Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

Form 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2009

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File No. 1-10308

 

 

Avis Budget Group, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   06-0918165

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification Number)

6 Sylvan Way

Parsippany, NJ

  07054
(Address of principal executive offices)   (Zip Code)

(973) 496-4700

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares outstanding of the issuer’s common stock was 101,978,177 shares as of July 31, 2009.

 

 

 


Table of Contents

Table of Contents

 

          Page
PART I    Financial Information (Unaudited)   
Item 1.    Financial Statements   
   Consolidated Condensed Statements of Operations for the Three and Six Months Ended June 30, 2009 and 2008 (Unaudited)    3
   Consolidated Condensed Balance Sheets as of June 30, 2009 and December 31, 2008 (Unaudited)    4
   Consolidated Condensed Statements of Cash Flows for the Six Months Ended June 30, 2009 and 2008 (Unaudited)    5
   Notes to Consolidated Condensed Financial Statements (Unaudited)    7
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    31
Item 3.    Quantitative and Qualitative Disclosures about Market Risk    40
Item 4.    Controls and Procedures    40
PART II    Other Information   
Item 1.    Legal Proceedings    41
Item 4.    Submission of Matters to a Vote of Security Holders    41
Item 6.    Exhibits    43
   Signatures    44


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FORWARD-LOOKING STATEMENTS

The forward-looking statements contained herein are subject to known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements are based on various facts and were derived utilizing numerous important assumptions and other important factors that could cause actual results to differ materially from those in the forward-looking statements. Forward-looking statements include the information concerning our future financial performance, business strategy, projected plans and objectives. Statements preceded by, followed by or that otherwise include the words “believes”, “expects”, “anticipates”, “intends”, “projects”, “estimates”, “plans”, “may increase”, “may fluctuate” and similar expressions or future or conditional verbs such as “will”, “should”, “would”, “may” and “could” are generally forward-looking in nature and not historical facts. You should understand that the following important factors and assumptions could affect our future results and could cause actual results to differ materially from those expressed in such forward-looking statements:

 

   

the high level of competition in the vehicle rental industry and the impact such competition may have on pricing and rental volume;

 

   

an increase in our fleet costs as a result of an increase in the cost of new vehicles and/or a decrease in the price at which we dispose of used vehicles either in the used vehicle market or under repurchase or guaranteed depreciation programs;

 

   

the results of operations or financial condition of the manufacturers of our cars, which could impact their ability to perform their payment obligations under repurchase and/or guaranteed depreciation arrangements they have with us, and/or their willingness or ability to make cars available to us or the rental car industry as a whole on commercially reasonable terms or at all;

 

   

risks associated with the impact of the Chapter 11 bankruptcy filings of General Motors and Chrysler;

 

   

weakness in travel demand, including the downturn in airline passenger traffic in the United States and in the international locations in which we operate;

 

   

the decline in general economic conditions and weakness in the housing market, which could lead to a disruption or decline in rental activity, and the impact such a disruption or decline may have on us, particularly during our peak season or in key market segments;

 

   

our ability to obtain financing for our operations, including the funding of our vehicle fleet via the asset-backed securities and lending market as outstanding indebtedness matures, as a result of the significant disruption in the credit market or other factors, and the financial condition of financial-guaranty firms that have insured a portion of our outstanding vehicle-backed debt;

 

   

an occurrence or threat of terrorism, pandemic disease, natural disasters or military conflict in the locations in which we operate;

 

   

our dependence on third-party distribution channels;

 

   

our ability to successfully implement our cost-savings and efficiency improvement initiatives and business strategy;

 

   

the impact of our derivative instruments, which can be affected by fluctuations in interest rates;

 

   

our ability to accurately estimate our future results;

 

   

a major disruption in our communication or centralized information networks;

 

   

our exposure to uninsured claims in excess of historic levels;

 

   

our failure or inability to comply with regulations or any changes in regulations, including with respect to personally identifiable information;

 

   

any impact on us from the actions of our licensees, dealers and independent contractors;

 

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substantial increases in the cost, or decreases in the supply, of fuel, vehicle parts, energy or other resources on which we depend to operate our business;

 

   

risks related to our indebtedness, including our substantial amount of debt and our ability to incur substantially more debt;

 

   

our ability to meet the financial and other covenants contained in our senior credit facilities, our outstanding unsecured senior notes and certain asset-backed funding arrangements;

 

   

the terms of agreements among us and the former real estate, hospitality and travel distribution businesses following the separation of those businesses from us during third quarter 2006, when we were known as Cendant Corporation (the “Separation”), particularly with respect to the allocation of assets and liabilities, including contingent liabilities and guarantees, commercial arrangements, the ability of each of the separated companies to perform its obligations, including its indemnification obligations, under these agreements, and the former real estate business’ right to control the process for resolving disputes related to contingent liabilities and assets;

 

   

the trading price of our stock, which could limit our access to capital;

 

   

our exposure to fluctuations in foreign exchange rates; and

 

   

other business, economic, competitive, governmental, regulatory, political or technological factors affecting our operations, pricing or services.

Other factors and assumptions not identified above, including those described under headings such as “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2008 Annual Report on Form 10-K and our Quarterly Report on Form 10-Q for the period ended March 31, 2009, were also involved in the derivation of these forward-looking statements, and the failure of such other assumptions to be realized, as well as other factors, may also cause actual results to differ materially from those projected. Most of these factors are difficult to predict accurately and are generally beyond our control.

You should consider the areas of risk described above, as well as those described under headings such as “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2008 Annual Report on Form 10-K and our Quarterly Report on Form 10-Q for the period ended March 31, 2009 and those that may be disclosed from time to time in filings and furnishings with the Securities and Exchange Commission, in connection with any forward-looking statements that may be made by us and our businesses generally. Except for our ongoing obligations to disclose material information under the federal securities laws, we undertake no obligation to release any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events unless required by law. For any forward-looking statements contained in any document, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

 

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

Avis Budget Group, Inc.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(In millions, except per share data)

(Unaudited)

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2009     2008    2009     2008

Revenues

         

Vehicle rental

   $ 995      $ 1,194    $ 1,913      $ 2,313

Other

     317        383      593        709
                             

Net revenues

     1,312        1,577      2,506        3,022
                             

Expenses

         

Operating

     648        811      1,288        1,588

Vehicle depreciation and lease charges, net

     393        441      747        823

Selling, general and administrative

     133        173      267        344

Vehicle interest, net

     71        74      140        159

Non-vehicle related depreciation and amortization

     24        20      45        39

Interest expense related to corporate debt, net

     37        32      77        61

Restructuring charges

     8        —        13        —  

Impairment

     —          —        1        —  

Separation costs

     —          1      —          1
                             

Total expenses

     1,314        1,552      2,578        3,015
                             

Income (loss) before income taxes

     (2     25      (72     7

Provision for (benefit from) income taxes

     4        10      (17     3
                             

Net income (loss)

   $ (6   $ 15    $ (55   $ 4
                             

Earnings (loss) per share, basic and diluted:

         

Net income (loss)

   $ (0.06   $ 0.15    $ (0.54   $ 0.04

See Notes to Consolidated Condensed Financial Statements (Unaudited).

 

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Avis Budget Group, Inc.

CONSOLIDATED CONDENSED BALANCE SHEETS

(In millions, except share data)

(Unaudited)

 

     June 30,
2009
    December 31,
2008
 

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 434      $ 258   

Receivables, net

     313        360   

Deferred income taxes

     73        75   

Other current assets

     385        380   
                

Total current assets

     1,205        1,073   

Property and equipment, net

     460        485   

Deferred income taxes

     570        503   

Goodwill

     75        75   

Other intangibles, net

     471        467   

Other non-current assets

     846        889   
                

Total assets exclusive of assets under vehicle programs

     3,627        3,492   
                

Assets under vehicle programs:

    

Program cash

     1        12   

Vehicles, net

     6,964        7,164   

Receivables from vehicle manufacturers and other

     100        533   

Investment in Avis Budget Rental Car Funding (AESOP) LLC—related party

     117        117   
                
     7,182        7,826   
                

Total assets

   $ 10,809      $ 11,318   
                

Liabilities and stockholders’ equity

    

Current liabilities:

    

Accounts payable and other current liabilities

   $ 867      $ 901   

Current portion of long-term debt

     11        10   
                

Total current liabilities

     878        911   

Long-term debt

     1,876        1,779   

Other non-current liabilities

     1,109        1,121   
                

Total liabilities exclusive of liabilities under vehicle programs

     3,863        3,811   
                

Liabilities under vehicle programs:

    

Debt

     1,006        892   

Debt due to Avis Budget Rental Car Funding (AESOP) LLC—related party

     4,346        5,142   

Deferred income taxes

     1,246        1,188   

Other

     225        192   
                
     6,823        7,414   
                

Commitments and contingencies (Note 13)

    

Stockholders’ equity:

    

Preferred stock, $.01 par value—authorized 10 million shares; none issued and outstanding

     —          —     

Common stock, $.01 par value—authorized 250 million shares; issued 136,900,385 and 136,812,802 shares

     1        1   

Additional paid-in capital

     9,090        9,197   

Accumulated deficit

     (2,699     (2,644

Accumulated other comprehensive income (loss)

     (117     (194

Treasury stock, at cost— 34,624,346 and 35,030,086 shares

     (6,152     (6,267
                

Total stockholders’ equity

     123        93   
                

Total liabilities and stockholders’ equity

   $ 10,809      $ 11,318   
                

See Notes to Consolidated Condensed Financial Statements (Unaudited).

 

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Avis Budget Group, Inc.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

 

     Six Months Ended
June 30,
 
     2009     2008  

Operating Activities

    

Net income (loss)

   $ (55 ) $    4   

Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities exclusive of vehicle programs:

    

Non-vehicle related depreciation and amortization

     45      39   

Net change in assets and liabilities, excluding the impact of acquisitions and dispositions:

    

Receivables

     16      (24

Income taxes and deferred income taxes

     (26   (3

Accounts payable and other current liabilities

     (36   23   

Other, net

     11      (19
              

Net cash (used in) provided by operating activities exclusive of vehicle programs

     (45   20   
              

Vehicle programs:

    

Vehicle depreciation

     733      820   
              
     733      820   
              

Net cash provided by operating activities

     688      840   
              

Investing Activities

    

Property and equipment additions

     (14   (47

Net assets acquired, net of cash acquired, and acquisition-related payments

     —        (71

Proceeds received on asset sales

     7      9   

Proceeds received from Realogy and Wyndham, net

     2      1   

Other, net

     (1   (9
              

Net cash used in investing activities exclusive of vehicle programs

     (6   (117
              

Vehicle programs:

    

Decrease in program cash

     11      1   

Investment in vehicles

     (3,949   (6,202

Proceeds received on disposition of vehicles

     3,966      4,027   

Distribution from (investment in) Avis Budget Rental Car Funding (AESOP) LLC—related party

     47      (343
              
     75      (2,517
              

Net cash provided by (used in) investing activities

     69      (2,634
              

 

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Avis Budget Group, Inc.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Continued)

(In millions)

(Unaudited)

 

     Six Months Ended
June 30,
 
     2009     2008  

Financing Activities

    

Proceeds from borrowings

     100        —     

Principal payments on borrowings

     (6     (5

Repurchases of common stock

     —          (33

Other, net

     (2     —     
                

Net cash provided by (used in) financing activities exclusive of vehicle programs

     92        (38
                

Vehicle programs:

    

Proceeds from borrowings

     4,261        5,799   

Principal payments on borrowings

     (5,097     (4,136

Net change in short-term borrowings

     144        226   

Other, net

     —          (8
                
     (692     1,881   
                

Net cash (used in) provided by financing activities

     (600     1,843   
                

Effect of changes in exchanges rates on cash and cash equivalents

     19        (1
                

Net increase in cash and cash equivalents

     176        48   

Cash and cash equivalents, beginning of period

     258        214   
                

Cash and cash equivalents, end of period

   $ 434      $ 262   
                

See Notes to Consolidated Condensed Financial Statements (Unaudited).

 

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Avis Budget Group, Inc.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)

(Unless otherwise noted, all amounts in tables are in millions, except per share amounts)

 

1. Basis of Presentation and Recently Issued Accounting Pronouncements

Basis of Presentation

Avis Budget Group, Inc. provides car and truck rentals and ancillary services to businesses and consumers in the United States and internationally. The accompanying unaudited Consolidated Condensed Financial Statements include the accounts and transactions of Avis Budget Group, Inc. and its subsidiaries (“Avis Budget”), as well as entities in which Avis Budget directly or indirectly has a controlling financial interest (collectively, the “Company”), and have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim financial reporting.

The Company operates in the following business segments:

 

   

Domestic Car Rental— provides car rentals and ancillary products and services in the United States.

 

   

International Car Rental— provides vehicle rentals and ancillary products and services primarily in Argentina, Australia, Canada, New Zealand, Puerto Rico and the U.S. Virgin Islands.

 

   

Truck Rental— provides truck rentals and related services to consumers and light commercial users in the United States.

In presenting the Consolidated Condensed Financial Statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), management makes estimates and assumptions that affect the amounts reported and related disclosures. Estimates, by their nature, are based on judgments and available information. Accordingly, actual results could differ from those estimates. In management’s opinion, the Consolidated Condensed Financial Statements contain all normal recurring adjustments necessary for a fair presentation of interim results reported. The results of operations reported for interim periods are not necessarily indicative of the results of operations for the entire year or any subsequent interim period. These financial statements should be read in conjunction with the Company’s 2008 Annual Report on Form 10-K filed on February 26, 2009.

Vehicle Programs. The Company presents separately the financial data of its vehicle programs. These programs are distinct from the Company’s other activities since the assets under vehicle programs are generally funded through the issuance of debt, asset-backed funding or other similar arrangements which are collateralized by such assets. The income generated by these assets is used, in part, to repay the principal and interest associated with the debt. Cash inflows and outflows relating to the generation or acquisition of such assets and the principal debt repayment or financing of such assets are classified as activities of the Company’s vehicle programs. The Company believes it is appropriate to segregate the financial data of its vehicle programs because, ultimately, the source of repayment of such debt is the realization of such assets.

Separation. In connection with the separation of Cendant Corporation (as the Company was formerly known) into four independent companies (the “Separation”), the Company completed the spin-offs of Realogy Corporation (“Realogy”) and Wyndham Worldwide Corporation (“Wyndham”) on July 31, 2006 and completed the sale of Travelport, Inc. (“Travelport”) on August 23, 2006.

Compliance with Debt Covenants, Business Risks and Management’s Plans

Compliance with Debt Covenants. Many of the Company’s debt instruments, including its senior credit facilities, contain financial and other covenants that impose significant requirements on the Company and limit its ability to engage in certain transactions or activities. The Company’s financial covenants require it to maintain minimum trailing twelve month EBITDA (as defined in the Company’s senior credit facilities) amounts on a quarterly basis. Commencing with the Company’s fiscal quarter ending June 30, 2010, the requirement to maintain a quarterly minimum trailing twelve month EBITDA under the financial covenants of its amended senior credit facilities will be replaced by the maximum leverage ratio that was in place prior to the December 2008 amendment to the senior credit facilities.

The U.S. economy appears to have been in recession throughout 2008 and the first half of 2009, and such conditions are likely to persist further into 2009. Historically, the Company’s results of operations have declined during periods of general economic weakness. The effects of the current recession contributed to the significant year-over-year decline in the results of the Company’s operations for the three and six months ended June 30, 2009 compared to the three and six

 

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months ended June 30, 2008. If economic conditions in the United States worsen, the Company’s results of operations could be materially and adversely impacted.

The Company relies upon financing for its operations, particularly asset-backed financing, through asset-backed securities and the lending market, for its vehicle fleet. In fourth quarter 2008, the Company amended and renewed its two asset-backed domestic rental car conduit facilities; such facilities now mature from September through December 2009. As a result of these amendments and renewals, the Company’s borrowing costs and collateral requirements for 2009 will increase compared to 2008. In addition, approximately $42 million and $1.1 billion of term asset-backed financings for the Company’s car rental operations will mature in 2009 and 2010, respectively. The existing availability under the asset-backed vehicle financing programs including the asset-backed conduit facilities should be sufficient to increase the Company’s fleet for the third quarter, which has historically been its strongest quarter due to the increased level of leisure travel and household moving activity. A default by, or insolvency of, any of the financial-guaranty firms that have insured a portion of the Company’s outstanding vehicle-backed debt could affect the timing for repayment of such debt. There has been significant disruption in the asset-backed financing market; therefore, there can be no assurance that the Company will be able to obtain refinancing for its operations at current levels, or at all, when its asset-backed rental car financings mature, and any new financing or refinancing of the Company’s existing financing could increase its borrowing costs, including an increase in its collateral requirements.

Dependence on Vehicle Manufacturers. The Company is dependent on vehicle manufacturers for its fleet purchases and related incentive payments, and a substantial portion of the rental cars that comprise its domestic car fleet (“program cars”) are subject to manufacturer repurchase or guaranteed depreciation programs. A default on any repurchase or guaranteed depreciation agreement or incentive payment could leave the Company with a substantial unpaid claim against the manufacturer particularly with respect to program cars that were either (i) resold at an amount less than the amount guaranteed under the applicable agreement, and therefore subject to a “true-up” payment obligation from the manufacturer or (ii) returned to the manufacturer but for which the Company was not paid. In addition, the Company could incur additional expenses if, following a manufacturer default, the prices at which it were able to dispose of program cars were less than the specified prices under the repurchase or guaranteed depreciation program and/or if the prices at which the Company were able to dispose of non-program cars were less than previously assumed.

Cost Reduction Initiatives. In light of the challenging conditions facing its business as well as for competitive reasons, the Company has taken numerous actions to reduce expenses, including implementing a five-point plan designed to reduce costs and improve efficiency. This plan includes (i) targeting significant reductions in operating costs, fleet costs, selling, general and administrative expenses, headcount, discretionary spending and other variable costs, (ii) reviewing and improving station, channel and customer profitability, (iii) reviewing and strengthening the Company’s pricing strategies and marketing, selling and affinity efforts, (iv) consolidation of both customer facing and non-customer facing activities and locations to reduce costs and provide synergies, and (v) consolidation of purchasing and procurement programs and practices. The Company closed and consolidated certain facilities and terminated employees in fourth quarter 2008 and the six months ended June 30, 2009 in conjunction with this initiative (see Note 2—Restructuring Charges). The Company also anticipates generating additional cost savings in 2009 through implementation of its Performance Excellence process improvement initiative, which began in late 2007. The Company has also identified a number of additional cost reduction measures that it could implement, if necessary, to offset additional costs.

Notwithstanding the December 2008 amendments to the Company’s senior credit facilities and its cost reduction initiatives, due to reduced demand for travel services, disruption in the credit markets, rising borrowing costs, the Company’s dependence on vehicle manufacturers, and other factors, there can be no assurance that the Company will be able to generate sufficient earnings to enable it to satisfy the minimum EBITDA requirement or other covenants included in its senior credit facilities, the asset-backed conduit facilities used to finance a portion of its domestic car rental operations or other borrowing agreements. The Company’s failure to comply with these covenants, if not waived, would cause a default under the senior credit facilities and could result in principal under the conduit facilities being required to be repaid from a portion of vehicle disposition proceeds and lease payments the Company makes to its vehicle program subsidiaries and adversely affect the Company’s liquidity position. If such a failure were to occur, there can be no assurance that the Company would be able to refinance or obtain a replacement for such facilities and in certain circumstances such failure could also give rise to a default under the instruments that govern its other indebtedness.

Adoption of New Accounting Standards during 2009

In April 2009, FASB issued FSP No. FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies” (“FSP FAS 141(R)-1”). The Company adopted FSP FAS 141(R)-1 on January 1, 2009, as required, and it had no impact on its financial statements at the time of adoption.

In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2 and FAS 124-2”). FSP FAS 115-2 and FAS 124-2 provides additional

 

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guidance on how to evaluate whether an impairment of a debt security is other than temporary and for recognition of any such impairment in the financial statements. The Company adopted FSP FAS 115-2 and FAS 124-2 on June 30, 2009, as required, and it had no impact on its financial statements.

In April 2009, FASB issued FSP No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP FAS 157-4”). FSP FAS 157-4 provides additional guidance for estimating fair value in accordance with FASB Statement No. 157, “Fair Value Measurements”, when the volume and level of activity for the asset or liability have significantly decreased. FSP FAS 157-4 applies prospectively for interim and annual reporting periods ending after June 15, 2009. The Company adopted FSP FAS 157-4 on June 30, 2009, as required, and it had no impact on its financial statements.

In April 2009, FASB issued FSP No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB 28-1”). FSP FAS 107-1 and APB 28-1 amends FASB Statement No. 107, “Disclosures about Fair Values of Financial Instruments”, and requires a publicly traded entity to include disclosures about the fair value of its financial instruments for its interim reporting periods as well as its annual financial statements. FSP FAS 107-1 and APB 28-1 is effective for interim periods ending after June 15, 2009. The Company adopted FSP FAS 107-1 and APB 28-1 on June 30, 2009, as required, and it did not have a significant impact on its financial statements; however, it did result in enhanced disclosure about the fair value of financial instruments in the Company’s interim financial statements.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS No. 165”). SFAS No. 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The Company adopted SFAS No. 165 on June 30, 2009, as required, and it did not have a significant impact on its financial statements.

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162” (“SFAS No. 168”). SFAS No. 168 replaces FASB Statement No. 162 to allow the FASB Accounting Standards Codification to become the single source of authoritative U.S. accounting and reporting standards, other than guidance issued by the SEC. The Company adopted SFAS No. 168 on July 1, 2009, as required, and it did not have a significant impact on its financial statements.

Recently Issued Accounting Pronouncements

In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140” (“SFAS No. 166”). SFAS No. 166: (i) removes the concept of a Qualifying Special Purpose Entity (“QSPE”) from FASB No. 140 and eliminates the exception from applying FIN 46(R) to variable interest entities that are QSPEs, (ii) amends the accounting for transfers of financial assets and (iii) increases the related disclosures about transfers of financial assets. SFAS No. 166 applies to fiscal years beginning on or after November 15, 2009 and transfers that occurred both before and after its effective date. The Company will adopt SFAS No. 166 on January 1, 2010, as required, and does not believe it will have a significant impact on its financial statements.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS No. 167”). SFAS No. 167 changes the method for determining the primary beneficiary of a variable interest entity (“VIE”) from a quantitative-based risks and rewards calculation to a qualitative approach to identify which entity has the power to direct the activities of a VIE that most significantly impact the entity’s economic performance, subject to certain exceptions. SFAS No. 167 applies prospectively for fiscal years beginning on or after November 15, 2009. The Company will adopt SFAS No. 167 on January 1, 2010, as required, and does not believe it will have a significant impact on its financial statements.

 

2. Restructuring Charges

During 2008, the Company implemented various strategic initiatives within the Company’s Domestic Car Rental, International Car Rental and Truck Rental segments as part of its five-point plan announced in November 2008. These initiatives are targeted principally at reducing costs, enhancing organizational efficiency and consolidating and rationalizing existing processes and facilities. During the six months ended June 30, 2009, as part of the five-point plan, the Company eliminated approximately 1,400 positions, resulting in the termination of approximately 970 employees within its Domestic Car Rental, International Car Rental and Truck Rental segments and the closure and consolidation of certain facilities, including data center, back-office administrative locations and local market vehicle rental locations. As a result of these actions, the Company incurred $8 million and $13 million in restructuring-related charges for the three and six months ended June 30, 2009, respectively.

 

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At June 30, 2009, the remaining liability relating to restructuring actions amounted to $9 million, primarily for lease obligation costs. As part of the five-point plan, the Company continues to implement steps to reduce costs and consolidate certain customer facing and non-customer facing activities and locations. The Company expects further restructuring costs of approximately $6 million to be incurred through December 31, 2009 and is continuing to look at other initiatives expected to reduce costs and may incur further restructuring costs.

The restructuring charges and corresponding utilization are recorded within the Company’s segments as follows:

 

     Domestic
Car Rental
    International
Car Rental
    Truck
Rental
    Total  

Balance as of January 1, 2009 (a)

   $ 12      $ 2      $ 2      $ 16   

2008 Restructuring plan charge (b)

     11        1        1        13   

2008 Restructuring cash payment/utilization

     (16     (2     (2     (20
                                

Balance at June 30, 2009

   $ 7      $ 1      $ 1      $ 9   
                                

The initial recognition of the restructuring charges and the corresponding utilization from inception are summarized by category as follows:

 

     Personnel
Related
    Facility
Related
    Asset
Impairments(c)
    Total  

Balance as of January 1, 2009 (a)

   $ 10      $ 5      $ 1      $ 16   

2008 Restructuring plan charge (b)

     9        3        1        13   

2008 Restructuring cash payment/utilization

     (17     (2     (1     (20
                                

Balance June 30, 2009

   $ 2      $ 6      $ 1      $ 9   
                                
 
  (a)

The January 1, 2009 balance includes the 2008 initial charge that primarily represented severance benefits resulting from the reductions in staff. As of June 30, 2009, the Company had terminated all of these employees.

  (b)

During the six months ended June 30, 2009, the Company incurred additional restructuring charges primarily for severance benefits resulting from the reductions in staff and the closure of certain facilities. The Company formally communicated the termination of employment to approximately 970 employees, representing a wide range of employee groups. As of June 30, 2009, the Company had terminated substantially all of these employees.

  (c)

At June 30, 2009, the remaining asset impairment liability relates primarily to shuttle buses held available for sale.

 

3. Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share (“EPS”):

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2009     2008    2009     2008

Net income (loss)

   $ (6   $ 15    $ (55   $ 4
                             

Basic and diluted weighted average shares outstanding (a)

     102.2        101.4      102.0        102.1
                             

Earnings per share basic and diluted:

         

Net income (loss)

   $ (0.06   $ 0.15    $ (0.54   $ 0.04
                             
 
  (a)

As the Company incurred a net loss for the three and six months ended June 30, 2009, all outstanding stock options and restricted stock units have an anti-dilutive effect and therefore are excluded from the computation of diluted weighted average shares outstanding. Accordingly, basic and diluted weighted average shares outstanding are equal for such periods. The dilutive effect of stock options and restricted stock units for the three and six months ended June 30, 2008 had no impact on the weighted average shares outstanding.

The following table summarizes the Company’s outstanding common stock equivalents that were anti-dilutive and therefore excluded from the computation of diluted EPS:

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2009    2008    2009    2008

Options (a)

   7.8    5.3    7.8    5.3
 
  (a)

For the three and six months ended June 30, 2009, all outstanding stock options were anti-dilutive, as the Company incurred a loss from continuing operations. The weighted average exercise price for anti-dilutive options for the three and six months ended June 30, 2008 was $24.97 and $24.96, respectively.

 

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4. Acquisitions

Assets acquired and liabilities assumed in business combinations were recorded on the Company’s Consolidated Condensed Balance Sheets as of the respective acquisition dates based upon their estimated fair values at such dates. The results of operations of businesses acquired by the Company have been included in the Company’s Consolidated Condensed Statements of Operations since their respective dates of acquisition. The excess of the purchase price over the estimated fair values of the underlying assets acquired, including trademark assets related to franchisees, and liabilities assumed is allocated to goodwill. In certain circumstances, the allocations of the excess purchase price are based upon preliminary estimates and assumptions. Accordingly, the allocations may be subject to revision when the Company receives final information, including appraisals and other analyses. Any revisions to the fair values, within the allocation period, will be recorded by the Company as further adjustments to the purchase price allocations.

During the six months ended June 30, 2009, the Company made no acquisitions.

During the six months ended June 30, 2008, the Company acquired the exclusive rights to certain vehicle rental franchise territories and related assets, which included $23 million of associated vehicles, for $70 million in cash, resulting in trademark intangible assets of $46 million. These acquisitions for 2008 relate primarily to the Company’s Domestic Car Rental segment and were not significant individually or in the aggregate to the Company’s results of operations, financial position or cash flows.

 

5. Intangible Assets

Intangible assets consisted of:

 

     As of June 30, 2009    As of December 31, 2008
     Gross
Carrying
Amount
   Accumulated
Amortization
   Net
Carrying
Amount
   Gross
Carrying
Amount
   Accumulated
Amortization
   Net
Carrying
Amount

Amortized Intangible Assets

                 

Franchise agreements

   $ 73    $ 21    $ 52    $ 73    $ 20    $ 53

Customer lists

     19      8      11      19      8      11

Other

     2      1      1      2      1      1
                                         
   $ 94    $ 30    $ 64    $ 94    $ 29    $ 65
                                         

Unamortized Intangible Assets

                 

Goodwill

   $ 75          $ 75      
                         

Trademarks (a)

   $ 407          $ 402      
                         
 
  (a)

The increase in trademarks is primarily due to fluctuations in foreign currency.

Amortization expense relating to all intangible assets was approximately $1 million during the second quarter of 2009 and 2008. For the six months ended June 30, 2009 and 2008, amortization expense was approximately $2 million.

Based on the Company’s amortizable intangible assets at June 30, 2009, the Company expects amortization expense of approximately $2 million for the remainder of 2009 and approximately $3 million for each of the five fiscal years thereafter.

 

6. Financial Instruments

Debt Instruments

The fair value of the Company’s debt instruments are generally determined by reference to market values resulting from trading on a national securities exchange or in an over-the-counter market. In some cases where quoted market prices are not available, prices are derived by considering the yield of the benchmark security that was issued to initially price the instruments and adjusting this rate by the estimated credit spread that market participants would demand for the instruments as of the measurement date. In situations where long-term borrowings are part of a conduit facility backed by short-term floating rate debt, the Company has determined that its carrying value approximates the fair value of this debt. The carrying amounts of cash and cash equivalents, accounts receivable, program cash and accounts payable and accrued liabilities approximate fair value due to the short-term maturities of these assets and liabilities.

 

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The carrying amounts and estimated fair values of debt instruments are as follows:

 

     June 30, 2009
     Carrying
Amount
   Estimated
Fair
Value

Corporate debt

     

Current portion of long-term debt

   $ 11    $ 11

Long-term debt

     1,876      1,367

Debt under vehicle programs

     

Vehicle-backed debt

     1,004      988

Vehicle-backed debt due to Avis Budget Rental Car Funding

     4,346      4,041

Derivative instruments and hedging activities

The Company uses foreign exchange forward contracts to manage its exposure to changes in foreign currency exchange rates associated with its foreign currency denominated receivables and forecasted royalties, forecasted earnings of foreign subsidiaries and forecasted foreign currency denominated acquisitions. The Company primarily hedges its foreign currency exposure to the Australian dollar, British pound, Canadian dollar and the New Zealand dollar. The majority of forward contracts do not qualify for hedge accounting treatment under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”). The fluctuations in the fair value of these forward contracts do, however, largely offset the impact of changes in the value of the underlying risk they economically hedge. Forward contracts used to hedge forecasted third party receipts and disbursements up to twelve months are designated and do qualify as cash flow hedges. The amount of gains or losses reclassified from other comprehensive income to earnings resulting from ineffectiveness during the three and six months ended June 30, 2009 and 2008 was not material.

The Company uses various hedging strategies including interest rate swaps and interest rate caps to manage its exposure to changes in interest rates. The Company uses interest rate swaps, designated as cash flow hedges, to manage the risk related to its floating rate corporate debt. In connection with such cash flow hedges, the Company records net unrealized losses to other comprehensive income. To manage the risk associated with its floating rate vehicle-backed debt, the Company uses both interest rate swaps and caps. These derivatives include derivatives not designated as a hedge for accounting purposes and derivatives designated as cash flow hedges. In connection with such cash flow hedges, the Company records the effective portion of the change in fair value in other comprehensive income, net of tax. The Company records the change in fair value gains or losses related to derivatives not designated as a hedge in its consolidated results of operations.

The Company periodically enters into derivative commodity contracts to manage its exposure to changes in the price of unleaded gasoline. These instruments are not designated as hedges for accounting purposes and the changes in fair value are recorded in the Company’s consolidated results of operations.

Certain of the Company’s derivative instruments contain collateral support provisions that require the Company to post cash collateral to the extent that these derivatives are in a liability position. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a liability position on June 30, 2009 was approximately $5 million, for which the Company has posted cash collateral of $9 million in the normal course of business.

As of June 30, 2009, the Company held derivative instruments with absolute notional values as follows: interest rate caps of $6.4 billion, interest rate swaps of $1.2 billion, foreign exchange forward contracts of $46 million and commodity contracts for the purchase of 6 million gallons of unleaded gasoline.

The Company used significant observable inputs (Level 2 inputs) to determine the fair value of its derivative assets and liabilities. Derivatives entered into by the Company are typically executed over-the-counter and are valued using internal valuation techniques, as no quoted market prices exist for such instruments. The valuation technique and inputs depend on the type of derivative and the nature of the underlying exposure. The principal techniques used to value these instruments are discounted cash flows and Black-Scholes option valuation models. These models take into account a variety of factors including, where applicable, maturity, commodity prices, interest rate yield curves, credit curves of the Company and counterparties, counterparty creditworthiness and forward and spot currency exchange rates. These factors are applied on a consistent basis and are based upon observable inputs where available.

 

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Fair values of derivative instruments as of June 30, 2009 were as follows:

 

    

Derivative Assets

  

Derivative Liabilities

    

Balance Sheet

Category

   Fair
Value
  

Balance Sheet

Category

   Fair
Value

Derivatives designated as hedging instruments (a)

           

Interest rate swaps

  

Other non-current

assets

   $ 1   

Other non-current

liabilities

   $ 40
                   

Total

      $ 1       $ 40
                   

Derivatives not designated as hedging instruments (a)

           

Foreign exchange forward contracts

      $ —      Other current liabilities    $ 5

Interest rate contracts

        —     

Liabilities under vehicle

programs

     2

Commodity contracts

        —      Other current liabilities      1
                   

Total

      $ —         $ 8
                   
 
  (a)

Amounts in this table exclude derivatives issued by Avis Budget Rental Car Funding (AESOP) LLC (“Avis Budget Rental Car Funding”), as it is not consolidated by the Company; however, certain amounts related to the derivatives held by Avis Budget Rental Car Funding are included within other comprehensive income, as discussed in Note 14—Stockholders’ Equity.

The effect of derivative instruments on the Statement of Operations for the three months ended June 30, 2009, was (i) a loss of $3 million recognized as a component of operating expenses related to foreign exchange forward contracts, (ii) a $3 million gain recognized as a component of operating expenses related to our commodity contracts and (iii) an insignificant loss recognized as a component of interest expense related to interest rate swaps not designated as hedging instruments. The loss on the interest rate swaps had no impact on net interest expense as it was offset by reduced interest expense on the underlying floating rate debt which it hedges.

The effect of derivative instruments on the Statement of Operations for the six months ended June 30, 2009, was (i) a loss of $4 million recognized as a component of operating expenses related to foreign exchange forward contracts, (ii) a gain of $3 million recognized as a component of operating expenses related to our commodity contracts and (iii) a loss of $2 million recognized as a component of interest expense related to interest rate swaps not designated as hedging instruments. The loss on the interest rate swaps had no impact on net interest expense as it was offset by reduced interest expense on the underlying floating rate debt which it hedges.

The Company also recognized a gain of $17 million and $24 million, as a component of other comprehensive income, net of tax, for the three and six months ended June 30, 2009, respectively, which relates to interest rate swaps designated as cash flow hedges.

 

7. Vehicle Rental Activities

The components of the Company’s vehicles, net within assets under vehicle programs are as follows:

 

     As of
    June 30,    
2009
    As of
December 31,
2008
 

Rental vehicles

   $ 8,060      $ 7,502   

Less: Accumulated depreciation

     (1,208     (1,219
                
     6,852        6,283   

Vehicles held for sale

     112        881   
                

Vehicles, net

   $ 6,964      $ 7,164   
                

 

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The components of vehicle depreciation and lease charges, net are summarized below:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2009     2008     2009     2008  

Depreciation expense

   $ 387      $ 441      $ 733      $ 820   

Lease charges

     8        8        15        16   

Gain on sales of vehicles, net and cost of vehicle disposition

     (2     (8     (1     (13
                                

Vehicle depreciation and lease charges, net

   $ 393      $ 441      $ 747      $ 823   
                                

During the three months ended June 30, 2009 and 2008, vehicle interest, net on the accompanying Consolidated Condensed Statements of Operations excludes $39 million and $33 million, respectively, and for the six months ended June 30, 2009 and 2008, excludes $78 million and $66 million, respectively, of interest expense related to the fixed and floating rate borrowings of the Company’s Avis Budget Car Rental, LLC (“Avis Budget Car Rental”) subsidiary. Such interest is recorded within interest expense related to corporate debt, net on the accompanying Consolidated Condensed Statements of Operations.

 

8. Income Taxes

The Company’s effective tax rate from continuing operations for the six months ended June 30, 2009 is a benefit of 23.6%. Such rate differs from the Federal statutory rate of 35.0% primarily due to differences in the amount of stock-based compensation recorded for book and tax purposes. In addition, the Company established a valuation allowance related to certain state deferred tax assets.

The Company’s effective tax rate from continuing operations for the six months ended June 30, 2008 is a provision of 42.9%. Such rate differs from the Federal statutory rate of 35.0% primarily due to state taxes and differences in the amount of stock-based compensation recorded for book and tax purposes.

 

9. Equity Investment

At June 30, 2009, the Company’s equity-method investee and approximate ownership interest, based on outstanding shares, are as follows:

 

Company

   Percentage
Ownership
 

Carey Holdings, Inc.

   47.9

The Company’s investment in Carey Holdings, Inc. (“Carey”) is recorded within other non-current assets on the Consolidated Condensed Balance Sheets and the Company’s share of Carey’s operating results is reported within operating expenses on the Consolidated Condensed Statements of Operations. At June 30, 2009, the Company’s investment totaled $37 million, including a net loss of $6 million, representing the Company’s share of Carey’s operating results for the six months ended June 30, 2009. At December 31, 2008, the Company’s investment totaled $43 million.

 

10. Other Non-Current Liabilities

Other non-current liabilities consisted of:

 

     As of
    June 30,    
2009
   As of
December 31,
2008

Long-term income taxes payable

   $ 476    $ 480

Public liability and property damage insurance liability

     211      219

Accrued interest – tax contingencies

     121      111

Pension liability

     72      69

Other

     229      242
             
   $ 1,109    $ 1,121
             

 

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11. Long-term Debt and Borrowing Arrangements

Long-term debt consisted of:

 

    

Maturity

Date

   As of
June 30,
2009
   As of
December 31,
2008

Floating rate term loan (a)

   April 2012    $ 783    $ 787

Floating rate notes

   May 2014      250      250

7 5/8% notes

   May 2014      375      375

7 3/4% notes

   May 2016      375      375

Other

        104      2
                

Total long-term debt

        1,887      1,789

Less: Current portion

        11      10
                

Long-term debt

      $ 1,876    $ 1,779
                
 
  (a)

The floating rate term loan and our revolving credit facility are secured by pledges of all of the capital stock of all of the Company’s direct or indirect domestic subsidiaries and up to 66% of the capital stock of each direct foreign subsidiary, subject to certain exceptions, and liens on substantially all of the Company’s intellectual property and certain other real and personal property.

In February 2007, the Company agreed to guarantee (the “Guarantee”) the payment of principal, premium, if any, and interest on the $1.0 billion aggregate principal amount of senior notes issued by Avis Budget Car Rental in April 2006 (the “Notes”). The Notes consist of Avis Budget Car Rental’s 7 5/8% Senior Notes due 2014, 7 3/4% Senior Notes due 2016 and Floating Rate Senior Notes due 2014. In consideration for providing the Guarantee, the Company received $14 million, before fees and expenses, from certain institutional investors. The $14 million consideration is being treated as deferred income and being amortized over the life of the debt. As of June 30, 2009, the deferred consideration remaining to be amortized amounted to $10 million.

Committed Credit Facilities and Available Funding Arrangements

At June 30, 2009, the committed credit facilities available to the Company and/or its subsidiaries at the corporate or Avis Budget Car Rental level were as follows:

 

     Total
Capacity
   Outstanding
Borrowings
   Letters of
Credit
Issued
   Available
Capacity

Revolving credit facility (a)

   $ 1,150    $ 100    $ 735    $ 315

Letter of credit facility (b)

     228      —        228      —  
 
  (a)

This secured revolving credit facility was entered into by Avis Budget Car Rental in April 2006 and amended in December 2008, has a five year term and as of June 30, 2009 bears interest at one month LIBOR plus 400 basis points. The senior credit facilities, which encompass the floating rate term loan and the revolving credit facility, are secured by pledges of all of the capital stock of all of the Company’s direct or indirect domestic subsidiaries and up to 66% of the capital stock of each direct foreign subsidiary, subject to certain exceptions, and liens on substantially all of the Company’s intellectual property and certain other real and personal property. There is $315 million available capacity for the issuance of letters of credit, while the remaining borrowing capacity is $175 million as total outstanding borrowings are limited to $275 million under this secured revolving credit facility.

  (b)

Final maturity date is March 2010.

The Company’s debt agreements contain restrictive covenants, including restrictions on dividends paid to the Company by certain of its subsidiaries, the incurrence of indebtedness by the Company and certain of its subsidiaries, acquisitions, mergers, liquidations, and sale and leaseback transactions. The senior credit facilities also contain a minimum EBITDA requirement (as defined in the senior credit facilities). As of June 30, 2009, the Company was in compliance with the financial covenants in its senior credit facilities.

 

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12. Debt Under Vehicle Programs and Borrowing Arrangements

Debt under vehicle programs (including related party debt due to Avis Budget Rental Car Funding (AESOP) LLC (“Avis Budget Rental Car Funding”)) consisted of:

 

     As of
June 30,
2009
   As of
December 31,
2008

Debt due to Avis Budget Rental Car Funding (a)

   $ 4,346    $ 5,142

Budget Truck financing:

     

Budget Truck Funding program

     281      316

Capital leases

     109      126

Other

     616      450
             
   $ 5,352    $ 6,034
             
 
  (a)

The decrease reflects reduced borrowings within Domestic Car Rental operations principally due to a decrease in the size of the Company’s car rental fleet.

The following table provides the contractual maturities of the Company’s debt under vehicle programs (including related party debt due to Avis Budget Rental Car Funding) at June 30, 2009:

 

     Vehicle-
Backed
Debt
   Capital
Leases
   Total

Within 1 year

   $ 2,632    $ 91    $ 2,723

Between 1 and 2 years

     1,240      18      1,258

Between 2 and 3 years

     892      —        892

Between 3 and 4 years

     258      —        258

Between 4 and 5 years

     —        —        —  

Thereafter

     221      —        221
                    
   $ 5,243    $ 109    $ 5,352
                    

As of June 30, 2009, available funding under the Company’s vehicle programs (including related party debt due to Avis Budget Rental Car Funding) consisted of:

 

     Total
Capacity (a)
   Outstanding
Borrowings
   Available
Capacity

Debt due to Avis Budget Rental Car Funding (b)

   $ 5,621    $ 4,346    $ 1,275

Budget Truck financing:

        

Budget Truck Funding program (c)

     281      281      —  

Capital leases (d)

     109      109      —  

Other (e)

     773      616      157
                    
   $ 6,784    $ 5,352    $ 1,432
                    
 
  (a)

Capacity is subject to maintaining sufficient assets to collateralize debt.

  (b)

The outstanding debt is collateralized by approximately $5.8 billion of underlying vehicles and related assets.

  (c)

The outstanding debt is collateralized by approximately $314 million of underlying vehicles and related assets.

  (d)

These capital leases are collateralized by approximately $126 million of underlying vehicles.

  (e)

The outstanding debt is collateralized by approximately $926 million of underlying vehicles and related assets.

Debt agreements under the Company’s vehicle-backed funding programs contain restrictive covenants, including restrictions on dividends paid to the Company by certain of its subsidiaries and restrictions on indebtedness, mergers, liens, liquidations, and sale and leaseback transactions. As of June 30, 2009, the Company was not aware of any instances of non-compliance with such covenants.

 

13. Commitments and Contingencies

Contingencies

The Internal Revenue Service (“IRS”) has commenced an audit of the Company’s taxable years 2003 through 2006, the year of the Separation. The Company has recorded a $476 million liability in respect of such taxable years, reflecting the Company’s current best estimates of the probable outcome with respect to certain tax positions. The Company believes that its accruals for tax liabilities, including the liabilities for which it is entitled to indemnification from Realogy and

 

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Wyndham, are adequate for all remaining open years based on its assessment of many factors, including past experience and interpretations of tax law applied to the facts of each matter.

The rules governing taxation are complex and subject to varying interpretations. Therefore, the Company’s tax accruals reflect a series of complex judgments about future events and rely heavily on estimates and assumptions. Although the Company believes the estimates and assumptions supporting its tax accruals are reasonable, the potential result of an audit or litigation related to tax could include a range of outcomes, and could result in tax liabilities for the Company that are materially different from those reflected in the Consolidated Condensed Financial Statements. Notwithstanding this, as discussed above, the Company is entitled to indemnification by Realogy and Wyndham for substantially all of its recorded liabilities for open tax matters and therefore does not expect such resolution to have a significant impact on its earnings, financial position or cash flows. As further discussed below, Realogy posted a letter of credit in April 2007 for the benefit of the Company related to its indemnification obligations to the Company.

In May 2009, President Obama’s administration proposed significant changes to the U.S. international tax laws. The Company is currently unable to predict whether any such new tax legislation could have a significant adverse impact to the Company’s effective tax rate, if and when it becomes effective.

The Company is involved in litigation alleging breach of contract and fraud arising out of the acquisition of a business in 1998 which occurred just prior to Cendant’s announcement of the discovery of accounting irregularities at its former CUC business units. The Company has accrued liabilities of approximately $105 million regarding such claims. Pursuant to the Separation Agreement (described below), Realogy and Wyndham have assumed all liabilities related to this litigation, as discussed below, and therefore a corresponding receivable has been established for such amount. Changes in liabilities related to such legal matters for which the Company is entitled to indemnification, and corresponding changes in the Company’s indemnification assets, are shown net on the Consolidated Condensed Statements of Operations. A judgment has been entered in favor of the plaintiffs with respect to this claim and as a result of payments made by Realogy and Wyndham in July 2009, the judgment was satisfied, subject to plaintiffs’ right to petition the court for reasonable attorneys’ fees. There was no net impact to the Company’s financial statements or cash balances as a result of the satisfaction of such payments.

In connection with the spin-offs of Realogy and Wyndham, the Company entered into the Separation Agreement, pursuant to which Realogy assumed 62.5% and Wyndham assumed 37.5% of certain contingent and other corporate liabilities of the Company or its subsidiaries, which are not primarily related to any of the respective businesses of Realogy, Wyndham, Travelport and/or the Company’s vehicle rental operations, in each case incurred or allegedly incurred on or prior to the separation of Travelport from the Company (“Assumed Liabilities”). Realogy is entitled to receive 62.5% and Wyndham is entitled to receive 37.5% of the proceeds from certain contingent corporate assets of the Company, which are not primarily related to any of the respective businesses of Realogy, Wyndham, Travelport and/or the Company’s vehicle rental operations, arising or accrued on or prior to the separation of Travelport from the Company (“Assumed Assets”). Additionally, if Realogy or Wyndham were to default on its payment of costs or expenses to the Company related to any Assumed Liabilities, the Company would be responsible for 50% of the defaulting party’s obligation. In such event, the Company would be allowed to use the defaulting party’s share of the proceeds of any Assumed Assets as a right of offset. Realogy and Wyndham have also agreed to guarantee each other’s as well as the Company’s obligation under each entity’s deferred compensation plans for amounts deferred in respect of 2005 and earlier years.

The Company does not believe that the impact of any unresolved proceedings constituting Assumed Liabilities related to the litigation described above or other pre-Separation activities should result in a material liability to the Company in relation to its consolidated financial position or liquidity, as Realogy and Wyndham each have agreed to assume responsibility for these liabilities, which include liabilities associated with litigation which was retained by the Company in connection with the sale of its former Marketing Services division.

In April 2007, Realogy was acquired by an affiliate of Apollo Management VI, L.P. The acquisition does not affect Realogy’s obligation to satisfy 62.5% of the contingent and other corporate liabilities of the Company or its subsidiaries pursuant to the terms of the Separation Agreement. As a result of the acquisition, Realogy has greater debt obligations and its ability to satisfy its portion of the contingent and other corporate liabilities may be adversely impacted. In accordance with the terms of the Separation Agreement, Realogy posted a letter of credit in April 2007 for the benefit of the Company to cover its estimated share of the Assumed Liabilities discussed above, subject to adjustment, although there can be no assurance that such letter of credit will be sufficient or effective to cover Realogy’s actual obligations if and when they arise.

In addition to the matters discussed above, the Company is also involved in claims, legal proceedings and governmental inquiries related to its vehicle rental operations, including contract disputes, business practices issues, insurance claims, intellectual property claims, environmental issues and other commercial, employment and tax matters, and breach of

 

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contract claims by licensees. The Company believes that it has adequately accrued for such matters as appropriate or, for matters not requiring accrual, believes that they will not have a material adverse impact on its results of operations, financial position or cash flows based on information currently available. However, litigation is inherently unpredictable and, although the Company believes that its accruals are adequate and/or that it has valid defenses in these matters, unfavorable resolutions could occur, which could adversely impact the Company’s results of operations or cash flows in a particular reporting period.

Commitments to Purchase Vehicles

The Company maintains agreements with vehicle manufacturers which require the Company to purchase approximately $1.0 billion of vehicles from manufacturers over the next twelve months. The majority of these commitments are subject to the vehicle manufacturers’ satisfying their obligations under the repurchase and guaranteed depreciation agreements. The Company’s featured suppliers for the Avis and Budget brands are General Motors Company and Ford Motor Company, respectively, although the Company purchases vehicles produced by numerous other manufacturers. The purchase of such vehicles is financed primarily through the issuance of vehicle-backed debt in addition to cash received upon the sale of vehicles in the used car market and under repurchase or guaranteed depreciation programs.

Concentrations

Concentrations of credit risk at June 30, 2009 include (i) risks related to the Company’s repurchase or guaranteed depreciation agreements with domestic and foreign car manufacturers, including General Motors Company, Ford Motor Company, Chrysler Group LLC and Hyundai Motor America, primarily with respect to receivables for program cars that have been returned to the car manufacturers and (ii) risks related to receivables from Realogy and Wyndham of $563 million and $343 million, respectively, related to certain contingent, income tax and other corporate liabilities assumed by Realogy and Wyndham in connection with the Separation.

Other Guarantees

The Company has provided certain guarantees to, or for the benefit of, subsidiaries of Realogy, Wyndham and Travelport which, as previously discussed, were disposed of during third quarter 2006. These guarantees relate to various real estate operating leases. The maximum potential amount of future payments that the Company may be required to make under the guarantees relating to the various real estate operating leases is estimated to be approximately $269 million. At June 30, 2009, the liability recorded by the Company in connection with these guarantees was approximately $5 million. To the extent that the Company would be required to perform under any of these guarantees, the Company is entitled to indemnification by Realogy, Wyndham and Travelport. The Company monitors the credit ratings and other relevant information for Realogy, Wyndham and Travelport’s parent company in order to assess the status of the payment/performance risk of these guarantees.

 

14. Stockholders’ Equity

Dividends

For the six months ended June 30, 2009 and 2008, the Company did not pay cash dividends.

Share Repurchases

During the six months ended June 30, 2009, the Company did not repurchase any of its common stock. The Company used approximately $33 million of available cash to repurchase approximately 2.9 million shares of Avis Budget Group, Inc. common stock under its common stock repurchase program during the six months ended June 30, 2008.

 

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Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive income (loss) were as follows:

 

     Currency
Translation
Adjustments
   Unrealized
Gains (Losses)
on Cash Flow
Hedges
    Minimum
Pension
Liability
Adjustment
    Accumulated
Other
Comprehensive
Income (Loss)
 

Balance, January 1, 2009

   $ 7    $ (149   $ (52   $ (194

Current period change

     53      24        —          77   
                               

Balance, June 30, 2009

   $ 60    $ (125   $ (52   $ (117
                               

 

All components of accumulated other comprehensive income (loss) are net of tax except currency translation adjustments, which exclude income taxes related to indefinite investments in foreign subsidiaries.

   

Total Comprehensive Income

Comprehensive income consists of net income (loss) and other gains and losses affecting stockholders’ equity that, under U.S. GAAP, are excluded from net income.

The components of other comprehensive income (loss) were as follows:

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
 
     2009     2008    2009     2008  

Net income (loss)

   $ (6   $ 15    $ (55   $ 4   

Other comprehensive income (loss):

         

Currency translation adjustments

     62        14      53        25   

Gains (losses) on cash flow hedges, net of tax

     17        68      24        (2
                               
     79        82      77        23   
                               

Total comprehensive income

   $ 73      $ 97    $ 22      $ 27   
                               

During the six months ended June 30, 2009 and 2008, the Company recorded unrealized gains on cash flow hedges of $39 million ($24 million, net of tax) and unrealized losses on cash flow hedges of $2 million, net of tax, respectively, in accumulated other comprehensive income (loss), which primarily related to the derivatives used to manage the interest-rate risk associated with the Company’s vehicle-backed debt and the Company’s floating rate debt. Such amount in the six months ended June 30, 2009 and 2008, included $48 million of unrealized gains and $5 million of unrealized losses, excluding tax, respectively, on cash flow hedges related to the Company’s vehicle-backed debt and is offset by a corresponding change in the Company’s Investment in Avis Budget Rental Car Funding on the Consolidated Condensed Balance Sheets.

 

15. Stock-Based Compensation

The Company records compensation expense for all outstanding employee stock awards based on the provisions of SFAS No. 123(R). The Company recorded stock-based compensation expense of $4 million and $2 million ($2 million and $1 million, after tax) during second quarter 2009 and 2008, respectively, and $7 million and $6 million ($4 million and $4 million, after tax) during the six months ended June 30, 2009 and 2008, respectively, related to employee stock awards that were granted by the Company.

The Company applies the direct method and tax law ordering approach to calculate the tax effects of stock-based compensation. In jurisdictions with net operating loss carryforwards, tax deductions for 2009 and 2008 exercises of stock-based awards did not generate a cash benefit. Approximately $30 million of tax benefits will be recorded in additional paid-in capital when realized in these jurisdictions.

In first quarter 2009, the Company granted approximately 4 million stock options to its employees under the Company’s 2007 Equity and Incentive Plan. The grant consisted of approximately 2.7 million time-vesting stock options, approximately 0.9 million performance-vesting stock options and approximately 0.4 million market-vesting stock options. The performance-vesting and market-vesting stock options also contain a time-vesting component.

The time-based awards cliff vest on the two-year anniversary of the date of grant while the performance-based awards vest on the one-year anniversary of the date of grant provided certain minimum EBITDA levels are attained. The market-based

 

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awards were granted to the Company’s CEO and President and vest on the two-year anniversary of the date of grant if, at any point during that two-year period, the average closing stock price of the Company’s common stock equals or exceeds $5 for a 20 consecutive trading day period. The option exercise price was set at the closing price of the Company’s common stock on the date of the grant and the options expire 10 years from the date of the grant. The performance-vesting and market-vesting stock options expire immediately if vesting criteria are not met by the deadline of such criteria.

The Company used the Black-Scholes option pricing model to calculate the fair value of the time-vesting and performance-vesting stock option awards granted in first quarter 2009. The Company determined the fair value of its market-vesting awards using a Monte Carlo simulation model with assumptions including, but not limited to, the options’ expected life and the price volatility of the underlying stock. Based on facts and circumstances at the time of the grant, the Company used a blended volatility rate that combines market-based measures of implied volatility with historical volatility as the most appropriate indicator of the Company’s expected volatility. The Company considered several factors in estimating the life of the options granted, including the historical option exercise behavior of employees and the option vesting periods. The risk-free interest rate is derived from the U.S. Treasury yield curve in effect at the time of grant and, since the Company does not currently pay or plan to pay a dividend on its common stock, the expected dividend yield was zero. Based on these assumptions, the fair value of each of the Company’s time-vesting, performance-vesting and market-vesting stock options issued in first quarter 2009 was estimated to be approximately $0.64, $0.59 and $0.45, respectively.

The following table presents the assumptions used to estimate the fair value of stock options at the time of the grant using the Black-Scholes and Monte Carlo simulation option pricing models:

 

     Three Months Ended
March 31, 2009
 

Expected volatility of stock price

   130

Risk-free interest rate

   1.22% - 1.46

Expected life of options

   3-4 years   

Dividend yield

   0.0

The activity related to the Company’s restricted stock units (“RSUs”) and stock option plans consisted of (in thousands of shares):

 

     Six Months Ended June 30, 2009
     RSUs    Options
     Number
of RSUs
    Weighted
Average
Grant Price
   Number
of Options
    Weighted
Average
Exercise
Price

Balance at January 1, 2009

   2,673      $ 20.18    $ 5,003      $ 24.90

Granted at fair market value

   —          —        4,012        0.79

Vested/exercised

   (602     21.98      —          —  

Cancelled

   (132     22.21      (1,217     25.73
                   

Balance at June 30, 2009 (a)

   1,939        19.49      7,798        12.36
                   
 
  (a)

As of June 30, 2009, the Company’s outstanding RSUs and stock options had an aggregate intrinsic value of $11 million and $19 million, respectively. Aggregate unrecognized compensation expense related to RSUs and unvested stock options amounted to $33 million and $2 million, respectively, as of June 30, 2009. The balance of RSUs at June 30, 2009 consisted of 1,034,000 related to time-based awards and 905,000 related to performance-based awards.

The table below summarizes information regarding the Company’s outstanding and exercisable stock options as of June 30, 2009 (in thousands of shares):

 

Range of

Exercise

Prices

   Weighted Average
Contractual Life (years)
   Number of
Options

Less than $10.00

   9.6    4,011

$10.01 to $15.00

   1.4    777

$15.01 to $20.00

   2.0    355

$20.01 to $25.00

   0.9    205

$25.01 to $30.00

   1.9    1,373

$30.01 and above

   0.5    1,077
       
   5.7    7,798
       

 

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As of June 30, 2009, the Company also had approximately 0.5 million outstanding stock appreciation rights with a weighted average exercise price of $24.40, a weighted average remaining contractual life of 4.1 years and unrecognized compensation expense of $1 million.

 

16. Segment Information

The reportable segments presented below represent the Company’s operating segments for which separate financial information is available and is utilized on a regular basis by its chief operating decision maker to assess performance and to allocate resources. In identifying its reportable segments, the Company also considers the nature of services provided by its operating segments. Management evaluates the operating results of each of its reportable segments based upon revenue and “EBITDA,” which is defined as income from continuing operations before non-vehicle related depreciation and amortization, any impairment of goodwill, other intangible asset or equity investment, non-vehicle related interest and income taxes. The Company’s presentation of EBITDA may not be comparable to similarly-titled measures used by other companies.

 

     Three Months Ended June 30,  
     2009     2008  
     Revenues    EBITDA     Revenues    EBITDA  

Domestic Car Rental

   $ 1,031    $ 37      $ 1,241    $ 46   

International Car Rental

     183      18        230      25   

Truck Rental

     97      9        105      8   

Corporate and Other (a)

     1      (5     1      (2
                              

Total Company

   $ 1,312      59      $ 1,577      77   
                  

Less: Non-vehicle related depreciation and amortization

        24           20   

Interest expense related to corporate debt, net

        37           32   
                      

Income (loss) before income taxes

      $ (2      $ 25   
                      

 

     Six Months Ended June 30,  
     2009     2008  
     Revenues    EBITDA     Revenues    EBITDA  

Domestic Car Rental

   $ 1,991    $ 26      $ 2,377    $ 61   

International Car Rental

     347      37        460      55   

Truck Rental

     167      (1     183      (2

Corporate and Other (a)

     1      (11     2      (7
                              

Total Company

   $ 2,506      51      $ 3,022      107   
                  

Less: Non-vehicle related depreciation and amortization

        45           39   

Interest expense related to corporate debt, net

        77           61   

Impairment

        1           —     
                      

Income (loss) before income taxes

      $ (72      $ 7   
                      
 
  (a)

Includes unallocated corporate overhead and the elimination of transactions between segments.

Since December 31, 2008, there have been no significant changes in segment assets with the exception of the Company’s Domestic Car Rental segment, for which assets under vehicle programs amounted to approximately $5.8 billion and approximately $6.5 billion at June 30, 2009 and December 31, 2008, respectively.

 

17. Guarantor and Non-Guarantor Consolidating Condensed Financial Statements

The following consolidating financial information presents Consolidating Condensed Statements of Operations for the three months and six months ended June 30, 2009 and 2008, Consolidating Condensed Balance Sheets as of June 30, 2009 and December 31, 2008, and Consolidating Condensed Statements of Cash Flows for the six months ended June 30, 2009 and 2008 for: (i) Avis Budget Group, Inc. (the “Parent”); (ii) Avis Budget Car Rental and Avis Budget Finance, Inc. (the “Subsidiary Issuers”); (iii) the guarantor subsidiaries; (iv) the non-guarantor subsidiaries; (v) elimination entries necessary to consolidate the Parent with the Subsidiary Issuers, the guarantor and non-guarantor subsidiaries; and (vi) the Company on a consolidated basis. The Subsidiary Issuers and the guarantor and non-guarantor subsidiaries are 100% owned by the Parent, either directly or indirectly. All guarantees are full and unconditional and joint and several. This financial information is being presented in relation to the Company’s Guarantee of the Notes issued by Avis Budget Car Rental. See Note 11—Long-term Debt and Borrowing Arrangements for additional description of these Notes. The Notes have separate investors than the equity investors of the Company and the Notes are guaranteed by certain subsidiaries.

 

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Investments in subsidiaries are accounted for using the equity method of accounting for purposes of the consolidating presentation. The principal elimination entries relate to investments in subsidiaries and intercompany balances and transactions. For purposes of the accompanying Consolidating Condensed Statements of Operations, certain expenses incurred by the Subsidiary Issuers are allocated to the guarantor and non-guarantor subsidiaries.

In September 2007, Avis Budget Car Rental transferred certain assets and liabilities to Wizard Services, Inc., (“Wizard Services”) a newly created subsidiary. Wizard Services executed a Supplemental Indenture in January 2009 to become a subsidiary guarantor under the Indenture governing the Notes. Accordingly, financial information for Wizard Services for the three and six months ended June 30, 2009 and as of June 30, 2009, is presented in the “Guarantor Subsidiaries” column. Previously, such information was included in the “Subsidiary Issuers” column. Financial information for the three and six months ended June 30, 2008 and as of December 31, 2008 for Wizard Services has been recast to reflect Wizard Services as a Guarantor for comparability purposes.

Consolidating Condensed Statements of Operations

Three Months Ended June 30, 2009

 

     Parent     Subsidiary
Issuers
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Total  

Revenues

            

Vehicle rental

   $ —        $ —        $ 871      $ 124      $ —        $ 995   

Other

     —          —          238        471        (392     317   
                                                

Net revenues

     —          —          1,109        595        (392     1,312   
                                                

Expenses

            

Operating

     3        2        540        103        —          648   

Vehicle depreciation and lease charges, net

     —          —          347        320        (274     393   

Selling, general and administrative

     3        —          112        18        —          133   

Vehicle interest, net

     —          —          66        16        (11     71   

Non-vehicle related depreciation and amortization

     —          —          22        2        —          24   

Interest expense related to corporate debt, net:

            

Interest expense

     —          38        —          (1     —          37   

Intercompany interest expense (income)

     —          (38     38        —          —          —     

Restructuring charges

     —          —          7        1        —          8   
                                                

Total expenses

     6        2        1,132        459        (285     1,314   
                                                

Income (loss) before income taxes and equity in earnings of subsidiaries

     (6     (2     (23     136        (107     (2

Provision (benefit) for income taxes

     (3     —          (3     10        —          4   

Equity in earnings (loss) of subsidiaries

     (3     (1     19        —          (15     —     
                                                

Net income (loss)

   $ (6   $ (3   $ (1   $ 126      $ (122   $ (6
                                                

 

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Six Months Ended June 30, 2009

 

     Parent     Subsidiary
Issuers
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Total  

Revenues

            

Vehicle rental

   $ —        $ —        $ 1,677      $ 236      $ —        $ 1,913   

Other

     1        —          439        913        (760     593   
                                                

Net revenues

     1        —          2,116        1,149        (760     2,506   
                                                

Expenses

            

Operating

     7        4        1,076        201        —          1,288   

Vehicle depreciation and lease charges, net

     —          —          658        608        (519     747   

Selling, general and administrative

     5        —          230        32        —          267   

Vehicle interest, net

     —          —          131        33        (24     140   

Non-vehicle related depreciation and amortization

     —          —          41        4        —          45   

Interest expense related to corporate debt, net:

            

Interest expense

     —          78        —          (1     —          77   

Intercompany interest expense (income)

     —          (78     78        —          —          —     

Restructuring charges

     —          —          12        1        —          13   

Impairment

     —          1        —          —          —          1   
                                                

Total expenses

     12        5        2,226        878        (543     2,578   
                                                

Income (loss) before income taxes and equity in earnings of subsidiaries

     (11     (5     (110     271        (217     (72

Provision (benefit) for income taxes

     (6     2        (32     19        —          (17

Equity in earnings (loss) of subsidiaries

     (50     (43     35        —          58        —     
                                                

Net income (loss)

   $ (55   $ (50   $ (43   $ 252      $ (159   $ (55
                                                

 

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Three Months Ended June 30, 2008

 

     Parent     Subsidiary
Issuers
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Total

Revenues

            

Vehicle rental

   $ —        $ —        $ 1,038      $ 156      $ —        $ 1,194

Other

     1        —          284        537        (439     383
                                              

Net revenues

     1        —          1,322        693        (439     1,577
                                              

Expenses

            

Operating

     1        7        678        125        —          811

Vehicle depreciation and lease charges, net

     —          —          385        219        (163     441

Selling, general and administrative

     3        —          149        21        —          173

Vehicle interest, net

     —          —          67        52        (45     74

Non-vehicle related depreciation and amortization

     —          —          18        2        —          20

Interest expense related to corporate debt, net:

            

Interest expense

     —          33        —          (1     —          32

Intercompany interest expense (income)

     —          (33     33        —          —          —  

Separation costs, net

     —          1        —          —          —          1
                                              

Total expenses

     4        8        1,330        418        (208     1,552
                                              

Income (loss) before income taxes and equity in earnings of subsidiaries

     (3     (8     (8     275        (231     25

Provision (benefit) for income taxes

     (1     3        (7     15        —          10

Equity in earnings (loss) of subsidiaries

     17        28        29        —          (74     —  
                                              

Net income (loss)

   $ 15      $ 17      $ 28      $ 260      $ (305   $ 15
                                              

 

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Six Months Ended June 30, 2008

 

     Parent     Subsidiary
Issuers
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Total

Revenues

            

Vehicle rental

   $ —        $ —        $ 1,992      $ 321      $ —        $ 2,313

Other

     1        —          519        1,032        (843     709
                                              

Net revenues

     1        —          2,511        1,353        (843     3,022
                                              

Expenses

            

Operating

     2        7        1,319        260        —          1,588

Vehicle depreciation and lease charges, net

     —          —          714        624        (515     823

Selling, general and administrative

     6        —          296        42        —          344

Vehicle interest, net

     —          —          146        111        (98     159

Non-vehicle related depreciation and amortization

     —          —          35        4        —          39

Interest expense related to corporate debt, net:

            

Interest expense

     (1     64        —          (2     —          61

Intercompany interest expense (income)

     —          (64     64        —          —          —  

Separation costs, net

     —          1        —          —          —          1
                                              

Total expenses

     7        8        2,574        1,039        (613     3,015
                                              

Income (loss) before income taxes and equity in earnings of subsidiaries

     (6     (8     (63     314        (230     7

Provision (benefit) for income taxes

     (3     3        (26     29        —          3

Equity in earnings (loss) of subsidiaries

     7        18        55        —          (80     —  
                                              

Net income (loss)

   $ 4      $ 7      $ 18      $ 285      $ (310   $ 4
                                              

 

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Table of Contents

Consolidating Condensed Balance Sheets

As of June 30, 2009

 

     Parent     Subsidiary
Issuers
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
   Eliminations     Total

Assets

             

Current assets:

             

Cash and cash equivalents

   $ 6      $ 105      $ 5      $ 318    $ —        $ 434

Receivables, net

     —          68        168        77      —          313

Deferred income taxes

     1        —          95        3      (26     73

Other current assets

     181        76        73        55      —          385
                                             

Total current assets

     188        249        341        453      (26     1,205

Property and equipment, net

     —          59        361        40      —          460

Deferred income taxes

     12        281        256        21      —          570

Goodwill

     —          —          74        1      —          75

Other intangibles, net

     —          7        386        78      —          471

Other non-current assets

     765        64        14        3      —          846

Intercompany receivables (payables)

     (27     710        (968     285      —          —  

Investment in subsidiaries

     12        789        2,025        —        (2,826     —  
                                             

Total assets exclusive of assets under vehicle programs

     950        2,159        2,489        881      (2,852     3,627
                                             

Assets under vehicle programs:

             

Program cash

     —          —          —          1      —          1

Vehicles, net

     —          35        158        6,771      —          6,964

Receivables from vehicle manufacturers and other

     —          —          —          100      —          100

Investment in Avis Budget Rental Car Funding (AESOP) LLC-related party

     —          —          —          117      —          117
                                             
     —          35        158        6,989      —          7,182
                                             

Total assets

   $ 950      $ 2,194      $ 2,647      $ 7,870    $ (2,852   $ 10,809
                                             

Liabilities and stockholders’ equity

             

Current liabilities:

             

Accounts payable and other current liabilities

   $ 191      $ 183      $ 432      $ 87    $ (26   $ 867

Current portion of long-term debt

     —          9        2        —        —          11
                                             

Total current liabilities

     191        192        434        87      (26     878

Long-term debt

     —          1,875        1        —        —          1,876

Other non-current liabilities

     636        114        241        118      —          1,109
                                             

Total liabilities exclusive of liabilities under vehicle programs

     827        2,181        676        205      (26     3,863
                                             

Liabilities under vehicle programs:

             

Debt

     —          26        109        871      —          1,006

Due to Avis Budget Rental Car Funding (AESOP) LLC-related party

     —          —          —          4,346      —          4,346

Deferred income taxes

     —          —          1,073        173      —          1,246

Other

     —          —          —          225      —          225
                                             
     —          26        1,182        5,615      —          6,823
                                             

Total stockholders’ equity

     123        (13     789        2,050      (2,826     123
                                             

Total liabilities and stockholders’ equity

   $ 950      $ 2,194      $ 2,647      $ 7,870    $ (2,852   $ 10,809
                                             

 

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Table of Contents

As of December 31, 2008

 

     Parent     Subsidiary
Issuers
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
   Eliminations     Total

Assets

             

Current assets:

             

Cash and cash equivalents

   $ 11      $ 51      $ 15      $ 181    $ —        $ 258

Receivables, net

     —          108        179        73      —          360

Deferred income taxes

     1        —          95        3      (24     75

Other current assets

     189        66        88        41      (4     380
                                             

Total current assets

     201        225        377        298      (28     1,073

Property and equipment, net

     —          60        385        40      —          485

Deferred income taxes

     12        217        255        19      —          503

Goodwill

     —          —          74        1      —          75

Other intangibles, net

     —          7        387        73      —          467

Other non-current assets

     765        99        21        4      —          889

Intercompany receivables (payables)

     (29     794        (1,075     310      —          —  

Investment in subsidiaries

     (19     752        1,961        —        (2,694     —  
                                             

Total assets exclusive of assets under vehicle programs

     930        2,154        2,385        745      (2,722     3,492
                                             

Assets under vehicle programs:

             

Program cash

     —          —          —          12      —          12

Vehicles, net

     —          —          174        6,990      —          7,164

Receivables from vehicle manufacturers and other

     —          —          —          533      —          533

Investment in Avis Budget Rental Car Funding (AESOP) LLC-related party

     —          —          —          117      —          117
                                             
     —          —          174        7,652      —          7,826
                                             

Total assets

   $ 930      $ 2,154      $ 2,559      $ 8,397    $ (2,722   $ 11,318
                                             

Liabilities and stockholders’ equity

             

Current liabilities:

             

Accounts payable and other current liabilities

   $ 205      $ 234      $ 410      $ 80    $ (28   $ 901

Current portion of long-term debt

     —          10        —          —        —          10
                                             

Total current liabilities

     205        244        410        80      (28     911

Long-term debt

     —          1,779        —          —        —          1,779

Other non-current liabilities

     632        125        251        113      —          1,121
                                             

Total liabilities exclusive of liabilities under vehicle programs

     837        2,148        661        193      (28     3,811
                                             

Liabilities under vehicle programs:

             

Debt

     —          50        126        716      —          892

Due to Avis Budget Rental Car Funding (AESOP) LLC-related party

     —          —          —          5,142      —          5,142

Deferred income taxes

     —          —          1,020        168      —          1,188

Other

     —          —          —          192      —          192
                                             
     —          50        1,146        6,218      —          7,414
                                             

Total stockholders’ equity

     93        (44     752        1,986      (2,694     93
                                             

Total liabilities and stockholders’ equity

   $ 930      $ 2,154      $ 2,559      $ 8,397    $ (2,722   $ 11,318
                                             

 

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Consolidating Condensed Statements of Cash Flows

Six Months Ended June 30, 2009

 

     Parent     Subsidiary
Issuers
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Total  

Net cash provided by (used in) operating activities

   $ (4   $ 16      $ 30      $ 715      $ (69   $ 688   
                                                

Investing activities

            

Property and equipment additions

     —          (8     (5     (1     —          (14

Proceeds received on asset sales

     —          6        —          1        —          7   

Proceeds received from Realogy and Wyndham, net

     2        —          —          —          —          2   

Other, net

     —          (1     —          —          —          (1
                                                

Net cash provided by (used in) investing activities exclusive of vehicle programs

     2        (3     (5     —          —          (6
                                                

Vehicle programs:

            

Decrease in program cash

     —          —          —          11        —          11   

Investment in vehicles

     —          (11     —          (3,938     —          (3,949

Proceeds received on disposition of vehicles

     —          21        3        3,942        —          3,966   

Distribution from Avis Budget Rental Car Funding (AESOP) LLC-related party

     —          —          —          47        —          47   
                                                
     —          10        3        62        —          75   
                                                

Net cash provided by investing activities

     2        7        (2     62        —          69   
                                                

Financing activities

            

Proceeds from borrowings

     —          100        —          —          —          100   

Principal payments on borrowings

     —          (5     (1     —          —          (6

Net intercompany transactions

     (1     (43     (20     (5     69        —     

Other, net

     (2     —          —          —          —          (2
                                                

Net cash provided by (used in) financing activities exclusive of vehicle programs

     (3     52        (21     (5     69        92   
                                                

Vehicle programs:

            

Proceeds from borrowings

     —          —          —          4,261        —          4,261   

Principal payments on borrowings

     —          (21     (17     (5,059     —          (5,097

Net change in short-term borrowings

     —          —          —          144        —          144   
                                                
     —          (21     (17     (654     —          (692
                                                

Net cash provided by (used in) financing activities

     (3     31        (38     (659     69        (600
                                                

Effect of changes in exchange rates on cash and cash equivalents

     —          —          —          19        —          19   
                                                

Net increase (decrease) in cash and cash equivalents

     (5     54        (10     137        —          176   

Cash and cash equivalents, beginning of period

     11        51        15        181        —          258   
                                                

Cash and cash equivalents, end of period

   $ 6      $ 105      $ 5      $ 318      $ —        $ 434   
                                                

 

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Table of Contents

Six Months Ended June 30, 2008

 

     Parent     Subsidiary
Issuers
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Total  

Net cash provided by (used in) operating activities

   $ (2   $ 76      $ (1   $ 876      $ (109   $ 840   
                                                

Investing activities

            

Property and equipment additions

     —          (7     (34     (6     —          (47

Net assets acquired, net of cash acquired, and acquisition-related payments

     —          —          (71     —          —          (71

Proceeds received on asset sales

     —          6        1        2        —          9   

Proceeds received from Realogy and Wyndham, net

     1        —          —          —          —          1   

Other, net

     (1     (3     (6     1        —          (9
                                                

Net cash used in investing activities exclusive of vehicle programs

     —          (4     (110     (3     —          (117
                                                

Vehicle programs:

            

Decrease in program cash

     —          —          —          1        —          1   

Investment in vehicles

     —          (131     (9     (6,062     —          (6,202

Proceeds received on disposition of vehicles

     —          67        1        3,959        —          4,027   

Investment in Avis Budget Rental Car Funding (AESOP) LLC-related party

     —          —          —          (343     —          (343
                                                
     —          (64     (8     (2,445     —          (2,517
                                                

Net cash used in investing activities

     —          (68     (118     (2,448     —          (2,634
                                                

Financing activities

            

Principal payments on borrowings

     (1     (4     —          —          —          (5

Repurchases of common stock

     (33     —          —          —          —          (33

Net intercompany transactions

     16        (8     144        (261     109        —     
                                                

Net cash provided by (used in) financing activities exclusive of vehicle programs

     (18     (12     144        (261     109        (38
                                                

Vehicle programs:

            

Proceeds from borrowings

     —          30        —          5,769        —          5,799   

Principal payments on borrowings

     —          (9     (25     (4,102     —          (4,136

Net change in short-term borrowings

     —          —          —          226        —          226   

Other, net

     —          (6     (2     —          —          (8
                                                
     —          15        (27     1,893        —          1,881   
                                                

Net cash provided by (used in) financing activities

     (18     3        117        1,632        109        1,843   
                                                

Effect of changes in exchange rates on cash and cash equivalents

     —          —          —          (1     —          (1
                                                

Net increase (decrease) in cash and cash equivalents

     (20     11        (2     59        —          48   

Cash and cash equivalents, beginning of period

     37        99        12        66        —          214   
                                                

Cash and cash equivalents, end of period $

   $ 17      $ 110      $ 10      $ 125      $ —        $ 262   
                                                

 

18. Subsequent Event

The Company evaluated events through August 5, 2009 for consideration as a subsequent event to be included in its June 30, 2009 Financial Statements issued August 5, 2009.

 

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On July 23, 2009, the Company’s Avis Budget Rental Car Funding (AESOP) LLC subsidiary issued $450 million in asset-backed notes to provide funds for repayment of maturing vehicle-backed debt and the acquisition of rental cars in the United States. These notes’ expected final payment date is in October 2012.

* * * *

 

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Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our Consolidated Condensed Financial Statements and accompanying Notes thereto included elsewhere herein and with our 2008 Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 26, 2009 (the “2008 Form 10-K”). Unless otherwise noted, all dollar amounts in tables are in millions and those relating to our results of operations are presented before taxes.

We operate two of the most recognized brands in the global vehicle rental industry through Avis Rent A Car System, LLC and Budget Rent A Car System, Inc. We provide car and truck rentals and ancillary services to businesses and consumers in the United States and internationally.

We operate in the following business segments:

 

   

Domestic Car Rental— provides car rentals and ancillary products and services in the United States.

 

   

International Car Rental— provides vehicle rentals and ancillary products and services primarily in Argentina, Australia, Canada, New Zealand, Puerto Rico and the U.S. Virgin Islands.

 

   

Truck Rental— provides truck rentals and related services to consumers and light commercial users in the United States.

Our revenues are derived principally from car and truck rentals in our Company-owned operations and include (i) time and mileage (“T&M”) fees charged to our customers for vehicle rentals, (ii) reimbursement from our customers for certain operating expenses we incur, including gasoline and vehicle licensing fees, as well as airport concession fees, which we pay in exchange for the right to operate at airports and other locations, and (iii) sales of loss damage waivers and insurance and rentals of navigation units and other items in conjunction with vehicle rentals. We also earn royalty revenue from our franchisees in conjunction with their vehicle rental transactions.

Car rental volumes are closely associated with the travel industry, particularly airline passenger volumes, or enplanements. Because we operate primarily in the United States and generate a significant portion of our revenue from our on-airport operations, we expect that our ability to generate revenue growth will be somewhat dependent on increases in domestic enplanements. We have also experienced significant per-unit fleet cost increases over the last four years, which have negatively impacted our margins. Accordingly, our ability to achieve profit margins consistent with prior periods remains dependent on our ability to successfully manage our costs and to implement changes in our pricing programs. Our vehicle rental operations are seasonal. Historically, the third quarter of the year has been our strongest quarter due to the increased level of leisure travel and household moving activity. Any occurrence that disrupts rental activity during the third quarter could have a disproportionate adverse effect on our results of operations. We have a partially variable cost structure and routinely adjust the size and, therefore, the cost of our rental fleet in response to fluctuations in demand. However, certain expenses, such as rent, are fixed and cannot be reduced in response to seasonal fluctuations in our operations.

We believe that the following trends, among others, may affect and/or have impacted our financial condition and results of operations:

 

   

Domestic enplanements, which declined in 2008 compared to 2007 and are expected to decline again in 2009;

 

   

Rising per-unit car fleet costs and changes in conditions in the used vehicle marketplace;

 

   

Changes in the financial condition of vehicle manufacturers;

 

   

Difficulty in achieving sustained pricing increases;

 

   

Our expansion in off-airport or local vehicle rentals, including insurance replacement rentals;

 

   

Increases in borrowing costs, and decreases in market appetite for, corporate and vehicle-related debt;

 

   

Changes in foreign exchange rates; and

 

   

Demand for truck rentals, which have been impacted by the decline in economic activity.

Many of these trends are the result of the current downturn in the U.S. and worldwide economies and have caused our results for the three and six months ended June 30, 2009 to be significantly lower than for the three and six months ended June 30,

 

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2008. Due to reduced demand for travel services, rising borrowing costs and other factors, there can be no assurance that we will be able to satisfy the minimum EBITDA requirement and other covenants contained in our senior credit facilities and our asset-backed car rental conduit facilities. Failure to comply with such covenants could significantly impact our liquidity if we were unable to obtain an amendment or waiver or were unable to refinance or obtain a replacement for such facilities. The financial covenants to our senior credit facilities were amended in December 2008 and commencing with our fiscal quarter ending June 30, 2010, the requirement to maintain a quarterly minimum trailing twelve month EBITDA (as defined in our senior credit facilities) under these financial covenants will cease and be replaced by the maximum leverage ratio that was in place prior to the December 2008 amendments. There can also be no assurance that past results will be indicative of results we will achieve in 2009 or future periods. We have also been impacted by, and may be further impacted by, the current financial market disruptions as we rely heavily on financing for our operations, particularly asset-backed financing. See “Risk Factors” set forth in Item 1A of our 2008 Form 10-K.

RESULTS OF OPERATIONS

Discussed below are our consolidated results of operations and the results of operations for each of our reportable segments.

We measure performance using the following key operating statistics: (i) rental days, which represents the total number of days (or portion thereof) a vehicle was rented, and (ii) T&M revenue per rental day, which represents the average daily revenue we earned from rental and mileage fees charged to our customers. Our car rental operating statistics (rental days and T&M revenue per rental day) are all calculated based on the actual rental of the vehicle during a 24-hour period. We believe that this methodology, while conservative, provides our management with the most relevant statistics in order to manage the business. Our calculation may not be comparable to other companies’ calculation of similarly-titled statistics.

The reportable segments presented below represent our operating segments for which separate financial information is available and is utilized on a regular basis by our chief operating decision maker to assess performance and to allocate resources. In identifying our reportable segments, we also consider the nature of services provided by our operating segments. Management evaluates the operating results of each of our reportable segments based upon revenue and “EBITDA”, which we define as income from continuing operations before non-vehicle related depreciation and amortization, any impairment of goodwill, other intangible asset or equity investment, non-vehicle related interest and income taxes. Our presentation of EBITDA may not be comparable to similarly-titled measures used by other companies.

THREE MONTHS ENDED JUNE 30, 2009 VS. THREE MONTHS ENDED JUNE 30, 2008

Our consolidated results of operations comprised the following:

 

     Three Months Ended June 30,  
     2009     2008    Change  

Net revenues

   $ 1,312      $ 1,577    $ (265

Total expenses

     1,314        1,552      (238
                       

Income (loss) before income taxes

     (2     25      (27

Provision for income taxes

     4        10      (6
                       

Net income (loss)

   $ (6   $ 15    $ (21
                       

During second quarter 2009, our net revenues decreased $265 million (17%) principally due to (i) a 17% decrease in T&M revenue in our car rental operations resulting primarily from a 21% decrease in car rental days, partially offset by a 7% increase in T&M revenue per day in our domestic car rental operations, (ii) a 17% decrease in total ancillary revenues, also resulting from decreased car rental days, and (iii) an 8% decrease in truck rental T&M revenue. In addition, the revenue decrease includes a negative impact of $34 million related to the effect of foreign currency exchange rate fluctuations on the translation of our international operations’ results into U.S. dollars.

Total expenses decreased $238 million (15%) principally due to decreases of (i) $163 million (20%) in operating expenses largely resulting from the 21% decrease in car rental days and reduced staffing levels, (ii) $51 million (10%) in vehicle depreciation, vehicle interest and lease charges resulting from a 21% decline in our average car rental fleet and (iii) $40 million (23%) in selling, general and administrative expenses mainly related to reduced marketing and commission expenditures, most of which are volume-related. The decrease in total expenses includes a positive impact from foreign currency exchange rates of $29 million, including our foreign exchange earnings hedges, and also reflects numerous actions taken in late 2008 and the first half of 2009 to reduce non-volume-related expenses. These year-over-year expense decreases were partially offset by (i) an $8 million restructuring charge recorded in second quarter 2009, primarily for severance costs tied to recent headcount reductions, and (ii) a $5 million increase in interest expense on corporate debt related to the December 2008 amendments to our senior credit facilities.

 

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As a result of these items, partially offset by a $6 million decrease in our provision for income taxes, our net income decreased $21 million to a net loss of $6 million.

In second quarter 2009, we had income tax expense of $4 million on a loss before income taxes of $2 million, compared to an effective tax rate of 40.0% in second quarter 2008.

Following is a discussion of the results of each of our reportable segments during the three months ended June 30:

 

         Revenues     EBITDA  
         2009    2008    %
Change
    2009     2008     %
Change
 

Domestic Car Rental

   $ 1,031    $ 1,241    (17 %)    $      37      $      46      (20 %) 

International Car Rental

     183      230    (20     18        25      (28

Truck Rental

     97      105    (8     9        8      13   

Corporate and Other (a)

     1      1    *        (5     (2   *   
                                    

Total Company

   $ 1,312    $ 1,577        59        77     
                        

Less:

 

Non-vehicle related depreciation and amortization

             24        20     
 

Interest expense related to corporate debt, net

             37        32     
                            

Income (loss) before income taxes

           $ (2   $ 25     
                            

 

(*)

Not meaningful.

(a)

Includes unallocated corporate overhead and the elimination of transactions between segments.

Domestic Car Rental

Revenues and EBITDA decreased $210 million (17%) and $9 million (20%), respectively, in second quarter 2009 compared with 2008, primarily due to decreased demand for car rental services.

The revenue decrease of $210 million was comprised of a $160 million (17%) decrease in T&M revenue and a $50 million (17%) decrease in ancillary revenues. The decrease in T&M revenue was principally the result of a 22% decrease in rental days, partially offset by a 7% year-over-year increase in T&M revenue per day. The $50 million decrease in ancillary revenues was also primarily due to the decline in rental days and reflected (i) a $30 million decrease in gasoline sales, which was more than offset in EBITDA by $40 million of decreased gasoline expense, (ii) a $13 million decrease in airport concession and vehicle licensing revenues, $8 million of which was offset in EBITDA by lower airport concessions and vehicle licensing expense remitted to airport and other regulatory authorities, and (iii) a $7 million decrease in GPS rentals, counter sales of insurance and other items (although revenues per transaction increased year-over-year).

We continued to reduce costs during the second quarter in response to the decline in demand. EBITDA reflected a $125 million (19%) decrease in operating expenses including (i) a $64 million decrease in expenses associated with car rental volume and fleet size, primarily related to agency operator commissions, shuttling expenses, credit card fees and other items, (ii) a $34 million decrease in selling, general and administration expenses related to decreases in marketing and commission expenditures, most of which are volume-related, and other items due primarily to management’s actions to reduce expenditures, and (iii) a $25 million decrease in employee costs, rents and other expenses related primarily to reduced domestic staffing levels and the closure of unprofitable locations. EBITDA also reflected $33 million (9%) of decreased fleet depreciation and lease charges resulting from the 22% decrease in the average size of our domestic rental fleet, while per-unit fleet costs increased 17%. The decreases in expenses were slightly offset by $6 million of restructuring charges recorded in second quarter 2009 related to the Company’s previously announced cost reduction initiatives.

International Car Rental

Revenues and EBITDA decreased $47 million (20%) and $7 million (28%), respectively, in second quarter 2009 compared with second quarter 2008, primarily due to the impact of foreign currency exchange rate movements and lower demand for car rentals.

The revenue decrease of $47 million was comprised of a $33 million (21%) decrease in car rental T&M revenue and a $14 million (19%) decrease in ancillary revenues. The total decline in revenue includes a $34 million decrease related to foreign currency exchange rates, impacting T&M revenue by $23 million and ancillary revenues by $11 million, and was largely offset in EBITDA by the opposite impact on expenses of $29 million. The decrease in T&M revenue was principally driven by a 12% decrease in T&M revenue per day, all of which is due to movements in foreign currency exchange rates, and a 10% decrease in rental days. The $14 million decrease in ancillary revenues was primarily due to the impact of foreign currency exchange rates, as well as the decline in rental days, and reflected (i) a $7 million decrease in counter sales of insurance, GPS

 

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rentals and other items, (ii) a $4 million decrease in airport concession and vehicle licensing revenues, which was offset in EBITDA by lower airport concessions and vehicle licensing expense remitted to airport and other regulatory authorities, and (iii) a $3 million decrease in gasoline sales, which was offset in EBITDA by lower gasoline costs.

EBITDA reflected a $23 million (20%) decrease in operating expenses including (i) a $12 million decrease in costs associated with decreased rental volume and fleet size primarily related to agency operator commissions, credit card fees, maintenance and damage, vehicle licensing and other costs, (ii) a $6 million decrease in salaries and wages, rents and other costs related primarily to reduced staffing levels and (iii) a $4 million decrease in selling, general and administrative expenses related primarily to decreased marketing and commission expenditures and other expenses. EBITDA also benefited from $10 million (18%) of decreased fleet depreciation and lease charges, reflecting a 10% decrease in the average size of our international rental fleet and a 9% decrease in per-unit fleet costs. The decreases in expenses were slightly offset by $1 million of restructuring charges recorded in second quarter 2009 related to the Company’s previously announced cost reduction initiatives.

Truck Rental

Revenues decreased $8 million (8%) while EBITDA increased $1 million (13%) in second quarter 2009 compared with second quarter 2008.

The revenue decrease was primarily due to a decline of $7 million (8%) in T&M revenue, which reflected an 8% decrease in rental days, while T&M revenue per day remained unchanged year-over-year. EBITDA benefited from (i) a decrease of $8 million (14%) in direct operating costs primarily due to decreased employee costs and decreased operating commissions related to lower transaction volumes and (ii) a decline of $5 million (17%) in fleet depreciation, interest and lease charges reflecting lower per-unit fleet costs, partially offset by an increase of $5 million in insurance related expenses. Second quarter 2009 results also include a $1 million restructuring charge related to the Company’s previously announced cost reduction initiatives.

SIX MONTHS ENDED JUNE 30, 2009 VS. SIX MONTHS ENDED JUNE 30, 2008

Our consolidated results of operations comprised the following:

 

     Six Months Ended June 30,  
     2009     2008    Change  

Net revenues

   $ 2,506      $ 3,022    $ (516

Total expenses

     2,578        3,015      (437
                       

Income (loss) before income taxes

     (72     7      (79

Provision for (benefit from) for income taxes

     (17     3      (20
                       

Net income (loss)

   $ (55   $ 4    $ (59
                       

During the six months ended June 30, 2009, our net revenues decreased $516 million (17%) principally due to (i) an 18% decrease in T&M revenue in our car rental operations resulting primarily from a 19% decrease in domestic and international car rental days, partially offset by a 1% increase in T&M revenue per day, (ii) a 16% decrease in ancillary revenues, also resulting from decreased car rental days, and (iii) a 9% decrease in truck rental T&M revenue. In addition, the total revenue decrease includes a negative impact of $84 million related to the effect of foreign currency exchange rate fluctuations on the translation of our international operations’ results into U.S. dollars.

Total expenses decreased $437 million (14%) principally due to decreases of (i) $300 million (19%) in operating expenses largely resulting from the 19% decrease in car rental days and reduced staffing levels, (ii) $77 million (22%) in selling, general and administrative expenses mainly related to reduced marketing and commission expenditures, most of which are volume-related, (iii) $76 million (9%) in vehicle depreciation and lease charges resulting from an 18% decline in our average car rental fleet and (iv) $19 million (12%) in vehicle interest resulting from the decline in our average car rental fleet. The decrease in total expenses includes a positive impact from foreign currency exchange rates of $74 million including our foreign exchange earnings hedges and also reflects numerous actions taken in late 2008 and the first half of 2009 to reduce non-volume-related expenses. These year-over-year decreases were partially offset by (i) a $16 million increase in interest expense on corporate debt related to the December 2008 amendments to our senior credit facilities, (ii) $13 million in restructuring costs, primarily for severance costs tied to recent headcount reductions, and (iii) a $6 million increase in non-vehicle related depreciation and amortization expense. As a result of these items, partially offset by a $20 million increase in our benefit from income taxes, we incurred a net loss of $55 million for the six months ended June 30, 2009 compared to $4 million of net income during the same period in 2008.

Our effective tax rate for continuing operations was a benefit and a provision of 23.6% and 42.9% for the six months ended June 30, 2009 and 2008, respectively.

 

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Following is a discussion of the results of each of our reportable segments during the six months ended June 30:

 

         Revenues     EBITDA  
         2009    2008    %
Change
    2009     2008     %
Change
 

Domestic Car Rental

   $ 1,991    $ 2,377    (16 %)    $      26      $      61      (57 %) 

International Car Rental

     347      460    (25     37        55      (33

Truck Rental

     167      183    (9     (1     (2   *   

Corporate and Other (a)

     1      2    *        (11     (7   *   
                                    
 

Total Company

   $ 2,506    $ 3,022        51        107     
                        

Less:

 

Non-vehicle related depreciation and amortization

             45        39     
 

Interest expense related to corporate debt, net

             77        61     
 

Impairment (b)

             1        —       
                            

Income (loss) before income taxes

           $ (72   $ 7     
                            

 

(*)

Not meaningful.

(a)

Includes unallocated corporate overhead and the elimination of transactions between segments.

(b)

In first quarter 2009, we recorded an approximately $1 million charge for the impairment of an investment.

Domestic Car Rental

Revenues and EBITDA decreased $386 million (16%) and $35 million (57%), respectively, in the six months ended June 30, 2009 compared with the prior year period, primarily due to decreased demand for car rental services.

The revenue decrease of $386 million was comprised of a $302 million (16%) decrease in T&M revenue and an $84 million (16%) decrease in ancillary revenues. The decrease in T&M revenue was principally the result of a 20% decrease in rental days, partially offset by a 5% year-over-year increase in T&M revenue per day. The $84 million decrease in ancillary revenues was also primarily due to the decline in rental days and reflected (i) a $48 million decrease in gasoline sales, which was more than offset in EBITDA by $63 million of decreased gasoline expense, (ii) a $25 million decrease in airport concession and vehicle licensing revenues, which was completely offset by lower airport concession and vehicle licensing fees remitted to airport and other regulatory authorities, and (iii) an $11 million decrease in counter sales of insurance, GPS rentals and other items.

We have aggressively reduced costs in response to the sharp decline in demand. EBITDA reflected a $226 million (17%) decrease in operating expenses including (i) a $99 million decrease in expenses associated with car rental volume and fleet size, primarily related to agency operator commissions, shuttling expenses, credit card fees, maintenance and damage and other items, (ii) a $62 million decrease in selling, general and administrative expenses related to decreases in marketing and commission expenditures, most of which are volume-related, and other items due primarily to management’s actions to reduce expenditures, (iii) a $43 million decrease in employee costs, rents and other expenses related primarily to reduced domestic staffing levels and the closure of unprofitable locations, (iv) a $13 million decrease in vehicle interest related to lower fleet levels and (v) a $9 million decrease in insurance-related costs, as our liability-related and workers’ compensation claims experience has continued to develop favorably compared to earlier actuarial estimates. EBITDA also benefited from $48 million (7%) of decreased fleet depreciation and lease charges resulting from the 19% decrease in the average size of our domestic rental fleet, while per-unit fleet costs increased 15%. The decreases in expenses were partially offset by $11 million of restructuring costs recorded in the six months ended June 30, 2009 related to the Company’s previously announced cost reduction initiatives.

International Car Rental

Revenues and EBITDA decreased $113 million (25%) and $18 million (33%), respectively, in the six months ended June 30, 2009 compared with six months ended June 30, 2008, primarily due to the impact of foreign currency exchange rate movements and lower demand for car rentals.

The revenue decrease of $113 million was comprised of an $84 million (26%) decrease in car rental T&M revenue and a $29 million (21%) decrease in ancillary revenues. The total decline in revenue includes an $84 million decrease related to foreign currency exchange rates, impacting T&M revenue by $58 million and ancillary revenues by $26 million, and was largely offset in EBITDA by the opposite impact on expenses of $74 million, including our foreign exchange earnings hedges. The decrease in T&M revenue was principally driven by a 19% decrease in T&M revenue per day, all of which is due to movements in foreign currency exchange rates, and a 9% decrease in rental days. The $29 million decrease in ancillary revenues was due to the decline in rental days and reflected (i) a $17 million decrease in counter sales of insurance, GPS rentals and other items, (ii) a $6 million decrease in airport concession and vehicle licensing revenues, which was more than

 

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offset by $14 million lower airport concession and vehicle licensing fees remitted to airport and other regulatory authorities, and (iii) a $6 million decrease in gasoline sales, which was offset in EBITDA by lower gasoline costs.

EBITDA reflects a $55 million (24%) decrease in operating expenses including (i) a $26 million decrease in costs associated with decreased rental volume and fleet size primarily related to agency operator commissions, credit card fees, maintenance and damage, vehicle licensing and other costs, (ii) a $12 million decrease in employee costs, rents and other expenses related primarily to reduced staffing levels, (iii) an $11 million decrease in selling, general and administrative expenses related primarily to decreased marketing and commission expenditures and (iv) a $5 million decrease in vehicle interest related to lower fleet levels. EBITDA also benefited from $21 million (19%) of decreased fleet depreciation and lease charges, reflecting a 7% decrease in the average size of our international rental fleet and a 13% decrease in per-unit fleet costs. The decreases in expenses were slightly offset by a $1 million restructuring charge recorded in the six months ended June 30, 2009 related to the Company’s cost reduction initiatives.

Truck Rental

Revenues decreased $16 million (9%) while EBITDA increased $1 million (50%) in the six months ended June 30, 2009 compared with the same period in 2008.

The revenue decrease was primarily due to a decline of $14 million (9%) in T&M revenue, which reflected an 8% decrease in rental days and a 1% decrease in T&M revenue per day. The decrease in rental days was primarily the result of a decrease in the volume of commercial rentals. EBITDA benefited from (i) a decrease of $13 million (13%) in direct operating costs primarily due to reduced employee costs related to lower staffing levels and (ii) $9 million (16%) less fleet depreciation, interest and lease charges reflecting lower per-unit fleet costs, partially offset by an increase of $5 million in insurance related expenses. The six months ended June 30, 2009 results also include a $1 million restructuring charge related to the Company’s cost reduction initiatives.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

We present separately the financial data of our vehicle programs. These programs are distinct from our other activities as the assets under vehicle programs are generally funded through the issuance of debt that is collateralized by such assets. The income generated by these assets is used, in part, to repay the principal and interest associated with the debt. Cash inflows and outflows relating to the generation or acquisition of such assets and the principal debt repayment or financing of such assets are classified as activities of our vehicle programs. We believe it is appropriate to segregate the financial data of our vehicle programs because, ultimately, the source of repayment of such debt is the realization of such assets.

FINANCIAL CONDITION

 

     June 30,
2009
   December 31,
2008
   Change  

Total assets exclusive of assets under vehicle programs

   $ 3,627    $ 3,492    $ 135   

Total liabilities exclusive of liabilities under vehicle programs

     3,863      3,811      52   

Assets under vehicle programs

     7,182      7,826      (644

Liabilities under vehicle programs

     6,823      7,414      (591

Stockholders’ equity

     123      93      30   

Total assets exclusive of assets under vehicle programs increased $135 million due to (i) a $176 million increase in cash and cash equivalents (see “Liquidity and Capital Resources—Cash Flows” for a detailed discussion) and (ii) a $65 million increase in deferred income taxes, offset by (i) a $47 million decrease in accounts receivable, primarily due to the collection of incentives from manufacturers, (ii) a $43 million decrease in other non-current assets, mainly related to amortization of deferred debt financing cost and deferred compensation, and (iii) a $25 million decrease in property and equipment.

Total liabilities exclusive of liabilities under vehicle programs increased $52 million primarily due to a $98 million increase in corporate debt related to outstanding borrowings under our revolving credit facility, offset by (i) a $34 million decrease in accounts payable and other current liabilities, primarily related to our derivatives, and (ii) a $12 million decrease in other non-current liabilities, related to deferred compensation and insurance liabilities.

Assets under vehicle programs decreased $644 million primarily due to (i) a $433 million decrease in receivables from vehicle manufacturers and (ii) a $200 million decrease in our net vehicles.

Liabilities under vehicle programs decreased $591 million, reflecting a decrease in our borrowings due to reductions in the size of our car rental fleet to match reduced car rental demand. See “Liquidity and Capital Resources—Debt and Financing Arrangements” for a detailed account of the change in our debt related to vehicle programs.

 

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Stockholders’ equity increased $30 million, primarily due to a $77 million increase in accumulated other comprehensive income resulting from currency translation and net unrealized gains in our cash flow hedges, offset by a net loss of $55 million.

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of liquidity are cash on hand and our ability to generate cash through operations and financing activities, as well as available funding arrangements and committed credit facilities, each of which is discussed below.

CASH FLOWS