Hertz 2011 Annual Report Download - page 107

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
We have assessed our exposure to changes in interest rates by analyzing the sensitivity to our earnings
assuming various changes in market interest rates. Assuming a hypothetical increase of one percentage
point in interest rates on our debt portfolio as of December 31, 2011, our net income would decrease by
an estimated $24.0 million over a twelve-month period.
Consistent with the terms of the agreements governing the respective debt obligations, we may hedge a
portion of the floating rate interest exposure under the various debt facilities to provide protection in
respect of such exposure.
Foreign Currency Risk
We have foreign currency exposure to exchange rate fluctuations worldwide and primarily with respect
to the Euro, Canadian dollar, Australian dollar and British pound.
We manage our foreign currency risk primarily by incurring, to the extent practicable, operating and
financing expenses in the local currency in the countries in which we operate, including making fleet and
equipment purchases and borrowing locally. Also, we have purchased foreign exchange options to
manage exposure to fluctuations in foreign exchange rates for selected marketing programs. The effect
of exchange rate changes on these financial instruments would not materially affect our consolidated
financial position, results of operations or cash flows. Our risks with respect to foreign exchange options
are limited to the premium paid for the right to exercise the option and the future performance of the
option’s counterparty.
We also manage exposure to fluctuations in currency risk on intercompany loans we make to certain of
our subsidiaries by entering into foreign currency forward contracts at the time of the loans which are
intended to offset the impact of foreign currency movements on the underlying intercompany loan
obligations.
On October 1, 2006, we designated our 7.875% Senior Notes due 2014 as an effective net investment
hedge of our Euro-denominated net investment in our international operations. Effective November 1,
2011, we de-designated the net investment hedge.
For the year ended December 31, 2011, our consolidated statement of operations contained realized
and unrealized losses relating to the effects of foreign currency of $6.7 million.
See Note 13 to the Notes to our consolidated financial statements included in this Annual Report under
the caption ‘‘Item 8—Financial Statements and Supplementary Data.’’
Other Risks
We purchase unleaded gasoline and diesel fuel at prevailing market rates. In January 2009, we began a
program to manage our exposure to changes in fuel prices through the use of derivative commodity
instruments. For the year ended December 31, 2011, we recognized a gain of $2.6 million in ‘‘Direct
operating’’ on our consolidated statement of operations relating to our gasoline swaps. See Note 13 to
the Notes to our consolidated financial statements included in this Annual Report under the caption
‘‘Item 8—Financial Statements and Supplementary Data.’’
Inflation
The increased cost of vehicles is the primary inflationary factor affecting us. Many of our other operating
expenses are also expected to increase with inflation, including health care costs and gasoline.
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