Hertz 2015 Annual Report Download - page 80

Table of Contents
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on our debt portfolio and cash equivalents and investments as of December 31, 2015, our pre-tax earnings would decrease by an estimated $74
million over a twelve-month period.
From time to time, we may enter into interest rate swap agreements and/or interest rate cap agreements to manage interest rate risk and our mix
of fixed and floating rate debt. See Note 13, "Financial Instruments," to the Notes to our consolidated financial statements included in this Annual
Report under the caption Item 8, "Financial Statements and Supplementary Data.”
Consistent with the terms of certain agreements governing the respective debt obligations, we may be required to hedge a portion of the floating
rate interest exposure under the various debt facilities to provide protection in respect of such exposure.
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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 cross currency marketing programs. 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 cross currency intercompany loans we make to certain of our subsidiaries by entering
into foreign currency forward contracts at the time of the loans are entered which are intended to offset the impact of foreign currency movements
on the underlying intercompany loan obligations.
We do not hedge our operating results against currency movement as they are primarily translational in nature. Using foreign currency forward
rates as of December 2015, we expect revenue growth to be negatively impacted by approximately 1% over a 12-month period. Additionally, each
1% point change in foreign currency movements is estimated to impact our adjusted pre-tax income by an estimated $2 million over a 12-month
period.
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We purchase unleaded gasoline and diesel fuel at prevailing market rates. We are subject to price exposure related to the fluctuations in the price
of fuel. We anticipate that fuel risk will remain a market risk for the foreseeable future. We have determined that a 10% hypothetical change in the
price of fuel will not have a material impact on our earnings.
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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.
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In January 2006, we implemented an 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 through
2009 and 2013, 2014, 2015 and part of 2010 and 2012. These programs allow 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, we have recognized some taxable gains in the
programs. 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 value. In August 2010, we elected to temporarily
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