Hertz 2010 Annual Report Download - page 75

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Pensions
Our employee pension costs and obligations are dependent on our assumptions used by actuaries in
calculating such amounts. These assumptions include discount rates, salary growth, long-term return
on plan assets, retirement rates, mortality rates and other factors. Actual results that differ from our
assumptions are accumulated and amortized over future periods and, therefore, generally affect our
recognized expense in such future periods. While we believe that the assumptions used are appropriate,
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 a
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 5 to the Notes to our consolidated financial statements included in this Annual
Report under the caption ‘‘Item 8—Financial Statements and Supplementary Data.’’ For a discussion of
the risks associated with our pension plans, see ‘‘Item 1A—Risk Factors’’ in this Annual Report.
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 past 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 2010, we performed our annual impairment analysis based upon market data as of
October 1, 2010 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.
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. Intangible assets with finite useful lives are amortized over their respective estimated
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