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HTZ > SEC Filings for HTZ > Form 10-K/A on 20-Mar-2014All Recent SEC Filings

Show all filings for HERTZ GLOBAL HOLDINGS INC

Form 10-K/A for HERTZ GLOBAL HOLDINGS INC


20-Mar-2014

Annual Report


ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of
Operations

The statements in this discussion and analysis regarding industry outlook, our expectations regarding the performance of our business and the other non-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in "Item 1A-Risk Factors." The following discussion and analysis provides information that we believe to be relevant to an understanding of our consolidated financial condition and results of operations. Our actual results may differ materially from those contained in or implied by any forward-looking statements. You should read the following discussion and analysis together with the sections entitled "Cautionary Note Regarding Forward-Looking Statements," "Item 1A-Risk Factors," "Item 6-Selected Financial Data" and our consolidated financial statements and related notes included in this Annual Report under the caption "Item 8-Financial Statements and Supplementary Data."
Overview of Our Business
We are engaged principally in the business of renting and leasing of cars and equipment.
Our 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 the sale of loss or collision damage waivers, liability insurance coverage, parking and other products and fees and certain cost reimbursements from our franchisees and from Simply Wheelz LLC for the sublease of vehicles);

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, such as our third party claims management services).

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 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 (including advertising); and

Interest expense.

Our profitability is primarily a function of the volume, mix and pricing of rental transactions and the utilization of cars and equipment. Significant changes in the purchase price or residual values of cars and equipment or interest rates can have a significant effect on our profitability depending on our ability to adjust pricing for these changes. We continue to balance our mix of non-program and program vehicles based on market conditions. Our business requires significant expenditures for cars and equipment, and consequently we require substantial liquidity to finance such expenditures. See "Liquidity and Capital Resources" below.
On November 19, 2012, Hertz acquired 100% of the equity of Dollar Thrifty, a car rental business. As of December 31, 2013, Dollar Thrifty had approximately 340 corporate locations in the United States and Canada, with approximately 4,100 employees located mainly in North America. In addition to its corporate operations, Dollar Thrifty had approximately 1,060 franchise locations in approximately 75 countries. Dollar Thrifty brings to Hertz an immediate leadership position in the value-priced rental vehicle market generally appealing to leisure customers, including domestic and foreign tourists, and to small businesses, government and independent business travelers. Our 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:


Table of Contents

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of
Operations (Continued)

rental of cars, crossovers and light trucks in the United States, or "U.S. car rental," rental of cars, crossovers and light trucks internationally, or "international car rental," rental of industrial, construction, material handling and other equipment, or "worldwide equipment rental" and "all other operations," which includes our Donlen operating segment.
We historically aggregated our U.S., Europe, Other International and Donlen car rental operating segments together to produce a worldwide car rental reportable segment. We now present our operations as four reportable segments (U.S. car rental, international car rental, worldwide equipment rental and all other operations). We have revised our segment results presented herein to reflect this new segment structure, including for prior periods. U.S. Car Rental
In recent periods we have decreased the percentage of program cars in our car rental fleet, but this strategy remains flexible as we continue to periodically review the efficiencies of an optimal mix between program and non-program cars in our fleet. However, 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. This flexibility is reduced as the percentage of non-program cars in our car rental fleet increases. Furthermore, it is expected that the average age of our fleet will increase since the average holding period for non-program vehicles is longer than program vehicles. However, the longer holding period does not necessarily equate to higher costs due to the stringent turnback requirements imposed by vehicle manufacturers for program cars.

                                                                     As of December 31,
                                                                  2013       2012      2011
Percentage of non-program cars in our U.S. car rental operations   91 %       95 %      83 %

In the year ended December 31, 2013, our U.S. monthly per vehicle depreciation costs decreased as compared to the prior year period due to mix optimization, improved procurement and remarketing efforts, optimization of fleet holding periods related to the integration of Dollar Thrifty and channel diversification.
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 2013, 2012 and 2011, depreciation rates being used to compute the provision for depreciation of revenue earning equipment were adjusted on certain vehicles in our car rental operations to reflect changes in the estimated residual values to be realized when revenue earning equipment is sold. These depreciation rate changes in our U.S. car rental operations from previous quarters resulted in net decreases of $44.2 million, $139.4 million and $26.7 million in depreciation expense for the years ended December 31, 2013, 2012 and 2011, respectively. The favorable adjustments reflect changes from the impact of car sales channel diversification, acceleration of our retail sales expansion and the optimization of fleet holding periods related to the integration of Dollar Thrifty. The cumulative effect of the reduction in rates was also indicative of the residual values experienced in the U.S. for the years ended December 31, 2013, 2012 and 2011.
For the years ended December 31, 2013, 2012 and 2011, our U.S. car rental operations sold approximately 197,700, 136,400 and 121,800 non-program cars, respectively, an 44.9% increase in 2013 versus 2012. This increase was primarily related to our recent acquisition of Dollar Thrifty.
Total revenue per transaction day, or "Total RPD," is calculated as total revenues less revenues from fleet subleases, divided by the total number of transaction days, with all periods adjusted to eliminate the effect of fluctuations in foreign currency. For the year ended December 31, 2013, we experienced a 26.2% increase in transaction days and a 1.4% increase in Total RPD as compared with the same period in the prior year in the United States. Revenues from our U.S. off-airport operations represented $1,453.3 million, $1,306.6 million and $1,198.6 million of our total car rental revenues in the years ended December 31, 2013, 2012 and 2011, respectively. As of December 31, 2013, we have 2,785 off-airport locations in the U.S. Our strategy includes selected openings of new off-airport locations, the disciplined evaluation of existing locations and the pursuit of same-store sales growth. Our strategy also includes increasing penetration in the off-airport market and growing the online leisure market, particularly in the longer length weekly sector, which is characterized by lower vehicle costs and lower transaction costs at a lower Total RPD. Increasing our penetration in these sectors is consistent with our long-term strategy to generate profitable growth. When we open a new off-airport location, we incur a number of costs, including those relating to site selection, lease negotiation, recruitment of employees, selection and development of managers, initial sales activities and integration


Table of Contents

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of
Operations (Continued)

of our systems with those of the companies who will reimburse the location's replacement renters for their rentals. A new off-airport location, once opened, takes time to generate its full potential revenues and, as a result, revenues at new locations do not initially cover their start-up costs and often do not, for some time, cover the costs of their ongoing operations.
As of December 31, 2013, our U.S. car rental operations had a total of approximately 5,550 corporate and 560 franchisee locations.

International Car Rental
                                                                  As of December 31,
                                                               2013       2012      2011
Percentage of non-program cars in our international car
rental operations                                               76 %       79 %      75 %

In the year ended December 31, 2013, our international monthly per vehicle depreciation costs decreased as compared to the prior year period due to mix optimization, improved procurement and remarketing efforts and slight strengthening of used vehicle residual values.
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 2013, 2012 and 2011, depreciation rates being used to compute the provision for depreciation of revenue earning equipment were adjusted on certain vehicles in our car rental operations to reflect changes in the estimated residual values to be realized when revenue earning equipment is sold. Depreciation rate changes in our international operations resulted in net increases of $5.0 million, $8.8 million and $12.9 million in depreciation expense for the years ended December 31, 2013, 2012 and 2011.
For the years ended December 31, 2013, 2012 and 2011, our international car rental operations sold approximately 64,500, 54,500 and 54,800 non-program cars, respectively, an 18.3% increase in 2013 versus 2012. This increase was due to accelerated rotation strategy due to slight strengthening of used vehicle residual values.
During the year ended December 31, 2013, in our international operations, we experienced a 4.1% increase in transaction days and a 0.6% increase in Total RPD when compared to the year ended December 31, 2012.
As of December 31, 2013, our international car rental operations had a total of approximately 1,450 corporate and 3,930 franchisee locations in approximately 145 countries in North America (excluding the United States), Europe, Latin America, Asia, Australia, Africa, the Middle East and New Zealand. Equipment Rental
HERC experienced higher rental volumes and pricing for the year ended December 31, 2013 compared to the prior year as the industry continued its recovery in North America. The recovery has been led by continued strength in oil and gas, industrial and specialty markets, and the early beginnings of the construction recovery. We continued to see growth in industrial performance, especially oil and gas related, and improvement in the construction sector in part reflecting higher rental penetration. Additionally, there continue to be opportunities for growth in 2014 as the uncertain economic outlook makes rental solutions attractive to customers. Our European equipment rental business, which represents approximately 6.5% of our worldwide equipment rental revenues, saw a revenue decline of 1.9% for the year ended December 31, 2013 compared to the prior year period, due to the soft industry conditions in France and Spain. Depreciation rate changes in certain of our equipment rental operations resulted in a decrease of $0.4 million, an increase of $0.5 million and a decrease of $4.4 million in depreciation expense for the years ended December 31, 2013, 2012 and 2011, respectively.
All Other Operations
On September 1, 2011, Hertz acquired 100% of the equity of Donlen, a leading provider of fleet leasing and management services for corporate fleets. For the years ended December 31, 2013 and 2012 and for the four months ended December 31, 2011 (period it was owned by Hertz), Donlen had an average of approximately 169,600, 150,800 and 137,000 vehicles under lease and management, respectively.


Table of Contents

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of
Operations (Continued)

Seasonality
Our car rental and equipment rental operations are seasonal businesses, with decreased levels of business in the winter months and heightened activity during the spring and summer. We have the ability to dynamically manage fleet capacity, the most significant portion of our cost structure, to meet market demand. For instance, to accommodate increased demand, we increase our available fleet and staff during the second and third quarters of the year. As business demand declines, fleet and staff are decreased accordingly. A number of our other major operating costs, including airport concession fees, commissions and vehicle liability expenses, are directly related to revenues or transaction volumes. In addition, our management expects to utilize enhanced process improvements, including efficiency initiatives and the use of our information technology systems, to help manage our variable costs. Approximately three-fifths of our typical annual operating costs represent variable costs, while the remaining two-fifths 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. Restructuring
As part of our ongoing effort to implement our strategy of reducing operating costs, we have evaluated our workforce and operations and made adjustments, including headcount reductions and business process reengineering resulting in optimized work flow at rental locations and maintenance facilities as well as streamlined our back-office operations and evaluated potential outsourcing opportunities. When we made adjustments to our workforce and operations, we incurred incremental expenses that delay the benefit of a more efficient workforce and operating structure, but we believe that increased operating efficiency and reduced costs associated with the operation of our business are important to our long-term competitiveness.
During 2007 through 2013, we announced several initiatives to improve our competitiveness and industry leadership through targeted job reductions. These initiatives included, but were not limited to, job reductions at our corporate headquarters, integration of Dollar Thrifty and back-office operations in the U.S. and Europe. As part of our re-engineering optimization we outsourced selected functions globally. In addition, we streamlined operations and reduced costs by initiating the closure of targeted car rental locations and equipment rental branches throughout the world. The largest of these closures occurred in 2008 which resulted in closures of approximately 250 off-airport locations and 22 branches in our U.S. equipment rental business. These initiatives impacted approximately 10,700 employees.
For the years ended December 31, 2013, 2012 and 2011, our consolidated statement of operations includes restructuring charges relating to various initiatives of $77.0 million, $38.0 million and $56.4 million, respectively.
For the year ended December 31, 2013, $21.9 million of costs related to the relocation of our corporate headquarters to Estero, Florida were recorded within restructuring charges.
Additional efficiency and cost saving initiatives are being developed, however, we presently do not have firm plans or estimates of any related expenses. See Note 14 to the Notes to our audited annual consolidated financial statements included in this Annual Report under caption "Item 8-Financial Statements and Supplementary Data."
Critical Accounting Policies and Estimates Our discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or "GAAP." The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts in our financial statements and accompanying notes.
We believe the following accounting policies may involve a higher degree of judgment and complexity in their application and represent the critical accounting policies used in the preparation of our financial statements. If different assumptions or conditions were to prevail, the results could be materially different from our reported results. For additional discussion of our accounting policies, see Note 2 to the Notes to our audited annual consolidated financial statements included in this Annual Report under the caption "Item 8-Financial Statements and Supplementary Data."


Table of Contents

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of
Operations (Continued)

Acquisition Accounting
We account for business combinations using the acquisition method, which requires an allocation of the purchase price of an acquired entity to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. Goodwill represents the excess of the purchase price over the net tangible and intangible assets acquired. Revenue Earning Equipment
Our principal assets are revenue earning equipment, which represented approximately 58% of our total assets as of December 31, 2013. Revenue earning equipment consists of vehicles utilized in our car rental operations and equipment utilized in our equipment rental operations. For the year ended December 31, 2013, 30% of the vehicles purchased for our combined U.S. and international car rental fleets were subject to repurchase by automobile manufacturers under contractual repurchase and guaranteed depreciation programs, subject to certain manufacturers' car condition and mileage requirements, at a specific price during a specified time period. These programs limit our residual risk with respect to vehicles purchased under these programs. For all other vehicles, as well as equipment acquired by our equipment rental business, we use historical experience, as well as industry residual value guidebooks, and the monitoring of market conditions, to set depreciation rates. Generally, when revenue earning equipment is acquired, we estimate the period that we will hold the asset, primarily based on historical measures of the amount of rental activity (e.g., automobile mileage and equipment usage) and the targeted age of equipment at the time of disposal. We also estimate the residual value of the applicable revenue earning equipment at the expected time of disposal. The residual values for rental vehicles are affected by many factors, including make, model and options, age, physical condition, mileage, sale location, time of the year and channel of disposition (e.g., auction, retail, dealer direct). The residual value for rental equipment is affected by factors which include equipment age and amount of usage. Depreciation is recorded on a straight-line basis over the estimated holding period. 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. Market conditions for used vehicle and equipment sales can also be affected by external factors such as the economy, natural disasters, fuel prices and incentives offered by manufacturers of new cars. These key factors are considered when estimating future residual values. Depreciation rates are adjusted prospectively through the remaining expected life. As a result of this ongoing assessment, we make periodic adjustments to depreciation rates of revenue earning equipment in response to changing market conditions. Upon disposal of revenue earning equipment, depreciation expense is adjusted for any difference between the net proceeds received and the remaining net book value and a corresponding gain or loss is recorded.
Within our Donlen subsidiary, revenue earning equipment is under longer term lease agreements with our customers. These leases contain provisions whereby we have a contracted residual value guaranteed to us by the lessee, such that we do not experience any gains or losses on the disposal of these vehicles. Therefore depreciation rates on these vehicles are not adjusted at any point in time per the associated lease contract.
See Note 8 to the Notes to our audited annual consolidated financial statements included in this Annual Report under the caption "Item 8-Financial Statements and Supplementary Data."
Public Liability and Property Damage
The obligation for public liability and property damage on self-insured U.S. and international vehicles and equipment 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 rental volume and actuarial evaluations of historical accident claim experience and trends, as well as future projections of ultimate losses, expenses, premiums and administrative costs. The adequacy of the liability is regularly monitored based on evolving accident claim history and insurance related state legislation changes. If our estimates change or if actual results differ from these assumptions, the amount of the recorded liability is adjusted to reflect these results. Our actual results as compared to our estimates have historically resulted in relatively minor adjustments to our recorded liability. Pension Benefit Obligations
Our employee pension costs and obligations are dependent on our assumptions used by actuaries in calculating such amounts. These assumptions include discount rates, salary growth, long-term return on plan assets, retirement rates, mortality rates and other factors. Actual results that differ from our assumptions are accumulated and amortized over future periods and, therefore, generally affect our recognized expense in such future periods. While we believe that the assumptions used are appropriate, significant differences in actual experience or significant changes in assumptions


Table of Contents

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of
Operations (Continued)

would affect our pension costs and obligations. The various employee related actuarial assumptions (e.g., retirement rates, mortality rates, salary growth) used in determining pension costs and plan liabilities are reviewed periodically by management, assisted by the enrolled actuary, and updated as warranted. The discount rate used to value the pension liabilities and related expenses and the expected rate of return on plan assets are the two most significant assumptions impacting pension expense. The discount rate used is a market based spot rate as of the valuation date. For the expected return on assets assumption, we use a forward looking rate that is based on the expected return for each asset class (including the value added by active investment management), weighted by the target asset allocation. The past annualized long-term performance of the Plans' assets has generally been in line with the long-term rate of return assumption. See Note 6 to the Notes to our audited annual consolidated financial statements included in this Annual Report under the caption "Item 8-Financial Statements and Supplementary Data." For a discussion of the risks associated with our pension plans, see "Item 1A-Risk Factors" in this Annual Report. Goodwill
We review goodwill for impairment whenever events or changes in circumstances indicate that the carrying amount of the goodwill may not be recoverable, and also review goodwill annually. Goodwill impairment is deemed to exist if the carrying value of goodwill exceeds its fair value. Goodwill must be tested at least annually using a two-step process. The first step is to identify any potential impairment by comparing the carrying value of the reporting unit to its fair value. A reporting unit is an operating segment or a business one level below that operating segment (the component level) if discrete financial information is prepared and regularly reviewed by segment management. However, components are aggregated as a single reporting unit if they have similar economic characteristics. We estimate the fair value of our reporting units using a discounted cash flow methodology. The key assumptions used in the discounted cash flow valuation model for impairment testing include discount rates, growth rates, cash flow projections and terminal value rates. Discount rates are set by using the Weighted Average Cost of Capital, or "WACC," methodology. The WACC methodology considers market and industry data as well as Company specific risk factors for each reporting unit in determining the appropriate discount rates to be used. The discount rate utilized for each reporting unit is indicative of the return an investor would expect to receive . . .

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