Hertz 2011 Annual Report Download - page 79

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
guaranteed depreciation programs, subject to certain manufacturers’ car condition and mileage
requirements, at a specific price during a specified time period. These programs limit our residual risk
with respect to vehicles purchased under these programs. For all other vehicles, as well as equipment
acquired by our equipment rental business, we use historical experience and monitor market conditions
to set depreciation rates. Generally, when revenue earning equipment is acquired, we estimate the
period that we will hold the asset, primarily based on historical measures of the amount of rental activity
(e.g., automobile mileage and equipment usage) and the targeted age of equipment at the time of
disposal. We also estimate the residual value of the applicable revenue earning equipment at the
expected time of disposal. The residual values for rental vehicles are affected by many factors, including
make, model and options, age, physical condition, mileage, sale location, time of the year and channel
of disposition (e.g., auction, retail, dealer direct). The residual value for rental equipment is affected by
factors which include equipment age and amount of usage. Depreciation is recorded on a straight-line
basis over the estimated holding period. Depreciation rates are reviewed on a quarterly basis based on
management’s ongoing assessment of present and estimated future market conditions, their effect on
residual values at the time of disposal and the estimated holding periods. Market conditions for used
vehicle and equipment sales can also be affected by external factors such as the economy, natural
disasters, fuel prices and incentives offered by manufacturers of new cars. These key factors are
considered when estimating future residual values and assessing depreciation rates. As a result of this
ongoing assessment, we make periodic adjustments to depreciation rates of revenue earning
equipment in response to changing market conditions. Upon disposal of revenue earning equipment,
depreciation expense is adjusted for the difference between the net proceeds received and the
remaining net book value.
Within our Donlen subsidiary, revenue earning equipment is under longer term lease agreements with
our customers. These leases contain provisions whereby we have a contracted residual value
guaranteed to us by the lessee, such that we do not experience any gains or losses on the disposal of
these vehicles. Therefore depreciation rates on these vehicles are not adjusted at any point in time per
the associated lease contract.
See Note 7 to the Notes to our consolidated financial statements included in this Annual Report under
the caption ‘‘Item 8—Financial Statements and Supplementary Data.’’
Public Liability and Property Damage
The obligation for public liability and property damage on self-insured U.S. and international vehicles
and equipment represents an estimate for both reported accident claims not yet paid, and claims
incurred but not yet reported. The related liabilities are recorded on a non-discounted basis. Reserve
requirements are based on actuarial evaluations of historical accident claim experience and trends, as
well as future projections of ultimate losses, expenses, premiums and administrative costs. The
adequacy of the liability is regularly monitored based on evolving accident claim history and insurance
related state legislation changes. If our estimates change or if actual results differ from these
assumptions, the amount of the recorded liability is adjusted to reflect these results. Our actual results as
compared to our estimates have historically resulted in relatively minor adjustments to our recorded
liability.
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
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