HRI

Business Context and Reporting Period

Company: Hertz Global Holdings, Inc. (Hertz)

Filing Type: Form 10-Q (Quarterly Report)

Period Ended: March 31, 2008

Hertz operates two primary reportable segments: Car Rental and Equipment Rental (HERC). The company is a successor to corporations engaged in the car and truck rental business since 1918 and equipment rental since 1965. As of May 7, 2008, there were 322,677,061 shares of common stock outstanding.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 6.1% year-over-year. Car rental revenue rose 6.2% driven by a 4.6% increase in volume and foreign currency translation, partially offset by a 2.6% decline in Rental Rate per Day (RPD). Equipment rental revenue increased 5.4% due to higher volumes and currency effects.
• Expense Trends: Total expenses increased 4.1%. Depreciation of revenue earning equipment rose 14.1% to $533.9 million, primarily due to higher vehicle costs, increased fleet size, and lower net proceeds on disposals. Interest expense decreased 14.5% to $196.2 million, aided by the absence of a $16.2 million debt modification write-off recorded in 2007.
• Profitability: The net loss narrowed by 7.8% to $57.7 million. Adjusted pre-tax income for the Car Rental segment increased 6.5% to $39.3 million, while the Equipment Rental segment decreased 9.6% to $59.3 million due to higher fleet costs.
• Liquidity: Cash and equivalents remained relatively stable at $728.9 million. Restricted cash decreased significantly by $524.5 million to $136.5 million, primarily due to the timing of vehicle purchases and sales.

Guidance, Outlook, and Risks

• Restructuring: The company incurred $19.6 million in restructuring charges in Q1 2008 related to job reductions (approx. 950 employees) and outsourcing initiatives. Management anticipates incurring future charges for additional efficiency initiatives in 2008 but has not provided detailed estimates.
• Capital Expenditures: Net expenditures for revenue earning equipment were $1,131.9 million in Q1 2008. Management expects full-year 2008 net expenditures to be similar to 2007 levels.
• Market Risks:
  • Interest Rates: A hypothetical 1% increase in interest rates would decrease net income by an estimated $12.0 million over twelve months.
  • Credit Markets: Recent turmoil in credit markets and instability of insurance guarantors (MBIA/Ambac) for asset-backed securities could reduce financing availability or increase costs.
  • Legal Proceedings: Significant pending litigation includes fuel-related class actions (Texas), equipment rental loss damage waiver claims, and tourism assessment fee challenges in California.
• Covenants: As of March 31, 2008, the company was in compliance with all financial covenants, including a consolidated leverage ratio of 3.03:1 (limit 5.25:1) and an interest expense coverage ratio of 3.96:1 (limit 2.00:1).

Investor Verification Checklist

• Debt Maturities: Verify the $3,668.7 million in debt maturities due in 2009 and the company's refinancing strategy given tight credit markets.
• Asset-Backed Financing: Confirm the status of financial guaranty insurance policies (MBIA/Ambac) backing the U.S. Fleet Debt and potential impacts of insurer instability.
• Restructuring Costs: Monitor future announcements regarding the $30-$40 million in expected restructuring costs for the first half of 2008 and subsequent efficiency initiatives.
• Legal Exposure: Track developments in the Texas fuel surcharge class action and California tourism assessment litigation, which could result in material liabilities.
• Depreciation Assumptions: Review management's assumptions regarding residual values of revenue earning equipment, as changes significantly impact depreciation expense and net income.