Hertz 2010 Annual Report Download - page 102

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
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 years 2007, 2008 and 2009 and part of 2010. A LKE Program for HERC has also 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. Over the last few years, for strategic purposes,
such as cash management and fleet reduction, we have recognized some taxable gains in the program.
In 2009, the bankruptcy filing of an original equipment manufacturer, or ‘‘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 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 the fleet. In the event of an extended fleet
reduction, we believe the likelihood of making material cash tax payments in the near future is low
because of our significant net operating losses. In August 2010, we elected to temporarily suspend the
U.S. car rental LKE Program allowing cash proceeds from sales of vehicles to be utilized for various
business purposes, one being building liquidity in anticipation of future growth initiatives. In addition,
new tax legislation effective September 2010 through December 2011 enables us to temporarily
suspend the LKE Program with an expected neutral effect on our federal net operating loss position for
U.S. tax purposes.
For a discussion of risks related to our reliance on asset-backed financing to purchase cars, see
‘‘Item 1A—Risk Factors’’ included in this Annual Report.
On January 1, 2009, Bank of America acquired Merrill Lynch & Co., Inc., the parent company of BAMLCP.
Accordingly, Bank of America is now an indirect beneficial owner of our common stock held by BAMLCP
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 5 of the Notes to our consolidated
financial statements included in this Annual Report under the caption ‘‘Item 8—Financial Statements and
Supplementary Data.’’ Our 2010 worldwide pre-tax pension expense was approximately $32.2 million,
which is a decrease of $3.7 million from 2009. The decrease in expense compared to 2009 is primarily
due to higher expected return on assets based on higher asset values.
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
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