HGH Q1 2015 FORM 10-Q
Table of Contents


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________________________________________________________________
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2015
OR
o
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)

999 Vanderbilt Beach Road - 3rd Floor
Naples, Florida 34108
(239) 552-5800
(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 o No x

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 x

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 
x
Accelerated filer 
o
Non-accelerated filer 
o
Smaller reporting company 
o
 
 
 
 
(Do not check if a smaller
reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of June 30, 2015, 459,015,115 shares of the registrant's common stock, par value $0.01 per share, were outstanding.

 


Table of Contents


HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
INDEX

 
 
 
 
 
Page
 
 
 
 
 
 
 


Table of Contents


HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES



EXPLANATORY NOTE

As described in additional detail in the Explanatory Note to our Annual Report on Form 10-K for the year ended December 31, 2014 (the "2014 Form 10-K"), during the preparation of our Form 10-Q for the first quarter of 2014, misstatements were identified in our previous financial statements relating to the capitalization and timing of depreciation for certain non-fleet assets, allowances for doubtful accounts in Brazil, as well as other items. These misstatements, in combination with misstatements previously identified in the revision included in our 2013 10-K/A related to vehicle vendor allowances for marketing and misstatements related to the Brazil operations, resulted in the Audit Committee of our Board of Directors (the “Audit Committee” and the “Board”), in consultation with our management, concluding on June 3, 2014 that our financial statements for 2011 should no longer be relied upon, and would require restatement.

On November 10, 2014, the Audit Committee, in consultation with our management, concluded that additional proposed adjustments arising out of the review were material to our 2012 and 2013 financial statements and that, as a result, our 2012 and 2013 financial statements also would require restatement. Those restated financial statements are included in Item 8 of the 2014 Form 10-K.

Due to the length of the review of our historical financial statements, we were unable to file the 2014 Form 10-K until July 16, 2015. We were unable to file this Report on Form 10-Q until the 2014 Form 10-K was filed, which was after the prescribed May 11, 2015 due date and the five day extension provided by Rule 12b-25(b). In the 2014 Form 10-K we restated our financial statements for the years ended December 31, 2012 and 2013, including the 2013 interim periods. In addition, we also included restated unaudited selected financial data for the year ended December 31, 2011. We also included in the 2014 Form 10-K the financial data and management's discussion and analysis for the three months ended March 31, 2014 that would typically be disclosed in a Form 10-Q. We have not, and do not intend to file our Quarterly Report on Form 10-Q for the three months ended March 31, 2014.




























i

Table of Contents


HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
PART I—FINANCIAL INFORMATION
ITEM l.    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited
(In millions, except par value)
 
March 31,
2015
 
December 31, 2014
ASSETS
 
 
 
Cash and cash equivalents
$
585

 
$
490

Restricted cash and cash equivalents
411

 
571

Receivables, net of allowance of $65 and $67, respectively
1,304

 
1,597

Inventories, net
71

 
67

Prepaid expenses and other assets
990

 
917

Revenue earning equipment:
 
 
 
Cars
15,412

 
14,622

Less accumulated depreciation - cars
(3,292
)
 
(3,411
)
Other equipment
3,626

 
3,613

Less accumulated depreciation - other equipment
(1,153
)
 
(1,171
)
Revenue earning equipment, net
14,593

 
13,653

Property and equipment:
 
 
 
Land, buildings and leasehold improvements
1,251

 
1,268

Service equipment and other
1,048

 
1,148

Less accumulated depreciation
(985
)
 
(1,094
)
Property and equipment, net
1,314

 
1,322

Other intangible assets, net
3,978

 
4,009

Goodwill
1,356

 
1,359

Total assets
$
24,602

 
$
23,985

LIABILITIES AND EQUITY
 
 
 
Accounts payable
$
1,401

 
$
1,008

Accrued liabilities
1,160

 
1,148

Accrued taxes, net
135

 
134

Debt
16,351

 
15,993

Public liability and property damage
369

 
385

Deferred taxes on income, net
2,837

 
2,853

Total liabilities
22,253

 
21,521

Commitments and contingencies

 

Equity:
 
 
 
Preferred Stock, $0.01 par value, 200 shares authorized, no shares issued and outstanding

 

Common Stock, $0.01 par value, 2,000 shares authorized, 463 and 463 shares issued and 459 and 459 shares outstanding
5

 
5

Additional paid-in capital
3,326

 
3,325

Accumulated deficit
(734
)
 
(664
)
Accumulated other comprehensive income (loss)
(161
)
 
(115
)
 
2,436

 
2,551

Treasury Stock, at cost, 4 shares and 4 shares
(87
)
 
(87
)
Total equity
2,349

 
2,464

Total liabilities and equity
$
24,602

 
$
23,985

 The accompanying notes are an integral part of these financial statements.

1

Table of Contents


HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
(In millions, except per share data)
 
Three Months Ended
March 31,
 
2015
 
2014
Revenues:
 
 
 
Worldwide car rental
$
1,956

 
$
2,039

Worldwide equipment rental
355

 
358

All other operations
143

 
139

Total revenues
2,454

 
2,536

Expenses:

 
 
Direct operating
1,408

 
1,443

Depreciation of revenue earning equipment and lease charges, net
707

 
726

Selling, general and administrative
266

 
276

Interest expense, net
154

 
156

Other (income) expense, net
5

 
(3
)
Total expenses
2,540

 
2,598

Income (loss) before income taxes
(86
)
 
(62
)
(Provision) benefit for taxes on income (loss)
16

 
(7
)
Net income (loss)
$
(70
)
 
$
(69
)
Weighted average shares outstanding:

 
 
Basic
459

 
447

Diluted
459

 
447

Loss per share:

 
 
Basic
$
(0.15
)
 
$
(0.15
)
Diluted
$
(0.15
)
 
$
(0.15
)


The accompanying notes are an integral part of these financial statements.


2

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HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Unaudited
(In millions)
 
Three Months Ended
March 31,
 
2015
 
2014
Net income (loss)
$
(70
)
 
$
(69
)
Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustments
(48
)
 
(3
)
Unrealized holding losses on securities

 
(14
)
Reclassification from other comprehensive loss to selling, general and administrative expense for amortization of actuarial losses on defined benefit pension plans
2

 
(1
)
Total other comprehensive income (loss) before income taxes
(46
)
 
(18
)
Income tax (provision) benefit related to items of other comprehensive income (loss)

 
(1
)
Total other comprehensive income (loss)
(46
)
 
(19
)
Total comprehensive income (loss)
$
(116
)
 
$
(88
)



The accompanying notes are an integral part of these financial statements.


3

Table of Contents
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In millions)



 
Three Months Ended
March 31,
 
2015
 
2014
Cash flows from operating activities
 
 
 
Net income (loss)
$
(70
)
 
$
(69
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Depreciation of revenue earning equipment, net
689

 
707

Depreciation and amortization, non-fleet
86

 
90

Amortization and write-off of deferred financing costs
15

 
12

Amortization and write-off of debt discount
1

 
(1
)
Stock-based compensation charges
4

 
8

Provision for losses on doubtful accounts
6

 
16

Deferred taxes on income
(16
)
 
(5
)
Impairment charges and asset write downs
20

 

Other
(4
)
 
2

Changes in assets and liabilities
 
 
 
Receivables
(13
)
 
(85
)
Inventories, prepaid expenses and other assets
(65
)
 
(25
)
Accounts payable
18

 
2

Accrued liabilities
91

 
76

Accrued taxes
20

 
16

Public liability and property damage

 
16

Net cash provided by (used in) operating activities
782

 
760

Cash flows from investing activities
 
 
 
Net change in restricted cash and cash equivalents
154

 
407

Revenue earning equipment expenditures
(3,438
)
 
(2,582
)
Proceeds from disposal of revenue earning equipment
2,289

 
1,859

Capital asset expenditures, non-fleet
(97
)
 
(75
)
Proceeds from disposal of property and equipment
22

 
25

Acquisitions, net of cash acquired
(96
)
 
(6
)
Net cash provided by (used in) investing activities
(1,166
)
 
(372
)

The accompanying notes are an integral part of these financial statements.


4


Table of Contents
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Unaudited
(In millions)

 
Three Months Ended
March 31,
 
2015
 
2014
Cash flows from financing activities
 
 
 
Proceeds from issuance of long-term debt

 
400

Repayments of long-term debt
(1,027
)
 
(92
)
Short-term borrowings:
 
 
 
Proceeds
175

 
169

Payments
(142
)
 
(259
)
Proceeds under the revolving lines of credit
3,326

 
1,081

Payments under the revolving lines of credit
(1,828
)
 
(1,582
)
Payment of financing costs
(1
)
 
(7
)
Other
(4
)
 
(11
)
Net cash provided by (used in) financing activities
499

 
(301
)
Effect of foreign exchange rate changes on cash and cash equivalents
(20
)
 

Net increase (decrease) in cash and cash equivalents during the period
95

 
87

Cash and cash equivalents at beginning of period
490

 
411

Cash and cash equivalents at end of period
$
585

 
$
498

 

 

Supplemental disclosures of cash information:
 
 
 
Cash paid during the period for:
 
 
 
Interest (net of amounts capitalized)
$
98

 
$
90

Income taxes, net of refunds
4

 
14

Supplemental disclosures of non-cash information:
 
 
 
Purchases of revenue earning equipment included in accounts payable and accrued liabilities
$
633

 
$
555

Sales of revenue earning equipment included in receivables
293

 
223

Purchases of property and equipment included in accounts payable   
71

 
59

Sales of property and equipment included in receivables
24

 
25



The accompanying notes are an integral part of these financial statements.


5


Table of Contents
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited


Note 1Background

Hertz Global Holdings, Inc. ("Hertz Holdings," and together with its subsidiaries, the "Company") was incorporated in Delaware in 2005 to serve as the top-level holding company for Hertz Investors, Inc. which wholly owns The Hertz Corporation ("Hertz"), Hertz Holdings' primary operating company. The Company's common stock trades on the New York Stock Exchange under the symbol "HTZ".
In March 2014, the Company announced that its Board of Directors approved plans to separate Hertz Holdings into two independent, publicly traded companies. One of the companies will continue to operate the Hertz, Dollar, Thrifty and Firefly rental car businesses as well as Donlen; and the other will operate the Hertz Equipment Rental Corporation ("HERC"). The separation is planned to be in the form of a tax-free spin-off to Hertz Holdings' shareholders (the "HERC spin-off") and the Company expects to separate the businesses in a tax-efficient manner.

Note 2Basis of Presentation and Recently Issued Accounting Pronouncements

Basis of Presentation

The Company prepares its unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments of a normal recurring nature that are necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year.

The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The information included in this Form 10-Q should be read in conjunction with information included in the Company’s Form 10-K for the year ended December 31, 2014 filed with the U.S. Securities and Exchange Commission on July 16, 2015 (the "2014 Form 10-K").

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and footnotes. Actual results could differ materially from those estimates.

In the 2014 Form 10-K, the Company filed its 2014 annual financial statements along with its restated annual financial statements for 2013 and 2012, as well as unaudited restated selected financial data for 2011. In lieu of filing quarterly reports on Form 10-Q for 2014, quarterly financial information and management's discussion and analysis for 2014 was included in the 2014 Form 10-K.

Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of Hertz Holdings and its wholly and majority owned domestic and international subsidiaries. In the event that the Company is a primary beneficiary of a variable interest entity, the assets, liabilities, and results of operations of the variable interest entity are included in the Company's consolidated financial statements. The Company accounts for its investment in CAR, Inc. and other immaterial investments in joint ventures using the equity method when it has significant influence but not control and is not the primary beneficiary. All significant intercompany transactions have been eliminated in consolidation.


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HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited

Recent Accounting Pronouncements

Adopted

Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity

In April 2014, the Financial Accounting Standards Board ("FASB") issued guidance that changes the criteria for reporting discontinued operations. As a result of this guidance, only disposals of a component that represent a strategic shift that have, or will have, a major effect on the Company’s operations and financial results will be reported as a discontinued operation. Expanded disclosures are required for discontinued operations and for individually significant components that do not qualify for discontinued operations reporting. The Company adopted this guidance on January 1, 2015 in accordance with the effective date. Adoption of this new guidance did not impact the Company's financial position, results of operations or cash flows.

Not yet adopted

Revenue from Contracts with Customers

In May 2014, the FASB issued guidance that will replace most existing revenue recognition guidance in U.S. GAAP. The core principle of the guidance is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. The guidance requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. The new guidance may be adopted on either a full or modified retrospective basis. As issued, the guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those reporting periods. In April 2015, the FASB issued a proposal to defer the effective date of the guidance until annual and interim reporting periods beginning after December 15, 2017. The Company is in the process of determining the method of adoption and assessing the potential impacts of adopting this guidance on its financial position, results of operations and cash flows.

Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could be Achieved after the Requisite Service Period
In June 2014, the FASB issued guidance that requires that a performance target in a share-based payment award that affects vesting and that can be achieved after the requisite service period is completed is to be accounted for as a performance condition; therefore, compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved, and the amount of compensation cost recognized should be based on the portion of the service period fulfilled. The guidance is effective either prospectively or retrospectively for annual periods beginning after December 15, 2015 and interim periods within those annual periods. The Company is in the process of determining the method of adoption and assessing the potential impacts of adopting this guidance on its financial position, results of operations and cash flows.
Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items

In January 2015, the FASB issued guidance that eliminates the concept of an event or transaction that is unusual in nature and occurs infrequently being treated as an extraordinary item. The guidance is effective for annual periods beginning after December 15, 2015 and interim periods within those annual periods. The Company has assessed the potential impacts from future adoption of this guidance and has determined that there will be no impact on its financial position, results of operations and cash flows.

Amendments to the Consolidation Analysis
In February 2015, the FASB issued guidance that changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The new guidance may be applied using a full or modified retrospective approach. The guidance is effective for annual periods beginning after December 15, 2015 and interim periods within those annual periods. The Company is in the process of determining the method of adoption and assessing the potential impacts of adopting this guidance on its financial position, results of operations and cash flows.

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HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited


Note 3Acquisitions

In February 2015, the Company acquired substantially all of the assets of certain Hertz-branded franchises, including existing fleets and contract and concession rights, for $87 million. The franchises acquired include on airport locations in Indianapolis, South Bend and Ft. Wayne, Indiana and in Memphis, Tennessee, as well as several smaller off airport locations. The acquisition was part of a strategic decision to increase the number of Hertz-owned locations and capitalize on certain benefits of ownership not available under a franchise agreement.

The acquisition was accounted for utilizing the acquisition method of accounting where the purchase price of the reacquired franchises was allocated based on estimated fair values of the assets acquired and liabilities assumed. The excess of the purchase price over the estimated fair value of the net tangible and intangible assets acquired was recorded as goodwill. The purchase price was allocated as follows:

(In millions)
U.S. Car Rental
Revenue earning equipment
$
71

Property and equipment
6

Other intangible assets
9

Goodwill
1

Total
$
87


Note 4Revenue Earning Equipment

The components of revenue earning equipment, net are as follows:
(In millions)
March 31,
2015
 
December 31, 2014
Revenue earning equipment
$
18,634

 
$
17,837

Less: Accumulated depreciation
(4,345
)
 
(4,427
)
 
14,289

 
13,410

Revenue earning equipment held for sale, net
304

 
243

Revenue earning equipment, net
$
14,593

 
$
13,653


Depreciation of revenue earning equipment and lease charges, net includes the following:
 
Three Months Ended
March 31,
(In millions)
2015
 
2014
Depreciation of revenue earning equipment
$
703

 
$
706

(Gain) loss on disposal of revenue earning equipment(a)
(14
)
 
1

Rents paid for vehicles leased
18

 
19

Depreciation of revenue earning equipment and lease charges, net
$
707

 
$
726


(a)     (Gain) loss on disposal of revenue earning equipment by segment is as follows:
 
Three Months Ended
March 31,
(In millions)
2015
 
2014
U.S. Car Rental
$
(20
)
 
$
3

International Car Rental

 
(6
)
Worldwide Equipment Rental
6

 
4

Total
$
(14
)
 
$
1



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Table of Contents
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited

Depreciation rates are reviewed on a quarterly basis based on management's ongoing assessment of present and estimated future market conditions, their effect on residual values at the time of disposal and the estimated holding periods for the fleet and equipment. Depreciation rate changes impacted the following segments:
Increase (decrease)
Three Months Ended
March 31,
(In millions)
2015
 
2014
U.S. Car Rental
$
30

 
$
37

International Car Rental

 
1

Total
$
30

 
$
38


Note 5Debt

The Company's debt consists of the following (in millions):
Facility
 
Average Interest Rate at March 31, 2015
 
Fixed or
Floating
Interest
Rate
 
Maturity
 
March 31,
2015
 
December 31,
2014
Corporate Debt
 
 
 
 
 
 
 
 
 
 
Senior Term Facility
 
3.68%
 
Floating
 
3/2018
 
$
2,078

 
$
2,083

Senior ABL Facility
 
2.70%
 
Floating
 
3/2016 - 3/2017
 
355

 
344

Senior Notes(1)
 
6.58%
 
Fixed
 
4/2018–10/2022
 
3,900

 
3,900

Promissory Notes
 
7.00%
 
Fixed
 
1/2028
 
27

 
27

Other Corporate Debt
 
3.86%
 
Floating
 
Various
 
71

 
74

Unamortized Net Premium (Corporate)
 
 
 
 
 
 
 
3

 
3

Total Corporate Debt
 
 
 
 
 
 
 
6,434

 
6,431

Fleet Debt
 
 
 
 
 
 
 
 
 
 
HVF U.S. Fleet Medium Term Notes
 
 
 
 
 
 
 
 
 
 
HVF Series 2009-2(2)
 
N/A
 
N/A
 
N/A
 

 
404

HVF Series 2010-1(2)
 
4.23%
 
Fixed
 
2/2014–2/2018
 
490

 
490

HVF Series 2011-1(2)
 
3.51%
 
Fixed
 
3/2015–3/2017
 
230

 
414

HVF Series 2013-1(2)
 
1.68%
 
Fixed
 
8/2016–8/2018
 
950

 
950

 
 
 
 
 
 
 
 
1,670

 
2,258

RCFC U.S. ABS Program
 
 
 
 
 
 
 
 
 
 
RCFC U.S. Fleet Medium Term Notes
 
 
 
 
 
 
 
 
 
 
RCFC Series 2011-1 Notes(2)
 
N/A
 
N/A
 
N/A
 

 
167

RCFC Series 2011-2 Notes(2)
 
N/A
 
N/A
 
N/A
 

 
266

 
 
 
 
 
 
 
 

 
433

HVF II U.S. ABS Program
 
 
 
 
 
 
 
 
 
 
HVF II U.S. Fleet Variable Funding Notes:
 
 
 
 
 
 
 
 
 
 
HVF II Series 2013-A(2)
 
1.11%
 
Floating
 
10/2016
 
1,384

 
1,999

HVF II Series 2013-B(2)
 
1.11%
 
Floating
 
10/2016
 
1,500

 
976

HVF II Series 2014-A(2)
 
1.41%
 
Floating
 
10/2016
 
2,465

 
869

 
 
 
 
 
 
 
 
5,349

 
3,844

Donlen ABS Program
 
 
 
 
 
 
 
 
 
 
HFLF Variable Funding Notes
 
 
 
 
 
 
 
 
 
 
HFLF Series 2013-2 Notes(2)
 
1.02%
 
Floating
 
9/2016
 
330

 
247

 
 
 
 
 
 
 
 
330

 
247


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Table of Contents
HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited

Facility
 
Average Interest Rate at March 31, 2015
 
Fixed or
Floating
Interest
Rate
 
Maturity
 
March 31,
2015
 
December 31,
2014
HFLF Medium Term Notes
 
 
 
 
 
 
 
 
 
 
HFLF Series 2013-3 Notes(2)
 
0.81%
 
Floating
 
9/2016–11/2016
 
433

 
500

HFLF Series 2014-1 Notes(2)
 
0.68%
 
Floating
 
12/2016–3/2017
 
400

 
400

 
 
 
 
 
 
 
 
833

 
900

Other Fleet Debt
 
 
 
 
 
 
 
 
 
 
U.S. Fleet Financing Facility
 
2.93%
 
Floating
 
3/2017
 
190

 
164

European Revolving Credit Facility
 
2.74%
 
Floating
 
10/2017
 
234

 
304

European Fleet Notes
 
4.375%
 
Fixed
 
1/2019
 
463

 
517

European Securitization(2)
 
1.95%
 
Floating
 
10/2016
 
228

 
270

Hertz-Sponsored Canadian Securitization(2)
 
2.08%
 
Floating
 
10/2016
 
97

 
105

Dollar Thrifty-Sponsored Canadian Securitization(2)
 
2.11%
 
Floating
 
10/2016
 
37

 
40

Australian Securitization(2)
 
3.81%
 
Floating
 
12/2016
 
100

 
112

Brazilian Fleet Financing Facility
 
16.00%
 
Floating
 
10/2015
 
9

 
11

Capitalized Leases
 
3.01%
 
Floating
 
2/2015 - 10/2017
 
383

 
364

Unamortized (Discount) Premium (Fleet)
 
 
 
 
 
 
 
(6
)
 
(7
)
 
 
 
 
 
 
 
 
1,735

 
1,880

Total Fleet Debt
 
 
 
 
 
 
 
9,917

 
9,562

Total Debt
 
 
 
 
 
 
 
$
16,351

 
$
15,993

N/A - Not Applicable

(1)
References to the "Senior Notes" include the series of Hertz's unsecured senior notes. Outstanding principal amounts for each such series of the Senior Notes is specified below:
(In millions)
Outstanding Principal 
Senior Notes
March 31, 2015
 
December 31, 2014
4.25% Senior Notes due April 2018
$
250

 
$
250

7.50% Senior Notes due October 2018
700

 
700

6.75% Senior Notes due April 2019
1,250

 
1,250

5.875% Senior Notes due October 2020
700

 
700

7.375% Senior Notes due January 2021
500

 
500

6.25% Senior Notes due October 2022
500

 
500

 
$
3,900

 
$
3,900


(2)
Maturity reference is to the "expected final maturity date" as opposed to the subsequent "legal maturity date." The expected final maturity date is the date by which Hertz and investors in the relevant indebtedness expect the relevant indebtedness to be repaid, which in the case of the HFLF Medium Term Notes was based upon various assumptions made at the time of the pricing of such notes. The legal final maturity date is the date on which the relevant indebtedness is legally due and payable.

Fleet Debt

Rental Car Finance Corp. ("RCFC"), a bankruptcy remote, indirect, wholly-owned, special purpose subsidiary of Hertz is the issuer under the RCFC U.S. ABS Program. In 2011, RCFC issued Series 2011-1 Rental Car Asset-Backed Notes in an aggregate original principal amount of $500 million and issued Series 2011-2 Rental Car Asset-Backed Notes in an aggregate original principal amount of $400 million (collectively, the "RCFC U.S. Fleet Medium Term Notes"). In February 2015, the RCFC U.S. Fleet Medium Term Notes were paid in full as scheduled in accordance with their terms.

See Note 16, "Subsequent Events," regarding transactions occurring subsequent to the March 31, 2015 balance sheet date.

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HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited


Borrowing Capacity and Availability

The following facilities were available to the Company as of March 31, 2015:
(In millions)
Remaining
Capacity
 
Availability Under
Borrowing Base
Limitation
Corporate Debt
 
 
 
Senior ABL Facility
$
1,127

 
$
933

Total Corporate Debt
1,127

 
933

Fleet Debt
 
 
 
HVF II U.S. Fleet Variable Funding Notes
1,226

 
9

HFLF Variable Funding Notes
70

 

European Revolving Credit Facility
38

 

European Securitization
207

 

Dollar Thrifty-Sponsored Canadian Securitization
82

 

Australian Securitization
94

 

Total Fleet Debt
1,717

 
9

Total
$
2,844

 
$
942


As of March 31, 2015, the Senior ABL Facility had $1,026 million available under the letter of credit facility sublimit, subject to borrowing base restrictions.

Letters of Credit

As of March 31, 2015, there were outstanding standby letters of credit totaling $632 million. Of this amount, $618 million was issued under the Senior Term Facility and the Senior ABL Facility (together, the “Senior Credit Facilities”). As of March 31, 2015, none of these letters of credit have been drawn upon.

Cash Restrictions

Certain amounts of cash and cash equivalents are restricted for the purchase of revenue earning vehicles and other specified uses under the Fleet Debt facilities and the Like-Kind Exchange Program ("LKE Program"). As of March 31, 2015 and December 31, 2014, the portion of total restricted cash and cash equivalents that was associated with the Fleet Debt facilities was $369 million and $515 million, respectively. Restricted cash balances fluctuate based on the timing of purchases and sales of revenue earning vehicles and could also be impacted by the occurrence of an amortization event.

Special Purpose Entities

Substantially all of the revenue earning equipment and certain related assets are owned by special purpose entities, or are encumbered in favor of the lenders under the various credit facilities, other secured financings and asset-backed securities programs. None of such assets (including the assets owned by Hertz Vehicle Financing II LP, Hertz Vehicle Financing LLC, Rental Car Finance Corp., DNRS II LLC, HFLF, Donlen Trust and various international subsidiaries that facilitate the Company's international securitizations) are available to satisfy the claims of general creditors.

Some of these special purpose entities are consolidated variable interest entities, of which the Company is the primary beneficiary, whose sole purpose is to provide commitments to lend in various currencies subject to borrowing bases comprised of rental vehicles and related assets of certain of Hertz International, Ltd.'s subsidiaries. As of March 31, 2015 and December 31, 2014, the Company's International Fleet Financing No. 1 B.V., International Fleet Financing No. 2 B.V. and HA Funding Pty, Ltd. variable interest entities had total assets of $352 million and $427 million, respectively, primarily comprised of loans receivable and revenue earning equipment, and total liabilities of $352 million and $426 million, respectively, primarily comprised of debt.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited


Financial Covenant Compliance

Under the terms of the Senior Term Facility and Senior ABL Facility, the Company is not subject to ongoing financial maintenance covenants; however, under the Senior ABL Facility, failure to maintain certain levels of liquidity will subject the Company to a contractually specified fixed charge coverage ratio of not less than 1:1 for the four quarters most recently ended. As of March 31, 2015, the Company was not subject to the fixed charge coverage ratio test.

Waivers

Due to the Company's accounting restatement, investigation and remediation activities, the Company failed to file certain quarterly and annual reports and certain of its subsidiaries failed to file statutory financial statements within certain time periods set forth in the documentation of various of its (and/or its special purpose subsidiaries') financing facilities which resulted in the occurrence of various potential and/or actual defaults and potential amortization events under certain of such financing facilities.

In connection with certain refinancings consummated in October and November 2014, the Company and/or certain of its subsidiaries obtained waivers, or extensions of waivers, under certain facilities and the Australian Securitization and various counterparties in respect of derivative transactions, in each case, through June 30, 2015.

In December 2014, Hertz entered into an Amendment and Waiver (the “Amendment and Waiver”) relating to the Senior Term Facility. The waiver set forth in the Amendment and Waiver defers Hertz’s requirement to furnish certain financial statements within certain time periods set forth in the documentation of the Senior Term Facility, as well as waives defaults arising directly or indirectly from (1) the delay in providing such financial statements and (2) the restatement of Hertz’s 2012 and 2013 financial statements. The waiver is effective with respect to the non-delivery of the subject financial statements through December 31, 2015, provided that after June 30, 2015 such waiver will terminate if Hertz’s failure to furnish such financial statements results in Hertz being prohibited from drawing funds under the Senior ABL Facility, after giving effect to all amendments and waivers with respect to the Senior ABL Facility in effect as of such date.

The Amendment and Waiver increases the interest rates payable on the term loans and credit linked deposits during the period from December 15, 2014 through but excluding the date on which Hertz has furnished all financial statements then due to be delivered under the terms of the Senior Term Facility. During such period, (A) the Tranche B Term Loans and the Tranche B-1 Term Loans will bear interest at a floating rate measured by reference to, at Hertz’s option, either (i) an adjusted LIBOR not less than 1.00% plus a borrowing margin of 3.00% per annum or (ii) an alternate base rate plus a borrowing margin of 2.00% per annum, and (B) the Tranche B-2 Term Loans will bear interest at a floating rate measured by reference to, at Hertz’s option, either (i) an adjusted LIBOR not less than 0.75% plus a borrowing margin of 2.75% per annum or (ii) an alternate base rate plus a borrowing margin of 1.75% per annum. From and after the date on which Hertz has furnished all financial statements then due to be delivered under the terms of the Senior Term Facility, (A) the Tranche B Term Loans and the Tranche B-1 Term Loans will bear interest at a floating rate measured by reference to, at Hertz’s option, either (i) an adjusted LIBOR not less than 1.00% plus a borrowing margin of 2.75% per annum or (ii) an alternate base rate plus a borrowing margin of 1.75% per annum, and (B) the Tranche B-2 Term Loans will bear interest at a floating rate measured by reference to, at Hertz’s option, either (i) an adjusted LIBOR not less than 0.75% plus a borrowing margin of 2.25% per annum or (ii) an alternate base rate plus a borrowing margin of 1.25% per annum.

For so long as the waivers remain effective, any potential and/or actual defaults and potential amortization events ceased to exist and were deemed to have been cured for all purposes of the related transaction documents.

The Company and certain of its subsidiaries obtained additional waivers subsequent to the March 31, 2015 balance sheet date - see Note 16, "Subsequent Events," for additional information regarding such waivers.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited

Note 6Employee Retirement Benefits

Effective December 31, 2014, the Company amended the Hertz Retirement Plan to permanently discontinue future benefit accruals and participation under the plan for non-union employees. The Company increased employer contributions under the Company’s qualified 401(k) savings plan (the “401(k) Plan”). Effective January 1, 2015, eligible participants under the 401(k) Plan receive a matching employer contribution to their 401(k) Plan account equal to (i) 100% of the first 3% of employee contributions made by such participant and (ii) 50% of the next 2% of employee contributions, with the total amount of such matching employer contribution to be completely vested, subject to applicable limits under the United States Internal Revenue Code. Certain eligible participants under the 401(k) Plan also receive additional employer contribution amounts to their 401(k) Plan account depending on their years of service and age.

The following table sets forth the net periodic pension expense:
 
Pension Benefits
 
U.S.
 
Non-U.S.
 
Three Months Ended March 31,
In millions
2015
 
2014
 
2015
 
2014
Components of Net Periodic Benefit Cost:
 
 
 
 
 
 
 
Service cost
$
1

 
$
8

 
$
1

 
$
1

Interest cost
7

 
8

 
2

 
2

Expected return on plan assets
(10
)
 
(10
)
 
(4
)
 
(4
)
Net amortizations
1

 
1

 

 

Settlement loss
1

 

 

 

Net periodic pension expense (benefit)
$

 
$
7

 
$
(1
)
 
$
(1
)

The Company's policy for funded plans is to contribute annually, at a minimum, amounts required by applicable laws, regulations and union agreements. From time to time, the Company makes contributions beyond those legally required. For the three-month period ended March 31, 2015, the Company contributed $3 million to the worldwide pension plans, all of which was a discretionary contribution to the United Kingdom defined benefit pension plan (the "U.K. Plan"). For the three-month period ended March 31, 2014, the Company contributed $10 million to worldwide pension plans, of which $3 million was a discretionary contribution to the U.K. Plan. The Company does not anticipate contributing to the worldwide pension plans during the remainder of 2015.

Note 7Stock-Based Compensation

During the three months ended March 31, 2015, the Company granted 2,369,857 non-qualified stock options to certain executives and employees at a weighted average grant date fair value of $7.51, under the Hertz Global Holdings, Inc. 2008 Omnibus Incentive Plan with vesting terms of three to five years. The stock options are subject to time-based vesting based on the participant’s continued employment.

A summary of the total compensation expense and associated income tax benefits recognized under all plans, including the cost of stock options, restricted stock units ("RSUs") and performance stock units ("PSUs"), is as follows:
 
Three Months Ended
March 31,
(In millions)
2015
 
2014
Compensation expense
$
4

 
$
8

Income tax benefit
(1
)
 
(3
)
Total
$
3

 
$
5


As of March 31, 2015, there was $40 million of total unrecognized compensation cost related to non-vested stock options, RSUs and PSUs granted by Hertz Holdings under all plans, of which $19 million represents the value of the

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited

PSUs. The total unrecognized compensation cost is expected to be recognized over the remaining 2.2 years, on a weighted average basis, of the requisite service period that began on the grant dates.

Note 8Restructuring

As part of its ongoing effort to implement a strategy of reducing operating costs, as well as the integration of Dollar Thrifty, the Company has evaluated its workforce and operations and made adjustments, including headcount reductions and business process re-engineering.

Restructuring charges in the condensed consolidated statements of operations are as follows:
 
Three Months Ended
March 31,
(In millions)
2015
 
2014
By Type:
 
 
 
Termination benefits
$
6

 
$
9

Asset write-downs
1

 

Facility closure and lease obligation costs
1

 
6

Other non-cash charges
(1
)
 

Total
$
7

 
$
15


 
Three Months Ended
March 31,
(In millions)
2015
 
2014
By Caption:
 
 
 
Direct operating
$
2

 
$
6

Selling, general and administrative
5

 
9

Total
$
7

 
$
15

 
Three Months Ended
March 31,
(In millions)
2015
 
2014
By Segment:
 
 
 
U.S. Car Rental
$
2

 
$
5

International Car Rental
2

 
4

Worldwide Equipment Rental
1

 
3

Corporate
2

 
3

Total
$
7

 
$
15


The following table sets forth the activity affecting the restructuring accrual during the three-month period ended March 31, 2015. The remainder of the restructuring accrual relates to future lease obligations which will be paid over the remaining term of the applicable leases.
(In millions)
Termination
Benefits
 
Other
 
Total
Balance as of January 1, 2015
$
21

 
$
22

 
$
43

Charges incurred
6

 
1

 
7

Cash payments
(6
)
 
(4
)
 
(10
)
Other non-cash changes
(1
)
 
(1
)
 
(2
)
Balance as of March 31, 2015
$
20

 
$
18

 
$
38



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited


Note 9Tangible Asset Impairments

In the first quarter 2015, the Company recorded a $3 million impairment charge to reduce the carrying value of a held for sale corporate asset to its fair market value, which is included in other (income) expense in the Company's statement of operations. The asset was sold in April 2015.

In the first quarter 2015, the Company performed an impairment assessment of the Dollar Thrifty headquarters campus in Tulsa, Oklahoma, which the Company is currently marketing for sale, using market and income approaches to value the long-lived assets, including inputs such as expected cash flows and recent comparable transactions. Based on the impairment assessment, the Company recorded a charge of $6 million which is included in selling, general and administrative expense in the Company's statement of operations.

In the first quarter 2015, the Company recorded $11 million in charges associated with U.S. Car Rental service equipment and assets deemed to have no future use, of which $4 million is included in direct operating and $7 million is included in other (income) expense in the Company's statement of operations.

Note 10Taxes on Income (Loss)

The effective tax rate for the three months ended March 31, 2015 and 2014 was 19% and (11)%, respectively. The effective tax rate for the full fiscal year 2015 is expected to be approximately 37%.

The Company recorded a tax benefit of $16 million for the three months ended March 31, 2015 compared with a provision for taxes of $7 million for the three months ended March 31, 2014. The change was the result of lower losses in certain non-U.S. jurisdictions for which tax benefits are not realized in the first quarter 2015 and a comparatively larger effect of the suspension of the favorable Subpart F provision of the U.S. Federal Tax Law in the first quarter 2014.

Note 11Financial Instruments

The Company has the following risk exposures that it has historically used financial instruments to manage. None of the instruments have been designated in a hedging relationship as of March 31, 2015.

Interest Rate Risk

The Company’s objective in managing exposure to interest rate changes is to minimize the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve these objectives, the Company uses interest rate caps and other instruments to manage the mix of floating and fixed-rate debt.

Currency Exchange Rate Risk

The Company’s objective in managing exposure to currency fluctuations is to limit the exposure of certain cash flows and earnings from changes associated with currency exchange rate changes through the use of various derivative contracts. The Company experiences currency risks in its global operations as a result of various factors including intercompany local currency denominated loans, rental operations in various currencies and purchasing fleet in various currencies.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited

The following table summarizes the estimated fair value of financial instruments:
 
Fair Value of Financial Instruments
 
Asset Derivatives(1)
 
Liability Derivatives(1)
(In millions)
March 31,
2015
 
December 31,
2014
 
March 31,
2015
 
December 31,
2014
Interest rate caps
$
11

 
$
25

 
$
11

 
$
25

Foreign currency forward contracts
4

 
6

 
2

 
2

Total
$
15

 
$
31

 
$
13

 
$
27


(1)
All asset derivatives are recorded in "Prepaid expenses and other assets" and all liability derivatives are recorded in "Accrued liabilities" in the condensed consolidated balance sheets.

While foreign currency forward contracts and certain interest rate caps are subject to enforceable master netting agreements with their counterparties, the offsetting amounts are not significant and the Company does not offset the derivative assets and liabilities in its condensed consolidated balance sheets.

The following table summarizes the gains or (losses) on derivative instruments for the period indicated.
 
Location of Gain or (Loss) Recognized on Derivatives
 
Amount of Gain or (Loss) Recognized
on Derivatives

 
 
 
Three Months Ended
March 31,
(In millions)
 
 
2015
 
2014
Foreign currency forward contracts
Selling, general and administrative
 
$
(1
)
 
$
(5
)

Note 12Fair Value Measurements

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The fair value of cash, accounts receivable, accounts payable and accrued expenses, to the extent the underlying liability will be settled in cash, approximate carrying values because of the short-term nature of these instruments.

Cash Equivalents and Investments

The Company’s cash equivalents primarily consist of money market accounts which the Company measures at fair value on a recurring basis. The Company determines the fair value of cash equivalents using a market approach based on quoted prices in active markets.

Investments in equity and other securities that are measured at fair value on a recurring basis consist of various mutual funds. The valuation of these securities is based on pricing models whereby all significant inputs are observable or can be derived from or corroborated by observable market data.

The following table summarizes the ending balances of the Company's cash equivalents and investments.
 
 
March 31, 2015
 
December 31, 2014
(in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Money market funds
 
$
214

 
$

 
$

 
$
214

 
$
146

 
$

 
$

 
$
146

Equity and other securities
 

 
146

 

 
146

 

 
96

 

 
96

Total
 
$
214

 
$
146

 
$

 
$
360

 
$
146

 
$
96

 
$

 
$
242


CAR, Inc.

As of March 31, 2015, the Company held a 16.2% equity investment in CAR, Inc., a publicly held company trading on the Hong Kong Stock Exchange, which is accounted for under the equity method. The Company's net investment

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited

balance was approximately $267 million and $264 million as of March 31, 2015 and December 31, 2014, respectively, and is included in "Prepaid expenses and other assets" in the accompanying condensed consolidated balance sheets. The fair value of the investment using quoted market prices (Level 1) was approximately $725 million and $514 million as of March 31, 2015 and December 31, 2014, respectively. For subsequent fair value information see Note 16, "Subsequent Events."

As of March 31, 2014 the Company held convertible debt securities of CAR, Inc. which were classified as available-for-sale and which were carried at fair value within "Prepaid expenses and other assets." Unrealized gains and losses, net of related income taxes, associated with its investment were included in "Accumulated other comprehensive income." As of March 31, 2014, the fair value of debt securities was $137 million. In April 2014, the Company converted all of its debt securities into additional equity of CAR, Inc.

The following table summarizes the changes in fair value of CAR, Inc. convertible debt securities prior to conversion in April 2014, using Level 3 inputs (binomial valuation model) for the three months ended March 31, 2014 (in millions):
 
 
Three Months Ended
 March 31, 2014
Balance at the beginning of period
 
$
151

Unrealized gains (losses) related to investments
 
(14
)
Balance at the end of period
 
$
137


Financial Instruments

The fair value of the Company's financial instruments as of March 31, 2015 and December 31, 2014 are shown in Note 11, "Financial Instruments." The Company's financial instruments are classified as Level 2 assets and liabilities and are priced using quoted market prices for similar assets or liabilities in active markets.

Debt Obligations

The fair value of debt is estimated based on quoted market rates as well as borrowing rates currently available to the Company for loans with similar terms and average maturities (Level 2 inputs).
 
As of March 31, 2015
 
As of December 31, 2014
(in millions)
Nominal Unpaid Principal Balance
 
Aggregate Fair Value
 
Nominal Unpaid Principal Balance
 
Aggregate Fair Value
Corporate Debt
$
6,431

 
$
6,548

 
$
6,428

 
$
6,468

Fleet Debt
9,923

 
9,950

 
9,569

 
9,595

Total
$
16,354

 
$
16,498

 
$
15,997

 
$
16,063


Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

Assets and liabilities measured at fair value during the three months ended March 31, 2015 are as follows:
(In millions)
Balance
 
Level 1
 
Level 2
 
Level 3
 
Total Loss Adjustments
Long-lived assets held for sale
$
34

 
$

 
$

 
$
34

 
$
9


Refer to the impairment disclosures in Note 9, "Tangible Asset Impairments" for further information regarding the assets measured at fair value included in the table above.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited

Note 13Contingencies and Off-Balance Sheet Commitments

Legal Proceedings

Public Liability and Property Damage

The Company is currently a defendant in numerous actions and has 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 the Company. The obligation for public liability and property damage on self-insured U.S. and international vehicles and equipment, as stated on the Company's balance sheet, represents an estimate for both reported accident claims not yet paid and claims incurred but not yet reported. The related liabilities are recorded on a non-discounted basis. Reserve requirements are based on actuarial evaluations of historical accident claim experience and trends, as well as future projections of ultimate losses, expenses, premiums and administrative costs. At March 31, 2015 and December 31, 2014 the liability recorded for public liability and property damage matters was $369 million and $385 million, respectively. The Company believes that its analysis is based on the most relevant information available, combined with reasonable assumptions, and that the Company may prudently rely on this information to determine the estimated liability. The Company notes that the liability is subject to significant uncertainties. The adequacy of the liability reserve is regularly monitored based on evolving accident claim history and insurance related state legislation changes. If the Company's estimates change or if actual results differ from these assumptions, the amount of the recorded liability is adjusted to reflect these results.

Other Matters

From time to time the Company is a party to various legal proceedings. The Company has summarized below the most significant legal proceedings to which the Company was and/or is a party to during the three months ended March 31, 2015 or the period after March 31, 2015 but before the filing of this Report on Form 10-Q.

Concession Fee Recoveries - In October 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, or “Enterprise,” was filed in the U.S. District Court for the District of Nevada (Enterprise became a defendant in a separate action which they have now settled.) The Sobel case is a nationwide class action on behalf of all persons who rented cars from Hertz at airports in Nevada and were separately charged airport concession recovery fees by Hertz as part of their rental charges. The plaintiffs seek an unspecified amount of compensatory damages, restitution of any charges found to be improper and an injunction prohibiting Hertz from quoting or charging those airport fees that are alleged not to be allowed by Nevada law. The plaintiff also seeks attorneys' fees and costs. In 2010, the parties engaged in mediation which resulted in a proposed settlement. Although the court tentatively approved the settlement in November 2010, the court denied the plaintiffs' motion for final approval of the proposed settlement in May 2011. Following additional activity in the case, in March 2013, the court granted, in part, the plaintiffs' motion for partial summary judgment with respect to restitution and granted the plaintiffs' motion for class certification while denying the Company's motion for partial summary judgment. In October 2014, the court entered final judgment, merging all of its prior rulings and directed Hertz to pay the class approximately $42 million in restitution and $11 million in prejudgment interest, and to pay attorney's fees of $3.1 million with an additional $3.1 million to be paid from the restitution fund. In December 2014, Hertz timely filed an appeal of that final judgment with the U.S. Court of Appeals for the Ninth Circuit and the plaintiffs cross appealed the court's judgment seeking to challenge the lower court's ruling that Hertz did not deceive or mislead the class members. In April 2015, Hertz filed its opening brief. In June 2015, the plaintiffs filed their answering brief and opening brief on their cross-appeal. The Company continues to believe the outcome of this case will not be material to its financial condition, results of operations or cash flows.

In re Hertz Global Holdings, Inc. Securities Litigation - In November 2013, a purported shareholder class action, Pedro Ramirez, Jr. v. Hertz Global Holdings, Inc., et al., was commenced in the U.S. District Court for the District of New Jersey naming Hertz Holdings and certain of its officers as defendants and alleging violations of the federal securities laws. The complaint alleges that Hertz Holdings made material misrepresentations and/or omissions of material fact in its public disclosures during the period from February 25, 2013 through November 4, 2013, in violation of Section 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended,

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited

and Rule 10b-5 promulgated thereunder. Plaintiffs seek an unspecified amount of monetary damages on behalf of the purported class and an award of costs and expenses, including counsel fees and expert fees. In June 2014, Hertz Holdings responded to the amended complaint by filing a motion to dismiss. In August 2014, the plaintiffs filed their opposition to Hertz Holdings' motion to dismiss and also filed a motion to strike certain exhibits which were included in Hertz Holdings' motion to dismiss. After a hearing in October 2014, the court granted Hertz Holdings' motion to dismiss the complaint. The dismissal was without prejudice and plaintiff was granted leave to file a second amended complaint within 30 days of the order. The motion to strike was dismissed as moot. In November 2014, plaintiffs filed a Second Amended Complaint which shortened the putative class period such that it is not alleged to have commenced until May 18, 2013 and makes allegations that are not substantively very different than the allegations in the prior complaint. In early 2015 this case was assigned to a new federal judge in the District of New Jersey. Plaintiffs filed their opposition to Hertz Holdings' motion to dismiss in January 2015. In February 2015, Hertz Holdings filed its reply to Plaintiffs’ opposition. Hertz Holdings believes that it has valid and meritorious defenses and it intends to vigorously defend against these allegations, but litigation is subject to many uncertainties and the outcome of this matter is not predictable with assurance. It is possible that this matter could be decided unfavorably to Hertz Holdings, however, Hertz Holdings is currently unable to estimate the range of these possible losses, but they could be material.

The Company intends to assert that it has meritorious defenses in the foregoing matters and the Company intends to defend itself vigorously.

Governmental Investigations - In June 2014 the Company was advised by the staff of the New York Regional Office of the Securities and Exchange Commission (the “SEC”) that it is investigating the events disclosed in certain of the Company’s filings with the SEC. In addition, in December 2014 a state securities regulator requested information regarding the same events. The investigations generally involve the restatements included in the Company's 2014 Form 10-K and related accounting for prior periods. The Company has and intends to continue to cooperate with both the SEC and state requests. Due to the stage at which the proceedings are, Hertz is currently unable to predict the likely outcome of the proceedings or estimate the range of reasonably possible losses, which may be material.

French Antitrust - In February 2015, the French Competition Authority issued a Statement of Objections claiming that several car rental companies, including Hertz and certain of its subsidiaries, violated French competition law by receiving historic market information from twelve French airports relating to the car rental companies operating at those airports and by engaging in a concerted practice relating to train station surcharges. Hertz believes that it has valid defenses and intends to vigorously defend against the allegations, but, due to the early stage at which the proceedings are, Hertz is currently unable to predict the likely outcome of the proceedings or range of reasonably possible losses, which may be material.

The Company has established reserves for matters where the Company believes that losses are probable and can be reasonably estimated. Other than the aggregate reserve established for claims for public liability and property damage, none of those reserves are material. For matters, including certain of those described above, where the Company has not established a reserve, the ultimate outcome or resolution cannot be predicted at this time, or the amount of ultimate loss, if any, cannot be reasonably estimated. Litigation is subject to many uncertainties and the outcome of the individual litigated matters is not predictable with assurance. It is possible that certain of the actions, claims, inquiries or proceedings, including those discussed above, could be decided unfavorably to the Company or any of its subsidiaries involved. Accordingly, it is possible that an adverse outcome from such a proceeding could exceed the amount accrued in an amount that could be material to the Company's consolidated financial condition, results of operations or cash flows in any particular reporting period.

Indemnification Obligations

There have been no significant changes to the Company's indemnification obligations as compared to those disclosed in Note 14, "Contingencies and Off-Balance Sheet Commitments" of the Notes to consolidated financial statements included in the 2014 Form 10-K under the caption Item 8, "Financial Statements and Supplementary Data."


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited

Note 14Segment Information

The Company has identified four reportable segments, which are organized based on the products and services provided by its operating segments and the geographic areas in which its operating segments conduct business, as follows:

U.S. Car Rental - rental of cars, crossovers and light trucks, as well as ancillary products and services, in the United States and consists of the Company's United States operating segment;

International Car Rental - rental of cars, crossovers and light trucks, as well as ancillary products and services, internationally and consists of the Company's Europe and Other International operating segments, which are aggregated into a reportable segment based primarily upon similar economic characteristics, products and services, customers, delivery methods and general regulatory environments;

Worldwide Equipment Rental - rental of industrial, construction, material handling and other equipment and consists of the Company's worldwide equipment rental operating segment; and

All Other Operations - includes the Company's Donlen operating segment which provides fleet leasing and management services and is not considered a separate reportable segment in accordance with applicable accounting standards, together with other business activities, such as its claim management services.

In addition to the above reportable segments, the Company has corporate operations ("Corporate") which includes general corporate assets and expenses and certain interest expense (including net interest on corporate debt).

Adjusted pre-tax income (loss) is calculated as income before income taxes plus non-cash purchase accounting charges, debt-related charges relating to the amortization and write-off of debt financing costs and debt discounts and certain one-time charges and non-operational items. Adjusted pre-tax income (loss) is important because it allows management to assess operational performance of its business, exclusive of the items mentioned above. It also allows management to assess the performance of the entire business on the same basis as the segment measure of profitability. Management believes that it is important to investors for the same reasons it is important to management and because it allows them to assess the Company's operational performance on the same basis that management uses internally.

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HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited


The contribution of our reportable segments, and Corporate where applicable, to revenues and adjusted pre-tax income (loss) and the reconciliation to consolidated amounts are summarized below.
 
Three Months Ended March 31,
 
Revenues
 
Adjusted Pre-Tax Income (Loss)
(In millions)
2015
 
2014
 
2015
 
2014
U.S. Car Rental
$
1,520

 
$
1,557

 
$
71

 
$
119

International Car Rental
436

 
482

 
8

 
(39
)
Worldwide Equipment Rental
355

 
358

 
33

 
52

All Other Operations
143

 
139

 
16

 
16

Total reportable segments
$
2,454

 
$
2,536

 
128

 
148

Corporate (1)
 
 
 
 
(125
)
 
(124
)
Consolidated adjusted pre-tax income (loss)
 
 
 
 
3

 
24

Adjustments:
 
 
 
 
 
 
 
Acquisition accounting(2)
 
 
 
 
(31
)
 
(33
)
Debt-related charges(3)
 
 
 
 
(16
)
 
(12
)
Restructuring charges(4)
 
 
 
 
(7
)
 
(15
)
Restructuring related charges(5)
 
 
 
 
(13
)
 
(24
)
Acquisition related costs and charges(6)
 
 
 
 

 
(7
)
Equipment rental spin-off costs(7)
 
 
 
 
(9
)
 

Impairment charges and asset write-downs(8)
 
 
 
 
(9
)
 

Other(9)
 
 
 
 
(4
)
 
5

Income (loss) before income taxes
 
 
 
 
$
(86
)
 
$
(62
)

(1)
Represents general corporate expenses, certain interest expense (including net interest on corporate debt), as well as other business activities.
(2)
Represents the increase in amortization of other intangible assets, depreciation of property and equipment and accretion of revalued liabilities relating to acquisition accounting.
(3)
Represents debt-related charges relating to the amortization of deferred debt financing costs and debt discounts.
(4)
Represents expenses incurred under restructuring actions as defined in U.S. GAAP - for further information on restructuring costs, see Note 8, "Restructuring."
(5)
Represents incremental costs incurred directly supporting business transformation initiatives. Such costs include transition costs incurred in connection with business process outsourcing arrangements and incremental costs incurred to facilitate business process re-engineering initiatives that involve significant organization redesign and extensive operational process changes. Amount in 2015 also includes consulting costs and legal fees related to the accounting review and investigation and costs associated with the separation of certain executives during the quarter.
(6)
Represents costs related to acquisitions and strategic initiatives.
(7)
Represents expenses associated with the anticipated HERC spin-off transaction announced in March 2014.
(8)
Represents the impairment of the former Dollar Thrifty headquarters and the impairment of a corporate asset in the first quarter 2015. There were no impairments or asset write-downs in the first quarter 2014.
(9)
Includes integration charges and relocation expenses associated with the Company's relocation of its headquarters to Estero, Florida, as well as other miscellaneous non-recurring or non-cash items.


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HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited

Total assets
(In millions)
March 31, 2015
 
December 31, 2014
U.S. Car Rental
$
14,471

 
$
13,712

International Car Rental
3,355

 
3,358

Worldwide Equipment Rental
3,802

 
3,836

All Other Operations
1,523

 
1,458

Corporate
1,451

 
1,621

Total
$
24,602

 
$
23,985


Note 15Earnings (Loss) Per Share

Basic earnings (loss) per share is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding for each period. Because the Company generated net losses for the quarters ended March 31, 2015 and 2014, the weighted-average basic shares outstanding was used in calculating diluted loss per share, as all other potential common shares would be anti-dilutive. Anti-dilutive shares were comprised of approximately 7 million stock options, RSUs and PSUs and approximately 17 million stock options, RSUs, PSUs and shares issuable upon conversion of Convertible Senior Notes for the three months ended March 31, 2015 and 2014, respectively.

Note 16Subsequent Events

Fleet Debt

HVF II U.S. Fleet Medium Term Notes: In April 2015, HVF II issued the Series 2015-1 Rental Car Asset-Backed Notes, Class A, Class B, and Class C, or the “HVF II Series 2015-1 Notes”, collectively, in an aggregate principal amount of $780 million. The expected maturity of the HVF II Series 2015-1 Notes is March 2020. The HVF II Series 2015-1 Notes are comprised of $622 million aggregate principal amount of 2.73% Rental Car Asset-Backed Notes, Class A, $119 million aggregate principal amount of 3.52% Rental Car Asset-Backed Notes, Class B, and $39 million aggregate principal amount of 4.35% Rental Car Asset-Backed Notes, Class C. The net proceeds from the sale of the HVF II Series 2015-1 Notes were used (i) to repay a portion of the outstanding principal amount of HVF II's Series 2013-A Notes and HVF II's Series 2014-A Notes and (ii) to make loans to HVF for HVF to acquire or refinance vehicles to be leased to the Company or DTG Operations, Inc. for use in their daily rental operations.

Capitalized Leases: In May 2015, the U.K. Leveraged Financing was amended to provide for aggregate maximum leasing capacity (subject to asset availability) of up to £300 million during the peak season and at the same time amended and increased the ongoing core facility to £250 million.

European Revolving Credit Facility: In May 2015, HHN BV amended the European Revolving Credit Facility to provide for aggregate maximum borrowings of up to €340 million during the peak season, subject to borrowing base availability, for a seasonal commitment period through December 2015.

HFLF Medium Term Notes: In June 2015, HFLF issued $300 million in aggregate principal amount of Series 2015-1 Floating Rate Asset-Backed Notes, Class A, Class B, Class C, Class D, and Class E, or the “HFLF Series 2015-1 Notes,” collectively. The net proceeds from the issuance of the HFLF Series 2015-1 Notes were used (i) to repay a portion of amounts then-outstanding under the HFLF Series 2014-1 Notes and the HFLF Series 2013-2 Notes and (ii) to make loans to DNRS II. The HFLF Series 2015-1 Notes are floating rate and carry an interest rate based upon a spread to one-month LIBOR. An affiliate of HFLF purchased the Class E Notes.

Waivers

In May 2015, the Company obtained waivers from the requisite noteholders of its Senior Notes to amend and waive (the “Senior Notes Amendments and Waiver”) certain provisions of the indentures pursuant to which the Senior Notes were issued (the “Senior Notes Indentures”). The Senior Notes Amendments and Waiver amend, effective as of March 30, 2014, the reporting covenant in each of the Senior Notes Indentures to eliminate any obligation for the Company

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited

(or HHN BV as applicable) to deliver to the trustee or the noteholders or file with the SEC (i) its annual report on Form 10-K for the period ended December 31, 2014 and its quarterly reports on Form 10-Q for the periods ended March 31, 2015 and June 30, 2015, in each case prior to September 30, 2015 and (ii) its quarterly reports on Form 10-Q for the periods ended March 31, 2014, June 30, 2014 and September 30, 2014. Pursuant to the Senior Notes Amendments and Waiver, holders also waived any default or event of default under the relevant Senior Notes Indenture that may occur or exist as a result of or in connection with the Company not filing any amendments to previously filed SEC reports or the failure to timely deliver to the trustee or the noteholders, or file with the SEC, the delayed SEC reports.

In May 2015, the Company and HVF obtained waivers from the requisite noteholders of the U.S. Fleet Medium Term Notes to amend and waive (the “HVF Amendments and Waiver”) certain provisions of the operating lease between the Company and HVF that secures the U.S. Fleet Medium Term Notes (the “HVF Legacy Lease”). The HVF Amendments and Waiver amend the HVF Legacy Lease, effective as of March 30, 2014, to eliminate the requirement to furnish (or cause to be furnished) the quarterly reports on Form 10-Q for the periods ended March 31, 2014, June 30, 2014 and September 30, 2014 under the HVF Legacy Lease and in connection with the foregoing the noteholders waived any potential event of default or event of default under the HVF Legacy Lease that may occur or exist as a result, directly or indirectly arising out of or in connection with the failure to furnish (or cause to be furnished) such quarterly reports.

In June 2015, HHN BV obtained waivers from the requisite noteholders of its European Fleet Notes to amend and waive (the “European Fleet Notes Amendments and Waivers”) certain provisions of the indenture pursuant to which the European Fleet Notes were issued (the “European Fleet Notes Indenture”). The European Fleet Notes Amendments and Waiver amend, effective as of March 30, 2014, the reporting covenant in the European Fleet Notes Indenture to eliminate any obligation for the Company (or HHN BV as applicable) to deliver to the trustee or the noteholders or file with the SEC (i) its annual report on Form 10-K for the period ended December 31, 2014 and its quarterly reports on Form 10-Q for the periods ended March 31, 2015 and June 30, 2015, in each case prior to September 30, 2015 and (ii) its quarterly reports on Form 10-Q for the periods ended March 31, 2014, June 30, 2014 and September 30, 2014. Pursuant to the Senior Notes Amendments and Waiver, holders also waived any default or event of default under the European Fleet Notes Indenture that may occur or exist as a result of or in connection with the Company not filing any amendments to previously filed SEC reports or the failure to timely deliver to the trustee or the noteholders, or file with the SEC, the delayed SEC reports.

In June 2015, the Company and/or certain of its subsidiaries obtained extensions of previously obtained waivers under the Senior ABL Facility, HVF II U.S. Fleet Variable Funding Notes, European Revolving Credit Facility, European Securitization, Hertz-Sponsored Canadian Securitization, Dollar Thrifty-Sponsored Canadian Securitization, Australian Securitization, U.K. Leveraged Financing, our U.S. Fleet Financing Facility, and various derivative transactions, in each case through August 31, 2015. Such lenders permanently waived any of the aforementioned events arising from the failure to file such financial information within the required time periods. The waivers also facilitate the Company filing a comprehensive annual report on Form 10-K for the period ended December 31, 2014, including audited financial statements of the Company for the year ended December 31, 2014 and unaudited financial statements of Hertz for the fiscal quarters ending March 31, 2014, June 30, 2014 and September 30, 2014, to satisfy its 2014 financial statement delivery obligations under such facilities. In addition, the lenders under such facilities have waived any of the aforementioned events that could arise from any restatement of annual and quarterly financial statements previously delivered by the Company and/or certain of its subsidiaries under such facilities.

For so long as the waivers remain effective, any potential and/or actual defaults and potential amortization events ceased to exist and were deemed to have been cured for all purposes of the related transaction documents.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited

Divestiture

In June 2015, the Company signed a letter of intent for the sale of its HERC France and Spain businesses. The proposed transaction includes 60 locations in France and two in Spain. The proposed transaction is subject to receipt of the requisite works council opinions, the signing of the sale agreements and obtaining required corporate and regulatory approvals.

Contingencies

In July 2015, Ryanair filed a complaint against Hertz Europe Limited, a subsidiary of the Company, in the High Court of Justice, Queen’s Bench Division, Commercial Court, Royal Courts of Justice of the United Kingdom alleging breach of contract in connection with Hertz Europe Limited’s termination of its car hire agreement with Ryanair following a contractual dispute with respect to Ryanair’s agreement to begin using third party ticket distributors. The complaint seeks damages, interest and costs, together with attorney fees. The Company believes that it has valid and meritorious defenses and it intends to vigorously defend against these allegations, but litigation is subject to many uncertainties and the outcome of this matter is not predictable with assurance. It is possible that this matter could be decided unfavorably to the Company, however, the Company is currently unable to estimate the range of these possible losses in excess of amounts accrued, but they could be material.

Equity Method Investment

The fair value of the Company's CAR, Inc. equity method investment has been negatively impacted by recent volatility in the stock markets in China and other factors. The fair value of the investment at July 9, 2015 using quoted market prices (Level 1) was approximately $710 million.

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HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES

ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s discussion and analysis ("MD&A") should be read in conjunction with the MD&A presented in the 2014 Form 10-K filed on July 16, 2015 and the unaudited condensed consolidated financial statements and accompanying notes included in Item 1 of this Report on Form 10-Q, which include additional information about our accounting policies, practices and the transactions underlying our financial results. The preparation of our unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts in our unaudited condensed consolidated financial statements and the accompanying notes including various claims and contingencies related to lawsuits, taxes, environmental and other matters arising during the normal course of business. We apply our best judgment, our knowledge of existing facts and circumstances and our knowledge of actions that we may undertake in the future in determining the estimates that will affect our unaudited condensed consolidated financial statements. We evaluate our estimates on an ongoing basis using our historical experience, as well as other factors we believe appropriate under the circumstances, such as current economic conditions, and adjust or revise our estimates as circumstances change. As future events and their effects cannot be determined with precision, actual results may differ from these estimates.

In this MD&A we refer to certain Non-GAAP measures, including the following:
Adjusted Pre-Tax Income - important to management because it allows management to assess the operational performance of our business, exclusive of certain items and allows management to assess the performance of the entire business on the same basis as the segment measure of profitability. Management believes that it is important to investors for the same reasons it is important to management and because it allows them to assess our operational performance on the same basis that management uses internally.
Total Revenue Per Day ("Total RPD") - important to management and investors as it represents the best measurement of the changes in underlying pricing in the car rental business and encompasses the elements in car rental pricing that management has the ability to control.
Transaction Days - important to management and investors as it represents the number of revenue generating days per rental agreement. It is used as a component to measure Total RPD and fleet efficiency.
Fleet Efficiency - important to management and investors because it is the measurement of the proportion of our car rental fleet that is being used to generate revenues relative to the total amount of available fleet capacity. Higher fleet efficiency means more of the fleet is being utilized to generate revenue. 
Net Depreciation Per Unit Per Month - important to management and investors as depreciation of revenue earning equipment and lease charges, is one of our largest expenses for the car rental business and is driven by the number of vehicles, expected residual values at the time of disposal and expected hold period of the vehicles. Net depreciation per unit per month is reflective of how we are managing the costs of our fleet and facilitates comparison with other participants in the car rental industry.
Dollar Utilization - important to management and investors because it is the measurement of the proportion of our equipment rental revenue earning equipment, including additional capitalized refurbishment costs (with the basis for refurbished assets reset at the refurbishment date), that is being used to generate revenues relative to the total amount of available equipment fleet capacity.
Time Utilization - important to management and investors as it measures the extent to which the equipment rental fleet is on rent compared to total operated fleet and is an efficiency measurement utilized by participants in the equipment rental industry.
Non-GAAP measures should not be considered in isolation and should not be considered superior to, or a substitute for, financial measures calculated in accordance with U.S.GAAP. The above Non-GAAP measures are defined and reconciled to their most comparable U.S.GAAP measure in the "Footnotes to the Results of Operations and Selected Operating Data by Segment Tables" section of this MD&A.

OUR COMPANY

Hertz and its predecessors have been in the car rental business since 1918 and in the equipment rental business since 1965. We operate our car rental business through the Hertz, Dollar, Thrifty and Firefly brands from approximately 10,590 corporate and franchisee locations in North America and Europe, as well as Africa, Asia, Australia, Latin America, the Middle East and New Zealand. We are one of the largest worldwide airport general use car rental companies and

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ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

our Hertz brand has approximately 9,170 corporate and franchisee locations in approximately 145 countries. Our Dollar and Thrifty brands have approximately 1,315 corporate and franchisee locations in 73 countries and our Firefly brand has approximately 105 corporate and franchisee locations in 15 countries. Our Hertz brand name is one of the most recognized in the world, signifying leadership in quality rental services and products. We have an extensive network of rental locations in the United States, or "U.S.," and in all major European markets. We believe that we maintain one of the leading airport car rental brand market shares, by overall reported revenues, in the U.S. and at approximately 130 major airports in Europe where we have company-operated locations and where data regarding car rental concessionaire activity is available. Our equipment rental business is operated through the Hertz Equipment Rental brand from more than 350 branches in the U.S., Canada, China, France, Saudi Arabia, Spain and the United Kingdom, as well as through our international franchises. In addition to car rental and equipment rental businesses, we provide fleet leasing and management services through our Donlen subsidiary.

OVERVIEW OF OUR BUSINESS AND OPERATING ENVIRONMENT

We are engaged principally in the business of renting and leasing of cars through our Hertz, Dollar, Thrifty and Firefly brands and equipment through our Hertz Equipment Rental brand. In addition to car rental and equipment rental businesses, we provide fleet leasing and management services through our Donlen subsidiary. We have a diversified revenue base and a highly variable cost structure and are able to dynamically manage fleet capacity, the most significant determinant of our costs. Our profitability is primarily a function of the volume, mix and pricing of rental transactions and the utilization of cars and equipment, the related ownership cost of equipment and other operating costs. Significant changes in the purchase price or residual values of cars and equipment or interest rates can have a significant effect on our profitability depending on our ability to adjust pricing for these changes. We continue to balance our mix of non-program and program vehicles based on market conditions. Our business requires significant expenditures for cars and equipment, and consequently we require substantial liquidity to finance such expenditures. See "Liquidity and Capital Resources" below.

Our strategy includes optimization of our on airport operations, selected openings of new off airport locations, the disciplined evaluation of existing locations and the pursuit of same-store sales growth.

Our total revenues primarily are derived from rental and related charges and consist of:

Car rental revenues - revenues from all company-operated car rental operations, including charges to customers for the reimbursement of costs incurred relating to airport concession fees and vehicle license fees, the fueling of vehicles and revenues associated with ancillary products associated with car rentals, including the sale of loss or collision damage waivers, liability insurance coverage, parking and other products and fees, ancillary products associated with the retail car sales channel and certain royalty fees from our franchisees;

Equipment rental revenues - revenues from all company-operated equipment rental operations, including amounts charged to customers for the fueling and delivery of equipment and sale of loss damage waivers, as well as revenues from the sale of new equipment and consumables; and

All other operations revenues - revenues from fleet leasing and management services and other business activities.

Our expenses primarily consist of:

Direct operating expenses (primarily wages and related benefits; commissions and concession fees paid to airport authorities, travel agents and others; facility, self-insurance and reservation costs; the cost of new equipment and consumables purchased for resale; and other costs relating to the operation and rental of revenue earning equipment, such as damage, maintenance and fuel costs);

Depreciation expense and lease charges, net relating to revenue earning equipment (including net gains or losses on the disposal of such equipment). Revenue earning equipment includes cars and rental equipment;

Selling, general and administrative expenses; and

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ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)


Interest expense, net.

Our Business Segments

We have identified four reportable segments, which are organized based on the products and services provided by our operating segments and the geographic areas in which our operating segments conduct business, as follows:
U.S. Car Rental - Rental of cars, crossovers and light trucks, as well as sales of ancillary products and services, in the U.S.;
International Car Rental - Rental of cars, crossovers and light trucks, as well as sales of ancillary products and services, internationally;
Worldwide Equipment Rental - Rental of industrial, construction, material handling and other equipment; and
All Other Operations - Comprised of our Donlen business, which provides fleet leasing and management services, and other business activities, such as our claim management services.
In addition to the above reportable segments, the Company has corporate operations ("Corporate") which includes general corporate assets and expenses and certain interest expense (including net interest on corporate debt). We assess performance and allocate resources based upon the financial information for our operating segments.

Seasonality

Our car rental and equipment rental operations are seasonal businesses, with decreased levels of business in the winter months and heightened activity during the spring and summer. We have the ability to dynamically manage fleet capacity, the most significant portion of our cost structure, to meet market demand. For instance, to accommodate increased demand, we increase our available fleet and staff during the second and third quarters of the year. As business demand declines, fleet and staff are decreased accordingly. A number of our other major operating costs, including airport concession fees, commissions and vehicle liability expenses, are directly related to revenues or transaction volumes. In addition, our management expects to utilize enhanced process improvements, including efficiency initiatives and the use of our information technology systems, to help manage our variable costs. More than half of our typical annual operating costs represent variable costs, while the remaining costs are fixed or semi-fixed. We also maintain a flexible workforce, with a significant number of part time and seasonal workers. However, certain operating expenses, including rent, insurance, and administrative overhead, remain fixed and cannot be adjusted for seasonal demand. Revenues related to our fleet leasing and management services are generally not seasonal.

First Quarter 2015 Operating Highlights

Highlights of our business and financial performance in the first quarter 2015 and key factors influencing our results include:

Continued implementation of our previously announced fleet strategy - over 195,000 model year 2015 vehicles added to the U.S. car rental fleet through March 31, 2015, over half of which were added during the first quarter of 2015. The U.S. fleet has been significantly renewed since late September 2014, with a 47% improvement in the number of vehicles at or below 30,000 miles at March 31, 2015;

We sold 43% more non-program cars in our U.S. Car Rental segment in the first quarter of 2015 compared with the first quarter of 2014;

A decrease in net depreciation per unit per month in both U.S. and international fleets as a result of favorable residual values;

A decrease in Total RPD for the U.S. car rental segment due to a higher mix of off airport rentals as a result of an increase in the number of replacement renters during the period, as compared to the first quarter of 2014, the impact of lower fuel prices on ancillary revenue and challenges with our revenue execution capabilities;


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ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Increased operating costs in the U.S. car rental segment due to damage expenditures, maintenance expenditures associated with higher mileage cars in the fleet and increased personnel costs to support execution of the fleet renewal goals;
Excluding the impact of foreign currency, HERC revenues were higher during the first quarter 2015 as compared to first quarter 2014, despite decreased volumes in the oil and gas customer base, due in part to new customer wins and an increase in volume in commercial construction and infrastructure;
Higher maintenance costs in the worldwide equipment rental segment due to the investment made to improve the fleet available to rent and sales costs due to an increase in sales force personnel to focus on winning new accounts and diversifying the customer base;
Incurred approximately $9 million in costs associated with the anticipated separation of the equipment rental business;
Incurred approximately $10 million in consulting, audit and legal costs associated with the restatement and investigation activities; and
Incurred approximately $2 million in fees paid directly to our lenders, noteholders and agents (including increased interest spread on the Senior Term Facility) to obtain waivers under various financing facilities relating to, among other things, the failure to file certain quarterly and annual reports and matters relating to the restatement.

CONSOLIDATED RESULTS OF OPERATIONS
 
Three Months Ended March 31,
 
Percent Increase/(Decrease)
($ in millions)
2015
 
2014
 
Total revenues
$
2,454

 
$
2,536

 
(3
)%
Direct operating expenses
1,408

 
1,443

 
(2
)
Depreciation of revenue earning equipment and lease charges, net
707

 
726

 
(3
)
Selling, general and administrative expenses
266

 
276

 
(4
)
Interest expense, net
154

 
156

 
(1
)
Other (income) expense, net
5

 
(3
)
 
NM

Income (loss) before income taxes
(86
)
 
(62
)
 
39

(Provision) benefit for taxes on income (loss)
16

 
(7
)
 
NM

Net income (loss)
$
(70
)
 
$
(69
)
 
1

Adjusted pre-tax income(a)
$
3

 
$
24

 
(88
)
Footnotes to the table above are shown in the "Footnotes to the Results of Operations and Selected Operating Data by Segment Tables" section of this MD&A.

NM - Not meaningful

Total revenues decreased $82 million, or 3%, due primarily to decreases in our U.S. Car Rental and International Car Rental segments. Lower revenue in our U.S. Car Rental segment was largely driven by a decrease in airport rental volume, due to lower discretionary leisure rentals, disruptions from winter storms, lower international inbound tour business and challenges with our revenue execution capabilities. Lower revenue in our International Car Rental segment was primarily due to the impact of foreign currency of $68 million.

The decrease in direct operating expenses of $35 million, or 2%, was primarily comprised of decreases in our International Car Rental segment of $62 million, of which $45 million was the impact of foreign currency and the remaining decline was due to lower fleet related self-insurance expenses and other direct operating expenses. The decrease was partially offset by increases in our U.S. Car Rental segment of $19 million and our Worldwide Equipment Rental segment of $8 million.


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ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Depreciation of revenue earning equipment and lease charges, net decreased $19 million, or 3%, due primarily to a decrease of $18 million in our International Car Rental segment driven by the impact of foreign currency of $16 million, improved fleet procurement and higher residual values on certain vehicles.

Selling, general and administrative expenses (“SG&A”) decreased $10 million, or 4%, in the first quarter 2015 compared with 2014, primarily due to lower bonus incentives and marketing costs within our U.S. Car Rental segment and lower expenses resulting from the $10 million impact of foreign currency in our International Car Rental segment. These decreases were partially offset by increased administrative expenses of approximately $10 million resulting from the previously disclosed accounting restatement, investigation and remediation activities, as well as approximately $9 million of transaction costs for the anticipated separation of the Worldwide Equipment Rental business. Additionally, there was an impairment charge of $6 million in the first quarter 2015 related to the former Dollar Thrifty headquarters campus.

While total debt outstanding increased by $226 million in the first quarter of 2015 compared with 2014, interest expense, net remained virtually flat due to lower average interest rates as a result of a higher mix of debt with floating interest rates versus fixed.

Other expense of $5 million in the first quarter of 2015 was primarily comprised of $10 million of impairment charges and asset write-downs, see Note 9, "Impairments," partially offset by our share of earnings from our equity method and joint venture investments. Other income in the first quarter of 2014 is comprised of $7 million from Advantage sublease rent, fleet interest and administrative costs which was partially offset by $4 million of expense related to our share of losses in our equity method and joint venture investments.

The effective tax rate for the first quarter of 2015 was 19% as compared to (11)% in the first quarter of 2014. The effective tax rate for the full fiscal year 2015 is expected to be approximately 37%. There was a tax benefit of $16 million in the first quarter 2015 as compared to a provision of $7 million in the first quarter 2014. The change was the result of lower losses in the first quarter of 2015 in certain non-U.S. jurisdictions for which tax benefits are not realized and a comparatively larger effect of the suspension of the favorable Subpart F provision of the U.S. Federal Tax Law in the first quarter 2014.

We had adjusted pre-tax income of $3 million in the first quarter 2015 compared with $24 million in the first quarter 2014. See footnote (a) in the "Footnotes to the Results of Operations and Selected Operating Data by Segment Tables" for a summary and description of adjustments on a consolidated basis.

RESULTS OF OPERATIONS AND SELECTED OPERATING DATA BY SEGMENT

U.S. Car Rental

During 2015 we continued to increase the percentage of program cars in our car rental fleet. Our strategy remains flexible as we continue to periodically review the efficiencies of an optimal mix between program and non-program cars in our fleet. Non-program cars allow us the opportunity for ancillary revenue, such as warranty and financing, during disposition. Program cars generally provide us with flexibility to reduce the size of our fleet by returning cars sooner than originally expected without risk of loss in the event of an economic downturn or to respond to changes in rental demand. As we increase the percentage of program cars the average age of our fleet decreases since the average holding period for program vehicles is shorter than for non-program vehicles.

Depreciation rates are reviewed on a quarterly basis based on management's routine review of present and estimated future market conditions and their effect on residual values at the time of disposal. During the first quarter 2015 and 2014, 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 in our U.S. car rental operations resulted in a net increase in depreciation expense of $30 million and $37 million based on the reviews completed during the first quarter of 2015 and 2014, respectively. The rate change in the first quarter of 2015 reflects declining residual values and a reduction in the planned hold period of the vehicles as compared to our year end 2014 estimate.


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HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

For the three months ended March 31, 2015 and 2014 U.S. car rental operations sold approximately 67,000 and 47,000 non-program cars, respectively, a 43% increase in 2015 versus 2014. The quarter over quarter increase was primarily due to the impact of fleet rotation as we refresh our U.S. car rental fleet and from holding life reductions of non-program cars.

As of March 31, 2015, our U.S. car rental operations had a total of approximately 5,200 corporate and franchisee locations, comprised of 1,690 airport and 3,510 off-airport locations.
 
Three Months Ended March 31,
 
Percent Increase/(Decrease)
($ in millions, except for Total RPD and net depreciation per unit per month)
2015
 
2014
 
Total revenues
$
1,520

 
$
1,557

 
(2
)%
Direct operating expenses
$
926

 
$
907

 
2

Depreciation of revenue earning equipment and lease charges, net
$
421

 
$
424

 
(1
)
Income (loss) before income taxes
$
35

 
$
94

 
(63
)
Adjusted pre-tax income (loss)(a)
$
71

 
$
119

 
(40
)
Transaction days (in thousands) (b)
32,036

 
32,360

 
(1
)
Total RPD (c)
$
47.07

 
$
47.90

 
(2
)
Average fleet (d)
489,300

 
491,500

 

Fleet efficiency (d)
73
%
 
75
%
 
NM

Net depreciation per unit per month (e)
$
287

 
$
288

 

Program cars as a percentage of average fleet at period end
24
%
 
15
%
 
NM

Footnotes to the table above are shown in the "Footnotes to the Results of Operations and Selected Operating Data by Segment Tables" section of this MD&A.

NM - Not meaningful

Total U.S. car rental revenue was $1.5 billion in the 2015 first quarter, down 2% from the 2014 first quarter as a result of a 1% overall decline in transaction days which were impacted by a decrease in airport rental volume, driven largely by lower discretionary leisure rentals, disruptions from winter storms and lower international inbound tour business. The lower airport volume was partially offset by an increase in off-airport volume. Total RPD declined 2% driven predominantly by lower fuel-related ancillary revenue, a higher mix of off-airport business and a lower mix of higher-rate international inbound business. Off-airport revenues comprised 25% of total revenues for the segment in the first quarter 2015 as compared to 24% in the first quarter 2014.

Direct operating expenses for our U.S. car rental segment increased $19 million, or 2%, primarily comprised of the following:

Fleet related expenses rose $6 million quarter over quarter. Increases in maintenance, vehicle damage and other expenses were offset in part by a decline in gasoline costs.
 
Personnel related expenses increased $19 million, or 7%, from the first quarter 2014 due to salaries and benefits for incremental headcount for our off airport locations, incremental headcount in maintenance personnel to reduce vehicle downtime and incremental headcount in customer facing service personnel.

Other direct operating expenses decreased $6 million, or 1%, from first quarter 2014 due to a decline in net field administration and other direct operating costs of our rental locations, partially offset by a $4 million write-off of service equipment and assets deemed to have no future use.

Depreciation of revenue earning equipment and lease charges, net decreased by $3 million when compared with the first quarter 2014, which resulted in net depreciation per unit per month remaining consistent at $287 in the first quarter 2015 as compared to $288 in the first quarter 2014.


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HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Income before income taxes decreased $59 million, or 63%, from the first quarter 2014 due primarily to the impact of lower revenues, higher direct operating expenses as discussed above and an increase in other expenses of $7 million, primarily related to charges associated with service equipment and assets deemed to have no future use.

Adjusted pre-tax income decreased $48 million, or 40%, from the prior year. See footnote (a) in the "Footnotes to the Results of Operations and Selected Operating Data by Segment Tables" for a summary and description of these adjustments on a consolidated basis.

International Car Rental

As of March 31, 2015, our international car rental operations had a total of approximately 5,390 corporate and franchisee locations in approximately 144 countries including Canada, Australia, New Zealand and in the regions of Europe, Latin and South America, Caribbean, Asia, Africa and the Middle East.
 
Three Months Ended March 31,
 
Percent Increase/(Decrease)
($ in millions, except for Total RPD and net depreciation per unit per month)
2015
 
2014
 
 
Total revenues
$
436

 
$
482

 
(10
)%
Direct operating expenses
$
267

 
$
329

 
(19
)
Depreciation of revenue earning equipment and lease charges, net
$
95

 
$
113

 
(16
)
Income (loss) before income taxes
$
2

 
$
(45
)
 
NM

Adjusted pre-tax income (loss) (a)
$
8

 
$
(39
)
 
NM

Transaction days (in thousands)(b)
9,775

 
9,395

 
4

Total RPD (c)
$
46.96

 
$
46.51

 
1

Average fleet (d)
144,000

 
141,400

 
2

Fleet efficiency (d)
75
%
 
74
%
 
NM

Net depreciation per unit per month (e)
$
231

 
$
240

 
(4
)
Program cars as a percentage of average fleet at period end
38
%
 
34
%
 
NM

Footnotes to the table above are shown in the "Footnotes to the Results of Operations and Selected Operating Data by Segment Tables" section of this MD&A.

NM - Not meaningful

Total revenues for the International Car Rental segment decreased $46 million, or 10%, when compared with the prior-year period, due to the impact of foreign currency of $68 million. Excluding the impact of foreign currency, revenues increased $22 million, or 5%, driven by a 4% increase in transaction days resulting from improved business mix from U.S. source rentals. Total RPD for the segment increased 1%, excluding currency effects.

Direct operating expenses for our International car rental segment decreased $62 million, or 19%, from the prior year. Excluding the $45 million impact of foreign currency, direct operating expenses decreased approximately $17 million, or 5%, primarily due to a decrease in fleet related self-insurance expenses of $12 million resulting from a loss recorded in the first quarter 2014 with no comparable charge in the first quarter of 2015. Additionally, fuel expenses were down $7 million quarter over quarter.

Depreciation of revenue earning equipment and lease charges, net decreased $18 million, or 16%, mainly driven by the impact of foreign currency of $16 million, improved fleet procurement and higher residual values on certain vehicles. Net depreciation per unit per month decreased 4% to $231 from $240 quarter over quarter, excluding currency effects.
Income before income taxes was $2 million in the first quarter 2015 as compared to a loss before income taxes of $45 million in the first quarter 2014. The change was due mainly to the reduction in direct operating expenses and depreciation of revenue earning equipment and lease charges, net mentioned above, partially offset by lower revenues.


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HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Adjusted pre-tax income was $8 million in the first quarter 2015 as compared to an adjusted pre-tax loss of $39 million in the first quarter 2014. See footnote (a) in the "Footnotes to the Results of Operations and Selected Operating Data by Segment Tables" for a summary and description of reconciling adjustments on a consolidated basis.

Worldwide Equipment Rental

As of March 31, 2015, HERC had a total of more than 350 branches in the U.S., Canada, China, France, Saudi Arabia, Spain, the United Kingdom and other International licenses.
 
Three Months Ended March 31,
 
Percent Increase/(Decrease)
($ in millions)
2015
 
2014
 
 
Total revenues
$
355

 
$
358

 
(1
)%
Direct operating expenses
$
208

 
$
200

 
4

Depreciation of revenue earning equipment and lease charges, net
$
76

 
$
78

 
(3
)
Income (loss) before income taxes
$
11

 
$
36

 
(69
)
Adjusted pre-tax income (loss) (a)
$
33

 
$
52

 
(37
)
Dollar utilization (f)
34
%
 
34
%
 
NM

Time utilization (g)
61
%
 
61
%
 
NM

Rental and rental related revenue (h)
$
336

 
$
326

 
3

Same store revenue growth (i)
1
%
 
5
%
 
NM

Footnotes to the table above are shown in the "Footnotes to the Results of Operations and Selected Operating Data by Segment Tables" section of this MD&A.

NM - Not meaningful

Total revenues for the segment decreased $3 million, or 1%, when compared with the prior-year period and increased $8 million, or 3% excluding the impact of foreign currency exchange rates. Revenue growth was tempered by accelerating weakness in oil and gas industries as well as a lower level of new equipment and parts sales. We experienced increases of 3% in worldwide equipment rental volumes. The increase in volume was driven by growth in commercial construction and infrastructure, including increases in new customer accounts. The increase in volume was partially muted by the decline in the oil and gas industry in North America. Equipment rental pricing was 2% higher compared with the 2014 first quarter. Upstream oil and gas revenue represented roughly 15% of North American equipment rental and rental-related revenue in the first quarter of 2015 on a constant currency basis. Upstream revenue was down approximately 13% in the first quarter as major oil producers reduced spending. In contrast, all other North American rental and rental-related revenue increased approximately 6%.

Direct operating expenses for our Worldwide Equipment Rental segment increased $8 million, or 4%, and increased $15 million excluding the impact of foreign currency. This increase is primarily due to increases in salary related expenses of $5 million due to increased costs associated with an increase in the headcount for mechanics and other maintenance expense of $5 million to repair fleet and reduce the fleet unavailable for rent.

Depreciation of revenue earning equipment and lease charges, net decreased $2 million, or 3% in first quarter 2015 when compared with 2014, primarily due to the impact of foreign currency.

Income before income taxes decreased $25 million, or 69%, due to the factors above coupled with a $14 million increase in selling, general and administrative expenses primarily resulting from $9 million of costs for the anticipated HERC spin-off transaction as well as increased costs associated with a larger sales force.

Adjusted pre-tax income decreased $19 million, or 37%. See footnote (a) in the "Footnotes to the Results of Operations and Selected Operating Data by Segment Tables" for a summary and description of these adjustments on a consolidated basis.


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HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

All Other Operations
 
Three Months Ended March 31,
 
Percent Increase/(Decrease)
($ in millions)
2015
 
2014
 
 
Total revenues
$
143

 
$
139

 
3
 %
Direct operating expenses
$
6

 
$
7

 
(14
)
Depreciation of revenue earning equipment and lease charges, net
$
115

 
$
111

 
4

Income (loss) before income taxes
$
12

 
$
11

 
9

Adjusted pre-tax income (loss)(a)
$
16

 
$
16

 

Average Fleet - Donlen
168,600

 
176,800

 
(5
)
Footnotes to the table above are shown in the "Footnotes to the Results of Operations and Selected Operating Data by Segment Tables" section of this MD&A.

Our Donlen operations had favorable revenue results on a quarter over quarter basis driven by increased volume. Higher depreciation expense mostly offset the impact of higher revenues.

Footnotes to the Results of Operations and Selected Operating Data by Segment Tables

(a)
Adjusted pre-tax income is calculated as income before income taxes plus certain non-cash purchase accounting charges, debt-related charges relating to the amortization and write-off of debt financing costs and debt discounts and certain one-time charges and nonoperational items. Adjusted pre-tax income is important to management because it allows management to assess operational performance of our business, exclusive of the items mentioned above. It also allows management to assess the performance of the entire business on the same basis as the segment measure of profitability. Management believes that it is important to investors for the same reasons it is important to management and because it allows them to assess our operational performance on the same basis that management uses internally. The contribution of our reportable segments to adjusted pre-tax income and reconciliation to consolidated amounts are presented below:
 
Three Months Ended
March 31,
(In millions)
2015
 
2014
Adjusted pre-tax income (loss):
 
 
 
U.S. car rental
$
71

 
$
119

International car rental
8

 
(39
)
Worldwide equipment rental
33

 
52

All other operations
16

 
16

Total reportable segments
128

 
148

Corporate (1)
(125
)
 
(124
)
Consolidated adjusted pre-tax income (loss)
3

 
24

Adjustments:
 
 
 
Acquisition accounting (2)
(31
)
 
(33
)
Debt-related charges (3)
(16
)
 
(12
)
Restructuring charges (4)
(7
)
 
(15
)
Restructuring related charges (5)
(13
)
 
(24
)
Acquisition related costs and charges (6)

 
(7
)
Equipment rental spin-off costs (7)
(9
)
 

Impairment charges and asset write-downs(8)
(9
)
 

Other (9)