Hertz 2007 Annual Report Download - page 86

Europe offsetting lower price activity in the U.S. During the years ended December 31, 2007 and 2006,
HERC added six and eight U.S. locations, respectively, one and two new Canadian location(s),
respectively, and seven and seven locations in Europe, respectively. HERC expects to add over 30
additional locations worldwide in 2008. In connection with its U.S. expansion, we expect HERC will incur
non-fleet start-up costs of approximately $0.7 million per location and additional fleet acquisition costs,
including costs to transport equipment from one branch to another, over an initial twelve-month period of
approximately $2 to $4 million per location. In its European expansion, we expect HERC will incur lower
start-up costs per location as compared with the United States.
Property damage and business interruption from the 2005 hurricanes in Florida and other Gulf Coast
states did not have a material effect on our results of operations for the year ended December 31, 2005.
Critical Accounting Policies and Estimates
Our discussion and analysis of financial condition and results of operations are based upon our
consolidated financial statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America, or ‘‘GAAP.’’ The preparation of these financial
statements requires management to make estimates and judgments that affect the reported amounts in
our financial statements and accompanying notes.
We believe the following critical accounting policies affect the more significant judgments and estimates
used in the preparation of our financial statements and changes in these judgments and estimates may
impact our future results of operations and financial condition. For additional discussion of our
accounting policies, see Note 1 to the Notes to our consolidated financial statements included in this
Annual Report under the caption ‘‘Item 8—Financial Statements and Supplementary Data.’’
Revenue Earning Equipment
Our principal assets are revenue earning equipment, which represented approximately 54% of our total
assets as of December 31, 2007. Revenue earning equipment consists of vehicles utilized in our car
rental operations and equipment utilized in our equipment rental operations. For the year ended
December 31, 2007, 50% of the vehicles purchased for our U.S. and international car rental fleets were
subject to repurchase by automobile manufacturers under contractual repurchase and guaranteed
depreciation programs, subject to certain manufacturers’ car condition and mileage requirements, at a
specific price during a specified time period. These programs limit our residual risk with respect to
vehicles purchased under these programs. For all other vehicles, as well as equipment acquired by our
equipment rental business, we use historical experience and monitor market conditions to set
depreciation rates. When revenue earning equipment is acquired, we estimate the period that we will
hold the asset. Depreciation is recorded on a straight-line basis over the estimated holding period, with
the objective of minimizing gain or loss on the disposition of the revenue earning equipment.
Depreciation rates are reviewed on an ongoing 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. Upon
disposal of the revenue earning equipment, depreciation expense is adjusted for the difference between
the net proceeds received and the remaining net book value. As market conditions change, we adjust
our depreciation rates prospectively, over the remaining holding period, to reflect these changes in
market conditions. See Note 6 to the Notes to our consolidated financial statements included in this
Annual Report under the caption ‘‘Item 8—Financial Statements and Supplementary Data.’’
Public Liability and Property Damage
The obligation for public liability and property damage on self-insured U.S. and international vehicles
and equipment 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
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