Hertz 2007 Annual Report Download - page 120

equipment purchases and borrowing for working capital needs. Also, we have purchased foreign
exchange options to manage exposure to fluctuations in foreign exchange rates for selected marketing
programs. The effect of exchange rate changes on these financial instruments would not materially
affect our consolidated financial position, results of operations or cash flows. Our risks with respect to
currency option contracts are limited to the premium paid for the right to exercise the option and the
future performance of the option’s counterparty. Premiums paid for options outstanding as of
December 31, 2007, were approximately $0.3 million, and we limit counterparties to financial institutions
that have strong credit ratings.
We also manage exposure to fluctuations in currency risk on intercompany loans we make to certain of
our subsidiaries by entering into foreign currency forward contracts at the time of the loans. The forward
rate is reflected in the intercompany loan rate to the subsidiaries, and as a result, the forward contracts
have no material impact on our results of operations.
In connection with the Transactions, we issued e225 million of unhedged Senior Euro Notes. Prior to
October 1, 2006, our Senior Euro Notes were not designated as a net investment hedge of our
Euro-denominated net investment in our foreign operations. For the nine months ended September 30,
2006, we incurred unrealized exchange transaction losses of $19.2 million resulting from the translation
of these Euro-denominated notes into the U.S. dollar, which are recorded in our consolidated statement
of operations in ‘‘Selling, general and administrative’’ expenses. On October 1, 2006, we designated our
Senior Euro Notes as an effective net investment hedge of our Euro-denominated net investment in our
foreign operations. As a result of this net investment hedge designation, as of December 31, 2007,
$27.8 million of losses, which are net of tax of $18.3 million, attributable to the translation of our Senior
Euro Notes into the U.S. dollar are recorded in our consolidated balance sheet in ‘‘Accumulated other
comprehensive income (loss).’’
Inflation
The increased acquisition cost of vehicles is the primary inflationary factor affecting us. Many of our other
operating expenses are also expected to increase with inflation, including health care costs.
Management does not expect that the effect of inflation on our overall operating costs will be greater for
us than for our competitors.
Like-Kind Exchange Program
In January 2006, we implemented a like-kind exchange program for our U.S. car rental business.
Pursuant to the program, we dispose of vehicles and acquire replacement vehicles in a form intended to
allow such dispositions and replacements to qualify as tax-deferred ‘‘like-kind exchanges’’ pursuant to
section 1031 of the Internal Revenue Code. The program has resulted in a material deferral of federal
and state income taxes for fiscal 2007. A like-kind exchange program for HERC has been in place for
several years. We cannot, however, offer assurance that the expected tax deferral will be achieved or that
the relevant law concerning the programs will remain in its current form. In addition, the benefit of
deferral is subject to recapture, if, for example, there were a material downsizing of our fleet.
Employee Retirement Benefits
Pension
We sponsor defined benefit pension plans worldwide. Pension obligations give rise to significant
expenses that are dependent on assumptions discussed in Note 4 of the Notes to our consolidated
financial statements included in this Annual Report under the caption ‘‘Item 8—Financial Statements and
Supplementary Data.’’ Our 2007 worldwide pre-tax pension expense was approximately $42.1 million,
which is an increase of $6.5 million from 2006. The increase in expense compared to 2006 is attributable
to net curtailment and settlement charges of $3.3 million and the effects of foreign currency translation.
To the extent that there are layoffs affecting a significant number of employees covered by any pension
plan worldwide, 2008 expense could vary significantly because of further charges or credits.
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