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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2022-02-23 compared with 2021-02-26 · 33 added, 48 removed, 7 unchanged (92% of the section changed)

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)

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.

OTHER INCOME TAX RELATED MATTERS

Prior to the TCJA, we operated a LKE program for our U.S.

vehicle rental business.

The program resulted in deferral of federal and state income taxes for fiscal years 2006 through 2009 and 2013 through 2017, and part of 2010 and 2012.

The TCJA repealed the LKE deferral rules as applicable to personal property, including rental vehicles.

To offset the detriment of LKE repeal for personal property, we will utilize the increases to existing first-year depreciation from 50 percent to 100 percent (“bonus depreciation”) under the TCJA.

Generally, the bonus depreciation percentage is increased for property acquired and placed in service after September 27, 2017, and before January 1, 2023.

At that point, a progressive step-down in bonus depreciation begins, with 80 percent permitted in 2023, 60 percent in 2024, 40 percent in 2025, and 20 percent in 2026.

Given the repeal of LKE and changes to bonus depreciation, we could incur material cash tax payments in the future.

TCJA also contains other provisions impacting our ability to fully expense the costs of purchased revenue earning vehicles under Section 163(j).

Generally, this provision limits the deductibility of business interest expense to a percentage of the taxpayer’s adjusted taxable income.

However, as amended by TCJA, Section 163(j) taxpayers with floor plan financing are not eligible for 100% expensing of the costs of the purchased vehicles.

As a result, our cash tax flows may be materially and adversely affected.

Our NOL utilization was statutorily limited under the TCJA, which limited a taxpayer's ability to use NOLs up to 80% of taxable income, disallowed the carryback of NOLs arising after 2017 and made the carryforward of NOLs indefinite.

The CARES Act temporarily suspends the TCJA's 80% limitation on NOLs for tax years beginning after December 31, 2017 and before January 1, 2021.

Such limitations on NOL utilization may materially impact our cash tax position.

During 2020, the IRS proposed transfer pricing adjustments to our 2014 and 2015 tax years, for which we are pursuing competent authority relief.

The IRS continues to audit our 2016 tax year.

Current year to date dispositions of Hertz Global's common stock by certain significant shareholders, as disclosed in Note 16, "Related Party Transactions," to the Notes to our consolidated financial statements included in this 2020 Annual Report under the caption Item 8, "Financial Statements and Supplementary Data," likely resulted in an "ownership change" as that term is defined in IRC Section 382.

IRC Section 382 can limit the utilization of the federal and state NOL and tax credit carryforwards.

We currently believe that this "ownership change" will not significantly impact our ability to utilize these U.S.

tax attributes.

However, there are numerous factors that are considered in the calculation of the IRC Section 382 limitation and, if one or several of these factors should be revised in the future, our ability to utilize our tax attributes could change.

Any Chapter 11 plan we may implement extinguishing pre-petition debt securities, a primary credit facility and certain other obligations, absent an exception, would result in CODI upon discharge of outstanding indebtedness for an amount of consideration that is less than its adjusted issue price.

The IRC provides that a debtor in a bankruptcy case may exclude CODI from income but must reduce certain of its tax attributes by the amount of any CODI realized as a result of the consummation of a plan of reorganization.

As a result, the market value of our equity upon emergence from Chapter 11 bankruptcy proceedings will dictate what portion of our U.S.

NOL, capital loss and tax credit carryforwards, after reduction of the Tax Attributes for CODI, will be realized on emergence from Chapter 11 bankruptcy proceedings.

IRC Sections 382 and 383 provide an annual limitation with respect to the ability of a corporation to utilize its Tax Attributes, as well as certain built-in-losses, against future U.S.

taxable income in the event of a change in ownership.

Our emergence from Chapter 11 bankruptcy proceedings will likely be considered a change in ownership for purposes of IRC Section 382.

The limitation under the IRC is based on the value of the

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

RISK MANAGEMENT

For a discussion of additional risks arising from our operations, including vehicle liability, general liability and property damage insurable risks, see “Item 1—Business—Risk Management” included in this 2021 Annual Report.

We are exposed to a variety of market risks, including the effects of changes in interest rates (including credit spreads), foreign currency exchange rates and fluctuations in fuel prices.

We manage our exposure to these market risks through our regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments.

Derivative financial instruments are viewed as risk management tools and have not been used for speculative or trading purposes.

In addition, derivative financial instruments are entered into with a diversified group of major financial institutions in order to manage our exposure to counterparty nonperformance on such instruments.

As a result of our declining credit profile from the impact from COVID-19 beginning in 2020, we were not able to enter into certain derivative financial instruments or renew existing derivative financial instruments in order to mitigate market risks arising from the effects of changes in foreign currency exchange rates and interest rates (including credit spreads).

As a result of our emergence from Chapter 11, during the third quarter of 2021, we began to enter into certain new derivative financial instruments as described below.

Interest Rate Risk

We have a significant amount of indebtedness with a mix of fixed and variable rates of interest.

Floating rate debt carries interest based generally on LIBOR, Euro inter-bank offer rate ("EURIBOR") or their equivalents for local currencies or bank conduit commercial paper rates plus an applicable margin.

Increase in interest rates could therefore significantly increase the associated interest payments that we are required to make on this debt.

See Note 6, "Debt," to the Notes to our consolidated financial statements under the caption Item 8, "Financial Statements and Supplementary Data” included in this 2021 Annual Report.

We have assessed our exposure to changes in interest rates by analyzing the sensitivity to our operating results assuming various changes in market interest rates.

Assuming a hypothetical increase of one percentage point in interest rates on our debt portfolio and cash equivalents and investments as of December 31, 2021, our pre-tax operating results would decrease by an estimated $36 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.

As of December 31, 2021, we do not have material exposures resulting from interest rate swap agreements or interest rate cap agreements.

Consistent with terms of certain agreements governing 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.

Foreign Currency Exchange Rate Risk

We have exposure to foreign currency exchange rate fluctuations worldwide and primarily with respect to the Euro, Canadian dollar, Australian dollar and British pound.

We have exposure to foreign currency exchange rate fluctuations on cross currency obligations, primarily intercompany loans.

As a result of our emergence from Chapter 11, during the third quarter of 2021, we began to enter into foreign currency exchange rate derivative financial instruments, which are not material.

Assuming a hypothetical change of one percentage point to the foreign currency exchange rates on our intercompany loan balance as of December 31, 2021, our pre-tax operating results would increase (decrease) by approximately $4 million.

Additionally, each one percentage point change in foreign

HERTZ GLOBAL HOLDINGS, INC.

1 unchanged sentence

THE HERTZ CORPORATION AND SUBSIDIARIES

(DEBTORS-IN-POSSESSION)

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)

corporation as of the emergence date.

As a result, our future U.S.

taxable income may not be fully offset by the Tax Attributes if such income exceeds our annual limitation, and we may incur a tax liability with respect to such income.

In addition, subsequent changes in ownership for purposes of the IRC could further diminish our Tax Attributes.

In 2016, the German Tax Authorities provided us with an assessment which asserted that we underreported our German taxable income for our 2005–2010 tax years based on the German Tax Authorities’ belief that certain transfer pricing matters made by the U.S.

to our German entity were overstated.

To avoid the double taxation resulting in these tax years from this assessment, we pursued U.S.

and German competent authority relief.

We expect to receive notification from the German and U.S.

tax authorities within ninety (90) days from the filing date of this 2020 Annual Report that they have agreed on a resolution of the transfer pricing matter covering the 2005-2010 tax years.

Upon receipt of such notification, we will reassess and, if appropriate, adjust our uncertain tax benefit related to the matter.

currency movements is estimated to impact our Adjusted Corporate EBITDA by an estimated $3 million over a twelve-month period.

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 operating results.

The increased cost of vehicles and staffing costs are the primary inflationary factors affecting us.