Hertz 2012 Annual Report Download - page 53

ITEM 1A. RISK FACTORS (Continued)
Seasonal changes in our revenues do not alter those fixed expenses, typically resulting in higher
profitability in periods when our revenues are higher. The second and third quarters of the year have
historically been our strongest quarters due to their increased levels of leisure travel and construction
activity. Any occurrence that disrupts rental activity during the second or third quarters could have a
disproportionately material adverse effect on our liquidity, cash flows and results of operations.
Following our acquisition of Dollar Thrifty, we expect this risk to increase, as the scale of our car rental
business and the related fixed costs have increased.
A material downsizing of our rental car fleet could require us to make additional cash payments for
tax liabilities, which could be material.
The Like-Kind Exchange Program, or ‘‘LKE Program,’’ allows tax gains on the disposition of vehicles in
our car rental fleet to be deferred and has resulted in deferrals of federal and state income taxes for prior
years. If a qualified replacement vehicle is not purchased within a specific time period after vehicle
disposal, then taxable gain is recognized. A material reduction in the net book value of our car rental
fleet, a material and extended reduction in vehicle purchases and/or a material downsizing of our car
rental fleet, for any reason, could result in reduced tax deferrals in the future, which in turn could require
us to make material cash payments for U.S. federal and state income tax liabilities. In August 2010, we
elected to temporarily suspend the U.S. car rental LKE Program. In October 2012, Hertz reinstated the
program. See the section entitled ‘‘Management’s Discussion and Analysis of Financial Condition and
Results of Operations—Income Taxes’’ in this Annual Report
Dollar Thrifty similarly used an LKE Program prior to our acquisition of Dollar Thrifty, which allowed Dollar
Thrifty to defer a material amount of federal and state income taxes beginning in 2002. Thus, our Dollar
Thrifty subsidiary is subject to the similar risks described above related to material payments for U.S.
federal and state tax liabilities in the event there is a material reduction in the net book value of its car
rental fleet, a material and extended reduction in its vehicle purchases and/or a material downsizing of its
car rental fleet, for any reason. Our ability to continue to defer the reversal of prior period tax deferrals by
Dollar Thrifty will depend on a number of factors, including the net book value of its car rental fleet.
If we are unable to purchase adequate supplies of competitively priced cars or equipment and the
cost of the cars or equipment we purchase increases, our financial condition, results of
operations, liquidity and cash flows may be materially adversely affected.
We are not a party to any long-term car supply arrangements with manufacturers. The price and other
terms at which we can acquire cars thus varies based on market and other conditions. For example,
certain car manufacturers have in the past, and may in the future, utilize strategies to de-emphasize sales
to the car rental industry, which can negatively impact our ability to obtain cars on competitive terms and
conditions. Consequently, there is no guarantee that we can purchase a sufficient number of vehicles at
competitive prices and on competitive terms and conditions. Reduced or limited supplies of equipment
together with increased prices are risks that we also face in our equipment rental business. If we are
unable to obtain an adequate supply of cars or equipment, or if we obtain less favorable pricing and
other terms when we acquire cars or equipment and are unable to pass on any increased costs to our
customers, then our financial condition, results of operations, liquidity and cash flows may be materially
adversely affected.
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