Hertz 2009 Annual Report Download - page 81

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
significant differences in actual experience or significant changes in assumptions would affect our
pension costs and obligations. The various employee-related actuarial assumptions (e.g., retirement
rates, mortality rates, salary growth) used in determining pension costs and plan liabilities are reviewed
periodically by management, assisted by the enrolled actuary, and updated as warranted. The discount
rate used to value the pension liabilities and related expenses and the expected rate of return on plan
assets are the two most significant assumptions impacting pension expense. The discount rate used is
an actual market-based spot rate as of the valuation date. For the expected return on assets assumption,
we use a forward-looking rate that is based on the expected return for each asset class (including the
value added by active investment management), weighted by the target asset allocation. The past
annualized long-term performance of the Plans’ assets has generally exceeded the long-term rate of
return assumption. See Note 4 to the Notes to our consolidated financial statements included in this
Annual Report under the caption ‘‘Item 8—Financial Statements and Supplementary Data.’’
Goodwill and Other Intangible Assets
We review goodwill for impairment whenever events or changes in circumstances indicate that the
carrying amount of the goodwill may not be recoverable, and also review goodwill annually. Goodwill
impairment is deemed to exist if the carrying value of goodwill exceeds its fair value. Goodwill must be
tested at least annually using a two-step process. The first step is to identify any potential impairment by
comparing the carrying value of the reporting unit to its fair value. We estimate the fair value of our
reporting units using a discounted cash flow methodology. The cash flows represent management’s
most recent planning assumptions. These assumptions are based on a combination of industry
outlooks, views on general economic conditions, our expected pricing plans and expected future
savings generated by our ongoing restructuring activities. If a potential impairment is identified, the
second step is to compare the implied fair value of goodwill with its carrying amount to measure the
impairment loss. A significant decline in the projected cash flows or a change in the weighted average
cost of capital used to determine fair value could result in a future goodwill impairment charge.
In the fourth quarter 2009, we performed our annual impairment analysis based upon market data as of
October 1, 2009 and concluded that there was no impairment related to our goodwill and our other
indefinite-lived intangible assets.
We performed the impairment analyses for our reporting units, using our business and long-term
strategic plans, revised to reflect the current economic conditions. Our weighted-average cost of capital
used in the discounted cash flow model was calculated based upon the fair value of our debt and our
stock price with a debt to equity ratio comparable to our industry. The total fair value of our reporting
units was then compared to our market capitalization to ensure their reasonableness.
As a result of the Acquisition, we also have recognized significant intangible assets. We re-evaluate the
estimated useful lives of our intangible assets annually or as circumstances change. Those intangible
assets considered to have indefinite useful lives, including our trade name, are evaluated for impairment
on an annual basis, by comparing the fair value of the intangible assets to their carrying value. In
addition, whenever events or changes in circumstances indicate that the carrying value of intangible
assets might not be recoverable, we will perform an impairment review. Intangible assets with finite
useful lives are amortized over their respective estimated useful lives and reviewed for impairment.
The valuation of our indefinite-lived assets utilized the relief from royalty method, which incorporates
cash flows and discount rates comparable to those discussed above. The royalty rates utilized in this
valuation were based on actual licensing agreements. We also considered the excess earnings as a
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