Statement of Cash Flows – Hertz Global Holdings, Inc.Hertz (NYSE: HTZ) is a car and equipment rental company. The car rental segment operates a
fleet of approximately 285,000 cars in the United States and 150,000 cars internationally. The
company’s average holding period for a rental car is fifteen months in the United States and
twelve months internationally. Hertz acquires many of its cars as “programs cars”. For
program cars, the manufacturers agree to repurchase the cars at a specified price, which is
generally based on a predetermined percentage of the original car cost. This program limits
Hertz’s residual risk; however, typically the acquisition cost is higher for these program cars.
The company was founded in 1918 and is headquartered in Park Ridge, New Jersey.
1) Hertz makes five adjustments (ignoring ‘Other adjustments’) to net income before including
the changes in operating assets and liabilities. List each of these five items and briefly
explain why each of these items is added (subtracted) from net income to calculate Net Cash
Provided by Operating Activities.
2) Did receivables increase or decrease from the end of 2011 to the end of 2012? Did accrued
liabilities increase or decrease from the end of 2011 to the end of 2012?
3) How much cash did Hertz pay out to investors in the form of dividends and/or share
repurchases in 2012? (Ignore other financing activities.)
4) What is the largest asset reported on Hertz’s balance sheet? Notice that Hertz does not
separately classify assets as ‘current’ and ‘long-term’. Do you think the largest asset is a
current or long-term asset? Why?
5) Notice that the largest cash outflow (inflow) relates to rental car acquisition (disposal).
a. In which section of the cash flow statement are these cash flows reported?
b. Select balance sheet and cash flow information for Coinstar (parent of Redbox), Aaron’s,
and Men’s Wearhouse is attached. Coinstar rents DVDs (called content library), Aaron’s
rents furniture (called lease merchandise), and Men’s Wearhouse rents tuxedos. In which
section of the cash flow statement does each of these companies report the cash outflows
related to obtaining their rental products?
c. Do you think Hertz reports the cash flows related to the acquisition and disposal of rental
cars in the appropriate section? If yes, explain why. If no, indicate which section you
would report these cash flows and explain why.
6) In 2014, Hertz announced that there were material errors in its 2011–2013 financial
statements. The full extent of the errors has not yet been determined and the company has
not filed any quarterly financial statements for 2014. So far, we know of two accounting
issues: (i) Hertz under-depreciated the self-service kiosks and (ii) Hertz underestimated the
amount of bad debt expense related to receivables from customers for damaged rental
vehicles. What effect do each of these errors have on 2012 operating cash flows?
©Christine Petrovits, The College of William and Mary
7) What is the Book Value of the assets that Hertz sold during the year?
8) If Hertz had leased the cars under operating leases, in which section would the cash flows be
reported?
©Christine Petrovits, The College of William and Mary
Hertz Global Holdings, Inc.
Consolidated Balance Sheet
December 31, 2012
(in thousands)
Cash and cash equivalents
Receivables, less allowance for doubtful accounts of $25,113
Inventories, at lower of cost or market
Prepaid expenses and other assets
$
533,255
2,458,230
105,728
470,120
Revenue earning equipment, at cost
Less accumulated depreciation
Revenue earning equipment, net
15,831,227
(2,922,891)
12,908,336
Property and equipment, at cost
Less accumulated depreciation
Property and equipment, net
2,549,882
(1,113,496)
1,436,386
Other intangible assets, net
Goodwill
4,032,111
1,341,872
Total assets
$
23,286,038
Total liabilities
$
20,778,733
Total equity
$
2,507,305
Total liabilities and equity
$
23,286,038
©Christine Petrovits, The College of William and Mary
Hertz Global Holdings, Inc.
Consolidated Statement of Cash Flows
Year ended December 31, 2012
(in thousands)
Cash flows from operating activities:
Net income
$
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depreciation of revenue earning equipment
Depreciation of property and equipment
Amortization of other intangible assets
Stock-based compensation charges
Gain on sale of property and equipment
Other adjustments
Changes in operating assets and liabilities, net of effects of acquisition:
Receivables
Inventories, prepaid expenses and other assets
Accounts payable
Accrued liabilities
Accrued taxes
Public liability and property damage
Net cash provided by operating activities
Cash flows from investing activities:
Revenue earning equipment expenditures
Proceeds from disposal of revenue earning equipment
Property and equipment expenditures
Proceeds from disposal of property and equipment
Acquisitions, net of cash acquired
Other investing activities
Net cash used by investing activities
243,079
2,068,378
172,582
84,096
30,255
(8,309)
290,634
(157,732)
(30,802)
49,896
(22,554)
2,801
(4,341)
2,717,983
(9,613,239)
7,125,096
(312,786)
137,694
(1,904,649)
(178,887)
(4,746,771)
Cash flows from financing activities:
Proceeds from issuance of long-term debt
Repayment of long-term debt
Short-term borrowings:
Proceeds
Repayments
Proceeds (repayments) under the revolving lines of credit, net
Other financing activities
Net cash provided by financing activities
438,387
(1,280,143)
1,280,164
(93,277)
1,630,264
Net change in cash and cash equivalents during the period
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
(398,524)
931,779
533,255
©Christine Petrovits, The College of William and Mary
2,237,280
(952,147)
$
Dec. 31,
2012
Current Assets:
Cash and cash equivalents
Accounts receivable, net of allowances of
$2,003 and $1,586
Content library
Deferred income taxes
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Notes receivable
Deferred income taxes
Goodwill and other intangible assets
Other long-term assets
Total assets
$
282,894
58,331
177,409
7,187
29,686
555,507
571,358
26,731
1,373
358,829
47,927
$ 1,561,725
2012
Operating Activities:
Net income
Adjustments to reconcile net income to net cash flows from
operating activities from continuing operations:
Depreciation and other
Amortization of intangible asset
Share-based payments expense
Other
Cash flows from changes in operating assets and liabilities:
Accounts receivable
Content library
Prepaid expenses and other current assets
Other assets
Accounts payable
Accrued payable to retailers
Other accrued liabilities
Net cash flows from operating activities
Investing Activities:
Purchases of property and equipment
Proceeds from sale of property and equipment
Acquisition of NCR DVD kiosk business
Equity investments
©Christine Petrovits, The College of William and Mary
Net cash flows from investing activities
$
150,230
179,147
7,504
19,362
90,026
(17,061)
(30,693)
(6,963)
858
58,248
10,461
2,787
$
463,906
$
(208,054)
1,131
(100,000)
(39,727)
(346,650)
Feb. 02, 2013
CURRENT ASSETS:
Cash and cash equivalents
Accounts receivable, net
Inventories
Other current assets
Total current assets
PROPERTY AND EQUIPMENT, AT COST:
Land
Buildings
Leasehold improvements
Furniture, fixtures and equipment
Less accumulated depreciation and amortization
Net property and equipment
TUXEDO RENTAL PRODUCT, net
GOODWILL
INTANGIBLE ASSETS, net
OTHER ASSETS
TOTAL ASSETS
$
156,063
63,010
556,531
79,549
855,153
18,524
107,073
439,079
473,450
1,038,126
(649,008)
389,118
126,825
87,835
32,442
4,974
1,496,347
$
2013
OPERATING ACTIVITIES:
Net earnings
Adjustmentss:
Depreciation and amortization
Tuxedo rental product amortization
Asset impairment charges
Loss on disposition of assets
Share-based compensation
Other
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Tuxedo rental product
Other assets
Accounts payable, accrued expenses and other current
liabilities
Income taxes payable
Other liabilities
Net cash provided by operating activities
INVESTING ACTIVITIES:
Capital expenditures
Investment in trademarks, tradenames and other assets
$
132,063,000
84,979,000
28,315,000
482,000
1,958,000
16,515,000
3,213,000
(6,447,000)
16,026,000
(55,281,000)
(11,089,000)
$
9,103,000
5,172,000
721,000
225,730,000
(121,433,000)
(2,075,000)
Proceeds from sales of property and equipment
33,000
$
(123,475,000)
Net
cash
used
in
investing
activities
©Christine Petrovits, The College of William and Mary
©Christine Petrovits, The College of William and Mary
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