10-Q 1 hghthcq32018form10-q.htm 10-Q Document

 
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 September 30, 2018
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

HERTZ GLOBAL HOLDINGS, INC.
THE HERTZ CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
 
001-37665
 
61-1770902
DELAWARE
 
001-07541
 
13-1938568
(State or other jurisdiction of
incorporation or organization)
 
(Commission File Number)
 
(I.R.S. Employer Identification No.)
 
 
 
 
 
 
 
8501 Williams Road
Estero, Florida 33928
(239) 301-7000
 
 
 
 
8501 Williams Road
Estero, Florida 33928
(239) 301-7000
 
 
 
 
(Address, including Zip Code, and
telephone number, including area code,
of registrant's principal executive offices)
 
 
 
 
 
 
 
 
 
Not Applicable
 
 
 
 
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.
Hertz Global Holdings, Inc.    Yes x No o
The Hertz Corporation    Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 
Hertz Global Holdings, Inc.    Yes x No o
The Hertz Corporation    Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Hertz Global Holdings, Inc.
Large accelerated filer 
o
Accelerated filer 
x
Non-accelerated filer
o

 
Smaller reporting company 
o
Emerging growth company
o
 
 
 
If an emerging growth company, indicate by check mark if the registrant has not elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
o
 
 
The Hertz Corporation
Large accelerated filer 
o
Accelerated filer 
o
Non-accelerated filer
x
 
Smaller reporting company 
o
Emerging growth company
o
 
 
 
If an emerging growth company, indicate by check mark if the registrant has not elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
o
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Hertz Global Holdings, Inc.    Yes o No x
The Hertz Corporation    Yes o No x

Indicate the number of shares outstanding as of the latest practicable date.
 
 
Class
 
Shares Outstanding at
October 29, 2018
Hertz Global Holdings, Inc.
 
Common Stock, par value $0.01 per share
 
83,932,275
The Hertz Corporation
 
Common Stock, par value $0.01 per share
 
100 (100% owned by
Rental Car Intermediate Holdings, LLC)
 
 
 
 
 
 


HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS



HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES

PART I. FINANCIAL INFORMATION
ITEM 1.   CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Index

 
 
Page
Hertz Global Holdings, Inc. and Subsidiaries
 
The Hertz Corporation and Subsidiaries
 
Notes to the Condensed Consolidated Financial Statements
 


1




HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited
(In millions, except par value)
 
September 30,
2018
 
December 31,
2017
ASSETS
 
 
 
Cash and cash equivalents
$
761

 
$
1,072

Restricted cash and cash equivalents:
 
 
 
Vehicle
236

 
386

Non-vehicle
29

 
46

Total restricted cash and cash equivalents
265

 
432

Total cash, cash equivalents, restricted cash and restricted cash equivalents
1,026

 
1,504

Receivables:
 
 
 
Vehicle
796

 
531

Non-vehicle, net of allowance of $29 and $33, respectively
1,009

 
834

Total receivables, net
1,805

 
1,365

Prepaid expenses and other assets
991

 
687

Revenue earning vehicles:
 
 
 
Vehicles
16,972

 
14,574

Less accumulated depreciation
(3,395
)
 
(3,238
)
Total revenue earning vehicles, net
13,577

 
11,336

Property and equipment:
 
 
 
Land, buildings and leasehold improvements
1,214

 
1,233

Service equipment and other
786

 
763

Less accumulated depreciation
(1,219
)
 
(1,156
)
Total property and equipment, net
781

 
840

Other intangible assets, net
3,197

 
3,242

Goodwill
1,083

 
1,084

Total assets(a)
$
22,460

 
$
20,058

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Accounts payable:
 
 
 
Vehicle
$
239

 
$
294

Non-vehicle
765

 
652

Total accounts payable
1,004

 
946

Accrued liabilities
1,306

 
920

Accrued taxes, net
181

 
160

Debt:
 
 
 
Vehicle
12,737

 
10,431

Non-vehicle
4,421

 
4,434

Total debt
17,158

 
14,865

Public liability and property damage
439

 
427

Deferred income taxes, net
1,145

 
1,220

Total liabilities(a)
21,233

 
18,538

Commitments and contingencies


 


Stockholders' equity:
 
 
 
Preferred Stock, $0.01 par value, no shares issued and outstanding

 

Common Stock, $0.01 par value, 86 and 86 shares issued and 84 and 84 shares outstanding
1

 
1

Additional paid-in capital
2,256

 
2,243

Accumulated deficit
(819
)
 
(506
)
Accumulated other comprehensive income (loss)
(135
)
 
(118
)
Treasury Stock, at cost, 2 shares and 2 shares
(100
)
 
(100
)
Total stockholders' equity attributable to Hertz Global
1,203

 
1,520

Noncontrolling interest
24

 

Total stockholders' equity
1,227

 
1,520

Total liabilities and stockholders' equity
$
22,460

 
$
20,058

(a)
Hertz Global Holdings, Inc.'s consolidated total assets as of September 30, 2018 and December 31, 2017 include total assets of variable interest entities (“VIEs”) of $800 million and $524 million, respectively, which can only be used to settle obligations of the VIEs. Hertz Global Holdings, Inc.'s consolidated total liabilities as of September 30, 2018 and December 31, 2017 include total liabilities of VIEs of $776 million and $524 million, respectively, for which the creditors of the VIEs have no recourse to Hertz Global Holdings, Inc. See "Special Purpose Entities" in Note 6, "Debt," and "Other Relationships" in Note 12, "Related Party Transactions," for further information.

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

2



HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
(In millions, except per share data)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
Worldwide vehicle rental
$
2,584

 
$
2,413

 
$
6,694

 
$
6,240

All other operations
174

 
159

 
515

 
473

Total revenues
2,758

 
2,572

 
7,209

 
6,713

Expenses:
 
 
 
 
 
 
 
Direct vehicle and operating
1,459

 
1,348

 
4,043

 
3,735

Depreciation of revenue earning vehicles and lease charges, net
672

 
700

 
2,020

 
2,144

Selling, general and administrative
265

 
217

 
765

 
661

Interest expense, net:
 
 
 
 
 
 
 
Vehicle
115

 
90

 
336

 
242

Non-vehicle
73

 
86

 
218

 
223

Total interest expense, net
188

 
176

 
554

 
465

Intangible asset impairments

 

 

 
86

Other (income) expense, net
(7
)
 
(12
)
 
(36
)
 
19

Total expenses
2,577

 
2,429

 
7,346

 
7,110

Income (loss) before income taxes
181

 
143

 
(137
)
 
(397
)
Income tax (provision) benefit
(41
)
 
(50
)
 
12

 
108

Net income (loss)
140

 
93

 
(125
)
 
(289
)
Net (income) loss attributable to noncontrolling interests
1

 

 
1

 

Net income (loss) attributable to Hertz Global
$
141

 
$
93

 
$
(124
)
 
$
(289
)
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
84

 
83

 
83

 
83

Diluted
84

 
83

 
83

 
83

Earnings (loss) per share:
 
 
 
 
 
 
 
Basic earnings (loss) per share
$
1.68

 
$
1.12

 
$
(1.49
)
 
$
(3.48
)
Diluted earnings (loss) per share
$
1.68

 
$
1.12

 
$
(1.49
)
 
$
(3.48
)



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

3



HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Unaudited
(In millions)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Net income (loss)
$
140

 
$
93

 
$
(125
)
 
$
(289
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
1

 
9

 
(18
)
 
21

Reclassification of realized gain on securities to other (income) expense

 

 

 
(3
)
Reclassification of foreign currency items to other (income) expense, net
(1
)
 
8

 
(1
)
 
8

Net gain (loss) on defined benefit pension plans
(1
)

(3
)

1


(7
)
Reclassification from other comprehensive income (loss) to selling, general and administrative expense for amortization of actuarial (gains) losses on defined benefit pension plans

 
1

 

 
3

Reclassification from other comprehensive income (loss) to other income/expense for amortization of actuarial (gains) losses on defined benefit pension plans
2

 

 
2

 

Total other comprehensive income (loss) before income taxes
1

 
15

 
(16
)
 
22

Income tax (provision) benefit related to reclassified amounts of net periodic costs on defined benefit pension plans
(1
)
 

 
(1
)
 
(1
)
Total other comprehensive income (loss)

 
15

 
(17
)
 
21

Total comprehensive income (loss)
140

 
108

 
(142
)
 
(268
)
Comprehensive (income) loss attributable to noncontrolling interests
1

 

 
1

 

Comprehensive income (loss) attributable to Hertz Global
$
141

 
$
108

 
$
(141
)
 
$
(268
)

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

4


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


 
Nine Months Ended
September 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(125
)
 
$
(289
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Depreciation of revenue earning vehicles, net
1,952

 
2,089

Depreciation and amortization, non-vehicle
166

 
182

Amortization of deferred financing costs and debt discount (premium)
36

 
33

Loss on extinguishment of debt
22

 
8

Stock-based compensation charges
10

 
16

Provision for receivables allowance
29

 
28

Deferred income taxes, net
(39
)
 
(138
)
Impairment charges and asset write-downs

 
116

(Gain) loss on marketable securities
(21
)
 
(3
)
Gain on sale of Brazil Operations

 
(6
)
Other
1

 
(12
)
Changes in assets and liabilities:
 
 
 
Non-vehicle receivables
(217
)
 
(184
)
Prepaid expenses and other assets
(58
)
 
(25
)
Non-vehicle accounts payable
119

 
140

Accrued liabilities
106

 
(5
)
Accrued taxes, net
21

 
9

Public liability and property damage
15

 
18

Net cash provided by (used in) operating activities
2,017

 
1,977

Cash flows from investing activities:
 
 
 
Revenue earning vehicles expenditures
(10,076
)
 
(8,683
)
Proceeds from disposal of revenue earning vehicles
5,378

 
5,285

Capital asset expenditures, non-vehicle
(119
)
 
(124
)
Proceeds from property and other equipment disposed of or to be disposed of
47

 
18

Proceeds from sale of Brazil Operations, net of retained cash

 
94

Purchases of marketable securities
(60
)
 

Sales of marketable securities
36

 
9

Other
(5
)
 
(4
)
Net cash provided by (used in) investing activities
(4,799
)
 
(3,405
)

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

5


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

 
Nine Months Ended
September 30,
 
2018
 
2017
Cash flows from financing activities:
 
 
 
Proceeds from issuance of vehicle debt
11,871

 
6,907

Repayments of vehicle debt
(9,525
)
 
(5,887
)
Proceeds from issuance of non-vehicle debt
387

 
2,100

Repayments of non-vehicle debt
(398
)
 
(986
)
Payment of financing costs
(30
)
 
(43
)
Early redemption premium payment
(19
)
 
(5
)
Contributions from noncontrolling interest owners
25

 

Other
(3
)
 
(1
)
Net cash provided by (used in) financing activities
2,308

 
2,085

Effect of foreign currency exchange rate changes on cash, cash equivalents, restricted cash and restricted cash equivalents
(4
)
 
26

Net increase (decrease) in cash, cash equivalents, restricted cash and restricted cash equivalents during the period
(478
)
 
683

Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period
1,504

 
1,094

Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period
$
1,026

 
$
1,777

 


 


Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest, net of amounts capitalized:
 
 
 
Vehicle
$
268

 
$
212

Non-vehicle
171

 
164

Income taxes, net of refunds
15

 
40

Supplemental disclosures of non-cash information:
 
 
 
Purchases of revenue earning vehicles included in accounts payable and accrued liabilities, net of incentives
$
101

 
$
69

Sales of revenue earning vehicles included in receivables
658

 
443

Purchases of non-vehicle capital assets included in accounts payable
43

 
49

Sales of non-vehicle capital assets included in receivables
3

 
1

Receivable on sale of Brazil Operations

 
13

Revenue earning vehicles and non-vehicle capital assets acquired through capital lease
17

 
24




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

6




THE HERTZ CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited
(In millions, except par value and share data)
 
September 30,
2018
 
December 31,
2017
ASSETS
 
 
 
Cash and cash equivalents
$
761

 
$
1,072

Restricted cash and cash equivalents:
 
 
 
Vehicle
236

 
386

Non-vehicle
29

 
46

Total restricted cash and cash equivalents
265

 
432

Total cash, cash equivalents, restricted cash and restricted cash equivalents
1,026

 
1,504

Receivables:
 
 
 
Vehicle
796

 
531

Non-vehicle, net of allowance of $29 and $33, respectively
1,009

 
834

Total receivables, net
1,805

 
1,365

Prepaid expenses and other assets
991

 
687

Revenue earning vehicles:
 
 
 
Vehicles
16,972

 
14,574

Less accumulated depreciation
(3,395
)
 
(3,238
)
Total revenue earning vehicles, net
13,577

 
11,336

Property and equipment:
 
 
 
Land, buildings and leasehold improvements
1,214

 
1,233

Service equipment and other
786

 
763

Less accumulated depreciation
(1,219
)
 
(1,156
)
Total property and equipment, net
781

 
840

Other intangible assets, net
3,197

 
3,242

Goodwill
1,083

 
1,084

Total assets(a)
$
22,460

 
$
20,058

LIABILITIES AND STOCKHOLDER'S EQUITY
 
 
 
Accounts payable:
 
 
 
Vehicle
$
239

 
$
294

Non-vehicle
765

 
652

Total accounts payable
1,004

 
946

Accrued liabilities
1,306

 
920

Accrued taxes, net
181

 
160

Debt:
 
 
 
Vehicle
12,737

 
10,431

Non-vehicle
4,421

 
4,434

Total debt
17,158

 
14,865

Public liability and property damage
439

 
427

Deferred income taxes, net
1,146

 
1,220

Total liabilities(a)
21,234

 
18,538

Commitments and contingencies


 


Stockholder's equity:
 
 
 
Common Stock, $0.01 par value, 100 shares issued and outstanding

 

Additional paid-in capital
3,183

 
3,166

Due from affiliate
(50
)
 
(42
)
Accumulated deficit
(1,796
)
 
(1,486
)
Accumulated other comprehensive income (loss)
(135
)
 
(118
)
Total stockholder's equity attributable to Hertz
1,202

 
1,520

Noncontrolling interest
24

 

Total stockholder's equity
1,226

 
1,520

Total liabilities and stockholder's equity
$
22,460

 
$
20,058

(a)
The Hertz Corporation's consolidated total assets as of September 30, 2018 and December 31, 2017 include total assets of variable interest entities (“VIEs”) of $800 million and $524 million, respectively, which can only be used to settle obligations of the VIEs. The Hertz Corporation's consolidated total liabilities as of September 30, 2018 and December 31, 2017 include total liabilities of VIEs of $776 million and $524 million, respectively, for which the creditors of the VIEs have no recourse to the Hertz Corporation. See "Special Purpose Entities" in Note 6, "Debt," and "Other Relationships" in Note 12, "Related Party Transactions," for further information.

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

7



THE HERTZ CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
(In millions)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
Worldwide vehicle rental
$
2,584

 
$
2,413

 
$
6,694

 
$
6,240

All other operations
174

 
159

 
515

 
473

Total revenues
2,758

 
2,572

 
7,209

 
6,713

Expenses:
 

 
 

 
 

 
 

Direct vehicle and operating
1,459

 
1,348

 
4,043

 
3,735

Depreciation of revenue earning vehicles and lease charges, net
672

 
700

 
2,020

 
2,144

Selling, general and administrative
265

 
217

 
765

 
661

Interest expense, net:
 
 
 
 
 
 
 
Vehicle
115

 
90

 
336

 
242

Non-vehicle
71

 
85

 
213

 
219

Total interest expense, net
186

 
175

 
549

 
461

Intangible asset impairments

 

 

 
86

Other (income) expense, net
(7
)
 
(12
)
 
(36
)
 
19

Total expenses
2,575

 
2,428

 
7,341

 
7,106

Income (loss) before income taxes
183

 
144

 
(132
)
 
(393
)
Income tax (provision) benefit
(42
)
 
(50
)
 
10

 
107

Net income (loss)
141

 
94

 
(122
)
 
(286
)
Net (income) loss attributable to noncontrolling interests
1

 

 
1

 

Net income (loss) attributable to Hertz
$
142

 
$
94

 
$
(121
)
 
$
(286
)


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

8



THE HERTZ CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Unaudited
(In millions)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Net income (loss)
$
141

 
$
94

 
$
(122
)
 
$
(286
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
1

 
9

 
(18
)
 
21

Reclassification of realized gain on securities to other (income) expense

 

 

 
(3
)
Reclassification of foreign currency items to other (income) expense, net
(1
)
 
8

 
(1
)
 
8

Net gain (loss) on defined benefit pension plans
(1
)
 
(3
)
 
1

 
(7
)
Reclassification from other comprehensive income (loss) to selling, general and administrative expense for amortization of actuarial (gains) losses on defined benefit pension plans

 
1

 

 
3

Reclassification from other comprehensive income (loss) to other income/expense for amortization of actuarial (gains) losses on defined benefit pension plans
2

 

 
2

 

Total other comprehensive income (loss) before income taxes
1

 
15

 
(16
)
 
22

Income tax (provision) benefit related to reclassified amounts of net periodic costs on defined benefit pension plans
(1
)
 

 
(1
)
 
(1
)
Total other comprehensive income (loss)

 
15

 
(17
)
 
21

Total comprehensive income (loss)
141

 
109

 
(139
)
 
(265
)
Comprehensive (income) loss attributable to noncontrolling interests
1

 

 
1

 

Comprehensive income (loss) attributable to Hertz
$
142

 
$
109

 
$
(138
)
 
$
(265
)

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

9


THE HERTZ CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In millions)

 
Nine Months Ended
September 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(122
)
 
$
(286
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Depreciation of revenue earning vehicles, net
1,952

 
2,089

Depreciation and amortization, non-vehicle
166

 
182

Amortization of deferred financing costs and debt discount (premium)
36

 
33

Loss on extinguishment of debt
22

 
8

Stock-based compensation charges
10

 
16

Provision for receivables allowance
29

 
28

Deferred income taxes, net
(38
)
 
(137
)
Impairment charges and asset write-downs

 
116

(Gain) loss on marketable securities
(21
)
 
(3
)
Gain on sale of Brazil Operations

 
(6
)
Other
1

 
(12
)
Changes in assets and liabilities:
 

 
 

Non-vehicle receivables
(217
)
 
(184
)
Prepaid expenses and other assets
(58
)
 
(25
)
Non-vehicle accounts payable
119

 
140

Accrued liabilities
106

 
(5
)
Accrued taxes, net
21

 
9

Public liability and property damage
15

 
18

Net cash provided by (used in) operating activities
2,021

 
1,981

Cash flows from investing activities:
 

 
 

Revenue earning vehicles expenditures
(10,076
)
 
(8,683
)
Proceeds from disposal of revenue earning vehicles
5,378

 
5,285

Capital asset expenditures, non-vehicle
(119
)
 
(124
)
Proceeds from property and other equipment disposed of or to be disposed of
47

 
18

Proceeds from sale of Brazil Operations, net of retained cash

 
94

Purchases of marketable securities
(60
)
 

Sales of marketable securities
36

 
9

Other
(5
)
 
(4
)
Net cash provided by (used in) investing activities
(4,799
)
 
(3,405
)

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

10


THE HERTZ CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In millions)

 
Nine Months Ended
September 30,
 
2018
 
2017
Cash flows from financing activities:
 
 
 
Proceeds from issuance of vehicle debt
11,871

 
6,907

Repayments of vehicle debt
(9,525
)
 
(5,887
)
Proceeds from issuance of non-vehicle debt
387

 
2,100

Repayments of non-vehicle debt
(398
)
 
(986
)
Payment of financing costs
(30
)
 
(43
)
Early redemption premium payment
(19
)
 
(5
)
Advances to Hertz Holdings
(7
)
 
(4
)
Contributions from noncontrolling interest owners
25

 

Other

 
(1
)
Net cash provided by (used in) financing activities
2,304

 
2,081

Effect of foreign currency exchange rate changes on cash, cash equivalents, restricted cash and restricted cash equivalents
(4
)
 
26

Net increase (decrease) in cash, cash equivalents, restricted cash and restricted cash equivalents during the period
(478
)
 
683

Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period
1,504

 
1,094

Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period
$
1,026

 
$
1,777

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest, net of amounts capitalized:
 
 
 
Vehicle
$
268

 
$
212

Non-vehicle
171

 
164

Income taxes, net of refunds
15

 
40

Supplemental disclosures of non-cash information:
 

 
 

Purchases of revenue earning vehicles included in accounts payable and accrued liabilities, net of incentives
$
101

 
$
69

Sales of revenue earning vehicles included in receivables
658

 
443

Purchases of non-vehicle capital assets included in accounts payable
43

 
49

Sales of non-vehicle capital assets included in receivables
3

 
1

Receivable on sale of Brazil Operations

 
13

Revenue earning vehicles and non-vehicle capital assets acquired through capital lease
17

 
24




 


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

11


HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited


Note 1Background

Hertz Global Holdings, Inc. ("Hertz Global" when including its subsidiaries and variable interest entities and "Hertz Holdings" excluding its subsidiaries and variable interest entities) was incorporated in Delaware in 2015 to serve as the top-level holding company for Rental Car Intermediate Holdings, LLC, which wholly owns The Hertz Corporation ("Hertz" and interchangeably with Hertz Global, the "Company"), Hertz Global's primary operating company. Hertz was incorporated in Delaware in 1967 and is a successor to corporations that have been engaged in the vehicle rental and leasing business since 1918. Hertz operates its vehicle rental business globally primarily through the Hertz, Dollar and Thrifty brands from company-owned, licensee and franchisee locations in the United States ("U.S."), Africa, Asia, Australia, Canada, the Caribbean, Europe, Latin America, the Middle East and New Zealand. Through its Donlen subsidiary, Hertz provides vehicle leasing and fleet management services.

Note 2Basis of Presentation and Recently Issued Accounting Pronouncements

Basis of Presentation

This Quarterly Report on Form 10-Q combines the quarterly reports on Form 10-Q for the quarterly period ended September 30, 2018 of Hertz Global and Hertz. Hertz Global consolidates Hertz for financial statement purposes, therefore, disclosures that relate to activities of Hertz also apply to Hertz Global. In the sections that combine disclosure of Hertz Global and Hertz, this report refers to actions as being actions of the Company, or Hertz Global, which is appropriate because the business is one enterprise and Hertz Global operates the business through Hertz. When appropriate, Hertz Global and Hertz are named specifically for their individual disclosures and any significant differences between the operations and results of Hertz Global and Hertz are separately disclosed and explained.

The Company's unaudited condensed consolidated financial statements have been prepared in accordance 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 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.

The December 31, 2017 unaudited condensed consolidated balance sheet data is derived from audited financial statements but does not include all disclosures required by U.S. GAAP. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with information included in the Company's Form 10‑K for the year ended December 31, 2017 (the "2017 Form 10‑K"), as filed with the Securities and Exchange Commission ("SEC") on February 27, 2018. Certain prior period amounts have been reclassified to conform with current period presentation.

As disclosed below in "Recently Issued Accounting Pronouncements," the Company adopted the financial statement disclosure guidance "Restricted Cash" on January 1, 2018.


12


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

Principles of Consolidation

The unaudited condensed consolidated financial statements of Hertz Global include the accounts of Hertz Global and its wholly owned and majority owned U.S. and international subsidiaries. The unaudited condensed consolidated financial statements of Hertz include the accounts of Hertz and its wholly owned and majority owned U.S. and international subsidiaries. The Company is the primary beneficiary of certain variable interest entities, therefore, the assets, liabilities, results of operations and cash flows of the variable interest entities are included in the Company's unaudited condensed consolidated financial statements. The Company accounts for its investment 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.

Out of Period Adjustments

The Company identified a misstatement in its 2016 financial statements, related to the income tax provision, that it corrected in the second quarter of 2017. The cumulative impact of the adjustment was an increase in net loss of approximately $10 million. There was no impact to loss before income taxes. The misstatement related to an error in the tax provision for U.S. income of a foreign equity investment transaction for fiscal year 2016. The Company considered both quantitative and qualitative factors in assessing the materiality of the item and determined that the misstatement was not material to any prior period and not material to the nine months ended September 30, 2017.

Recently Issued Accounting Pronouncements

Adopted

Revenue from Contracts with Customers

In May 2014, the Financial Accounting Standards Board (the "FASB") issued guidance that replaced most existing revenue recognition guidance in U.S. GAAP. The FASB also issued several amendments and updates to the new revenue standard (collectively, “Topic 606”). Topic 606 applies to all contracts with customers except for leases, insurance contracts, financial instruments, certain nonmonetary exchanges and certain guarantees. The core principle of Topic 606 is that an entity should recognize revenue from customers for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services, as well as when an entity should recognize revenue gross as a principal or net as an agent and how an entity should identify performance obligations. Topic 606 requires disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. The Company adopted Topic 606 on the effective date, January 1, 2018, using a modified retrospective approach applied to all contracts. Prior periods have not been retrospectively adjusted.

The impact to the Company’s financial position, results of operations and cash flows is primarily for revenue associated with the redemption of points earned by customers under the Company’s loyalty programs (“loyalty points”). For transactions that generate loyalty points to the customer, a portion of revenue is deferred until the loyalty points are redeemed by the customer. The amount of revenue deferred is equivalent to the retail value of each loyalty point less an estimated amount representing loyalty points that are not expected to be redeemed.


13


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

The cumulative effect of applying the new guidance to all contracts with customers that were not completed as of January 1, 2018 has been recorded as an adjustment to accumulated deficit, net of tax, as of the adoption date as follows:

Hertz Global
(In millions)
Deferred income taxes, net
 
Accrued liabilities
 
Total liabilities
 
Accumulated deficit
 
Total equity
 
Total liabilities and equity
As of December 31, 2017
$
1,220

 
$
920

 
$
18,538

 
$
(506
)
 
$
1,520

 
$
20,058

Effect of Adopting ASC 606
(51
)
 
240

 
189

 
(189
)
 
(189
)
 

As of January 1, 2018
$
1,169

 
$
1,160

 
$
18,727

 
$
(695
)
 
$
1,331

 
$
20,058


Hertz
(In millions)
Deferred income taxes, net
 
Accrued liabilities
 
Total liabilities
 
Accumulated deficit
 
Total equity
 
Total liabilities and equity
As of December 31, 2017
$
1,220

 
$
920

 
$
18,538

 
$
(1,486
)
 
$
1,520

 
$
20,058

Effect of Adopting ASC 606
(51
)
 
240

 
189

 
(189
)
 
(189
)
 

As of January 1, 2018
$
1,169

 
$
1,160

 
$
18,727

 
$
(1,675
)
 
$
1,331

 
$
20,058


As disclosed above, the Company adopted Topic 606 on a modified retrospective basis, therefore, historical financial information has not been restated for comparative purposes and continues to be reported under the accounting standards in effect for those periods (“legacy guidance”). The following table presents the amounts for line items in the Company’s unaudited condensed consolidated balance sheet, statement of operations and cash flows impacted by the adoption of Topic 606 as compared to the amounts that would have been recognized in accordance with legacy guidance. The impact to the Company's unaudited condensed consolidated statement of comprehensive income (loss) is comprised solely of the impact to net income (loss) as shown in the table below:

14


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


Hertz Global
(In millions, except per share data)
As Reported
 
Effect of Adoption Increase (Decrease)
 
Balances Without Adoption
Unaudited Condensed Consolidated Balance Sheet as of September 30, 2018:
Accrued liabilities
$
1,306

 
$
245

 
$
1,061

Deferred income taxes, net
1,145

 
(53
)
 
1,198

Total liabilities
21,233

 
192

 
21,041

Accumulated deficit
(819
)
 
(192
)
 
(627
)
Total stockholders' equity
1,227

 
(192
)
 
1,419

Unaudited Condensed Consolidated Statement of Operations for the Three Months Ended September 30, 2018:
Worldwide vehicle rental revenues
$
2,584

 
$
(7
)
 
$
2,591

Selling, general and administrative expense
265

 
(1
)
 
266

Income (loss) before income taxes
181

 
(6
)
 
187

Income tax (provision) benefit
(41
)
 

 
(41
)
Net income (loss)
140

 
(6
)
 
146

Net (income) loss attributable to noncontrolling interests
1

 

 
1

Net income (loss) attributable to Hertz Global
141

 
(6
)
 
147

Basic earnings (loss) per share
1.68

 
(0.07
)
 
1.75

Diluted earnings (loss) per share
1.68

 
(0.07
)
 
1.75

Unaudited Condensed Consolidated Statement of Operations for the Nine Months Ended September 30, 2018:
Worldwide vehicle rental revenues
$
6,694

 
$
(6
)
 
$
6,700

Selling, general and administrative expense
765

 
(1
)
 
766

Income (loss) before income taxes
(137
)
 
(5
)
 
(132
)
Income tax (provision) benefit
12

 
2

 
10

Net income (loss)
(125
)
 
(3
)
 
(122
)
Net (income) loss attributable to noncontrolling interests
1

 

 
1

Net income (loss) attributable to Hertz Global
(124
)
 
(3
)
 
(121
)
Basic earnings (loss) per share
(1.49
)
 
(0.04
)
 
(1.45
)
Diluted earnings (loss) per share
(1.49
)
 
(0.04
)
 
(1.45
)
Unaudited Condensed Consolidated Statement of Cash Flow for the Nine Months Ended September 30, 2018:
Cash flows from operating activities:
 
 
 
 
 
Net income (loss)
$
(125
)
 
$
(3
)
 
$
(122
)
Deferred income taxes, net
(39
)
 
(2
)
 
(37
)
Accrued liabilities
106

 
5

 
101



15


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

Hertz
(In millions, except per share data)
As Reported
 
Effect of Adoption Increase (Decrease)
 
Balances Without Adoption
Unaudited Condensed Consolidated Balance Sheet as of September 30, 2018:
Accrued liabilities
$
1,306

 
$
245

 
$
1,061

Deferred income taxes, net
1,146

 
(53
)
 
1,199

Total liabilities
21,234

 
192

 
21,042

Accumulated deficit
(1,796
)
 
(192
)
 
(1,604
)
Total stockholders' equity
1,226

 
(192
)
 
1,418

Unaudited Condensed Consolidated Statement of Operations for the Three Months Ended September 30, 2018:
Worldwide vehicle rental revenues
$
2,584

 
$
(7
)
 
$
2,591

Selling, general and administrative expense
265

 
(1
)
 
266

Income (loss) before income taxes
183

 
(6
)
 
189

Income tax (provision) benefit
(42
)
 

 
(42
)
Net income (loss)
141

 
(6
)
 
147

Net (income) loss attributable to noncontrolling interests
1

 

 
1

Net income (loss) attributable to Hertz
142

 
(6
)
 
148

Unaudited Condensed Consolidated Statement of Operations for the Nine Months Ended September 30, 2018:
Worldwide vehicle rental revenues
$
6,694

 
$
(6
)
 
$
6,700

Selling, general and administrative expense
765

 
(1
)
 
766

Income (loss) before income taxes
(132
)
 
(5
)
 
(127
)
Income tax (provision) benefit
10

 
2

 
8

Net income (loss)
(122
)
 
(3
)
 
(119
)
Net (income) loss attributable to noncontrolling interests
1

 

 
1

Net income (loss) attributable to Hertz
(121
)
 
(3
)
 
(118
)
Unaudited Condensed Consolidated Statement of Cash Flow for the Nine Months Ended September 30, 2018:
Cash flows from operating activities:
 
 
 
 
 
Net income (loss)
$
(122
)
 
$
(3
)
 
$
(119
)
Deferred income taxes, net
(38
)
 
(2
)
 
(36
)
Accrued liabilities
106

 
5

 
101


See Note 7, "Revenue," for information regarding the Company’s accounting policies for revenue recognition, including the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, as well as other required disclosures under Topic 606.

Restricted Cash

In November 2016, the FASB issued guidance that clarifies existing guidance on the classification and presentation of restricted cash in the statement of cash flows. The guidance requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. Additionally, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. The Company adopted this guidance retrospectively in accordance with the effective date on January 1, 2018.

16


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


Adoption of this guidance had no impact on the Company's financial position or results of operations. The impact to the unaudited condensed consolidated statement of cash flows of adopting this guidance is as follows:

Hertz Global
 
Nine Months Ended September 30, 2017
(In millions)
As Previously Reported
 
Adjustments
 
As Adjusted
Net change in restricted cash and cash equivalents, vehicle
$
89

 
$
(89
)
 
$

Net cash provided by (used in) investing activities
(3,316
)
 
(89
)
 
(3,405
)
Net change in restricted cash and cash equivalents, non-vehicle
(833
)
 
833

 

Net cash provided by (used in) financing activities
1,252

 
833

 
2,085

Effect of foreign currency exchange rate changes on cash, cash equivalents, restricted cash and restricted cash(1)
19

 
7

 
26

Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period(1)
816

 
278

 
1,094

Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period(1)
748

 
1,029

 
1,777


Hertz
 
Nine Months Ended September 30, 2017
(In millions)
As Previously Reported
 
Adjustments
 
As Adjusted
Net change in restricted cash and cash equivalents, vehicle
$
89

 
$
(89
)
 
$

Net cash provided by (used in) investing activities
(3,316
)
 
(89
)
 
(3,405
)
Net change in restricted cash and cash equivalents, non-vehicle
(833
)
 
833

 

Net cash provided by (used in) financing activities
1,248

 
833

 
2,081

Effect of foreign currency exchange rate changes on cash, cash equivalents, restricted cash and restricted cash(1)
19

 
7

 
26

Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period(1)
816

 
278

 
1,094

Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period(1)
748

 
1,029

 
1,777


(1)
The amounts as previously reported were comprised of cash and cash equivalents and did not include restricted cash and restricted cash equivalents.

Not Yet Adopted

Leases

In February 2016, the FASB issued guidance that replaces the existing lease guidance in U.S. GAAP. The new guidance ("Topic 842") establishes a right-of-use (“ROU”) model that requires a lessee to record on the balance sheet a ROU asset and corresponding lease liability based on the present value of future lease payments for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. Topic 842 also expands the requirements for lessees to record leases embedded in other arrangements. Additionally, enhanced quantitative and qualitative disclosures surrounding leases are required which provide financial statement users the ability to assess the amount, timing and uncertainty of cash flows arising from leases. Topic 842 is effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods with early adoption permitted. The Company intends to adopt this guidance, in accordance with the effective date, on January 1, 2019. A modified retrospective transition approach is required for

17


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

both lessees and lessors for existing leases at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company intends to avail itself of the allowable practical expedients for existing or expired contracts of lessees and lessors wherein the Company would not be required to reassess whether such contracts contain leases, the lease classification or the initial direct costs. Additionally, with respect to its real estate and fleet leases, the Company intends to avail itself of the practical expedient for lessees which allows it to elect an accounting policy by class of underlying asset to combine lease and non-lease components. The Company does not intend to utilize the practical expedient which allows the use of hindsight by lessees and lessors in determining the lease term and in assessing impairment of its ROU assets. The Company is in the process of evaluating whether to avail itself of other allowable practicable expedients during transition.

In July 2018, the FASB issued guidance related to Topic 842 that provides an additional transition method that would allow the Company to only apply the new lease standard in the year of adoption. Additionally, the guidance provides a practical expedient for lessors that would allow the Company to elect as an accounting policy, by class of underlying asset, to combine non-lease components with the related lease components, if certain conditions are met. This could allow the Company to account for all revenue earned from the operations of rental vehicles and from other forms of rental related activities under the new lease guidance. The Company plans to adopt the new transition method which allows the application of the standard at the adoption date, January 1, 2019, and will recognize a cumulative-effect adjustment to the opening balances of retained earnings in the period of adoption. The Company intends to avail itself of the practical expedient for lessors which allows it to elect an accounting policy by class of underlying asset to combine lease and non-lease components, with respect to its real estate and fleet leases.

Lessee

Adoption of Topic 842 will result in a material increase in the Company's lease-related assets and liabilities on its balance sheet, primarily for leases of rental locations and other assets. Additionally, adoption of this guidance will impact the statement of cash flows with respect to the presentation of the Company's operating activities, but is not expected to impact its presentation of investing or financing activities. Adoption of Topic 842 is not expected to have a material impact on the Company’s results of operations. The Company has reached conclusions on key accounting assessments related to its leases which includes an accounting policy election to not recognize ROU assets or lease liabilities for short-term leases (i.e. those with a term of 12 months or less). The Company is performing an analysis of its lease portfolio to ensure proper application of the new guidance including implementation of internal controls over financial reporting.

Lessor

The Company has concluded that revenue earned from the rental and leasing of vehicles and from other forms of rental related activities wherein an identified asset is transferred to the customer and the customer has the ability to control that asset is within the scope of this guidance and that additional disclosures regarding lease revenue are required upon adoption. The Company is in the process of evaluating the breakdown of its vehicle rental revenues into lease and non-lease components to determine if the recognition timing and pattern of transfer of the non-lease components meet the practical expedient requirements. There is no impact to the nature, timing or recognition of rental lease revenue upon adoption of this guidance.

Reporting Comprehensive Income

In February 2018, the FASB issued guidance that allows a reclassification from accumulated other comprehensive income to retained earnings for the stranded tax effects resulting from the U.S. Tax Cuts and Jobs Act ("TCJA"). The guidance is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods. The guidance should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the TCJA is recognized. The Company will adopt this guidance on January 1, 2019, in accordance with the effective date. Adoption of this guidance will result in a reclassification of certain amounts from accumulated other comprehensive income to retained earnings as of the date adopted.


18


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

Changes to Disclosure Requirements for Defined Benefit Plans

In August 2018, the FASB issued guidance that modifies disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans to remove disclosures no longer considered cost beneficial, add disclosures identified as relevant and clarify certain disclosure requirements. The guidance is effective for annual periods beginning after December 15, 2020 using a retrospective transition method. Early adoption is permitted. The Company is in the process of determining the timing of adoption and assessing the overall impact of adopting this guidance on its disclosures.

Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement

In August 2018, the FASB issued guidance on a customer's accounting for implementation fees paid in a cloud computing service contract arrangement that addresses which implementation costs to capitalize as an asset and which costs to expense. Capitalized implementation fees are to be expensed over the term of the cloud computing arrangement, and the expense is required to be recognized in the same line item in the income statement as the associated hosting service expenses. The entity is also required to present the capitalized implementation fees on the balance sheet in the same line item as the prepayment for hosting service fees associated with the cloud computing arrangement.

The guidance is effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods using a retrospective or prospective transition method. Early adoption is permitted, including adoption in any interim period. The Company is in the process of determining the method and timing of adoption and assessing the overall impact of adopting this guidance on its financial position, results of operations and cash flows.
  
Note 3Acquisitions and Divestitures

Divestitures

Equity Investment

The Company had an investment that was accounted for under the equity method. In March 2017, the Company determined it had an other than temporary loss in value of its investment and recorded an impairment charge of $30 million, which is included in other (income) expense, net in the accompanying unaudited condensed consolidated statement of operations for the nine months ended September 30, 2017. In September 2017, the investee was dissolved and the Company no longer has an ownership interest in the entity.

Brazil Operations

In August 2017, the Company completed the sale of Car Rental Systems do Brasil Locação de Veiculos Ltd., a wholly owned subsidiary of the Company located in Brazil ("Brazil Operations"), to Localiza Fleet S.A., a corporation headquartered in Brazil, and received proceeds of $115 million, of which $13 million was placed in escrow to secure certain indemnification obligations. Prior to the sale, the Brazil Operations were reported in the Company's International Rental Car Segment. As a result of the sale, the Company recorded a $6 million gain, net of the impact of foreign currency adjustments, which is included in other (income) expense, net in the accompanying unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2017. As part of the sale, both companies entered into referral and brand cooperation agreements to govern their ongoing relationship which have an initial term of twenty years with an option to extend for another twenty years. The alliance also involves the exchange of knowledge in areas of technology, customer service and operational excellence.


19


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


Note 4Revenue Earning Vehicles

The components of revenue earning vehicles, net are as follows:
(In millions)
September 30, 2018
 
December 31, 2017
Revenue earning vehicles
$
16,376

 
$
14,209

Less accumulated depreciation
(3,231
)
 
(3,123
)
 
13,145

 
11,086

Revenue earning vehicles held for sale, net
432

 
250

Revenue earning vehicles, net
$
13,577

 
$
11,336


Depreciation of revenue earning vehicles and lease charges, net includes the following:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(In millions)
2018
 
2017
 
2018
 
2017
Depreciation of revenue earning vehicles
$
619

 
$
636

 
$
1,847

 
$
1,902

(Gain) loss on disposal of revenue earning vehicles, net(a)
27

 
43

 
105

 
187

Lease charges
26

 
21

 
68

 
55

Depreciation of revenue earning vehicles and lease charges, net
$
672

 
$
700

 
$
2,020

 
$
2,144


(a)    (Gain) loss on disposal of revenue earning vehicles, net by segment is as follows:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(In millions)
2018
 
2017
 
2018
 
2017
U.S. Rental Car(i)
$
29

 
$
43

 
$
107

 
$
187

International Rental Car
(2
)
 

 
(2
)
 

Total
$
27

 
$
43

 
$
105

 
$
187


(i)
Includes costs associated with the Company's U.S. vehicle sales operations of $39 million and $36 million for the three months ended September 30, 2018 and 2017, respectively, and $109 million and $99 million for the nine months ended September 30, 2018 and 2017, respectively.

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 vehicles. The impact of depreciation rate changes is as follows:
Increase (decrease)
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(In millions)
2018
 
2017
 
2018
 
2017
U.S. Rental Car(a)
$
(32
)
 
$
6

 
$
(20
)
 
$
68

International Rental Car
(1
)
 
4

 
2

 
5

Total
$
(33
)
 
$
10

 
$
(18
)
 
$
73


(a)
The depreciation rate changes in the U.S. Rental Car operations for the three and nine months ended September 30, 2018 include a net decrease in depreciation expense of $30 million based on the review completed during the third quarter of 2018. The depreciation rate changes in the U.S. Rental Car operations for the three and nine months ended September 30, 2017 include a net decrease in depreciation expense of $15 million based on the review completed during the third quarter of 2017.


20


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

Note 5Intangible Asset Impairment

As a result of declines in revenue and profitability of the Company and a decline in the share price of Hertz Global's common stock, the Company performed an impairment analysis of its indefinite-lived intangible assets as of June 30, 2017 using the relief from royalty method, a measurement using level 3 inputs under the U.S. GAAP fair value hierarchy. As a result of the analysis, the Company concluded that there was an impairment of the Dollar Thrifty tradename in its U.S. Rental Car segment and recorded a charge of $86 million. The impairment was largely due to a decrease in long-term revenue projections coupled with an increase in the weighted average cost of capital. The carrying value of the Dollar Thrifty tradename subsequent to recording the impairment charge is approximately $934 million, representing its estimated fair value.

Note 6Debt

The Company's debt, including its available credit facilities, consists of the following ($ in millions):
Facility
 
Weighted Average Interest Rate
as of
September 30, 2018
 
Fixed or
Floating
Interest
Rate
 
Maturity
 
September 30,
2018
 
December 31,
2017
Non-Vehicle Debt
 
 
 
 
 
 
 
 
 
 
Senior Term Loan
 
5.00%
 
Floating
 
6/2023
 
$
677

 
$
688

Senior RCF
 
N/A
 
Floating
 
6/2021
 

 

Senior Notes(1)
 
6.13%
 
Fixed
 
10/2020-10/2024
 
2,500

 
2,500

Senior Second Priority Secured Notes
 
7.63%
 
Fixed
 
6/2022
 
1,250

 
1,250

Promissory Notes
 
7.00%
 
Fixed
 
1/2028
 
27

 
27

Other Non-Vehicle Debt
 
3.08%
 
Fixed
 
Various
 
2

 
11

Unamortized Debt Issuance Costs and Net (Discount) Premium
 
 
 
 
 
 
 
(35
)
 
(42
)
Total Non-Vehicle Debt
 
 
 
 
 
 
 
4,421

 
4,434

Vehicle Debt
 
 
 
 
 
 
 
 
 
 
HVF U.S. Vehicle Medium Term Notes
 
 
 
 
 
 
 
 
HVF Series 2010-1
 
N/A
 
N/A
 
N/A
 

 
39

HVF Series 2013-1(2)
 
N/A
 
N/A
 
N/A
 

 
625

 
 
 
 
 
 
 
 

 
664

HVF II U.S. ABS Program
 
 
 
 
 
 
 
 
 
 
HVF II U.S. Vehicle Variable Funding Notes
 
 
 
 
 
 
 
 
HVF II Series 2013-A(2)
 
3.68%
 
Floating
 
3/2020
 
3,170

 
1,970

HVF II Series 2013-B(2)
 
3.66%
 
Floating
 
3/2020
 
15

 
123

 
 
 
 
 
 
 
 
3,185

 
2,093


21


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

Facility
 
Weighted Average Interest Rate
as of
September 30, 2018
 
Fixed or
Floating
Interest
Rate
 
Maturity
 
September 30,
2018
 
December 31,
2017
HVF II U.S. Vehicle Medium Term Notes
 
 
 
 
 
 
 
 
HVF II Series 2015-1(2)
 
2.93%
 
Fixed
 
3/2020
 
780

 
780

HVF II Series 2015-2(2)
 
N/A
 
N/A
 
N/A
 

 
265

HVF II Series 2015-3(2)
 
3.10%
 
Fixed
 
9/2020
 
371

 
371

HVF II Series 2016-1(2)
 
2.89%
 
Fixed
 
3/2019
 
466

 
466

HVF II Series 2016-2(2)
 
3.41%
 
Fixed
 
3/2021
 
595

 
595

HVF II Series 2016-3(2)
 
2.72%
 
Fixed
 
7/2019
 
424

 
424

HVF II Series 2016-4(2)
 
3.09%
 
Fixed
 
7/2021
 
424

 
424

HVF II Series 2017-1(2)
 
3.38%
 
Fixed
 
10/2020
 
450

 
450

HVF II Series 2017-2(2)
 
3.57%
 
Fixed
 
10/2022
 
350

 
350

HVF II Series 2018-1(2)
 
3.41%
 
Fixed
 
2/2023
 
1,000

 

HVF II Series 2018-2(2)
 
3.80%
 
Fixed
 
6/2021
 
200

 

HVF II Series 2018-3(2)
 
4.15%
 
Fixed
 
7/2023
 
200

 

 
 
 
 
 
 
 
 
5,260

 
4,125

Donlen ABS Program
 
 
 
 
 
 
 
 
 
 
HFLF Variable Funding Notes
 
 
 
 
 
 
 
 
 
 
HFLF Series 2013-2(2)
 
2.72%
 
Floating
 
3/2020
 
170

 
380

 
 
 
 
 
 
 
 
170

 
380

HFLF Medium Term Notes
 
 
 
 
 
 
 
 
 
 
HFLF Series 2015-1(3)
 
3.22%
 
Floating
 
10/2018-3/2019
 
58

 
145

HFLF Series 2016-1(3)
 
3.28%
 
Both
 
10/2018-2/2020
 
204

 
318

HFLF Series 2017-1(3)
 
2.66%
 
Both
 
10/2018-2/2021
 
437

 
500

HFLF Series 2018-1(3)
 
2.58%
 
Both
 
7/2019-6/2021
 
550

 

 
 
 
 
 
 
 
 
1,249

 
963

Vehicle Debt - Other
 
 
 
 
 
 
 
 
 
 
U.S. Vehicle RCF
 
4.52%
 
Floating
 
6/2021
 
133

 
186

European Revolving Credit Facility
 
2.95%
 
Floating
 
10/2018-3/2020
 
514

 
184

European Vehicle Notes(4)
 
5.07%
 
Fixed
 
10/2021-3/2023
 
851

 
773

European Securitization(2)
 
1.70%
 
Floating
 
10/2018-3/2020
 
515

 
367

Canadian Securitization(2)
 
3.27%
 
Floating
 
10/2018-3/2020
 
315

 
237

Australian Securitization(2)
 
3.56%
 
Floating
 
3/2020
 
142

 
155

New Zealand RCF
 
4.61%
 
Floating
 
3/2020
 
40

 
42

U.K. Financing Facility
 
3.08%
 
Floating
 
10/2018-8/2021
 
363

 
251

Other Vehicle Debt
 
4.01%
 
Floating
 
10/2018-10/2022
 
47

 
51

 
 
 
 
 
 
 
 
2,920

 
2,246

Unamortized Debt Issuance Costs and Net (Discount) Premium
 
 
 
 
 
 
 
(47
)
 
(40
)
Total Vehicle Debt
 
 
 
 
 
 
 
12,737

 
10,431

Total Debt
 
 
 
 
 
 
 
$
17,158

 
$
14,865

N/A - Not applicable

22


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


(1)
References to the "Senior Notes" include the series of Hertz's unsecured senior notes set forth on the table below. Outstanding principal amounts for each such series of the Senior Notes is also specified below:
(In millions)
Outstanding Principal
Senior Notes
September 30, 2018
 
December 31, 2017
5.875% Senior Notes due October 2020
$
700

 
$
700

7.375% Senior Notes due January 2021
500

 
500

6.250% Senior Notes due October 2022
500

 
500

5.500% Senior Notes due October 2024
800

 
800

 
$
2,500

 
$
2,500


(2)
Maturity reference is to the earlier "expected final maturity date" as opposed to the subsequent "legal final maturity date." The expected final maturity date is the date by which Hertz and investors in the relevant indebtedness expect the outstanding principal of the relevant indebtedness to be repaid in full. The legal final maturity date is the date on which the outstanding principal of the relevant indebtedness is legally due and payable in full.

(3)
In the case of the Hertz Fleet Lease Funding LP ("HFLF") Medium Term Notes, such notes are repayable from cash flows derived from third-party leases comprising the underlying HFLF collateral pool. The initial maturity date referenced for each series of HFLF Medium Term Notes represents the end of the revolving period for such series, at which time the related notes begin to amortize monthly by an amount equal to the lease collections payable to that series. To the extent the revolving period already has ended, the initial maturity date reflected is October 2018. The second maturity date referenced for each series of HFLF Medium Term Notes represents the date by which Hertz and the investors in the related series expect such series of notes to be repaid in full, which is based upon various assumptions made at the time of pricing of such notes, including the contractual amortization of the underlying leases as well as the assumed rate of prepayments of such leases. Such maturity reference is to the “expected final maturity date” as opposed to the subsequent “legal final maturity date.” The legal final maturity date is the date on which the relevant indebtedness is legally due and payable. Although the underlying lease cash flows that support the repayment of the HFLF Medium Term Notes may vary, the cash flows generally are expected to approximate a straight-line amortization of the related notes from the initial maturity date through the expected final maturity date.

(4)
References to the "European Vehicle Notes" include the series of Hertz Holdings Netherlands B.V.'s, an indirect wholly owned subsidiary of Hertz organized under the laws of The Netherlands (“HHN BV”), unsecured senior notes (converted from Euros to U.S. dollars at a rate of 1.17 to 1 and 1.19 to 1 as of September 30, 2018 and December 31, 2017, respectively) set forth on the table below. Outstanding principal amounts for each such series of the European Vehicle Notes is also specified below:
(In millions)
Outstanding Principal
European Vehicle Notes
September 30, 2018
 
December 31, 2017
4.375% Senior Notes due January 2019
$

 
$
505

4.125% Senior Notes due October 2021
264

 
268

5.500% Senior Notes due March 2023
587

 

 
$
851

 
$
773


The Company is highly leveraged and a substantial portion of its liquidity needs arise from debt service on its indebtedness and from the funding of its costs of operations and capital expenditures. The Company’s practice is to maintain sufficient liquidity through cash from operations, credit facilities and other financing arrangements, to mitigate any adverse impact on its operations resulting from adverse financial market conditions. As of September 30, 2018, approximately $2.3 billion of vehicle debt and $16 million of non-vehicle debt is due to mature between October 1, 2018 and September 30, 2019.

The Company has reviewed its debt facilities and determined that it is probable that the Company will be able, and has the intent, to refinance these facilities at such times as the Company determines appropriate prior to their respective maturities.

Non-Vehicle Debt

Senior Facilities

In June 2018, the Company terminated letters of credit issued under the Senior RCF with a stated amount of approximately $302 million and reissued such letters of credit under the Letter of Credit Facility, as defined below. As a result, the commitments under the Senior RCF were permanently reduced on a dollar-for-dollar basis, such that after giving effect to such reduction the Senior RCF consists of a $865 million senior secured revolving credit facility.

23


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


Vehicle Debt

HVF II U.S. Vehicle Variable Funding Notes

HVF II Series 2013 Notes: In April 2018, HVF II increased the maximum commitments under the HVF II Series 2013-A Notes and HVF II Series 2013-B Notes (the "HVF II Series 2013 Notes") by $250 million, such that after giving effect to such increase, the aggregate maximum principal amount of the HVF II Series 2013 Notes is approximately $3.7 billion.

HVF II Series 2017-A Notes: In March 2018, HVF II terminated all $500 million of commitments under the HVF II Series 2017-A Notes.

HVF II U.S. Vehicle Medium Term Notes

HVF II Series 2018-2 Notes and HVF II Series 2018-3 Notes: In June 2018, HVF II issued the Series 2018-2 Rental Car Asset Backed Notes, Class A, Class B, Class C and Class D ("the HVF II Series 2018-2 Notes") and the Series 2018-3 Rental Car Asset Backed Notes, Class A, Class B, Class C and Class D ("the HVF II Series 2018-3 Notes") in an aggregate principal amount of approximately $426 million. Hertz purchased the Class D Notes of each such series and as a result, approximately $26 million of the aggregate principal amount is eliminated in consolidation. There is subordination within the HVF II Series 2018-2 Notes and the HVF II Series 2018-3 Notes based on class.

HVF II Series 2018-1 Notes: In January 2018, HVF II issued the Series 2018-1 Rental Car Asset Backed Notes, Class A, Class B, Class C and Class D ("the HVF II Series 2018-1 Notes") in an aggregate principal amount of approximately $1.1 billion. Hertz purchased the Class D Notes of such series and as a result, approximately $58 million of the aggregate principal amount is eliminated in consolidation. There is subordination within the HVF II Series 2018-1 Notes based on class.

HFLF Medium Term Notes

HFLF Series 2018-1 Notes: In May 2018, HFLF issued the Series 2018-1 Asset-Backed Notes, Class A, Class B, Class C, Class D, and Class E (collectively, the “HFLF Series 2018-1 Notes”) in an aggregate principal amount of $550 million. The HFLF Series 2018-1 Notes are fixed rate, except for the Class A-1 Notes which are floating rate and carry an interest rate based upon a spread to one-month LIBOR. A portion of the net proceeds of this issuance were used to reduce amounts outstanding under the HFLF Series 2013-2 Notes.

Vehicle Debt - Other

European Vehicle Notes

In March 2018, HHN BV issued 5.50% Senior Notes due March 2023 in an aggregate original principal amount of €500 million (the "2023 Notes"). A portion of the net proceeds from this issuance were used in April 2018 to fully redeem all €425 million of 4.375% Senior Notes due January 2019, and the Company recorded $20 million of charges for the early redemption premium and write-off of deferred financing costs.

European Revolving Credit Facility

In March 2018, HHN BV amended its credit agreement ("European Revolving Credit Facility") to provide for aggregate maximum borrowing capacity (subject to borrowing base availability) of up to €438 million during the peak rental season, for a seasonal commitment period through October 2018. Following the expiration of the seasonal commitment period, aggregate maximum borrowings available under the European Revolving Credit Facility will revert to €235 million (subject to borrowing base availability). In October 2018, the European Revolving Credit Facility was terminated, as further described below.


24


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

European ABS

In October 2018, International Fleet Financing No.2 B.V (“IFF No. 2”), a special purpose entity which is intended to be bankruptcy remote, issued variable funding rental car asset backed notes that permit borrowings by IFF No. 2 on a revolving basis in an aggregate amount up to €1.0 billion with a term of two years ("European ABS"). The European ABS is the primary vehicle financing facility for the Company's vehicle rental operations in France, the Netherlands, Germany and Spain. The lenders under the European ABS have been granted a security interest in the owned rental vehicles used in the Company's vehicle rental operations in these countries and certain contractual rights related to such vehicles.

In connection with the above transaction, the Company terminated the European Revolving Credit Facility and the European Securitization.

Canadian Securitization

In May 2018, TCL Funding Limited Partnership, a bankruptcy remote, indirect, wholly owned, special purpose subsidiary of Hertz, amended its supplemental indenture for its Series 2015-A Variable Funding Rental Car Asset Backed Notes (the "Funding LP Series 2015-A Notes") to provide for aggregate maximum borrowing capacity (subject to borrowing base availability) of up to CAD$410 million during the peak rental season, for a seasonal commitment period through October 2018. Following the expiration of the seasonal commitment period, aggregate maximum borrowings available under the Funding LP Series 2015-A Notes will revert to CAD$350 million (subject to borrowing base availability).

U.K. Financing Facility

In May 2018, Hertz U.K. Limited amended its credit agreement ("U.K. Financing Facility") to provide for aggregate maximum borrowing capacity (subject to asset availability) of up to £287.5 million during the peak rental season, and in July 2018, the U.K. Financing Facility was further amended to provide for aggregate maximum borrowing capacity (subject to asset availability) of up to £300 million during the peak rental season, for a seasonal commitment period through September 2018. Following the expiration of the seasonal commitment period, aggregate maximum borrowings available under the U.K. Financing Facility reverted to £250 million (subject to asset availability).

Borrowing Capacity and Availability

Borrowing capacity and availability comes from the Company's "revolving credit facilities," which are a combination of variable funding asset-backed securitization facilities, cash-flow-based revolving credit facilities, asset-based revolving credit facilities and a standalone $400 million letter of credit facility (the "Letter of Credit Facility"). Creditors under each such asset-backed securitization facility and asset-based revolving credit facility have a claim on a specific pool of assets as collateral. The Company's ability to borrow under each such asset-backed securitization facility and asset-based revolving credit facility is a function of, among other things, the value of the assets in the relevant collateral pool. With respect to each such asset-backed securitization facility and asset-based revolving credit facility, the Company refers to the amount of debt it can borrow given a certain pool of assets as the borrowing base.

The Company refers to "Remaining Capacity" as the maximum principal amount of debt permitted to be outstanding under the respective facility (i.e., with respect to a variable funding asset-backed securitization facility or asset-based revolving credit facility, the amount of debt the Company could borrow assuming it possessed sufficient assets as collateral) less the principal amount of debt then-outstanding under such facility. With respect to a variable funding asset-backed securitization facility or asset-based revolving credit facility, the Company refers to "Availability Under Borrowing Base Limitation" as the lower of Remaining Capacity or the borrowing base less the principal amount of debt then-outstanding under such facility (i.e., the amount of debt that can be borrowed given the collateral possessed at such time). With respect to the Senior RCF and the Letter of Credit Facility, "Availability Under Borrowing Base Limitation" is the same as "Remaining Capacity" since borrowings under the Senior RCF and the Letter of Credit Facility are not subject to a borrowing base.


25


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

The following facilities were available to the Company as of September 30, 2018, and are presented net of any outstanding letters of credit:
(In millions)
Remaining
Capacity
 
Availability Under
Borrowing Base
Limitation
Non-Vehicle Debt
 
 
 
Senior RCF
$
505

 
$
505

Letter of Credit Facility
1

 
1

Total Non-Vehicle Debt
506

 
506

Vehicle Debt
 

 
 

U.S. Vehicle RCF

 

HVF II U.S. Vehicle Variable Funding Notes
480

 

HFLF Variable Funding Notes
330

 
1

European Revolving Credit Facility

 

European Securitization
25

 
5

Canadian Securitization

 

Australian Securitization
40

 

U.K. Financing Facility
32

 

New Zealand RCF

 

Total Vehicle Debt
907

 
6

Total
$
1,413

 
$
512


Letters of Credit

As of September 30, 2018, there were outstanding standby letters of credit totaling $672 million. As disclosed above, the Company terminated letters of credit issued under the Senior RCF and reissued such letters of credit under the Letter of Credit Facility. Issued letters of credit primarily support the Company's insurance programs, vehicle rental concessions and leaseholds as well as to provide credit enhancement for its asset-backed securitization facilities. Of this amount, $360 million was issued under the Senior RCF and $301 million was issued under the Letter of Credit Facility. As of September 30, 2018, none of the issued letters of credit have been drawn upon.

Special Purpose Entities

Substantially all of the Company's revenue earning vehicles 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 LLC, 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.

The Company has a 25% ownership interest in "IFF No. 2", whose sole purpose is to provide commitments to lend in various currencies subject to borrowing bases comprised of revenue earning vehicles and related assets of certain of Hertz International, Ltd.'s subsidiaries. IFF No. 2 is a variable interest entity and the Company is the primary beneficiary, therefore, the assets, liabilities, and results of operations of IFF No. 2 are included in the Company's unaudited condensed consolidated financial statements. As of September 30, 2018 and December 31, 2017, IFF No. 2 had total assets of $776 million and $524 million, respectively, primarily comprised of loan receivables, and total liabilities of $776 million and $524 million, respectively, primarily comprised of debt and loan payables.

Covenant Compliance

The financial covenant provides that Hertz’s consolidated first lien net leverage ratio, as defined in the credit agreements governing the Senior RCF and the Letter of Credit Facility, as of the last day of any fiscal quarter following and including

26


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

fiscal quarter ending December 31, 2017 (the "Covenant Leverage Ratio"), may not exceed a ratio of 3.00 to 1.00. As of September 30, 2018, Hertz was in compliance with the Covenant Leverage Ratio.

Note 7Revenue

The Company recognizes two types of revenue: (i) revenue from contracts with customers; and (ii) lease revenue, which is generated through the fleet leasing operations of its Donlen subsidiary.

As disclosed in the Revenue from Contracts with Customers section of Note 2, “Basis of Presentation and Recently Issued Accounting Pronouncements” ("Note 2"), the Company adopted Topic 606 in accordance with the effective date on January 1, 2018. Note 2 includes disclosures regarding the Company’s method of adoption and the impact on the Company’s financial position, results of operations and cash flows. In the Leases section of Note 2, the Company discloses that it has concluded that revenue earned from vehicle rentals, and from other forms of rental related activities wherein an identified asset is transferred to the customer and the customer has the ability to control that asset, will be accounted for under Topic 842 upon its adoption. Until the Company adopts Topic 842, vehicle rental and rental related revenues are recognized in accordance with Topic 606.

The Company recognizes revenue net of any taxes or non-concession fees collected from customers on behalf of governmental authorities.

Revenue from Contracts with Customers

The Company operates at airport rental locations in the U.S. and internationally ("airport") and at off airport locations also in the U.S. and internationally ("off airport"). For the Company's airport company-operated rental locations, the Company has obtained concessions or similar leasing agreements or arrangements, granting it the right to conduct a vehicle rental business at the respective airport. The terms of an airport concession typically require the Company to pay the airport's operator concession fees based upon a specified percentage of the revenues it generates at the airport, subject to a minimum annual guarantee. The terms of the Company's concessions typically do not forbid it from seeking, and in a few instances require it to seek, reimbursement from customers for concession fees it pays; however, in certain jurisdictions the law limits or forbids the Company from doing so. Where the Company is required or permitted to seek such reimbursement, it is its general practice to do so. The Company's airport rental customers are typically airline travelers; whereas the Company's off airport rental customers include people who prefer to rent vehicles closer to their home or place of work for business or leisure purposes, as well as those needing to travel to or from airports. The Company's off airport customers also include people who have been referred by, or whose rental costs are being wholly or partially reimbursed by, insurance companies following accidents in which their vehicles were damaged, those expecting to lease vehicles that are not yet available from their leasing companies and replacement renters. In addition, the Company's off airport customers include drivers for transportation network companies ("TNC").

27


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



The following table presents revenues from contracts with customers by reportable segment and disaggregated by product/service and type of location and customer:

 
Three Months Ending September 30, 2018
(In millions)
U.S. Rental Car
 
International Rental Car
 
All Other Operations
 
Consolidated
Vehicle rental and rental related:
 
 
 
 
 
 
 
Airport
$
1,279

 
$
446

 
$

 
$
1,725

Off airport
535

 
242

 

 
777

Total vehicle rental and rental related
1,814

 
688

 

 
2,502

 
 
 
 
 
 
 
 
Other:
 
 
 
 
 
 
 
Licensee revenue
10

 
44

 

 
54

Ancillary retail vehicle sales
27

 

 

 
27

Fleet management

 

 
10

 
10

Total other
37

 
44

 
10

 
91

Total revenue from contracts with customers
$
1,851

 
$
732

 
$
10

 
$
2,593


 
Nine Months Ending September 30, 2018
(In millions)
U.S. Rental Car
 
International Rental Car
 
All Other Operations
 
Consolidated
Vehicle rental and rental related:
 
 
 
 
 
 
 
Airport
$
3,403

 
$
1,029

 
$

 
$
4,432

Off airport
1,400

 
646

 

 
2,046

Total vehicle rental and rental related
4,803

 
1,675

 

 
6,478

 
 
 
 
 
 
 
 
Other:
 
 
 
 
 
 
 
Licensee revenue
24

 
114

 

 
138

Ancillary retail vehicle sales
78

 

 

 
78

Fleet management

 

 
32

 
32

Total other
102

 
114

 
32

 
248

Total revenue from contracts with customers
$
4,905

 
$
1,789

 
$
32

 
$
6,726


Vehicle Rental and Rental Related Revenues

The Company recognizes revenue from its vehicle rental operations when persuasive evidence of a contract exists, the performance obligations have been satisfied, the transaction price is fixed or determinable and collection is reasonably assured. Performance obligations associated with vehicle rental transactions are satisfied over the rental period, except for the portion associated with loyalty points, as further described below. Rental periods are short term in nature. Therefore, the Company has elected to apply the practical expedient which eliminates the requirement to disclose information about remaining performance obligations. Performance obligations associated with rental related activities, such as charges to the customer for the fueling of vehicles and value-added services such as loss damage waivers, insurance products, navigation units, supplemental equipment and other consumables, are also satisfied over the rental period. Revenue from charges that are passed through to the customer, such as gasoline, vehicle licensing and airport concession fees, is recorded on a gross basis with a corresponding charge to direct vehicle and operating

28


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

expense. Sales commissions paid to third parties are generally expensed when incurred due to the short-term nature of the related transaction on which the commission was earned and are recorded within selling, general and administrative expense. Payments are due from customers at the completion of the rental, except for customers with negotiated payment terms, generally net 30 days or less, which are invoiced and remain as accounts receivable until collected.

Loyalty Programs - The Company offers loyalty programs, primarily Hertz Gold Plus Rewards, wherein customers are eligible to earn loyalty points that are redeemable for free rental days or can be converted to loyalty points for redemption of products and services under loyalty programs of other companies. Each transaction that generates loyalty points results in the deferral of revenue equivalent to the retail value of the redemption of the loyalty points. The associated revenue is recognized when the customer redeems the loyalty points at some point in the future. The retail value of loyalty points is estimated based on the expected retail value of the future vehicle rental to be provided less an estimated amount representing loyalty points that are not expected to be redeemed (“breakage”). Breakage is estimated on a quarterly basis and includes significant assumptions such as historical breakage trends and internal Company forecasts. During the three and nine months ended September 30, 2018, based on the net impact of loyalty points earned and redeemed by customers, the Company recorded a net revenue deferral of $9 million and $5 million, respectively. As of September 30, 2018, the value of unredeemed loyalty points is $271 million, which is recorded as a contract liability in accrued liabilities in the accompanying unaudited condensed consolidated balance sheet.

Customer Rebates - The Company has business customers that rent vehicles based on terms that have been negotiated through contracts with their employers, or other entities with which they are associated (“commercial contracts”), which can differ substantially from the terms on which the Company rents vehicles to the general public. Some of the commercial contracts contain provisions which allow for rebates to the entity based on achieving a specific rental volume threshold. Rebates are treated as variable consideration and are recognized as a reduction of revenue at the time of the rental based on the rebate expected to be earned by the entity.

Licensee Revenue

The Company has franchise agreements which allow an independent entity to rent their vehicles under the Company’s brands, primarily Hertz, Dollar or Thrifty, for a fee (“franchise fee”). Franchise fees are earned over time for the duration of the franchise agreement and are typically based on the larger of a minimum payment or an amount representing a percentage of net sales of the franchised business. Franchise fees are recognized as earned and when collectability is reasonably assured. Franchise fees that relate to a future contract term, such as initial fees or renewal fees, are deferred and recognized over the term of the franchise agreement. The Company has elected to apply one of the practical expedients under Topic 606, and as such the value of unsatisfied performance obligations for sales-based royalty fees from franchisees is not disclosed.

Ancillary Retail Vehicle Sales Revenue

Ancillary retail vehicle sales represent revenues generated from the sale of warranty contracts, financing and title fees, and other ancillary services associated with vehicles disposed of at the Company’s retail outlets. These revenues are recorded at the point in time when the Company sells the product or provides the service to the customer. These revenues exclude the sale price of the vehicle which is a component of the gain or loss on the disposition and is included in depreciation of revenue earning vehicles and lease charges, net.

Fleet Management Revenue

The Company's Donlen subsidiary generates revenue from various fleet management services, such as fuel purchasing and management, preventive maintenance, repair consultation, toll management and accident management. Fleet management revenue is recognized net of any fees collected from customers on behalf of third-party service providers, as services are rendered.


29


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

Contract Balances

The Company recognizes receivables and liabilities resulting from its contracts with customers. Contract receivables primarily consist of receivables from customers for vehicle rentals. Contract liabilities primarily consist of obligations to customers for prepaid vehicle rentals and related to the Company’s points-based loyalty programs.

The contract liability balance as of September 30, 2018 is $351 million and is included in accrued liabilities in the accompanying unaudited condensed consolidated balance sheet. The contract liability as of January 1, 2018, after giving effect to the adoption of Topic 606, was $345 million and revenue recognized during the nine months ended September 30, 2018 for such contract liabilities is $129 million. The contract liability as of June 30, 2018 was $412 million and revenue recognized during the three months ended September 30, 2018 for such contract liabilities is $164 million.

Note 8Income Tax (Provision) Benefit

The Company recognized the income tax effects of the tax reform legislation commonly referred to as the Tax Cuts and Jobs Act ("TCJA") in its audited consolidated financial statements included in the Company’s 2017 Form 10‑K in accordance with Staff Accounting Bulletin No. 118, which provides SEC staff guidance for the application of Topic 740, Income Taxes, in the reporting period in which the TCJA was signed into law. The guidance also provides for a measurement period of up to one year from the enactment date for the Company to complete the accounting for the U.S. tax law changes. As such, the Company’s 2017 financial position reflects the provisional estimate of the income tax effects of the TCJA, which was based on certain assumptions and the Company's interpretation of the law at that time.

During the third quarter of 2018, the Company further analyzed tax liabilities associated with the deemed repatriation of cumulative earnings from foreign subsidiaries. As a result of the analysis, the Company has recorded a non-cash tax expense of approximately $15 million, consisting of a $25 million one-time transition tax liability, offset by $10 million of remeasured net operating losses. The amounts recorded are estimates and are subject to change as the Company continues to analyze the impact of TCJA provisions.

The income tax provision for the three and nine months ended September 30, 2018 also incorporates the TCJA's changes to deductions for executive compensation and meals and entertainment. Other provisions include global intangible low-tax income ("GILTI"), base erosion anti-avoidance tax ("BEAT"), foreign-derived intangible income ("FDII") and an interest expense deduction limitation. As of September 30, 2018, the Company estimates no short-to-medium term tax liability resulting from GILTI, BEAT, FDII, or the interest limitation. These estimates are based on the Company's current interpretation of the TCJA. These assumptions and interpretations may change as as the interpretation of the TCJA evolves and as additional clarification and implementation guidance are issued.

Changes in the estimates described above could potentially affect the measurement of deferred tax assets and liabilities or potentially give rise to new deferred tax amounts.

Hertz Global

The effective tax rate for the three months ended September 30, 2018 and 2017 is (23)% and (35)%, respectively. The effective tax rate for the nine months ended September 30, 2018 and 2017 is 9% and 27%, respectively.

The Company recorded a tax provision of $41 million for the three months ended September 30, 2018, compared to $50 million for the three months ended September 30, 2017. The effective income tax rate and related tax expense are lower for the three months ended September 30, 2018 primarily due to the reduced corporate tax rate as a result of the TCJA, tax credits, and the composition of earnings by jurisdictions, partially offset by a net provisional amount of $15 million for the one-time transition tax related to TCJA.

The Company recorded a tax benefit of $12 million for the nine months ended September 30, 2018, compared to $108 million for the nine months ended September 30, 2017. The effective income tax rate and related tax benefit are lower

30


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

for the nine months ended September 30, 2018 primarily due to the reduced corporate tax rate as a result of the TCJA, reduced corporate losses, and the composition of earnings by jurisdictions, partially offset by a net provisional amount of $15 million for the one-time transition tax related to TCJA.

Hertz

The effective tax rate for the three months ended September 30, 2018 and 2017 is (23)% and (35)%, respectively. The effective tax rate for the nine months ended September 30, 2018 and 2017 is 8% and 27%, respectively.

The Company recorded a tax provision of $42 million for the three months ended September 30, 2018, compared to $50 million for the three months ended September 30, 2017. The effective income tax rate and related tax expense are lower for the three months ended September 30, 2018 primarily due to the reduced corporate tax rate as a result of the TCJA, tax credits, and the composition of earnings by jurisdictions, partially offset by a net provisional amount of $15 million for the one-time transition tax related to TCJA.

The Company recorded a tax benefit of $10 million for the nine months ended September 30, 2018, compared to $107 million for the nine months ended September 30, 2017. The effective income tax rate and related tax benefit are lower for the nine months ended September 30, 2018 primarily due to the reduced corporate tax rate as a result of the TCJA, reduced corporate losses, and the composition of earnings by jurisdictions, partially offset by a net provisional amount of $15 million for the one-time transition tax related to TCJA.

Note 9Earnings (Loss) Per Share - Hertz Global

Basic earnings (loss) per share has been computed based upon the weighted average number of common shares outstanding. Diluted earnings (loss) per share has been computed based upon the weighted average number of common shares outstanding plus the effect of all potentially dilutive common stock equivalents, except when the effect would be anti-dilutive.

The following table sets forth the computation of basic and diluted earnings (loss) per share:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(In millions, except per share data)
2018
 
2017
 
2018
 
2017
Basic and diluted earnings (loss) per share:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net income (loss) attributable to Hertz Global
$
141

 
$
93

 
$
(124
)
 
$
(289
)
Denominator:
 
 
 
 
 
 
 
Basic weighted average shares outstanding
84

 
83

 
83

 
83

Dilutive stock options, RSUs, PSUs and PSAs

 

 

 

Diluted weighted average shares outstanding
84

 
83

 
83

 
83

Antidilutive stock options, RSUs, PSUs and PSAs
1

 
3

 
1

 
3

Earnings (loss) per share:
 
 
 
 
 
 
 
Basic earnings (loss) per share
$
1.68

 
$
1.12

 
$
(1.49
)
 
$
(3.48
)
Diluted earnings (loss) per share
$
1.68

 
$
1.12

 
$
(1.49
)
 
$
(3.48
)

Note 10Fair Value Measurements

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

31


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


Cash Equivalents, Restricted Cash Equivalents and Investments

The Company’s cash equivalents and restricted cash equivalents primarily consist of investments in money market funds and time deposits. The Company determines the fair value of cash equivalents using a market approach based on quoted prices in active markets (Level 1 inputs).

Investments in equity securities that are measured at fair value on a recurring basis consist of marketable securities.

The following table summarizes the ending balances of the Company's cash equivalents, restricted cash equivalents and investments:
 
September 30, 2018
 
December 31, 2017
(In millions)
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Money market funds and time deposits
$
356

 
$

 
$

 
$
356

 
$
634

 
$

 
$

 
$
634

Equity securities
45

 

 

 
45

 

 

 

 


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 September 30, 2018
 
As of December 31, 2017
(In millions)
Nominal Unpaid Principal Balance
 
Aggregate Fair Value
 
Nominal Unpaid Principal Balance
 
Aggregate Fair Value
Non-vehicle Debt
$
4,456

 
$
4,254

 
$
4,476

 
$
4,438

Vehicle Debt
12,784

 
12,715

 
10,471

 
10,456

Total
$
17,240

 
$
16,969

 
$
14,947

 
$
14,894


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

In March 2017, as further described in Note 3, "Acquisitions and Divestitures," the Company determined it had an other than temporary loss in value of its equity method investment. In June 2017, as further described in Note 5, "Intangible Asset Impairment," the Company recorded impairment charges for the Dollar Thrifty tradename.

The Company measured the assets and liabilities of its Brazil Operations at fair value as of March 31, 2017 and June 30, 2017, while held for sale, and recorded a pre-tax gain of $4 million and a loss of $4 million, respectively. The Brazil Operations were sold in August 2017 and the Company recorded a pre-tax gain of $6 million as further described in Note 3, "Acquisitions and Divestitures."

Note 11Contingencies 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 rented from the Company. The obligation for public liability and property damage on self-insured U.S. and international vehicles, as stated on the accompanying unaudited condensed consolidated balance sheets, 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

32


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

administrative costs. As of September 30, 2018 and December 31, 2017, the Company's liability recorded for public liability and property damage matters is $439 million and $427 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 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, typically involving operational issues common to the vehicle rental business, including claims by employees and former employees, and governmental investigations. The Company has summarized below the most significant legal proceedings to which the Company was and/or is a party to during the nine months ended September 30, 2018 or the period after September 30, 2018, but before the filing of this Report on Form 10‑Q.

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 Old Hertz Holdings (as defined in the Company's 2017 Form 10‑K) and certain of its officers as defendants and alleging violations of the federal securities laws. The complaint alleged that Old 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, and Rule 10b-5 promulgated thereunder. The complaint sought 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, Old Hertz Holdings responded to the amended complaint by filing a motion to dismiss. After a hearing in October 2014, the court granted Old 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. In November 2014, plaintiff filed a second amended complaint which shortened the putative class period such that it was not alleged to have commenced until May 18, 2013 and made allegations that were 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, and Old Hertz Holdings responded to the second amended complaint by filing another motion to dismiss. On July 22, 2015, the court granted Old Hertz Holdings’ motion to dismiss without prejudice and ordered that plaintiff could file a third amended complaint on or before August 22, 2015. On August 21, 2015, plaintiff filed a third amended complaint. The third amended complaint included additional allegations, named additional current and former officers as defendants and expanded the putative class period such that it was alleged to span from February 14, 2013 to July 16, 2015. Plaintiffs filed a fourth amended complaint to add a new plaintiff on March 1, 2016. Old Hertz Holdings and the individual defendants moved to dismiss the fourth amended complaint in its entirety with prejudice on March 24, 2016, and plaintiff filed its opposition to same. The court granted Old Hertz Holdings' motion to dismiss with prejudice on April 27, 2017. The plaintiffs appealed to the United States Court of Appeals for the Third Circuit and filed their Initial Brief in November 2017. Old Hertz Holdings - joined by two of the individual defendants along with a separate brief by one of the individual defendants - filed Opposition Briefs in January 2018. The plaintiffs’ Reply Brief was thereafter filed in February of 2018. Oral arguments were held on June 12, 2018. On September 20, 2018, the Third Circuit affirmed the dismissal of the fourth amended complaint with prejudice.

Governmental Investigations - In June 2014, the Company was advised by the staff of the New York Regional Office of the Securities and Exchange Commission (“SEC”) that it is investigating the events disclosed in certain of the Company’s filings with the SEC. In addition, starting in June 2016 the Company has had communications with the U.S. Attorney’s Office for the District of New Jersey regarding the same or similar events. The investigations and communications generally involve the restatements included in the Old Hertz Holdings Form 10-K for the year ended December 31, 2014, as filed with the SEC on July 16, 2015 and related accounting for prior periods. The Company has and intends to continue to cooperate with all requests related to the foregoing. The Company is engaged in discussions with the enforcement staff of the New York office of

33


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

the SEC ("Staff") to resolve certain matters under investigation. Any proposed settlement that might result from discussions with the Staff would be subject to additional reviews and approvals, including acceptance and authorization by the SEC. The Company cannot predict the ultimate timing or the final terms of a possible settlement, including any settlement amount. The Company has accrued a loss contingency of $13.6 million which is its best estimate of probable loss based on current circumstances. It is possible that the final settlement could result in losses that exceed the accrual and could be material to the Company's consolidated financial condition, results of operations or cash flows.

Additionally, the Company previously identified certain activities in Brazil that raised issues under the Foreign Corrupt Practices Act (the "FCPA") and other federal and local laws, which the Company self-reported to appropriate government entities. The matters associated with the FCPA and other federal matters have been resolved without further action by the applicable U.S. government entities. The Company is continuing its cooperation with respect to matters under local Brazilian laws. The Company has accrued a loss contingency with respect to the ongoing Brazil-related matters that is not material. However, it is possible that an adverse outcome with respect to the ongoing matters in Brazil could result in losses that could be material to the Company's consolidated financial condition, results of operations or cash flows in any particular reporting period.

French Road Tax - The French Tax Authority has challenged the historic practice of several vehicle rental companies, including Hertz France, of registering vehicles in jurisdictions where it is established and where the road tax payable with respect to those vehicles is lower than the road tax payable in the jurisdictions where the vehicles will primarily be used. In respect of a period in 2005, the Company has unsuccessfully appealed the French Tax assessment to the highest Administrative court in France. In respect of a period from 2003 to 2005, following an adverse judgment, the Company appealed the French Tax Authority’s assessment to the Civil Court of Appeal. In March 2017, the Company received an adverse judgment in the 2003 -2005 road tax appeal from the Civil Court of Appeal. The Company appealed this decision to the Supreme Civil Court in May 2017. In December 2017, the French Tax Authority issued an assessment for registration tax for the year 2014 and the Company submitted a rebuttal to the French Tax Authority in February 2018. The Company began reserving for this matter in 2015 and assesses the reserve on a quarterly basis as part of the financial statements close process.

In addition to the matters described above, the Company maintains an internal compliance program through which it from time to time identifies other potential violations of laws and regulations applicable to the Company. When the Company identifies such matters, the Company conducts an internal investigation and otherwise cooperates with governmental authorities, as appropriate.

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. These matters are 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 accompanying consolidated financial condition, results of operations or cash flows in any particular reporting period.

Indemnification Obligations

In the ordinary course of business, the Company has executed contracts involving indemnification obligations customary in the relevant industry and indemnifications specific to a transaction such as the sale of a business. These indemnification obligations might include claims relating to the following: environmental matters; intellectual property rights; governmental regulations and employment-related matters; customer, supplier and other commercial contractual relationships; and financial matters. Specifically, the Company has indemnified various parties for the costs associated

34


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

with remediating numerous hazardous substance storage, recycling or disposal sites in many states and, in some instances, for natural resource damages. The amount of any such expenses or related natural resource damages for which the Company may be held responsible could be substantial. In addition, Hertz entered into customary indemnification agreements with Hertz Holdings and certain of the Company's stockholders and their affiliates pursuant to which Hertz Holdings and Hertz will indemnify those entities and their respective affiliates, directors, officers, partners, members, employees, agents, representatives and controlling persons, against certain liabilities arising out of performance of a consulting agreement with Hertz Holdings and each of such entities and certain other claims and liabilities, including liabilities arising out of financing arrangements or securities offerings. The Company has entered into customary indemnification agreements with each of its directors and certain of its officers. Performance under these indemnification obligations would generally be triggered by a breach of terms of the contract or by a third-party claim. In connection with the Spin-Off, the Company executed an agreement with Herc Holdings that contains mutual indemnification clauses and a customary indemnification provision with respect to liability arising out of or resulting from assumed legal matters. The Company regularly evaluates the probability of having to incur costs associated with these indemnification obligations and has accrued for expected losses that are probable and estimable.

Note 12Related Party Transactions

Agreements with the Icahn Group

In the normal course of business, the Company purchases goods and services and leases property from entities controlled by Carl C. Icahn and his affiliates, including The Pep Boys - Manny, Moe & Jack (collectively, the "Icahn Group"). During the three months ended September 30, 2018 and 2017, the Company purchased approximately $10 million and $3 million, respectively, worth of goods and services from these related parties. During the nine months ended September 30, 2018 and 2017, the Company purchased approximately $27 million and $8 million, respectively, worth of goods and services from these related parties.

In May 2018, the Company sold approximately $36 million of marketable securities to the Icahn Group at the then current market price of such securities.

Transactions between Hertz Holdings and Hertz

In June 2017, Hertz entered into a master loan agreement with Hertz Holdings for a facility size of $425 million with an expiration in June 2018 (the "2017 Master Loan"). The interest rate is based on the U.S. Dollar LIBOR rate plus a margin.

In June 2018, upon expiration of the 2017 Master Loan, Hertz entered into a new master loan agreement with Hertz Holdings for a facility size of $425 million with an expiration in June 2019 (the "2018 Master Loan") where amounts outstanding under the 2017 Master Loan were transferred to the 2018 Master Loan. The interest rate is based on the U.S. Dollar LIBOR rate plus a margin. As of September 30, 2018 and December 31, 2017, there was $115 million and $107 million, respectively, outstanding under the 2018 Master Loan representing advances and any accrued but unpaid interest.

As of September 30, 2018 and December 31, 2017, Hertz has a due to affiliate in the amount of $65 million, which represents its tax-related liability to Hertz Holdings.

The above amounts are included in equity in the accompanying unaudited condensed consolidated balance sheets of Hertz.


35


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

Other Relationships

In January 2018, Hertz entered into a Master Motor Vehicle Lease and Management Agreement (the “767 Lease Agreement”) pursuant to which Hertz granted 767 Auto Leasing LLC (“767”), an entity affiliated with the Icahn Group, the option to acquire certain vehicles from Hertz at rates aligned with the rates at which Hertz sells vehicles to third parties. Hertz will lease the vehicles, purchased by 767 under the 767 Lease Agreement or from third parties, under a mutually developed fleet plan and Hertz will manage, service, repair, sell and maintain those leased vehicles on behalf of 767. Hertz will rent the leased vehicles to drivers of TNC, including Lyft, Inc. drivers, from rental counters within locations leased or owned by affiliates of 767, including locations operated under a master lease agreement with The Pep Boys - Manny, Joe & Jack. The 767 Lease Agreement has an initial term of 18 months and is subject to automatic six-month renewals thereafter, unless terminated by either party (with or without cause) prior to the start of any such six-month renewal. 767’s payment obligations under the 767 Lease Agreement are guaranteed by American Entertainment Properties Corp. ("American"), an entity affiliated with Mr. Icahn. American contributed $15 million and $25 million to 767 during the three and nine months ended September 30, 2018, respectively. During the three and nine months ended September 30, 2018, the Company sold approximately 1,000 and 1,600 vehicles, respectively, to 767 for approximately $11 million and $18 million, respectively.

The Company is entitled to 25% of the profit from the rental of the leased vehicles, as specified in the 767 Lease Agreement, which is variable and based primarily on the rental revenue, less certain costs, such as depreciation, licensing and maintenance expenses. The Company has determined that it is the primary beneficiary of 767 due to its power to direct the activities of 767 that most significantly impact 767's economic performance and the Company's obligation to absorb 25% of 767's gains/losses. Accordingly, 767 is consolidated by the Company as a VIE.

Note 13Segment Information

The Company has identified three 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. Rental Car ("U.S. RAC") - rental of vehicles (cars, crossovers and light trucks), as well as sales of value-added services, in the U.S. and consists of the Company's U.S. operating segment;

International Rental Car ("International RAC") - rental and leasing of vehicles (cars, vans, crossovers and light trucks), as well as sales of value-added 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;

All Other Operations - primarily consists of the Company's Donlen business, which provides vehicle leasing and fleet management services, together with other business activities which represent less than 2% of revenues and expenses of the segment.

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 non-vehicle debt).

36


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


The following tables provide significant statement of operations and balance sheet information by segment for each of Hertz Global and Hertz, as well as adjusted pre-tax income (loss), the segment measure of profitability.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(In millions)
2018
 
2017
 
2018
 
2017
Revenues
 
 
 
 
 
 
 
U.S. Rental Car
$
1,852

 
$
1,685

 
$
4,905

 
$
4,557

International Rental Car
732

 
728

 
1,789

 
1,683

All Other Operations
174

 
159

 
515

 
473

Total Hertz Global and Hertz
$
2,758

 
$
2,572

 
$
7,209

 
$
6,713

Depreciation of revenue earning vehicles and lease charges, net
 
 
 
 
 
 
 
U.S. Rental Car
$
414

 
$
455

 
$
1,295

 
$
1,478

International Rental Car
128

 
126

 
342

 
311

All Other Operations
130

 
119

 
383

 
355

Total Hertz Global and Hertz
$
672

 
$
700

 
$
2,020

 
$
2,144

Adjusted Pre-tax Income (Loss)(a)
 
 
 
 
 
 
 
U.S. Rental Car
$
222

 
$
158

 
$
200

 
$
5

International Rental Car
133

 
147

 
201

 
200

All Other Operations
22

 
20

 
68

 
59

Corporate
(137
)
 
(137
)
 
(425
)
 
(371
)
Total Hertz Global
240

 
188

 
44

 
(107
)
Corporate - Hertz
2

 
1

 
5

 
4

Total Hertz
$
242

 
$
189

 
$
49

 
$
(103
)

(In millions)
September 30, 2018
 
December 31, 2017
Total Assets
 
 
 
U.S. Rental Car
$
14,495

 
$
12,785

International Rental Car
5,081

 
3,971

All Other Operations
1,763

 
1,700

Corporate
1,121

 
1,602

Total Hertz Global and Hertz
$
22,460

 
$
20,058


(a)
Adjusted Pre-tax Income (Loss), the Company's segment profitability measure, is calculated as income (loss) before income taxes plus non-cash acquisition accounting charges, debt-related charges relating to the amortization and write-off of debt financing costs and debt discounts and premiums, goodwill, intangible and tangible asset impairments and write downs, information technology and finance transformation costs, income or loss attributable to noncontrolling interests, and certain other miscellaneous or non-recurring items.

Reconciliations of Adjusted Pre-tax Income (Loss) by segment to consolidated amounts are summarized below.


37


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

Hertz Global
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(In millions)
2018
 
2017
 
2018
 
2017
Adjusted Pre-tax Income (Loss):
 
 
 
 
 
 
 
U.S. Rental Car
$
222

 
$
158

 
$
200

 
$
5

International Rental Car
133

 
147

 
201

 
200

All Other Operations
22

 
20

 
68

 
59

Total reportable segments
377

 
325

 
469

 
264

Corporate(1)
(137
)
 
(137
)
 
(425
)
 
(371
)
Adjusted Pre-tax Income (Loss)
240

 
188

 
44

 
(107
)
Adjustments:
 
 
 
 
 
 
 
Acquisition accounting(2)
(15
)
 
(15
)
 
(46
)
 
(47
)
Debt-related charges(3)
(11
)
 
(12
)
 
(36
)
 
(33
)
Loss on extinguishment of debt(4)

 

 
(22
)
 
(8
)
Restructuring and restructuring related charges(5)
(12
)
 
(2
)
 
(26
)
 
(14
)
Impairment charges and asset write-downs(6)

 

 

 
(116
)
Information technology and finance transformation costs(7)
(24
)
 
(15
)
 
(75
)
 
(55
)
Other(8)
3


(1
)

24


(17
)
Income (loss) before income taxes
$
181

 
$
143

 
$
(137
)
 
$
(397
)

Hertz
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(In millions)
2018
 
2017
 
2018
 
2017
Adjusted Pre-tax Income (Loss):
 
 
 
 
 
 
 
U.S. Rental Car
$
222

 
$
158

 
$
200

 
$
5

International Rental Car
133

 
147

 
201

 
200

All Other Operations
22

 
20

 
68

 
59

Total reportable segments
377

 
325

 
469

 
264

Corporate(1)
(135
)
 
(136
)
 
(420
)
 
(367
)
Adjusted Pre-tax Income (Loss)
242

 
189

 
49

 
(103
)
Adjustments:
 
 
 
 
 
 
 
Acquisition accounting(2)
(15
)
 
(15
)
 
(46
)
 
(47
)
Debt-related charges(3)
(11
)
 
(12
)
 
(36
)
 
(33
)
Loss on extinguishment of debt(4)

 

 
(22
)
 
(8
)
Restructuring and restructuring related charges(5)
(12
)
 
(2
)
 
(26
)
 
(14
)
Impairment charges and asset write-downs(6)

 

 

 
(116
)
Information technology and finance transformation costs(7)
(24
)
 
(15
)
 
(75
)
 
(55
)
Other(8)
3


(1
)

24


(17
)
Income (loss) before income taxes
$
183

 
$
144

 
$
(132
)
 
$
(393
)

(1)
Represents general corporate expenses, non-vehicle interest expense, as well as other business activities.

38


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

(2)
Represents incremental expense associated with amortization of other intangible assets and depreciation of property and equipment relating to acquisition accounting.
(3)
Primarily represents debt-related charges relating to the amortization of deferred financing costs and debt discounts and premiums.
(4)
In 2018, primarily represents $20 million of early redemption premium and write-off of deferred financing costs associated with the full redemption of the 4.375% European Vehicle Senior Notes due January 2019 in April 2018. In 2017, represents $6 million of early redemption premium and write-off of deferred financing costs associated with the redemption of certain notes and a $2 million write-off of deferred financing costs associated with the termination of commitments under the Senior RCF incurred during the second quarter.
(5)
Represents charges incurred under restructuring actions as defined in U.S. GAAP, excluding impairments and asset write-downs, which are shown separately in the table. Also includes restructuring related charges such as 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. Also includes consulting costs, legal fees, the loss contingency, which totals $13.6 million for the nine months of 2018, and other expenses related to the previously disclosed accounting review and investigation.
(6)
In 2017, represents a second quarter $86 million impairment of the Dollar Thrifty tradename and a first quarter impairment of $30 million related to an equity method investment.
(7)
Represents costs associated with the Company’s information technology and finance transformation programs, both of which are multi-year initiatives to upgrade and modernize the Company’s systems and processes.
(8)
Represents miscellaneous or non-recurring items. In 2018, includes net loss attributable to noncontrolling interests, a $4 million and $21 million pre-tax gain on marketable securities during the third quarter and nine months, respectively, and a $6 million legal settlement received in the second quarter related to an oil spill in the Gulf of Mexico in 2010. In 2017, includes net expenses of $13 million resulting from hurricanes, partially offset by a $6 million pre-tax gain on the sale of the Company's Brazil Operations in the third quarter. Also, includes second quarter charges of $6 million for labor-related matters and $5 million relating to PLPD as a result of a terrorist event.

Note 14Guarantor and Non-Guarantor Condensed Consolidating Financial Information - Hertz

The following condensed consolidating financial information presents the Condensed Consolidating Balance Sheets as of September 30, 2018 and December 31, 2017, the Condensed Consolidating Statements of Operations and Comprehensive Income (Loss) for the three and nine months ended September 30, 2018 and 2017 and the Statements of Cash Flows for the nine months ended September 30, 2018 and 2017 of (a) The Hertz Corporation, ("Parent”); (b) the Parent's subsidiaries that guarantee the Senior Notes issued by the Parent ("Guarantor Subsidiaries"); (c) the Parent's subsidiaries that do not guarantee the Senior Notes issued by the Parent ("Non-Guarantor Subsidiaries"); (d) elimination entries necessary to consolidate the Parent with the Guarantor Subsidiaries and Non-Guarantor Subsidiaries ("Eliminations"); and of (e) Hertz on a consolidated basis.

Investments in subsidiaries are accounted for using the equity method for purposes of the consolidating presentation. The principal elimination entries relate to investments in subsidiaries and intercompany balances and transactions. The Guarantor Subsidiaries are 100% owned by the Parent and all guarantees are full and unconditional and joint and several. Additionally, substantially all of the assets of the Guarantor Subsidiaries are pledged under the Senior Facilities and Senior Second Priority Secured Notes, and consequently will not be available to satisfy the claims of Hertz's general creditors. In lieu of providing separate unaudited financial statements for the Guarantor Subsidiaries, Hertz has included the accompanying condensed consolidating financial statements based on Rule 3-10 of the SEC's Regulation S-X. Management of Hertz does not believe that separate financial statements of the Guarantor Subsidiaries are material to Hertz's investors; therefore, separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented.

During the preparation of the condensed consolidating financial information of The Hertz Corporation and Subsidiaries as of and for the year ended December 31, 2017, it was determined that there were classification errors within the investing section of the statements of cash flows that resulted in overstatement of capital contributions to subsidiaries and return of capital from subsidiaries for the Parent and classification errors within the financing section of the statements of cash flows that resulted in overstatement of capital contributions received from parent and payment of dividends and returns of capital for the Non-Guarantor Subsidiaries. The overstatement was $164 million for the nine months ended September 30, 2017. The errors, which the Company has determined are not material to this disclosure, had no impact to cash from investing activities for the Parent or cash from financing activities of the Non-Guarantor Subsidiaries, and had no impact to any cash flows of the Guarantor Subsidiaries. These errors are eliminated in

39


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

consolidation and therefore have no impact on the Company’s unaudited condensed consolidated financial condition, results of operations or cash flows. The Company has revised the Condensed Consolidating Statements of Cash Flows for the Parent, Non-Guarantor Subsidiaries and Eliminations for the nine months ended September 30, 2017 to correct for these errors.


40


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

THE HERTZ CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
September 30, 2018
(In millions)

 
Parent
(The Hertz
Corporation)
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
The Hertz
Corporation &
Subsidiaries
ASSETS
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
271

 
$
7

 
$
483

 
$

 
$
761

Restricted cash and cash equivalents
90

 
8

 
167

 

 
265

Total cash, cash equivalents, restricted cash and restricted cash equivalents
361

 
15

 
650

 

 
1,026

Receivables, net of allowance
441

 
166

 
1,198

 

 
1,805

Due from affiliates
3,486

 
5,200

 
8,575

 
(17,261
)
 

Prepaid expenses and other assets
4,719

 
36

 
292

 
(4,056
)
 
991

Revenue earning vehicles, net
453

 
1

 
13,123

 

 
13,577

Property and equipment, net
590

 
62

 
129

 

 
781

Investment in subsidiaries, net
7,695

 
1,334

 

 
(9,029
)
 

Other intangible assets, net
139

 
3,052

 
6

 

 
3,197

Goodwill
102

 
943

 
38

 

 
1,083

Total assets
$
17,986

 
$
10,809

 
$
24,011

 
$
(30,346
)
 
$
22,460

LIABILITIES AND STOCKHOLDER'S EQUITY
 
 
 
 
 
 
 
 
 
Due to affiliates
$
10,728

 
$
2,270

 
$
4,263

 
$
(17,261
)
 
$

Accounts payable
430

 
112

 
462

 

 
1,004

Accrued liabilities
797

 
67

 
442

 

 
1,306

Accrued taxes, net
90

 
19

 
2,711

 
(2,639
)
 
181

Debt
4,554

 

 
12,604

 

 
17,158

Public liability and property damage
185

 
40

 
214

 

 
439

Deferred income taxes, net

 
1,525

 
1,038

 
(1,417
)
 
1,146

Total liabilities
16,784

 
4,033

 
21,734

 
(21,317
)
 
21,234

Stockholder's equity:
 
 
 
 
 
 
 
 
 
Total stockholder's equity attributable to Hertz
1,202

 
6,776

 
2,253

 
(9,029
)
 
1,202

Noncontrolling interest

 

 
24

 

 
24

Total stockholder's equity
1,202

 
6,776

 
2,277

 
(9,029
)
 
1,226

Total liabilities and stockholder's equity
$
17,986

 
$
10,809

 
$
24,011

 
$
(30,346
)
 
$
22,460



41


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

THE HERTZ CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2017
(In millions)
 
Parent
(The Hertz
Corporation)
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
The Hertz
Corporation &
Subsidiaries
ASSETS
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
686

 
$
9

 
$
377

 
$

 
$
1,072

Restricted cash and cash equivalents
225

 
7

 
200

 

 
432

Total cash, cash equivalents, restricted cash and restricted cash equivalents
911

 
16

 
577

 

 
1,504

Receivables, net of allowance
366

 
167

 
832

 

 
1,365

Due from affiliates
3,373

 
4,567

 
8,794

 
(16,734
)
 

Prepaid expenses and other assets
3,747

 
37

 
302

 
(3,399
)
 
687

Revenue earning vehicles, net
352

 
2

 
10,982

 

 
11,336

Property and equipment, net
639

 
61

 
140

 

 
840

Investment in subsidiaries, net
7,966

 
1,265

 

 
(9,231
)
 

Other intangible assets, net
141

 
3,091

 
10

 

 
3,242

Goodwill
102

 
944

 
38

 

 
1,084

Total assets
$
17,597

 
$
10,150

 
$
21,675

 
$
(29,364
)
 
$
20,058

LIABILITIES AND STOCKHOLDER'S EQUITY
 
 
 
 
 
 
 
 
 
Due to affiliates
$
10,368

 
$
2,156

 
$
4,210

 
$
(16,734
)
 
$

Accounts payable
375

 
92

 
479

 

 
946

Accrued liabilities
473

 
73

 
374

 

 
920

Accrued taxes, net
77

 
21

 
2,235

 
(2,173
)
 
160

Debt
4,619

 

 
10,246

 

 
14,865

Public liability and property damage
165

 
37

 
225

 

 
427

Deferred income taxes, net

 
1,451

 
995

 
(1,226
)
 
1,220

Total liabilities
16,077

 
3,830

 
18,764

 
(20,133
)
 
18,538

Stockholder's equity:
 
 
 
 
 
 
 
 
 
Total stockholder's equity
1,520

 
6,320

 
2,911

 
(9,231
)
 
1,520

Total liabilities and stockholder's equity
$
17,597

 
$
10,150

 
$
21,675

 
$
(29,364
)
 
$
20,058




42


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

THE HERTZ CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
For the Three Months Ended September 30, 2018
(In millions)

 
Parent
(The Hertz
Corporation)
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
The Hertz
Corporation &
Subsidiaries
Total revenues
$
1,349

 
$
418

 
$
2,272

 
$
(1,281
)
 
$
2,758

Expenses:
 
 
 
 
 
 
 
 
 
Direct vehicle and operating
865

 
190

 
404

 

 
1,459

Depreciation of revenue earning vehicles and lease charges, net
1,200

 
91

 
662

 
(1,281
)
 
672

Selling, general and administrative
176

 
24

 
65

 

 
265

Interest (income) expense, net
108

 
(42
)
 
120

 

 
186

Other (income) expense, net
(6
)
 

 
(1
)
 

 
(7
)
Total expenses
2,343

 
263

 
1,250

 
(1,281
)
 
2,575

Income (loss) before income taxes and equity in earnings (losses) of subsidiaries
(994
)
 
155

 
1,022

 

 
183

Income tax (provision) benefit
270

 
(41
)
 
(271
)
 

 
(42
)
Equity in earnings (losses) of subsidiaries, net of tax
866

 
32

 

 
(898
)
 

Net income (loss)
142

 
146

 
751

 
(898
)
 
141

Net (income) loss attributable to noncontrolling interests

 

 
1

 

 
1

Net income (loss) attributable to Hertz
142

 
146

 
752

 
(898
)
 
142

Total other comprehensive income (loss), net of tax

 
2

 
(1
)
 
(1
)
 

Comprehensive income (loss) attributable to Hertz
$
142

 
$
148

 
$
751

 
$
(899
)
 
$
142



43


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

THE HERTZ CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
For the Three Months Ended September 30, 2017
(In millions)

 
Parent
(The Hertz
Corporation)
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
The Hertz
Corporation &
Subsidiaries
Total revenues
$
1,296

 
$
394

 
$
1,861

 
$
(979
)
 
$
2,572

Expenses:
 
 
 
 
 
 
 
 
 

Direct vehicle and operating
772

 
188

 
388

 

 
1,348

Depreciation of revenue earning vehicles and lease charges, net
826

 
98

 
669

 
(893
)
 
700

Selling, general and administrative
151

 
9

 
57

 

 
217

Interest (income) expense, net
108

 
(26
)
 
93

 

 
175

Intangible asset impairments

 

 

 

 

Other (income) expense, net
(4
)
 

 
(8
)
 

 
(12
)
Total expenses
1,853

 
269

 
1,199

 
(893
)
 
2,428

Income (loss) before income taxes and equity in earnings (losses) of subsidiaries
(557
)
 
125

 
662

 
(86
)
 
144

Income tax (provision) benefit
188

 
(43
)
 
(195
)
 

 
(50
)
Equity in earnings (losses) of subsidiaries, net of tax
463

 
37

 

 
(500
)
 

Net income (loss)
94

 
119

 
467

 
(586
)
 
94

Total other comprehensive income (loss), net of tax
15

 
4

 
14

 
(18
)
 
15

Total comprehensive income (loss)
$
109

 
$
123

 
$
481

 
$
(604
)
 
$
109



44


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

THE HERTZ CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
For the Nine Months Ended September 30, 2018
(In millions)

 
 
 
 
 
 
 
 
 
 
 
Parent
(The Hertz
Corporation)
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
The Hertz
Corporation &
Subsidiaries
Total revenues
$
3,598

 
$
1,105

 
$
5,890

 
$
(3,384
)
 
$
7,209

Expenses:
 
 
 
 
 
 
 
 
 
Direct vehicle and operating
2,455

 
544

 
1,044

 

 
4,043

Depreciation of revenue earning vehicles and lease charges, net
3,185

 
273

 
1,946

 
(3,384
)
 
2,020

Selling, general and administrative
516

 
53

 
196

 

 
765

Interest (income) expense, net
311

 
(112
)
 
350

 

 
549

Other (income) expense, net
(33
)
 

 
(3
)
 

 
(36
)
Total expenses
6,434

 
758

 
3,533

 
(3,384
)
 
7,341

Income (loss) before income taxes and equity in earnings (losses) of subsidiaries
(2,836
)
 
347

 
2,357

 

 
(132
)
Income tax (provision) benefit
627

 
(76
)
 
(541
)
 

 
10

Equity in earnings (losses) of subsidiaries, net of tax
2,088

 
90

 

 
(2,178
)
 

Net income (loss)
(121
)
 
361

 
1,816

 
(2,178
)
 
(122
)
Net (income) loss attributable to noncontrolling interests

 

 
1

 

 
1

Net income (loss) attributable to Hertz
(121
)
 
361

 
1,817

 
(2,178
)
 
(121
)
Total other comprehensive income (loss), net of tax
(17
)
 
(3
)
 
(18
)
 
21

 
(17
)
Comprehensive income (loss) attributable to Hertz
$
(138
)
 
$
358

 
$
1,799

 
$
(2,157
)
 
$
(138
)


45


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

THE HERTZ CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
For the Nine Months Ended September 30, 2017
(In millions)

 
 
 
 
 
 
 
 
 
 
 
Parent
(The Hertz
Corporation)
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
The Hertz
Corporation &
Subsidiaries
Total revenues
$
3,516

 
$
1,055

 
$
5,109

 
$
(2,967
)
 
$
6,713

Expenses:
 
 
 
 
 
 
 
 
 
Direct vehicle and operating
2,201

 
538

 
996

 

 
3,735

Depreciation of revenue earning vehicles and lease charges, net
2,587

 
313

 
2,004

 
(2,760
)
 
2,144

Selling, general and administrative
457

 
28

 
176

 

 
661

Interest (income) expense, net
290

 
(73
)
 
244

 

 
461

Intangible asset impairments

 
86

 

 

 
86

Other (income) expense, net
30

 

 
(11
)
 

 
19

Total expenses
5,565

 
892

 
3,409

 
(2,760
)
 
7,106

Income (loss) before income taxes and equity in earnings (losses) of subsidiaries
(2,049
)
 
163

 
1,700

 
(207
)
 
(393
)
Income tax (provision) benefit
760

 
(57
)
 
(596
)
 

 
107

Equity in earnings (losses) of subsidiaries, net of tax
1,003

 
100

 

 
(1,103
)
 

Net income (loss)
(286
)
 
206

 
1,104

 
(1,310
)
 
(286
)
Total other comprehensive income (loss), net of tax
21

 
6

 
19

 
(25
)
 
21

Total comprehensive income (loss)
$
(265
)
 
$
212

 
$
1,123

 
$
(1,335
)
 
$
(265
)



46


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

THE HERTZ CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 2018
(In millions)
 
Parent
(The Hertz
Corporation)
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
The Hertz
Corporation &
Subsidiaries
Net cash provided by (used in) operating activities
$
187

 
$
7

 
$
3,732

 
$
(1,905
)
 
$
2,021

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Revenue earning vehicles expenditures
(328
)
 

 
(9,748
)
 

 
(10,076
)
Proceeds from disposal of revenue earning vehicles
183

 

 
5,195

 

 
5,378

Capital asset expenditures, non-vehicle
(85
)
 
(8
)
 
(26
)
 

 
(119
)
Proceeds from property and other equipment disposed of or to be disposed of
41

 

 
6

 

 
47

Purchases of marketable securities
(60
)
 

 

 

 
(60
)
Sales of marketable securities
36

 

 

 

 
36

Other
(2
)
 

 
(3
)
 

 
(5
)
Capital contributions to subsidiaries
(2,817
)
 

 

 
2,817

 

Return of capital from subsidiaries
2,445

 

 

 
(2,445
)
 

Proceeds from/repayments of intercompany loan

 

 
78

 
(78
)
 

Net cash provided by (used in) investing activities
(587
)
 
(8
)
 
(4,498
)
 
294

 
(4,799
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Proceeds from issuance of vehicle debt
1,809

 

 
10,062

 

 
11,871

Repayments of vehicle debt
(1,862
)
 

 
(7,663
)
 

 
(9,525
)
Proceeds from issuance of non-vehicle debt
387

 

 

 

 
387

Repayments of non-vehicle debt
(398
)
 

 

 

 
(398
)
Payment of financing costs
(1
)
 

 
(29
)
 

 
(30
)
Early redemption premium payment

 

 
(19
)
 

 
(19
)
Advances to Hertz Holdings
(7
)
 

 

 

 
(7
)
Contributions from noncontrolling interest owners


 

 
25

 

 
25

Capital contributions received from parent

 

 
2,817

 
(2,817
)
 

Payment of dividends and return of capital

 

 
(4,350
)
 
4,350

 

Proceeds from/repayments of intercompany loan

(78
)
 

 

 
78

 

Net cash provided by (used in) financing activities
(150
)
 

 
843

 
1,611

 
2,304

Effect of foreign currency exchange rate changes on cash, cash equivalents, restricted cash and restricted cash equivalents

 

 
(4
)
 

 
(4
)
Net increase (decrease) in cash, cash equivalents, restricted cash and restricted cash equivalents during the period
(550
)
 
(1
)
 
73

 

 
(478
)
Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period
911

 
16

 
577

 

 
1,504

Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period
$
361

 
$
15

 
$
650

 
$

 
$
1,026


47


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

THE HERTZ CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 2017
(In millions)

 
Parent
(The Hertz
Corporation)
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
The Hertz
Corporation &
Subsidiaries
Net cash provided by (used in) operating activities
$
(80
)
 
$
17

 
$
3,255

 
$
(1,211
)
 
$
1,981

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Revenue earning vehicles expenditures
(195
)
 
(5
)
 
(8,483
)
 

 
(8,683
)
Proceeds from disposal of revenue earning vehicles
123

 

 
5,162

 

 
5,285

Capital asset expenditures, non-vehicle
(82
)
 
(8
)
 
(34
)
 

 
(124
)
Proceeds from disposal of property and other equipment
7

 

 
11

 

 
18

Proceeds from sale of Brazil Operations, net of retained cash

 

 
94

 

 
94

Sales of marketable securities

 

 
9

 

 
9

Other

 

 
(4
)
 

 
(4
)
Capital contributions to subsidiaries
(2,060
)
 

 

 
2,060

 

Return of capital from subsidiaries
2,099

 

 

 
(2,099
)
 

Proceeds from/repayments of intercompany loan

 

 
80

 
(80
)
 

Net cash provided by (used in) investing activities
(108
)
 
(13
)
 
(3,165
)
 
(119
)
 
(3,405
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Proceeds from issuance of vehicle debt
1,133

 

 
5,774

 

 
6,907

Repayments of vehicle debt
(1,129
)
 

 
(4,758
)
 

 
(5,887
)
Proceeds from issuance of non-vehicle debt
2,100

 

 

 

 
2,100

Repayments of non-vehicle debt
(986
)
 

 

 

 
(986
)
Payment of financing costs
(18
)
 
(4
)
 
(21
)
 

 
(43
)
Early redemption premium payment
(5
)
 

 

 

 
(5
)
Advances to Hertz Holdings
(4
)
 

 

 

 
(4
)
Other
(1
)
 

 

 

 
(1
)
Capital contributions received from parent

 

 
2,060

 
(2,060
)
 

Payment of dividends and return of capital

 

 
(3,310
)
 
3,310

 

Proceeds from/repayments of intercompany loan
(80
)
 

 

 
80

 

Net cash provided by (used in) financing activities
1,010

 
(4
)
 
(255
)
 
1,330

 
2,081

Effect of foreign currency exchange rate changes on cash, cash equivalents, restricted cash and restricted cash equivalents

 

 
26

 

 
26

Net increase (decrease) in cash, cash equivalents, restricted cash and restricted cash equivalents during the period
822

 

 
(139
)
 

 
683

Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period
510

 
18

 
566

 

 
1,094

Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period
$
1,332

 
$
18

 
$
427

 
$

 
$
1,777



48


HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES

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

Hertz Global Holdings, Inc. (together with its consolidated subsidiaries and variable interest entities, "Hertz Global") is a holding company and its principal, wholly owned subsidiary is The Hertz Corporation (together with its consolidated subsidiaries and variable interest entities, "Hertz"). As Hertz Global consolidates Hertz for financial statement purposes, disclosures that relate to activities of Hertz also apply to Hertz Global, unless otherwise noted. Hertz comprises approximately the entire balance of Hertz Global's assets, liabilities and operating cash flows. In addition, Hertz's operating revenues and operating expenses comprise nearly 100% of Hertz Global's revenues and operating expenses. As such, Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") that follows for Hertz also applies to Hertz Global in all material respects, and differences between the operations and results of Hertz and Hertz Global are separately disclosed and explained. We sometimes use the words "we," "our," "us," and the "Company" in this MD&A for disclosures that relate to all of Hertz and Hertz Global.

This MD&A should be read in conjunction with the MD&A presented in our 2017 Form 10‑K and the unaudited condensed consolidated financial statements and accompanying notes included in Part I, Item 1 of this Report on Form 10-Q for the quarterly period ended September 30, 2018 (this "Report"), 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 vehicle depreciation and various claims and contingencies related to lawsuits, taxes 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 to be 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 key metrics and non-GAAP measures, including the following:
Adjusted Pre-Tax Income (Loss) - 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.
Net Depreciation Per Unit Per Month - important to management and investors as depreciation of revenue earning vehicles and lease charges is one of our largest expenses for the vehicle 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 vehicles and facilitates a comparison with other participants in the vehicle rental industry.
Total Revenue Per Transaction Day ("Total RPD," also referred to as "pricing") - important to management and investors as it represents a measurement of the changes in underlying pricing in the vehicle rental business and encompasses the elements in vehicle rental pricing that management has the ability to control.
Total Revenue Per Unit Per Month ("Total RPU") - important to management and investors as it provides a measure of revenue productivity relative to the total number of vehicles in our fleet whether owned or leased ("Average Vehicles" or "fleet capacity").
Transaction Days - important to management and investors as it represents the number of revenue generating days ("volume"). It is used as a component to measure Total RPD and Vehicle Utilization. Transaction Days represent the total number of 24-hour periods, with any partial period counted as one transaction day, that vehicles were on rent (the period between when a rental contract is opened and closed) in a given period. Thus, it is possible for a vehicle to attain more than one transaction day in a 24-hour period.
Vehicle Utilization - important to management and investors because it is the measurement of the proportion of our vehicles that are being used to generate revenues relative to fleet capacity. Higher vehicle utilization means more vehicles are being utilized to generate revenue.


49


HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES

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

Key metrics and 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 key metrics and non-GAAP measures are defined, and the non-GAAP measures are 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 Global was incorporated in Delaware in 2015 to serve as the top-level holding company for Rental Car Intermediate Holdings, LLC, which wholly owns Hertz, Hertz Global's primary operating company. Hertz was incorporated in Delaware in 1967 and is a successor to corporations that have been engaged in the vehicle rental and leasing business since 1918.

We operate our vehicle rental business globally through the Hertz, Dollar and Thrifty brands from approximately 10,200 corporate and franchisee locations in North America, Europe, Latin America, Africa, Asia, Australia, the Caribbean, the Middle East and New Zealand. We are one of the largest worldwide airport general use vehicle rental companies and our Hertz brand name is one of the most recognized globally, signifying leadership in quality rental services and products. We have an extensive network of rental locations in the U.S. and in all major European markets. We believe that we maintain one of the leading airport vehicle rental brand market shares, by overall reported revenues, in the U.S. and at major airports in Europe where data regarding vehicle rental concessionaire activity is available. We are a leading provider of comprehensive, integrated vehicle leasing and fleet management solutions through our Donlen subsidiary.

OVERVIEW OF OUR BUSINESS AND OPERATING ENVIRONMENT

We are engaged principally in the business of renting and leasing vehicles primarily through our Hertz, Dollar and Thrifty brands. In addition to vehicle rental, we provide comprehensive, integrated vehicle leasing and fleet management solutions through our Donlen subsidiary. We have a diversified revenue base and a highly variable cost structure and are able to adjust fleet capacity, the most significant determinant of our costs, over time to meet expectations of market demand. Our profitability is primarily a function of the volume, mix and pricing of rental transactions and the utilization of vehicles, the related ownership cost of vehicles and other operating costs. Significant changes in the purchase price or residual values of vehicles 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, including residual values. Our business requires significant expenditures for vehicles, and consequently we require substantial liquidity to finance such expenditures. See "Liquidity and Capital Resources" below.
 
Our strategy includes optimization of our vehicle rental operations, disciplined performance management and evaluation of all locations and the pursuit of same-store sales growth.

Our total revenues primarily are derived from rental and related charges and consist of:
Vehicle rental revenues - revenues from all company-operated vehicle 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 value-added services associated with vehicle rentals, including the sale of loss or collision damage waivers, liability insurance coverage, parking and other products and fees, ancillary revenues associated with the retail vehicle sales channel and certain royalty fees from our franchisees (such fees are less than 2% of total revenues each period); and
All other operations revenues - revenues from vehicle leasing and fleet management services by our Donlen business and other business activities.

Our expenses primarily consist of:
Direct vehicle and operating expense ("DOE") - primarily wages and related benefits, commissions and concession fees paid to airport authorities, travel agents and others, facility, self-insurance and reservation

50


HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES

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

costs and other costs relating to the operation and rental of revenue earning vehicles, such as damage, maintenance and fuel costs;
Depreciation expense and lease charges, net relating to revenue earning vehicles (including net gains or losses on the disposal of such vehicles);
Selling, general and administrative expense ("SG&A"), which includes costs for information technology and finance transformation programs; and
Interest expense, net.

Our Business Segments

We have identified three 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. Rental Car ("U.S. RAC") - Rental of vehicles, as well as sales of value-added services, in the U.S.;
International Rental Car ("International RAC") - Rental and leasing of vehicles, as well as sales of value-added services, internationally; and
All Other Operations - Comprised primarily of our Donlen business, which provides vehicle leasing and fleet management services, and other business activities.
In addition to the above reportable segments, we have Corporate operations. We assess performance and allocate resources based upon the financial information for our operating segments.

Fleet

We periodically review and adjust the mix between program and non-program vehicles in our fleet in an effort to optimize the mix of vehicles. Program vehicles generally provide us with flexibility to increase or reduce the size of our fleet based on economic demand. When we increase the percentage of program vehicles, the average age of our fleet decreases since the average holding period for program vehicles is shorter than for non-program vehicles. We dispose of our non-program vehicles via auction, dealer-direct and our retail locations. Non-program vehicles disposed of through our retail outlets allow us the opportunity for value-added revenue, such as warranty, financing and title fees. We adjust the ratio of program and non-program vehicles in our fleet as needed based on contract negotiations and the economic environment pertaining to our industry.

Seasonality

Our vehicle rental operations are a seasonal business, with decreased levels of business in the winter months and heightened activity during the spring and summer peak ("our peak season") for the majority of countries where we generate our revenues. To accommodate increased demand, we increase our available fleet and staff during the second and third quarters of the year. As business demand declines, vehicles 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 utilization initiatives and the use of our information technology systems, to help manage our variable costs. Generally, between 70% and 75% of our 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. Certain operating expenses, including real estate taxes, rent, insurance, utilities, maintenance and other facility-related expenses, the costs of operating our information technology systems and minimum staffing costs, remain fixed and cannot be adjusted for seasonal demand.


51


HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES

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

Adoption of the new Revenue Standard

Effective January 1, 2018, we adopted the new revenue standard, Topic 606, which resulted in a net increase to beginning accumulated deficit in the amount of $189 million related to the cumulative effect of our loyalty program. The adoption of Topic 606 did not have a significant impact to our results of operations for the third quarter and nine months ended September 30, 2018. See the Revenue from Contracts with Customers section in Note 2, "Basis of Presentation and Recently Issued Accounting Pronouncements" for further information.

2018 Operating Overview

The following provides an overview of our business and financial performance and key factors influencing our results:
U.S. RAC
3Q 2018 versus 3Q 2017:
Total revenues increased $167 million, or 10%
Total RPD and Total RPU increased 3%
Transaction Days increased 7%
Depreciation of revenue earning vehicles and lease charges, net decreased 9% to $414 million
Net Depreciation Per Unit Per Month decreased 15% to $261
Vehicle Utilization was 81%, an increase of 30 bps
DOE as a percentage of total revenues was flat at 58%
SG&A as a percentage of total revenues increased 130 bps (7% versus 6%)

Nine months of 2018 versus nine months of 2017:
Total revenues increased $348 million, or 8%
Total RPD increased 1%, and Total RPU increased 3%
Transaction Days increased 7%
Depreciation of revenue earning vehicles and lease charges, net decreased 12% to $1.3 billion
Net Depreciation Per Unit Per Month decreased 16% to $282
Vehicle Utilization increased 190 bps (81% versus 79%)
DOE as a percentage of total revenues increased 110 bps (61% versus 60%)
SG&A as a percentage of total revenues increased 70 bps (7% versus 6%)

International RAC
3Q 2018 versus 3Q 2017:
Total revenues increased $4 million, or 1%, and increased $18 million, or 3%, excluding the impact of foreign currency exchange at average rates ("fx")
Total RPD increased 3%, and Total RPU increased 1%
Transaction Days were flat
Depreciation of revenue earning vehicles and lease charges, net increased 2% to $128 million, and increased $5 million, or 4%, excluding fx
Net Depreciation Per Unit Per Month increased 3% to $205
Vehicle Utilization decreased 120 bps (80% versus 82%)
DOE as a percentage of total revenues increased 140 bps (52% versus 51%)
SG&A as a percentage of total revenues was flat at 9%

Nine months of 2018 versus nine months of 2017:
Total revenues increased $106 million, or 6%, and increased $40 million, or 2%, excluding fx
Total RPD increased 3%, and Total RPU increased 2%
Transaction Days decreased 1%
Depreciation of revenue earning vehicles and lease charges, net increased 10% to $342 million, and increased $15 million, or 5%, excluding fx
Net Depreciation Per Unit Per Month increased 6% to $208
Vehicle Utilization decreased 80 bps (78% versus 79%)

52


HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES

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

DOE as a percentage of total revenues decreased 90 bps (56% versus 57%)
SG&A as a percentage of total revenues was flat at 10%

Recorded $24 million and $75 million in expenses during the third quarter and the nine months of 2018, respectively, associated with our information technology and finance transformation programs, compared to $15 million and $55 million during the third quarter and nine months of 2017, respectively.

For more information on the above, see the discussion of our results on a consolidated basis and by segment that follows herein.

CONSOLIDATED RESULTS OF OPERATIONS - HERTZ
 
Three Months Ended September 30,
 
Percent Increase/(Decrease)
 
Nine Months Ended
September 30,
 
Percent Increase/(Decrease)
($ in millions)
2018
 
2017
 
 
2018
 
2017
 
Total revenues
$
2,758

 
$
2,572

 
7
 %
 
$
7,209

 
$
6,713

 
7
 %
Direct vehicle and operating expenses
1,459

 
1,348

 
8

 
4,043

 
3,735

 
8

Depreciation of revenue earning vehicles and lease charges, net
672

 
700

 
(4
)
 
2,020

 
2,144

 
(6
)
Selling, general and administrative expenses
265

 
217

 
22

 
765

 
661

 
16

Interest expense, net:
 
 
 
 
 
 
 
 
 
 
 
Vehicle
115

 
90

 
28

 
336

 
242

 
39

Non-vehicle
71

 
85

 
(16
)
 
213

 
219

 
(3
)
Interest expense, net
186

 
175

 
6

 
549

 
461

 
19

Intangible asset impairments

 

 

 

 
86

 
(100
)
Other (income) expense, net
(7
)
 
(12
)
 
(42
)
 
(36
)
 
19

 
NM

Income (loss) before income taxes
183

 
144

 
27

 
(132
)
 
(393
)
 
(66
)
Income tax (provision) benefit
(42
)
 
(50
)
 
(16
)
 
10

 
107

 
(91
)
Net income (loss)
$
141

 
$
94

 
50

 
$
(122
)
 
$
(286
)
 
(57
)
Net (income) loss attributable to noncontrolling interests
$
1

 
$

 

 
$
1

 
$

 

Net income (loss) attributable to Hertz
$
142

 
$
94

 
51

 
$
(121
)
 
$
(286
)
 
(58
)
Adjusted Pre-tax Income (Loss)(a)
$
242

 
$
189

 
28

 
$
49

 
$
(103
)
 
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

Three Months Ended September 30, 2018 Compared with Three Months Ended September 30, 2017

Total revenues increased $186 million, or 7%, due primarily to an increase of $167 million and $15 million in our U.S. RAC and All Other Operations segments, respectively. U.S. RAC revenues increased due to 7% higher volume, comprised of a 17% increase for our off airport business and a 2% increase for our airport business, while Total RPD increased 3% for the segment. Total revenues in our All Other Operations segment increased $15 million primarily due to an increase in Donlen's leasing volume. Revenues for the International RAC segment increased slightly and, excluding a $14 million fx impact, increased $18 million, or 3%, driven by a 3% increase in Total RPD.

DOE increased $111 million year over year primarily due to an increase of $98 million in our U.S. RAC segment and $12 million in our International RAC segment. The increase in our U.S. RAC segment was primarily due to increased core rental volumes, transportation network companies ("TNC") rentals and investments in additional personnel related to our transformation initiatives. Excluding an $8 million fx impact, DOE for International RAC increased $20 million primarily due to increased personnel and other vehicle expenses.

53


HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES

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


Depreciation of revenue earning vehicles and lease charges, net decreased $28 million, or 4%, primarily due to a $41 million decrease in our U.S. RAC segment resulting from favorable acquisition prices and residual values, and opportunistic sales of certain models. The decrease was partially offset by an $11 million increase in our All Other Operations segment.

SG&A increased $48 million, or 22%, in the third quarter of 2018 compared to 2017, primarily due to an increase of $63 million in marketing, information technology and finance transformation program costs, litigation charges, including the loss contingency related to the previously disclosed accounting review and investigation, incentive compensation and other expenses, offset by a $15 million decrease due to labor related matters and other expenses. The above changes are primarily related to our U.S. RAC segment and corporate operations.

Vehicle interest expense, net increased $25 million, or 28%, in the third quarter of 2018 compared to 2017 primarily due to higher market interest rates, increased margins on bank funded facilities and an increase in debt levels due to higher average fleet.

Non-vehicle interest expense, net decreased $14 million, or 16%, in the third quarter of 2018 compared to 2017, primarily due to decreased outstanding non-vehicle debt balances, partially offset by the impact of higher interest rates primarily associated with a higher LIBOR.

We had other income of $7 million for the third quarter of 2018 compared to $12 million in the third quarter of 2017. Other income in 2018 was primarily comprised of a pre-tax gain on marketable securities. Other income in 2017 was primarily comprised of a pre-tax gain on the sale of our Brazil Operations recorded in the International RAC segment and a pre-tax gain resulting from a return of capital from an equity method investment.

The effective tax rate in the third quarter of 2018 was (23%) compared to (35%) in the third quarter of 2017. We recorded a tax provision of $42 million in the third quarter of 2018 compared to $50 million in the third quarter of 2017. The effective income tax rate and related tax provision were lower primarily due to the reduced corporate tax rate as a result of the TCJA, tax credits, and the composition of earnings by jurisdictions, partially offset by a net provisional amount of $15 million for the one-time transition tax related to TCJA. The provisional amount for the one-time transition tax related to TCJA may change in the fourth quarter of 2018 once we finalize our calculation. 

Adjusted Pre-tax Income was $242 million in the third quarter of 2018 compared to $189 million in the third quarter of 2017. 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.

Nine Months Ended September 30, 2018 Compared with Nine Months Ended September 30, 2017

Total revenues increased $496 million, or 7%, due primarily to an increase of $348 million, $106 million and $42 million in our U.S. RAC, International RAC, and All Other Operations segments, respectively. U.S. RAC revenues increased due to a 7% increase in volume, comprised of a 15% increase for our off airport business and a 2% increase for our airport business, and increased Total RPD of 1%. Excluding a $66 million fx impact, International RAC revenues increased $40 million, or 2%, driven by a 3% increase in Total RPD, partially offset by a 1% decrease in transaction days. Total revenues in our All Other Operations segment increased primarily due to an increase in Donlen's leasing volume.

DOE increased $308 million year over year primarily due to increases of $266 million and $44 million in our U.S. RAC and International RAC segments, respectively. The increase in our U.S. RAC segment was primarily due to increased core rental volumes (those excluding TNC rentals), investments in additional personnel related to our transformation initiatives and TNC rentals. Excluding the $43 million fx impact, DOE for International RAC was nearly flat.


54


HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES

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

Depreciation of revenue earning vehicles and lease charges, net decreased $124 million, or 6%, primarily due to a $183 million decrease in our U.S. RAC segment resulting from decreases in losses on disposal of revenue earning vehicles due to stabilization in residual values and a 14 percentage point increase in dispositions through dealer direct and retail sales channels. The decrease was partially offset by an increase of $31 million and $28 million in our International RAC and All Other Operations segments, respectively. Excluding a $16 million fx impact, depreciation of revenue earning vehicles and lease charges, net for our International RAC segment increased $15 million resulting from higher per vehicle depreciation rates. The increase in All Other Operations was due to an increase in Donlen's leasing volume.

SG&A increased $104 million, or 16%, in the nine months of 2018 compared to 2017, due to an increase of $143 million in marketing, information technology and finance transformation program costs, incentive compensation, litigation charges, including the loss contingency related to the previously disclosed accounting review and investigation, which totals $13.6 million, and other expenses, partially offset by a $39 million decrease due to labor related matters and other expenses. The above changes are primarily related to the U.S. RAC and International RAC segments, and our corporate operations. Excluding the $10 million fx impact, SG&A for International RAC increased $6 million.

Vehicle interest expense, net increased $94 million, or 39%, in the nine months of 2018 compared to 2017 primarily due to higher market interest rates, an increase in margins on bank funded facilities, an increase in debt levels due to higher average fleet and an increase in loss on extinguishment of debt.

Non-vehicle interest expense, net decreased $6 million, or 3%, in the nine months of 2018 compared to 2017, primarily due to decreased outstanding non-vehicle debt balances during the period and a decrease in loss on extinguishment of debt, partially offset by the impact of higher interest rates largely attributable to a higher LIBOR and the issuance of our Senior Second Priority Secured Notes in June 2017.

We had intangible asset impairments of $86 million related to the Dollar Thrifty tradename in the nine months of 2017 with no comparable charges in the nine months of 2018.

We had other income of $36 million in the nine months of 2018 compared to other expense of $19 million in the nine months of 2017. Other income in 2018 was primarily comprised of a $21 million pre-tax gain on marketable securities and a $6 million legal settlement received in the second quarter related to an oil spill in the Gulf of Mexico in 2010, which relate to our corporate operations and U.S. RAC segment, respectively. Other expense in 2017 was primarily comprised of a $30 million impairment of an equity method investment which was partially offset by a pre-tax gain resulting from a return of capital from an equity method investment, and a pre-tax gain on the sale of our Brazil Operations.

The effective tax rate in the nine months of 2018 was 8% compared to 27% in the nine months of 2017. We recorded a tax benefit of $10 million in the nine months of 2018 compared to $107 million in the nine months of 2017. The effective income tax rate and related tax benefit were lower primarily due to the reduced corporate tax rate as a result of the TCJA, reduced corporate losses, and the composition of earnings by jurisdictions, partially offset by a net provisional amount of $15 million for the one-time transition tax liability related to TCJA. The provisional amount for the one-time transition tax related to TCJA may change in the fourth quarter of 2018 once we finalize our calculation. 

Adjusted Pre-tax Income was $49 million in the nine months of 2018 compared to Adjusted Pre-tax Loss of $103 million in the nine months of 2017. 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.

CONSOLIDATED RESULTS OF OPERATIONS - HERTZ GLOBAL

The above discussion for Hertz also applies to Hertz Global.

Hertz Global had $2 million and $5 million of interest expense, net for the third quarter and nine months of 2018, respectively, and $1 million and $4 million of interest expense, net for the third quarter and nine months of 2017,

55


HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES

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

respectively, that was incremental to the amounts shown for Hertz. This amount represents interest associated with amounts outstanding under a master loan agreement between the companies. Hertz includes this amount as interest income in its statement of operations, but this amount is eliminated in consolidation for purposes of presenting Hertz Global. Hertz had $1 million of income tax provision for the third quarter of 2018 that was incremental to the amounts shown for Hertz Global. Hertz Global had $2 million of income tax benefit for the nine months of 2018 and $1 million of income tax benefit for the nine months of 2017 that was incremental to the amounts shown for Hertz.


56


HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES

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

RESULTS OF OPERATIONS AND SELECTED OPERATING DATA BY SEGMENT

U.S. Rental Car
 
Three Months Ended
September 30,
 
Percent Increase/(Decrease)
 
 
Nine Months Ended
September 30,
 
Percent Increase/(Decrease)
 
($ in millions, except as noted)
2018
 
2017
 
 
 
2018
 
2017
 
 
Total revenues
$
1,852

 
$
1,685

 
10
 %

 
$
4,905

 
$
4,557

 
8
 %

Direct vehicle and operating expenses
$
1,068

 
$
970

 
10

 
 
$
3,016

 
$
2,750

 
10

 
Depreciation of revenue earning vehicles and lease charges, net
$
414

 
$
455

 
(9
)
 
 
$
1,295

 
$
1,478

 
(12
)
 
Selling, general and administrative expenses
$
128

 
$
94

 
36

 
 
$
345

 
$
290

 
19

 
Income (loss) before income taxes
$
203

 
$
131

 
55


 
$
145

 
$
(147
)
 
NM


Adjusted Pre-tax Income (Loss)(a)
$
222

 
$
158

 
41


 
$
200

 
$
5

 
NM


Transaction Days (in thousands)(b)
39,478

 
36,879

 
7

 
 
112,427

 
105,424

 
7

 
Average Vehicles (in whole units)(c)
527,900

 
495,000

 
7

 
 
509,800

 
489,300

 
4

 
Vehicle Utilization(c)
81
%
 
81
%
 
30

bps
 
81
%
 
79
%
 
190

bps
Total RPD (in whole dollars)(d)
$
46.23

 
$
45.04

 
3

 
 
$
42.93

 
$
42.56

 
1

 
Total RPU Per Month (in whole dollars)(e)
$
1,152

 
$
1,119

 
3

 
 
$
1,052

 
$
1,019

 
3

 
Net Depreciation Per Unit Per Month (in whole dollars)(f)
$
261

 
$
306

 
(15
)
 
 
$
282

 
$
336

 
(16
)
 
Percentage of program vehicles at period end
12
%
 
9
%
 
290

bps
 
12
%
 
9
%
 
290

bps
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

Three Months Ended September 30, 2018 Compared with Three Months Ended September 30, 2017

Total U.S. RAC revenues were $1.9 billion in the third quarter of 2018, an increase of $167 million, or 10%, from the third quarter of 2017. Transaction Days increased 7%, while Total RPD increased 3%. Increased volume was driven by a 17% increase in our off airport business and a 2% increase in our airport business. Off airport volume increased primarily due to growth in TNC, insurance replacement and retail rentals. Airport volume increased due to growth in corporate contracted rentals. Off airport revenues comprised 31% of total revenues for the segment in the third quarter of 2018 as compared to 28% in the third quarter of 2017. Total RPD increased due to growth in nearly all customer segments.

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. Depreciation rates being used to compute the provision for depreciation of revenue earning vehicles are adjusted on certain vehicles in our vehicle rental operations to reflect changes in the estimated residual values to be realized when revenue earning vehicles are sold based on the expected hold period for the vehicles. The change in estimate, based on the review completed for U.S. RAC during the third quarter of 2018, resulted in a reduction to depreciation expense of $30 million. The third quarter of 2018 rate change reflects favorable acquisition prices and residual values, and opportunistic sales of certain models. The change in estimate, based on the review completed for U.S. RAC during the third quarter of 2017, resulted in a decrease in depreciation expense of $15 million which reflected the stabilization of residual values and a two month

57


HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES

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

increase in the assumed hold period for model year 2017 vehicles to accommodate increased volume in our off airport rentals.

Depreciation of revenue earning vehicles and lease charges, net for U.S. RAC decreased by $41 million, or 9%, in the third quarter of 2018 compared to 2017. The decrease year over year was primarily the result of improved residual values and opportunistic sales of certain models. Net Depreciation Per Unit Per Month decreased to $261 in the third quarter of 2018 compared to $306 in the third quarter of 2017.

DOE for U.S. RAC increased $98 million, or 10%, of which $47 million was driven by higher core rental volume, $17 million was driven by growth in TNC rentals and $12 million was driven by incremental investments in additional personnel related to our transformation initiatives. Also contributing to the increase are the following:

Increased transportation expense of $9 million driven by higher rates from third-party transportation providers and additional trucking for pre-owned vehicle purchases.

Increased damage expense of $7 million related to weather events.

Increased fuel expense of $7 million due to higher market fuel prices compared to 2017.

DOE as a percentage of total revenues for U.S. RAC was 58% for the third quarters of both 2018 and 2017. SG&A as a percentage of total revenues for U.S. RAC was 7% for the third quarter of 2018 compared to 6% for the third quarter of 2017, an increase of 130 bps, primarily due to an increase of $24 million in incremental marketing investments.

Income before income taxes for U.S. RAC was $203 million in the third quarter of 2018 compared to $131 million in the third quarter of 2017. The $72 million year over year favorable variance was primarily due to the impact of increased revenues and decreased depreciation expense on our revenue earning vehicles. The favorable variance was partially offset by the increase in DOE and SG&A and an $18 million increase in vehicle related interest expense due to higher market interest rates, increased margins on bank funded facilities and an increase in debt levels due to higher average fleet.
 
Adjusted Pre-tax Income for U.S. RAC was $222 million in the third quarter of 2018 compared to $158 million in the third quarter of 2017. 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.

Nine Months Ended September 30, 2018 Compared with Nine Months Ended September 30, 2017

Total U.S. RAC revenues were $4.9 billion in the nine months of 2018, an increase of $348 million, or 8%, from the nine months of 2017. Transaction Days increased 7%, while Total RPD increased 1%. Increased volume was driven by a 15% increase in our off airport business and a 2% increase in our airport business. Off airport volume increased due to growth in TNC and insurance replacement rentals. Airport volume increased due to growth in corporate contracted rentals. Off airport revenues comprised 30% of total revenues for the segment in the nine months of 2018 as compared to 28% in the nine months of 2017. Total RPD increased primarily due to growth in TNC and retail customer segments.

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. Depreciation rates being used to compute the provision for depreciation of revenue earning vehicles are adjusted on certain vehicles in our vehicle rental operations to reflect changes in the estimated residual values to be realized when revenue earning vehicles are sold based on the expected hold period for the vehicles. The changes in estimate, based on reviews completed for U.S. RAC during the nine months of 2018, resulted in a reduction to depreciation expense of $20 million. The nine months of 2018 rate change reflects favorable residual values, particularly on mid and full-size sedans, and opportunistic sales of certain vehicles, partially offset by the impact of unfavorable residual values on regular and large sport utility vehicles. The changes in estimate, based on reviews completed for U.S. RAC during the nine months of 2017, resulted in additional depreciation expense of $68 million which reflected shortened hold periods on certain non-program vehicles

58


HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES

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

as we rebalanced the fleet, our onboarding of a richer mix of premium model year 2017 vehicles, and declining residual values primarily experienced in the first half of the year.

Depreciation of revenue earning vehicles and lease charges, net for U.S. RAC decreased by $183 million, or 12%, in the nine months of 2018 compared to 2017. The decrease year over year was primarily the result of improved residual values and a 14 percentage point increase in dispositions through dealer direct and retail sales channels. Net Depreciation Per Unit Per Month decreased to $282 in the nine months of 2018 compared to $336 in the nine months of 2017.

DOE for U.S. RAC increased $266 million, or 10%, of which $93 million was driven by core rental volume, $56 million was driven by incremental investments in additional personnel related to our transformation initiatives and $46 million was driven by growth in TNC rentals. Also contributing to the increase are the following:

Increased transportation expense of $26 million driven by increased usage, higher rates from third-party transportation providers and additional trucking for pre-owned vehicle purchases and fleet optimization.

Increased facility expenses of $15 million primarily driven by increased rent and facility services.

Increased other vehicle expense of $11 million primarily driven by increased licensing fees in certain states.

Increased fuel expense of $10 million due to higher market fuel prices compared to 2017.

DOE as a percentage of total revenues for U.S. RAC was 61% for the nine months of 2018 compared to 60% for the nine months of 2017, an increase of 110 bps. SG&A as a percentage of total revenues for U.S. RAC was 7% for the nine months of 2018 compared to 6% for the nine months of 2017, an increase of 70 bps, primarily due to an increase of $48 million in incremental marketing investments.

Income before income taxes for U.S. RAC was $145 million in the nine months of 2018 compared to loss before income taxes of $147 million in the nine months of 2017. The $292 million year over year improvement was primarily due to the impact of increased revenues, decreased depreciation expense on our revenue earning vehicles and the impairment of the Dollar Thrifty tradename in the second half of 2017. The improvement was partially offset by an increase in DOE and SG&A and an $11 million increase in interest expense, net primarily driven by vehicle related interest expense due to higher market interest rates, an increase in margins on bank funded facilities, and an increase in debt levels due to higher average fleet.

Adjusted Pre-tax Income for U.S. RAC was $200 million in the nine months of 2018 compared to $5 million in the nine months of 2017. 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.


59


HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES

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

International Rental Car
 
Three Months Ended
September 30,
 
Percent Increase/(Decrease)
 
 
Nine Months Ended
September 30,
 
Percent Increase/(Decrease)
 
($ in millions, except as noted)
2018
 
2017
 
 
 
2018
 
2017
 
 
Total revenues
$
732

 
$
728

 
1
 %

 
$
1,789

 
$
1,683

 
6
 %

Direct vehicle and operating expenses
$
384

 
$
372

 
3

 
 
$
1,006

 
$
962

 
5

 
Depreciation of revenue earning vehicles and lease charges, net
$
128

 
$
126

 
2

 
 
$
342

 
$
311

 
10

 
Selling, general and administrative expenses
$
65

 
$
63

 
3

 
 
$
186

 
$
170

 
9

 
Income (loss) before income taxes
$
131

 
$
152

 
(14
)

 
$
169

 
$
189

 
(11
)

Adjusted Pre-tax Income (loss)(a)
$
133

 
$
147

 
(10
)

 
$
201

 
$
200

 
1


Transaction Days (in thousands)(b)
15,876

 
15,947

 

 
 
39,075

 
39,366

 
(1
)
 
Average Vehicles (in whole units)(c)
214,900

 
212,600

 
1

 
 
183,600

 
183,100

 

 
Vehicle Utilization(c)
80
%
 
82
%
 
(120
)
bps
 
78
%
 
79
%
 
(80
)
bps
Total RPD (in whole dollars)(d)
$
47.37

 
$
46.03

 
3

 
 
$
46.01

 
$
44.56

 
3

 
Total RPU Per Month (in whole dollars)(e)
$
1,166

 
$
1,151

 
1

 
 
$
1,088

 
$
1,064

 
2

 
Net Depreciation Per Unit Per Month (in whole dollars)(f)
$
205

 
$
199

 
3

 
 
$
208

 
$
197

 
6

 
Percentage of program vehicles at period end
45
%
 
45
%
 
20

bps
 
45
%
 
45
%
 
20

bps
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.

Three Months Ended September 30, 2018 Compared with Three Months Ended September 30, 2017

Total revenues for International RAC increased $4 million, or 1%, in the third quarter of 2018 compared to 2017. Excluding a $14 million fx impact, revenues increased $18 million, or 3%, driven by a 3% increase in Total RPD. Excluding the impact of the sale of our Brazil operations in 2017, total revenues for International RAC increased $12 million, or 2%, Total RPD increased 1% due to improved pricing in leisure markets, and transaction days increased 2% due primarily to growth in corporate contracted and van rentals.

Depreciation of revenue earning vehicles and lease charges, net for International RAC increased $2 million, or 2%, in the third quarter of 2018 compared to 2017. Excluding a $3 million fx impact, depreciation of revenue earning vehicles and lease charges, net increased $5 million or 4% primarily due to higher per vehicle depreciation rates which were primarily driven by declining residual values on diesel vehicles in Europe. Net Depreciation Per Unit Per Month for International RAC increased 3% to $205 from $199 for the third quarter of 2018 versus 2017.

DOE for International RAC increased $12 million compared to the prior year. Excluding an $8 million fx impact, DOE increased $20 million, or 5% compared to the prior year driven by an increase of $9 million in personnel related expenses for the summer peak season and $9 million in other vehicle expenses, including maintenance and damage charges, due to fleet mix.

DOE as a percentage of total revenues for International RAC was 52% for the third quarter of 2018 compared to 51% for the third quarter of 2017, an increase of 140 bps, and SG&A as a percentage of total revenues for International RAC was 9% for the third quarter of 2018 and 2017.

60


HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES

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


Income before income taxes for International RAC was $131 million in the third quarter of 2018 compared to $152 million in the third quarter of 2017. The $21 million year over year unfavorable variance was primarily due to the increase in DOE and depreciation expense on our revenue earning vehicles. Additionally, there was a $6 million pre-tax gain recorded on the sale of our Brazil operations in 2017 with no comparable gain in 2018.

Adjusted Pre-tax Income for International RAC was $133 million in the third quarter of 2018 compared to $147 million in the third quarter of 2017. 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.

Nine Months Ended September 30, 2018 Compared with Nine Months Ended September 30, 2017

Total revenues for International RAC increased $106 million, or 6%, in the nine months of 2018 compared to 2017. Excluding a $66 million fx impact, revenues increased $40 million, or 2%, driven by an increase in pricing, partially offset by lower volume. Total RPD for International RAC increased 3% due to improved pricing in our leisure markets and the sale of our lower RPD operations in Brazil in the third quarter of 2017. Transaction days decreased 1% mostly due to the sale of our Brazil operations. Excluding the impact of the sale of our Brazil operations, total revenues for International RAC increased $139 million, or 8%, Total RPD increased 1%, and transaction days increased 3%.

Depreciation of revenue earning vehicles and lease charges, net for International RAC increased $31 million, or 10%, in the nine months of 2018 compared to 2017. Excluding a $16 million fx impact, depreciation of revenue earning vehicles and lease charges, net increased $15 million or 5% primarily due to higher per vehicle depreciation rates, which was primarily driven by declining residual values on diesel vehicles in Europe. Net Depreciation Per Unit Per Month for International RAC increased 6% to $208 from $197 for the nine months of 2018 versus 2017.

DOE for International RAC increased $44 million in the nine months of 2018 compared to 2017. Excluding a $43 million fx impact, DOE was flat driven by a $19 million decrease in public liability and property damage expense due to favorable case development and fewer large claims, and a charge recorded in 2017 resulting from a terrorist event. The decrease was partially offset by an increase of $12 million in field compensation.

DOE as a percentage of total revenues for International RAC was 56% for the nine months of 2018 compared to 57% for the nine months of 2017, a decrease of 90 bps, and SG&A as a percentage of total revenues for International RAC was 10% for the nine months of both 2018 and 2017.

Income before income taxes for International RAC was $169 million in the nine months of 2018 compared to $189 million in the nine months of 2017. The $20 million unfavorable variance year over year was primarily due to an increase in DOE and depreciation expense on our revenue earning vehicles. Additionally, there was an increase of $30 million in interest expense, net primarily due to a $20 million loss on extinguishment of debt associated with the redemption of the 4.375% European Vehicle Senior Notes due January 2019 and higher interest rates on our outstanding debt balances. Also, there was a $16 million increase in SG&A primarily due to the impact of foreign currency exchange rates. The above were partially offset by increased revenues.

Adjusted Pre-tax Income for International RAC was $201 million in the nine months of 2018 compared to $200 million in the nine months of 2017. 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.


61


HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES

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

All Other Operations

The All Other Operations segment is primarily comprised of our Donlen business, as such, our discussion is limited to Donlen.
 
Three Months Ended
September 30,
 
Percent Increase/(Decrease)
 
Nine Months Ended
September 30,
 
Percent Increase/(Decrease)
($ in millions)
2018
 
2017
 
 
2018
 
2017
 
Total revenues
$
174

 
$
159

 
9
 %
 
$
515

 
$
473

 
9
 %
Direct vehicle and operating expenses
$
8

 
$
9

 
(11
)
 
$
25

 
$
28

 
(11
)
Depreciation of revenue earning vehicles and lease charges, net
$
130

 
$
119

 
9

 
$
383

 
$
355

 
8

Selling, general and administrative expenses
$
10

 
$
8

 
25

 
$
28

 
$
25

 
12

Income (loss) before income taxes
$
19

 
$
17

 
12

 
$
59

 
$
51

 
16

Adjusted Pre-tax Income (Loss)(a)
$
22

 
$
20

 
10

 
$
68

 
$
59

 
15

Average Vehicles (in whole units) - Donlen
185,300

 
205,600

 
(10
)
 
188,200

 
206,500

 
(9
)
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.

Donlen had favorable results in the third quarter and nine months of 2018 as compared to the third quarter and nine months of 2017. Donlen units under lease increased 4% in the third quarter of 2018 versus 2017 and increased 3% in the nine months of 2018 versus 2017. Growth in units under lease, as well as a richer mix of vehicles, resulted in increased revenues and depreciation expense. Additionally, there were increased charges related to new leases entered into beginning in 2017 with fewer comparable leases entered into in 2018, resulting in a decrease in DOE. The decrease in overall average vehicles in the third quarter and nine months of 2018 as compared to the third quarter and nine months of 2017 was due to a reduction in non-lease units in our maintenance management programs which drive a lower revenue per unit when compared to lease units under these programs.

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

(a)
Adjusted Pre-tax Income (Loss) is calculated as income (loss) before income taxes plus non-cash acquisition accounting charges, debt-related charges relating to the amortization and write-off of debt financing costs and debt discounts and premiums, goodwill, intangible and tangible asset impairments and write downs, information technology and finance transformation costs, net income or loss attributable to noncontrolling interests, and certain other miscellaneous or non-recurring items. Adjusted Pre-tax Income (Loss) is important 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. When evaluating our operating performance, investors should not consider Adjusted Pre-tax Income (Loss) in isolation of, or as a substitute for, measures of our financial performance, such as net income (loss) or income (loss) before income taxes. The contribution of our reportable segments to Adjusted Pre-tax Income (Loss) and reconciliation to the most comparable consolidated U.S. GAAP measure are presented below:

62


HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES

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


Hertz
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(In millions)
2018
 
2017
 
2018
 
2017
Adjusted Pre-tax Income (Loss):
 
 
 
 
 
 
 
U.S. Rental Car
$
222

 
$
158

 
$
200

 
$
5

International Rental Car
133

 
147

 
201

 
200

All Other Operations
22

 
20

 
68

 
59

Total reportable segments
377

 
325

 
469

 
264

Corporate(1)
(135
)
 
(136
)
 
(420
)
 
(367
)
Adjusted Pre-tax Income (Loss)
242

 
189

 
49

 
(103
)
Adjustments:
 
 
 
 
 
 
 
Acquisition accounting(2)
(15
)
 
(15
)
 
(46
)
 
(47
)
Debt-related charges(3)
(11
)
 
(12
)
 
(36
)
 
(33
)
Loss on extinguishment of debt(4)

 

 
(22
)
 
(8
)
Restructuring and restructuring related charges(5)
(12
)
 
(2
)
 
(26
)
 
(14
)
Impairment charges and asset write-downs(6)

 

 

 
(116
)
Information technology and finance transformation costs(7)
(24
)
 
(15
)
 
(75
)
 
(55
)
Other(8)
3

 
(1
)
 
24

 
(17
)
Income (loss) before income taxes
$
183

 
$
144

 
$
(132
)
 
$
(393
)

Hertz Global
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(In millions)
2018
 
2017
 
2018
 
2017
Adjusted Pre-tax Income (Loss):
 
 
 
 
 
 
 
U.S. Rental Car
$
222

 
$
158

 
$
200

 
$
5

International Rental Car
133

 
147

 
201

 
200

All Other Operations
22

 
20

 
68

 
59

Total reportable segments
377

 
325

 
469

 
264

Corporate(1)
(137
)
 
(137
)
 
(425
)
 
(371
)
Adjusted Pre-tax Income (Loss)
240

 
188

 
44

 
(107
)
Adjustments:
 
 
 
 
 
 
 
Acquisition accounting(2)
(15
)
 
(15
)
 
(46
)
 
(47
)
Debt-related charges(3)
(11
)
 
(12
)
 
(36
)
 
(33
)
Loss on extinguishment of debt(4)

 

 
(22
)
 
(8
)
Restructuring and restructuring related charges(5)
(12
)
 
(2
)
 
(26
)
 
(14
)
Impairment charges and asset write-downs(6)

 

 

 
(116
)
Information technology and finance transformation costs(7)
(24
)
 
(15
)
 
(75
)
 
(55
)
Other(8)
3

 
(1
)
 
24

 
(17
)
Income (loss) before income taxes
$
181

 
$
143

 
$
(137
)
 
$
(397
)

(1)
Represents general corporate expenses, non-vehicle interest expense, as well as other business activities.
(2)
Represents incremental expense associated with amortization of other intangible assets and depreciation of property and equipment relating to acquisition accounting.
(3)
Primarily represents debt-related charges relating to the amortization of deferred financing costs and debt discounts and premiums.
(4)
In 2018, primarily represents $20 million of early redemption premium and write-off of deferred financing costs associated with the full redemption of the 4.375% European Vehicle Senior Notes due January 2019 in April 2018. In 2017, represents $6 million of early redemption premium and write-off of deferred financing costs associated with the redemption of certain notes and a $2 million write-off of deferred financing costs associated with the termination of commitments under the Senior RCF incurred during the second quarter.

63


HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES

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

(5)
Represents charges incurred under restructuring actions as defined in U.S. GAAP, excluding impairments and asset write-downs, which are shown separately in the table. Also includes restructuring related charges such as 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. Also includes consulting costs, legal fees, the loss contingency, which totals $13.6 million for the nine months of 2018, and other expenses related to the previously disclosed accounting review and investigation.
(6)
In 2017, represents a second quarter $86 million impairment of the Dollar Thrifty tradename and a first quarter impairment of $30 million related to an equity method investment.
(7)
Represents costs associated with our information technology and finance transformation programs, both of which are multi-year initiatives to upgrade and modernize our systems and processes.
(8)
Represents miscellaneous or non-recurring items. In 2018, includes net loss attributable to noncontrolling interests, a $4 million and $21 million pre-tax gain on marketable securities during the third quarter and nine months, respectively, and a $6 million legal settlement received in the second quarter related to an oil spill in the Gulf of Mexico in 2010. In 2017, includes net expenses of $13 million resulting from hurricanes, partially offset by a $6 million pre-tax gain on the sale of our Brazil Operations in the third quarter. Also, includes second quarter charges of $6 million for labor-related matters and $5 million relating to PLPD as a result of a terrorist event.

(b)
Transaction Days represent the total number of 24-hour periods, with any partial period counted as one Transaction Day, that vehicles were on rent (the period between when a rental contract is opened and closed) in a given period. Thus, it is possible for a vehicle to attain more than one Transaction Day in a 24-hour period. 

(c)
Average Vehicles are determined using a simple average of the number of vehicles at the beginning and end of a given period. Among other things, Average Vehicles is used to calculate our Vehicle Utilization which represents the portion of our vehicles that are being utilized to generate revenue. Vehicle Utilization is calculated by dividing total Transaction Days by Available Car Days. The calculation of Vehicle Utilization is shown in the table below.
 
U.S. Rental Car
 
International Rental Car
 
Three Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Transaction Days (in thousands)
39,478

 
36,879

 
15,876

 
15,947

Average Vehicles (in whole units)
527,900

 
495,000

 
214,900

 
212,600

Number of days in period
92

 
92

 
92

 
92

Available Car Days (in thousands)
48,567

 
45,540

 
19,771

 
19,559

Vehicle Utilization
81
%
 
81
%
 
80
%
 
82
%
 
U.S. Rental Car
 
International Rental Car
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Transaction Days (in thousands)
112,427

 
105,424

 
39,075

 
39,366

Average Vehicles (in whole units)
509,800

 
489,300

 
183,600

 
183,100

Number of days in period
273

 
273

 
273

 
273

Available Car Days (in thousands)
139,175

 
133,579

 
50,123

 
49,986

Vehicle Utilization
81
%
 
79
%
 
78
%
 
79
%


64


HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES

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

(d)
Total RPD is calculated as total revenue less ancillary retail vehicle sales revenue, with all periods adjusted to eliminate the effect of fluctuations in foreign currency exchange rates ("Total Rental Revenue"), divided by the total number of Transaction Days. Our management believes eliminating the effect of fluctuations in foreign currency exchange rates is useful in analyzing underlying trends. The calculation of Total RPD is shown below:
 
U.S. Rental Car
 
International Rental Car
 
Three Months Ended September 30,
($ in millions, except as noted)
2018
 
2017
 
2018
 
2017
Revenues
$
1,852

 
$
1,685

 
$
732

 
$
728

Ancillary retail vehicle sales revenue
(27
)
 
(24
)
 

 

Foreign currency adjustment(1)

 

 
20

 
6

Total Rental Revenue
$
1,825

 
$
1,661

 
$
752

 
$
734

Transaction Days (in thousands)
39,478

 
36,879

 
15,876

 
15,947

Total RPD (in whole dollars)
$
46.23

 
$
45.04

 
$
47.37

 
$
46.03


 
U.S. Rental Car
 
International Rental Car
 
Nine Months Ended September 30,
($ in millions, except as noted)
2018
 
2017
 
2018
 
2017
Revenues
$
4,905

 
$
4,557

 
$
1,789

 
$
1,683

Ancillary retail vehicle sales revenue
(78
)
 
(70
)
 

 

Foreign currency adjustment(1)

 

 
9

 
71

Total Rental Revenue
$
4,827

 
$
4,487

 
$
1,798

 
$
1,754

Transaction Days (in thousands)
112,427

 
105,424

 
39,075

 
39,366

Total RPD (in whole dollars)
$
42.93

 
$
42.56

 
$
46.01

 
$
44.56

(1)
Based on December 31, 2017 foreign currency exchange rates for the periods presented.

(e)
Total RPU is calculated as Total Rental Revenue divided by the Average Vehicles in each period and then divided by the number of months in the period reported. The calculation of Total RPU is shown below:
 
U.S. Rental Car
 
International Rental Car
 
Three Months Ended September 30,
($ in millions, except as noted)
2018
 
2017
 
2018
 
2017
Total Rental Revenue
$
1,825

 
$
1,661

 
$
752

 
$
734

Average Vehicles (in whole units)
527,900

 
495,000

 
214,900

 
212,600

Total revenue per unit (in whole dollars)
$
3,457

 
$
3,356

 
$
3,499

 
$
3,452

Number of months in period
3

 
3

 
3

 
3

Total RPU Per Month (in whole dollars)
$
1,152

 
$
1,119

 
$
1,166

 
$
1,151

 
U.S. Rental Car
 
International Rental Car
 
Nine Months Ended September 30,
($ in millions, except as noted)
2018
 
2017
 
2018
 
2017
Total Rental Revenue
$
4,827

 
$
4,487

 
$
1,798

 
$
1,754

Average Vehicles (in whole units)
509,800

 
489,300

 
183,600

 
183,100

Total revenue per unit (in whole dollars)
$
9,468

 
$
9,170

 
$
9,793

 
$
9,579

Number of months in period
9

 
9

 
9

 
9

Total RPU Per Month (in whole dollars)
$
1,052

 
$
1,019

 
$
1,088

 
$
1,064



65


HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES

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

(f)
Net Depreciation Per Unit Per Month represents the amount of average depreciation expense and lease charges, net per vehicle per month and is calculated as depreciation of revenue earning vehicles and lease charges, net, with all periods adjusted to eliminate the effect of fluctuations in foreign currency exchange rates, divided by the Average Vehicles in each period and then dividing by the number of months in the period reported. Our management believes eliminating the effect of fluctuations in foreign currency exchange rates is useful in analyzing underlying trends. The calculation of Net Depreciation Per Unit Per Month is shown below:
 
U.S. Rental Car
 
International Rental Car
 
Three Months Ended September 30,
($ in millions, except as noted)
2018
 
2017
 
2018
 
2017
Depreciation of revenue earning vehicles and lease charges, net
$
414

 
$
455

 
$
128

 
$
126

Foreign currency adjustment(1)

 

 
4

 
1

Adjusted depreciation of revenue earning vehicles and lease charges, net
$
414

 
$
455

 
$
132

 
$
127

Average Vehicles (in whole units)
527,900

 
495,000

 
214,900

 
212,600

Adjusted depreciation of revenue earning vehicles and lease charges, net divided by Average Vehicles (in whole dollars)
$
784

 
$
919

 
$
614

 
$
597

Number of months in period
3

 
3

 
3

 
3

Net Depreciation Per Unit Per Month (in whole dollars)
$
261

 
$
306

 
$
205

 
$
199

 
U.S. Rental Car
 
International Rental Car
 
Nine Months Ended September 30,
($ in millions, except as noted)
2018
 
2017
 
2018
 
2017
Depreciation of revenue earning vehicles and lease charges, net
$
1,295

 
$
1,478

 
$
342

 
$
311

Foreign currency adjustment(1)

 

 
1

 
14

Adjusted depreciation of revenue earning vehicles and lease charges, net
$
1,295

 
$
1,478

 
$
343

 
$
325

Average Vehicles (in whole units)
509,800

 
489,300

 
183,600

 
183,100

Adjusted depreciation of revenue earning vehicles and lease charges, net divided by Average Vehicles (in whole dollars)
$
2,540

 
$
3,021

 
$
1,868

 
$
1,775

Number of months in period
9

 
9

 
9

 
9

Net Depreciation Per Unit Per Month (in whole dollars)
$
282

 
$
336

 
$
208

 
$
197

(1)
Based on December 31, 2017 foreign currency exchange rates for the periods presented.

LIQUIDITY AND CAPITAL RESOURCES

Our U.S. and international operations are funded by cash provided by operating activities and by extensive financing arrangements maintained by us in the U.S. and internationally.

As of September 30, 2018, we had $761 million of cash and cash equivalents and $265 million of restricted cash. Of these amounts, $372 million of cash and cash equivalents and $47 million of restricted cash was held by our subsidiaries outside of the U.S. If not in the form of loan repayments, repatriation of some of these funds under current regulatory and tax law for use in domestic operations would expose us to additional taxes.

We believe that cash and cash equivalents generated by our operations and cash received on the disposal of vehicles, together with amounts available under various liquidity facilities and refinancing options available to us in the capital markets, will be sufficient to fund operating requirements for the next twelve months.

66


HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES

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

Cash Flows - Hertz

As of September 30, 2018, Hertz had cash, cash equivalents, restricted cash and restricted cash equivalents of $1.0 billion as compared to $1.5 billion as of December 31, 2017. The following table summarizes the net change in cash, cash equivalents and restricted cash for the periods shown:
 
Nine Months Ended
September 30,
 
 
(In millions)
2018
 
2017
 
$ Change
Cash provided by (used in):
 
 
 
 
 
Operating activities
$
2,021

 
$
1,981

 
$
40

Investing activities
(4,799
)
 
(3,405
)
 
(1,394
)
Financing activities
2,304

 
2,081

 
223

Effect of exchange rate changes
(4
)
 
26

 
(30
)
Net change in cash, cash equivalents, restricted cash and restricted cash equivalents
$
(478
)
 
$
683

 
$
(1,161
)

During the nine months of 2018, there was a $33 million decrease in cash outflows from working capital accounts period over period and an increase of cash inflows of $7 million from net income (loss), excluding non-cash and non-operating items. The change from working capital accounts was due to a $123 million increase in cash primarily driven by additional accruals for operational expenses, partially offset by a $90 million decrease in cash primarily from additional customer receivables and prepaid expense items, all of which were the result of increased rental volume during the period.

Our primary investing activities relate to the acquisition and disposal of revenue earning vehicles. We expended an additional $1.4 billion on revenue earning vehicles in 2018, primarily in the U.S. RAC operations, to increase the average fleet size and enrich the fleet mix.

Net financing cash inflows were $2.3 billion for the nine months of 2018 compared to $2.1 billion for the nine months of 2017. The variance was primarily driven by an increase of $1.3 billion in net cash inflows in 2018 for vehicle debt related to our richer fleet mix and larger fleet size. Comparatively, in June 2017, we issued non-vehicle debt of $1.25 billion and repaid $250 million of 4.25% Senior Notes, with the remaining proceeds being included in restricted cash. Additionally, we had $120 million outstanding on the Senior RCF at September 30, 2017.

Cash Flows - Hertz Global

As of September 30, 2018, Hertz Global had cash, cash equivalents, restricted cash and restricted cash equivalents of $1.0 billion as compared to $1.5 billion as of December 31, 2017. The following table summarizes the net change in cash, cash equivalents and restricted cash for the periods shown:
 
Nine Months Ended
September 30,
 
 
(In millions)
2018
 
2017
 
$ Change
Cash provided by (used in):
 
 
 
 
 
Operating activities
$
2,017

 
$
1,977

 
$
40

Investing activities
(4,799
)
 
(3,405
)
 
(1,394
)
Financing activities
2,308

 
2,085

 
223

Effect of exchange rate changes
(4
)
 
26

 
(30
)
Net change in cash, cash equivalents, restricted cash and restricted cash equivalents
$
(478
)
 
$
683

 
$
(1,161
)

Fluctuations in operating, investing and financing cash flows from period to period are due to the same factors as those disclosed for Hertz above, with the exception of any cash inflows or outflows related to the master loan agreement

67


HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES

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

between Hertz and Hertz Global and cash outflows by Hertz Global for the purchase of treasury shares. There were no purchases of treasury shares by Hertz Global during the nine months of 2018 or 2017.

Financing

Our primary liquidity needs include servicing of vehicle and non-vehicle debt, the payment of operating expenses and capital projects and purchases of revenue earning vehicles to be used in our operations. Our primary sources of funding are operating cash flows, cash received on the disposal of revenue earning vehicles, borrowings under our revolving credit facilities and access to the credit markets. Substantially all of our revenue earning vehicles and certain related assets are owned by special purpose entities, or are encumbered in favor of our lenders under our various credit facilities, other secured financings and asset-backed securities programs. None of such assets are available to satisfy the claims of our general creditors.

We are highly leveraged, and a substantial portion of our liquidity needs arise from debt service on our indebtedness and from the funding of our costs of operations and capital expenditures. Our practice is to maintain sufficient total liquidity through cash from operations, credit facilities and other financing arrangements, to mitigate any adverse effect on our operations resulting from adverse financial market conditions.

Refer to Part I, Item 1, Note 6, "Debt," to the Notes to our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for information on our outstanding debt obligations and our borrowing capacity and availability under our revolving credit facilities as of September 30, 2018. Cash paid for interest during the nine months of 2018 was $268 million for interest on vehicle debt and $171 million for interest on non-vehicle debt. Cash paid for interest during the nine months of 2017 was $212 million for interest on vehicle debt and $164 million for interest on non-vehicle debt.

Details of our corporate liquidity were as follows:
(In millions)
September 30, 2018
 
December 31, 2017
Cash and cash equivalents
$
761

 
$
1,072

Availability under the Senior RCF
505

 
552

Corporate liquidity
$
1,266

 
$
1,624


Approximately $1.8 billion of vehicle debt and $16 million of non-vehicle debt will mature during the twelve months following the issuance of this Report (the "next twelve months") and we will need to refinance a portion of the debt. We have reviewed the maturing debt obligations and determined that it is probable that we will be able, and have the intent, to repay or refinance these facilities at such times as we deem appropriate prior to their maturities. We believe that cash generated from operations, cash received on the disposal of vehicles, together with amounts available under various liquidity facilities and refinancing options available to us, will be adequate to permit us to meet our debt maturities over the next twelve months.

Covenants

The indentures for the Senior Notes and the Senior Second Priority Secured Notes contain covenants that, among other things, limit or restrict the ability of the Hertz credit group to incur additional indebtedness, incur guarantee obligations, prepay certain indebtedness, make certain restricted payments (including paying dividends, redeeming stock or making other distributions to parent entities of Hertz and other persons outside of the Hertz credit group), make investments, create liens, transfer or sell assets, merge or consolidate, and enter into certain transactions with Hertz's affiliates that are not members of the Hertz credit group.

Certain of our other debt instruments and credit facilities (including the Senior Facilities and the Letter of Credit Facility) contain a number of covenants that, among other things, limit or restrict the ability of the borrowers and the guarantors to dispose of assets, incur additional indebtedness, incur guarantee obligations, prepay certain indebtedness, make certain restricted payments (including paying dividends, share repurchases or making other distributions), create liens,

68


HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES

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

make investments, make acquisitions, engage in mergers, fundamentally change the nature of their business, make capital expenditures, or engage in certain transactions with certain affiliates.

The Senior RCF and the Letter of Credit Facility contain a financial maintenance covenant applicable to such facilities. Such covenant provides that Hertz’s consolidated first lien net leverage ratio, as defined in the credit agreements governing such facilities (together, the "Senior Credit Agreement"), as of the last day of any fiscal quarter (the "Covenant Leverage Ratio"), may not exceed a ratio of 3.00 to 1.00.

As of September 30, 2018, Hertz was in compliance with the Covenant Leverage Ratio with a ratio of 1.50 to 1.00, as calculated in accordance with the Senior Credit Agreement. Consolidated EBITDA, as defined in the Senior Credit Agreement, is a component of the calculation of the Covenant Leverage Ratio and is a non-GAAP financial measure that is not a measure of operating results, but instead is a measure used to determine compliance with the Covenant Leverage Ratio under the Senior Credit Agreement. Consolidated EBITDA is generally defined in the Senior Credit Agreement as consolidated net income plus the sum of income taxes, non-vehicle interest expense, non-vehicle depreciation and amortization expense, and non-cash charges or losses, as further adjusted for certain other items permitted in calculating covenant compliance under the Senior RCF and the Letter of Credit Facility, including add-backs for non-recurring, unusual or extraordinary charges, business optimization expenses or other restructuring charges or reserves.

Based on available liquidity from our expected operating results, the Senior RCF and other financing arrangements, Hertz expects to continue to be in compliance with the Covenant Leverage Ratio for at least the next twelve months.

Capital Expenditures

Revenue Earning Vehicles Expenditures

The table below sets forth our revenue earning vehicles expenditures and related disposal proceeds for the periods shown:
Cash inflow (cash outflow)
Revenue Earning Vehicles
(In millions)
Capital
Expenditures
 
Disposal
Proceeds
 
Net Capital
Expenditures
2018
 
 
 
 
 
First Quarter
$
(3,565
)
 
$
1,782

 
$
(1,783
)
Second Quarter
(4,045
)
 
1,872

 
(2,173
)
Third Quarter
(2,466
)
 
1,724

 
(742
)
Total
$
(10,076
)
 
$
5,378

 
$
(4,698
)
2017
 
 
 
 
 
First Quarter
$
(2,837
)
 
$
1,935

 
$
(902
)
Second Quarter
(3,872
)
 
1,900

 
(1,972
)
Third Quarter
(1,974
)
 
1,450

 
(524
)
Total
$
(8,683
)
 
$
5,285

 
$
(3,398
)

As previously disclosed, we identified a classification error in our first quarter 2017 statement of cash flows that we corrected in the second quarter of 2017 related to our former operations in Brazil. Correction of the error resulted in a $25 million decrease to revenue earning vehicles expenditures and proceeds from disposal of revenue earning vehicles for the first quarter of 2017 and a $25 million increase of revenue earning vehicles expenditures and proceeds from disposal of revenue earning vehicles for the second quarter of 2017 in the table above. These revisions had no impact on the third quarter of 2017. Additionally, there was no impact on 2017 net capital expenditures for revenue earning vehicles and no impact on the 2017 totals.


69


HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES

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

The table below sets forth net capital expenditures for revenue earning vehicles by segment for the periods shown:
Cash inflow (cash outflow)
Nine Months Ended
September 30,
 
 
 
 
($ in millions)
2018
 
2017
 
$ Change
 
% Change
U.S. Rental Car
$
(3,076
)
 
$
(1,748
)
 
$
(1,328
)
 
76
 %
International Rental Car
(1,201
)
 
(1,294
)
 
93

 
(7
)
All Other Operations
(421
)
 
(356
)
 
(65
)
 
18

Total
$
(4,698
)
 
$
(3,398
)
 
$
(1,300
)
 
38


Capital Assets, Non-Vehicle

The table below sets forth our capital asset expenditures, non-vehicle, and related disposal proceeds from property and other equipment disposed of or to be disposed of for the periods shown:
Cash inflow (cash outflow)
Capital Assets, Non-Vehicle
(In millions)
Capital
Expenditures
 
Disposal
Proceeds
 
Net Capital
Expenditures
2018
 
 
 
 
 
First Quarter
$
(44
)
 
$
4

 
$
(40
)
Second Quarter
(36
)
 
4

 
(32
)
Third Quarter
(39
)
 
39

 

Total
$
(119
)
 
$
47

 
$
(72
)
2017
 
 
 
 
 
First Quarter
$
(41
)
 
$
7

 
$
(34
)
Second Quarter
(43
)
 
4

 
(39
)
Third Quarter
(40
)
 
7

 
(33
)
Total
$
(124
)
 
$
18

 
$
(106
)

The table below sets forth capital asset expenditures, non-vehicle, net of disposal proceeds, by segment for the periods shown:
Cash inflow (cash outflow)
Nine Months Ended
September 30,
 
 
 
 
($ in millions)
2018
 
2017
 
$ Change
 
% Change
U.S. Rental Car
$
(14
)
 
$
(56
)
 
$
42

 
(75
)%
International Rental Car
(11
)
 
(15
)
 
4

 
(27
)
All Other Operations
(3
)
 
(4
)
 
1

 
(25
)
Corporate
(44
)
 
(31
)
 
(13
)
 
42

Total
$
(72
)
 
$
(106
)
 
$
34

 
(32
)

As previously disclosed, we revised our capital asset expenditures, non-vehicle for a correction of error related to intangible software assets for which no payment was made as of June 30, 2017. The correction resulted in a decrease in capital asset expenditures, non-vehicle of $13 million and $6 million for the first and second quarter of 2017, respectively. The cumulative error of $25 million was corrected in the third quarter of 2017. Accordingly, we revised our capital asset expenditures, non-vehicle for the third quarter of 2017 by a decrease of $19 million in the table above. These revisions had no impact on the 2017 totals.


70


HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES

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

CONTRACTUAL OBLIGATIONS

As of September 30, 2018, there have been no material changes outside of the ordinary course of business to our known contractual obligations as set forth in the table included in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our 2017 Form 10‑K. Changes to our aggregate indebtedness, including related interest and terms for new issuances, are described in Part I, Item 1, Note 6, "Debt," to the Notes to our unaudited condensed consolidated financial statements included in this Report.

OFF-BALANCE SHEET COMMITMENTS AND ARRANGEMENTS

Indemnification Obligations

There have been no significant changes to our indemnification obligations as compared to those disclosed in Note 16, "Contingencies and Off-Balance Sheet Commitments" of the Notes to our consolidated financial statements included in our 2017 Form 10‑K under the caption Item 8, "Financial Statements and Supplementary Data."

We regularly evaluate the probability of having to incur costs associated with indemnification obligations and will accrue for expected losses when they are probable and estimable.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

For a discussion of recent accounting pronouncements, see Note 2, "Basis of Presentation and Recently Issued Accounting Pronouncements," to the Notes to our unaudited condensed consolidated financial statements included in this Report ("Note 2").

As disclosed in Note 2, we adopted Topic 606 in accordance with the effective date on January 1, 2018. The Revenue from Contracts with Customers section of Note 2 includes disclosures regarding our method of adoption and the impact on our financial position, results of operations and cash flows. See Note 7, "Revenue," for information regarding our accounting policies for revenue recognition, including the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, as well as other required disclosures under Topic 606.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained or incorporated by reference in this Report on Form 10-Q and in reports we subsequently file with the United States Securities and Exchange Commission ("SEC") on Forms 10‑K and 10‑Q and file or furnish on Form 8‑K, and in related comments by our management, include "forward-looking statements." Forward-looking statements include information concerning our liquidity and our possible or assumed future results of operations, including descriptions of our business strategies. These statements often include words such as "believe," "expect," "project," "potential," "anticipate," "intend," "plan," "estimate," "seek," "will," "may," "would," "should," "could," "forecasts" or similar expressions. These statements are based on certain assumptions that we have made in light of our experience in the industry as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate in these circumstances. We believe these judgments are reasonable, but you should understand that these statements are not guarantees of performance or results, and our actual results could differ materially from those expressed in the forward-looking statements due to a variety of important factors, both positive and negative, that may be revised or supplemented in subsequent reports on Forms 10‑K, 10‑Q and 8‑K.

Important factors that could affect our actual results and cause them to differ materially from those expressed in forward-looking statements include, among others, those that may be disclosed from time to time in subsequent reports filed with the SEC, those described under "Item 1A—Risk Factors" included in our 2017 Form 10‑K and the following, which were derived in part from the risks set forth in "Item 1A—Risk Factors" of our 2017 Form 10‑K:

any claims, investigations or proceedings arising as a result of the restatement in 2015 of our previously issued financial results;
our ability to remediate the material weaknesses in our internal controls over financial reporting;

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THE HERTZ CORPORATION AND SUBSIDIARIES

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

levels of travel demand, particularly with respect to airline passenger traffic in the United States and in global markets;
the effect of our separation of our vehicle and equipment rental businesses, any failure by Herc Holdings Inc. to comply with the agreements entered into in connection with the separation and our ability to obtain the expected benefits of the separation;
significant changes in the competitive environment and the effect of competition in our markets on rental volume and pricing, including on our pricing policies or use of incentives;
occurrences that disrupt rental activity during our peak periods;
increased vehicle costs due to declines in the value of our non-program vehicles;
our ability to purchase adequate supplies of competitively priced vehicles and risks relating to increases in the cost of the vehicles we purchase;
our ability to accurately estimate future levels of rental activity and adjust the number and mix of vehicles used in our rental operations accordingly;
our ability to maintain sufficient liquidity and the availability to us of additional or continued sources of financing for our revenue earning vehicles and to refinance our existing indebtedness;
our ability to adequately respond to changes in technology and customer demands;
our access to third-party distribution channels and related prices, commission structures and transaction volumes;
an increase in our vehicle costs or disruption to our rental activity, particularly during our peak periods, due to safety recalls by the manufacturers of our vehicles;
a major disruption in our communication or centralized information networks;
financial instability of the manufacturers of our vehicles;
any impact on us from the actions of our franchisees, dealers and independent contractors;
our ability to sustain operations during adverse economic cycles and unfavorable external events (including war, terrorist acts, natural disasters and epidemic disease);
shortages of fuel and increases or volatility in fuel costs;
our ability to successfully integrate acquisitions and complete dispositions;
our ability to maintain favorable brand recognition and a coordinated and comprehensive branding and portfolio strategy;
costs and risks associated with litigation and investigations;
risks related to our indebtedness, including our substantial amount of debt, our ability to incur substantially more debt, the fact that substantially all of our consolidated assets secure certain of our outstanding indebtedness and increases in interest rates or in our borrowing margins;
our ability to meet the financial and other covenants contained in our Senior Facilities and the Letter of Credit Facility, our outstanding unsecured Senior Notes, our outstanding Senior Second Priority Secured Notes and certain asset-backed and asset-based arrangements;
changes in accounting principles, or their application or interpretation, and our ability to make accurate estimates and the assumptions underlying the estimates, which could have an effect on operating results;
risks associated with operating in many different countries, including the risk of a violation or alleged violation of applicable anticorruption or antibribery laws and our ability to repatriate cash from non-U.S. affiliates without adverse tax consequences;

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THE HERTZ CORPORATION AND SUBSIDIARIES

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

our ability to prevent the misuse or theft of information we possess, including as a result of cyber security breaches and other security threats;
our ability to successfully implement our information technology and finance transformation programs;
changes in the existing, or the adoption of new laws, regulations, policies or other activities of governments, agencies and similar organizations, such as the Tax Cuts and Jobs Act, where such actions may affect our operations, the cost thereof or applicable tax rates;
changes to our senior management team and the dependence of our business operations on our senior management team;
the effect of tangible and intangible asset impairment charges;
our exposure to uninsured claims in excess of historical levels;
fluctuations in interest rates and commodity prices;
our exposure to fluctuations in foreign currency exchange rates; and
other risks and uncertainties described from time to time in periodic and current reports that we file with the SEC.
You should not place undue reliance on forward-looking statements. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing cautionary statements. All such statements speak only as of the date made, and we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.


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THE HERTZ CORPORATION AND SUBSIDIARIES

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


We are exposed to a variety of market risks, including the effects of changes in interest rates (including credit spreads), foreign currency exchange rates and fluctuations in fuel prices. We manage our exposure to these market risks through our regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. Derivative financial instruments are viewed as risk management tools and have not been used for speculative or trading purposes. In addition, derivative financial instruments are entered into with a diversified group of major financial institutions in order to manage our exposure to counterparty nonperformance on such instruments.

There have been no material changes to the information reported under Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," included in our 2017 Form 10‑K.

ITEM 4.   CONTROLS AND PROCEDURES

HERTZ GLOBAL

Evaluation of Disclosure Controls and Procedures

Our senior management has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined under Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of September 30, 2018, due to the identification of material weaknesses in our internal control over financial reporting, as further described in Item 9A of our 2017 Form 10-K, our disclosure controls and procedures were not effective to provide reasonable assurance that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

During the three months ended September 30, 2018, we have taken, and continue to take, the actions described below to remediate our existing material weaknesses which have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

Income Taxes

To address the material weakness associated with controls over the analysis and assessment of income tax effects related to non-recurring transactions, the provision for income taxes and state deferred tax asset valuation allowances, during the three months ended September 30, 2018 management implemented quarterly control activities and enhanced and designed specific year-end control activities to assess the accounting for significant complex transactions and other tax related judgments.

To remediate our existing material weaknesses, we require additional time to complete the implementation of our remediation plans and demonstrate the effectiveness of our remediation efforts. The material weaknesses cannot be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

HERTZ

Our senior management has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined under Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of September30, 2018, due to the identification of material weaknesses in our internal control over financial reporting, as further described in Item 9A of our 2017 Form 10-K, our disclosure controls and procedures were not effective to provide reasonable assurance that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act of 1934 is recorded, processed, summarized and reported within the

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THE HERTZ CORPORATION AND SUBSIDIARIES

ITEM 4.   CONTROLS AND PROCEDURES (CONTINUED)

time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

During the three months ended September 30, 2018, we have taken, and continue to take, the actions described below to remediate our existing material weaknesses which have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

Income Taxes

To address the material weakness associated with controls over the analysis and assessment of income tax effects related to non-recurring transactions, the provision for income taxes and state deferred tax asset valuation allowances, during the three months ended September 30, 2018 management implemented quarterly control activities and enhanced and designed specific year-end control activities to assess the accounting for significant complex transactions and other tax related judgments.

Our remediation efforts were ongoing during the three months ended September 30, 2018. To remediate our existing material weaknesses, we require additional time to complete the implementation of our remediation plans and demonstrate the effectiveness of our remediation efforts. The material weaknesses cannot be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.


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HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES

PART II. OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS

For a description of certain pending legal proceedings see Part I, Item 1, Note 11, "Contingencies and Off-Balance Sheet Commitments," to the Notes to our unaudited condensed consolidated financial statements included in this Report.

ITEM 1A.   RISK FACTORS

There are no material amendments or additions to the information reported under Part I, Item 1A “Risk Factors” contained in our 2017 Form 10-K.

ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.   MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.   OTHER INFORMATION

None.

ITEM 6.   EXHIBITS

(a)
Exhibits:
The attached list of exhibits in the "Exhibit Index" immediately following the signature page to this Report on is filed as part of this Form 10-Q and is incorporated herein by reference in response to this item.

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THE HERTZ CORPORATION AND SUBSIDIARIES

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date:
November 8, 2018
HERTZ GLOBAL HOLDINGS, INC.
THE HERTZ CORPORATION
(Registrants)
 
 
By:
/s/ JAMERE JACKSON
 
 
 
Jamere Jackson
Executive Vice President and Chief Financial Officer

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THE HERTZ CORPORATION AND SUBSIDIARIES

EXHIBIT INDEX
Exhibit
Number
 
Description
4.17.1
Hertz Holdings
Hertz
4.17.2
Hertz Holdings
Hertz
Master Definitions and Constructions Agreement, dated September 25, 2018, by and among International Fleet Financing No. 2 B.V., Hertz Automobielen Nederland B.V., Stuurgroep Fleet (Netherlands) B.V., Hertz France S.A.S., RAC Finance S.A.S., Hertz De Espana SL, Hertz Autovermietung GMBH, Hertz Fleet Limited, Eurotitrisation S.A., BNP Paribas Securities Services, BNP Paribas S.A., Credit Agricole Corporate and Investment Bank, Hertz Europe Limited, BNP Paribas Securities Services, Luxembourg Branch, The Hertz Corporation, TMF SFS Management BV, KPMG LLP, BNP Paribas Trust Corporation UK Limited, BNP Paribas S.A., Dublin Branch, BNP Paribas S.A., Netherlands Branch, Sanne Trustee Services Limited, Hertz Holdings Netherlands B.V., and certain committed note purchasers, conduit investors and funding agents named therein.* #
4.17.3
Hertz Holdings
Hertz
4.17.4
Hertz Holdings
Hertz
4.17.5
Hertz Holdings
Hertz
4.17.6
Hertz Holdings
Hertz
4.17.7
Hertz Holdings
Hertz
10.35
Hertz Holdings
Hertz

10.36
Hertz Holdings
Hertz
31.1
Hertz Holdings
31.2
Hertz Holdings
31.3
Hertz
31.4
Hertz
32.1
Hertz Holdings
32.2
Hertz Holdings
32.3
Hertz

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HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
THE HERTZ CORPORATION AND SUBSIDIARIES

Exhibit
Number
 
Description
32.4
Hertz
101.INS
Hertz Holdings
Hertz
XBRL Instance Document*
101.SCH
Hertz Holdings
Hertz
XBRL Taxonomy Extension Schema Document*
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF
Hertz Holdings
Hertz
XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB
Hertz Holdings
Hertz
XBRL Taxonomy Extension Label Linkbase Document*
101.PRE
Hertz Holdings
Hertz
XBRL Taxonomy Extension Presentation Linkbase Document*
_______________________________________________________________________________

*Furnished herewith
# Confidential treatment has been requested for certain portions of this Exhibit pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, which portions have been omitted and filed separately with the Securities and Exchange Commission


Note: Certain instruments with respect to various additional obligations, which could be considered as long-term debt, have not been filed as exhibits to this Report because the total amount of securities authorized under any such instrument does not exceed 10% of our total assets on a consolidated basis. We agree to furnish to the SEC upon request a copy of any such instrument defining the rights of the holders of such long-term debt.

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