Hertz 2009 Annual Report Download - page 110

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Management does not expect that the effect of inflation on our overall operating costs will be greater for
us than for our competitors.
Income Taxes
In January 2006, we implemented a LKE 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 deferral of federal and state income taxes for
fiscal 2007, 2008 and 2009. A LKE Program for HERC has been in place for several years. The program
allows tax deferral if a qualified replacement asset is acquired within a specific time period after asset
disposal. Accordingly, if a qualified replacement asset is not purchased within this limited time period,
taxable gain is recognized. For strategic purposes, such as cash management and fleet reduction, we
have triggered some taxable gains in the program. The bankruptcy filing of an OEM also resulted in
minimal gain recognition. We had sufficient net operating losses to fully offset the taxable gains
recognized. We cannot offer assurance that the expected tax deferral will continue or that the relevant
law concerning the programs will remain in its current form. An extended reduction in purchases or
downsizing of our car rental fleet could result in reduced deferrals in the future, which in turn could
require us to make material cash payments for federal and state income tax liabilities. Our inability to
obtain replacement financing as our fleet financing facilities mature would likely result in an extended
reduction in purchases or downsizing of the fleet. However, we believe the likelihood of making material
cash payments in the near future is low because of our significant net operating losses. For a discussion
of risks related to our reliance on asset-backed financing to purchase cars, see ‘‘Item 1A—Risk Factors’’
in this Annual Report.
On January 1, 2009, Bank of America acquired Merrill Lynch & Co., Inc., the parent company of MLGPE.
Accordingly, Bank of America is now an indirect beneficial owner of our common stock held by MLGPE
and certain of its affiliates. For U.S. income tax purposes the transaction, when combined with other
unrelated transactions during the previous 36 months, resulted in a change in control as that term is
defined in Section 382 of the Internal Revenue Code. Consequently, utilization of all pre-2009 U.S. net
operating losses is subject to an annual limitation. The limitation is not expected to result in a loss of net
operating losses or have a material adverse impact on taxes.
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 2009 worldwide pre-tax pension expense was approximately $35.9 million,
which is a decrease of $3.5 million from 2008. The decrease in expense compared to 2008 is primarily
due to lower expense for U.S. plans, largely due to headcount reductions. To the extent that there are
layoffs affecting a significant number of employees covered by any pension plan worldwide, 2010
expense could vary significantly because of further charges or credits.
The funded status (i.e., the dollar amount by which the projected benefit obligations exceeded the
market value of pension plan assets) of our U.S. qualified plan, in which most domestic employees
participate, declined significantly as of December 31, 2009, compared with December 31, 2008 because
asset values decreased due to a drop in the securities markets. We contributed $42.6 million to our U.S.
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