Hertz 2009 Annual Report Download - page 48

ITEM 1A. RISK FACTORS (Continued)
in economic activity. To the extent we do not match or remain within a reasonable competitive margin of
our competitors’ pricing, or if competitive pressures lead us to match any of our competitors’ downward
pricing and we are not able to reduce our operating costs, our margins and results of operations could
be materially and adversely impacted.
Our business is highly seasonal and any occurrence that disrupts rental activity during our peak
periods could constrain our liquidity and adversely affect our results of operations.
Certain significant components of our expenses are fixed in the short-run, including minimum
concession fees, real estate taxes, rent, insurance, utilities, maintenance and other facility-related
expenses, the costs of operating our information technology systems and minimum staffing costs.
Seasonal changes in our revenues do not alter those fixed expenses, typically resulting in higher
profitability in periods when our revenues are higher and lower profitability in periods when our revenues
are lower. The second and third quarters of the year have historically been our strongest quarters in both
our car and equipment rental segments due to their increased levels of leisure travel and construction
activity. Any occurrence that disrupts rental activity during the second or third quarters could have a
disproportionately material adverse effect on our liquidity and results of operations.
We may not be successful in our business strategy to expand into the off-airport rental market.
We have been increasing our presence in the off-airport car rental market in the United States and intend
to continue to pursue profitable growth opportunities through a combination of selected new location
openings, a disciplined evaluation of and strategic changes with respect to existing locations, and the
pursuit of same-store sales growth. In order to increase revenues at our existing, and any new, off-airport
locations, we believe that we will need to successfully market to insurance companies and other
companies that provide rental referrals to those needing cars while their vehicles are being repaired or
are temporarily unavailable for other reasons, as well as to the renters themselves. Since some of our
competitors have a more established presence in the off-airport car rental market than we do, it may be
difficult for us to successfully market our off-airport rental car services to these individuals and
organizations. In addition, revenues at new locations usually do not initially cover their start-up costs and
often do not, for some time, cover the costs of their ongoing operation. As a result, it may take some time
before various of our new facilities are profitable. See ‘‘Item 1—Business—Worldwide Car Rental—
Operations.’’ Our competitors, some of which have greater market share than we do in the off-airport
rental market, may also try to increase their presence in that market, which could make it more difficult
for this business strategy to succeed. If we are unable to grow profitably in our off-airport network and
properly react to changes in market conditions, our financial condition and results of operations could
be materially adversely affected.
A downsizing of our rental car fleet could require us to make additional cash payments for tax
liabilities, which could be material.
The Like-Kind Exchange Program, or ‘‘LKE Program,’’ allows tax gains on the disposition of vehicles in
our car rental fleet to be deferred and has resulted in deferral of federal and state income taxes for fiscal
2007, 2008 and 2009. The LKE 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 in the past triggered some taxable gains in the LKE
Program, and the bankruptcy filing of a manufacturer of vehicles in our car rental fleet has also resulted
in minimal taxable gains. 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
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