notes to our audited annual consolidated financial
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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
statements included in our Form 10-K under the caption "Item 8Financial Statements and Supplementary Data." For a discussion of risks related to our reliance on asset-backed financing to purchase cars, see "Item 1ARisk Factors" in our Form 10-K and our Second Quarter Form 10-Q.
Immediately prior to Chrysler LLC's bankruptcy, less than 1% of our fleet was comprised of Chrysler LLC vehicles, so its bankruptcy filing has not had a material impact on our business, financial condition or results of operations.
General
Motors filed for bankruptcy in June 2009, which we will refer to as "Old General Motors," however, we do not believe that this will have a material long-term impact on our
business, financial condition or results of operations, because:
In the event of a bankruptcy of a car manufacturer, including Ford or New General Motors, our liquidity would be impacted by several factors including reductions in fleet residual values, as discussed above, 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 collateral enhancement associated with these program vehicles. For a discussion of the risks associated with a manufacturer's bankruptcy or our reliance on asset-backed financing, see "Item 1ARisk Factors" in our Form 10-K and our Second Quarter Form 10-Q.
Also, substantially all of our revenue earning equipment and certain related assets are owned by special purpose entities, or are subject to liens in favor of our lenders under the Senior ABL Facility, the ABS Program, the International Fleet Debt facilities, the Fleet Financing Facility, the Brazil Fleet Financing Facility, the Canadian Fleet Financing Facility, the Belgian Fleet Financing Facility, Capitalized Leases and the International ABS Fleet Financing Facility. Substantially all our other assets in the United States are also subject to liens in favor of our lenders under the Senior Credit Facilities, and substantially all of our other assets outside the United States are (with certain limited exceptions) subject to liens in favor of our lenders under the International Fleet Debt facilities or (in the case of our Canadian equipment rental business) the Senior ABL Facility. None of such assets will be available to satisfy the claims of our general creditors.
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 September 30 (in millions of dollars) are as follows: 2010, $4,836.1 (including $2,400.6 of other short-term borrowings); 2011, $1,036.1; 2012, $176.4; 2013, $1,362.1; 2014, $2,555.4; after 2014, $546.4. For a discussion of these maturities, see Note 3 to the Notes to our audited annual consolidated financial statements included in our Form 10-K under the caption "Item&n