TG1

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?

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.

©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

$ 533,255 2,458,230 105,728 470,120

15,831,227 Less accumulated depreciation (2,922,891) Revenue earning equipment, net 12,908,336

2,549,882 Less accumulated depreciation (1,113,496) Property and equipment, net 1,436,386

4,032,111 1,341,872

$ 23,286,038

Total liabilities $ 20,778,733

Total equity $ 2,507,305

Total liabilities and equity $ 23,286,038

Prepaid expenses and other assets

Revenue earning equipment, at cost

Property and equipment, at cost

(in thousands)

Goodwill Other intangible assets, net

Total assets

Cash and cash equivalents Receivables, less allowance for doubtful accounts of $25,113 Inventories, at lower of cost or market

©Christine  Petrovits,  The  College  of  William  and  Mary

Hertz Global Holdings, Inc. Consolidated Statement of Cash Flows Year ended December 31, 2012

$ 243,079

Depreciation of revenue earning equipment 2,068,378 Depreciation of property and equipment 172,582 Amortization of other intangible assets 84,096 Stock-based compensation charges 30,255 Gain on sale of property and equipment (8,309) Other adjustments 290,634

Receivables (157,732) Inventories, prepaid expenses and other assets (30,802) Accounts payable 49,896 Accrued liabilities (22,554) Accrued taxes 2,801 Public liability and property damage (4,341) Net cash provided by operating activities 2,717,983

(9,613,239) 7,125,096 (312,786) 137,694

(1,904,649) (178,887) (4,746,771)

2,237,280 (952,147)

Proceeds 438,387 Repayments (1,280,143) Proceeds (repayments) under the revolving lines of credit, net 1,280,164

(93,277) Net cash provided by financing activities 1,630,264

(398,524) 931,779

$ 533,255

Cash flows from investing activities: Revenue earning equipment expenditures Proceeds from disposal of revenue earning equipment

Changes in operating assets and liabilities, net of effects of acquisition:

Cash flows from operating activities: Net income

Repayment of long-term debt

Other investing activities Net cash used by investing activities

Property and equipment expenditures Proceeds from disposal of property and equipment Acquisitions, net of cash acquired

Cash and cash equivalents at end of period

(in thousands)

Adjustments to reconcile net income (loss) to cash provided by operating activities:

Other financing activities

Net change in cash and cash equivalents during the period Cash and cash equivalents at beginning of period

Short-term borrowings:

Cash flows from financing activities: Proceeds from issuance of long-term debt

©Christine  Petrovits,  The  College  of  William  and  Mary

2012 Operating Activities: Net income $ 150,230 Adjustments to reconcile net income to net cash flows from operating activities from continuing operations: Depreciation and other 179,147 Amortization of intangible asset 7,504 Share-based payments expense 19,362 Other 90,026 Cash flows from changes in operating assets and liabilities: Accounts receivable (17,061) Content library (30,693) Prepaid expenses and other current assets (6,963) Other assets 858 Accounts payable 58,248 Accrued payable to retailers 10,461 Other accrued liabilities 2,787 Net cash flows from operating activities $ 463,906

Investing Activities: Purchases of property and equipment (208,054) Proceeds from sale of property and equipment 1,131 Acquisition of NCR DVD kiosk business (100,000) Equity investments (39,727) Net cash flows from investing activities $ (346,650)

Current Assets: Cash and cash equivalents $ 282,894 Accounts receivable, net of allowances of $2,003 and $1,586 58,331 Content library 177,409 Deferred income taxes 7,187 Prepaid expenses and other current assets 29,686 Total current assets 555,507

Property and equipment, net 571,358 Notes receivable 26,731 Deferred income taxes 1,373 Goodwill and other intangible assets 358,829 Other long-term assets 47,927 Total assets $ 1,561,725

Dec. 31, 2012

©Christine  Petrovits,  The  College  of  William  and  Mary

CURRENT  ASSETS:        Cash  and  cash  equivalents  $                    156,063          Accounts  receivable,  net 63,010        Inventories 556,531      Other  current  assets 79,549              Total  current  assets 855,153 PROPERTY  AND  EQUIPMENT,  AT  COST:        Land 18,524        Buildings 107,073        Leasehold  improvements 439,079        Furniture,  fixtures  and  equipment 473,450

1,038,126        Less  accumulated  depreciation  and  amortization (649,008)                Net  property  and  equipment 389,118 TUXEDO  RENTAL  PRODUCT,  net 126,825 GOODWILL 87,835 INTANGIBLE  ASSETS,  net 32,442 OTHER  ASSETS 4,974              TOTAL  ASSETS  $              1,496,347

Feb.  02,  2013

2013 OPERATING  ACTIVITIES: Net  earnings    $              132,063,000   Adjustmentss: Depreciation  and  amortization                        84,979,000   Tuxedo  rental  product  amortization                        28,315,000   Asset  impairment  charges                                    482,000   Loss  on  disposition  of  assets                              1,958,000   Share-­‐based  compensation                        16,515,000   Other                              3,213,000   Changes  in  operating  assets  and  liabilities: Accounts  receivable                        (6,447,000) Inventories                        16,026,000   Tuxedo  rental  product                    (55,281,000) Other  assets                    (11,089,000) Accounts  payable,  accrued  expenses  and  other  current   liabilities                              9,103,000   Income  taxes  payable                              5,172,000   Other  liabilities                                    721,000                Net  cash  provided  by  operating  activities  $              225,730,000

INVESTING  ACTIVITIES: Capital  expenditures                (121,433,000) Investment  in  trademarks,  tradenames  and  other  assets                        (2,075,000) Proceeds  from  sales  of  property  and  equipment                                          33,000                Net  cash  used  in  investing  activities  $        (123,475,000)

©Christine  Petrovits,  The  College  of  William  and  Mary

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