Hertz 2012 Annual Report Download - page 113

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
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.
Management does not expect that the effect of inflation on our overall operating costs will be greater for
us than for our competitors.
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 2006, 2007, 2008 and 2009 and part of 2010 and 2012. 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, including paying down existing debt obligations, future
growth initiatives and for general operating purposes. From August 2010 through 2011, recognized tax
gains on vehicle dispositions resulting from the LKE suspension were more than offset by 100% tax
depreciation on newly acquired vehicles. During 2012 the allowable 50% bonus depreciation helped
offset tax gains during the period of LKE suspension. The U.S. car rental LKE Program was reinstated on
October 15, 2012.
On January 1, 2009, Bank of America acquired Merrill Lynch. Accordingly, Bank of America is now an
indirect beneficial owner of our common stock held by Merrill Lynch 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 6 of the Notes to our audited annual
consolidated financial statements included in this annual report under the caption ‘‘Item 8—Financial
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