Hertz 2012 Annual Report Download - page 112

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
significantly increase the associated interest payments that we are required to make on this debt. See
Note 5 to the Notes to our audited annual consolidated financial statements included in this Annual
Report under the caption ‘‘Item 8—Financial Statements and Supplementary Data.’’
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, 2012, our net income would decrease by
an estimated $31.3 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 years ended December 31, 2012, 2011 and 2010, our consolidated statement of operations
contained realized and unrealized losses relating to the effects of foreign currency of $10.6 million,
$6.7 million and $6.2 million, respectively.
See Note 14 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 years ended December 31, 2012, 2011 and 2010, we recognized gains of
$0.7 million, $2.6 million and $2.8 million, respectively, in ‘‘Direct operating’’ on our consolidated
statement of operations relating to our gasoline swaps. See Note 14 to the Notes to our consolidated
financial statements included in this Annual Report under the caption ‘‘Item 8—Financial Statements and
Supplementary Data.’’
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